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FUNDING A WARRANTY RESERVE WITH CONTRIBUTIONS AFTER EACH SALE

Published online by Cambridge University Press:  01 June 2006

Peter S. Buczkowski  and
Vidyadhar G. Kulkarni
Peter S. Buczkowski
Affiliation:
Department of Statistics and Operations Research, University of North Carolina at Chapel Hill, E-mail: [email protected]; [email protected]
Vidyadhar G. Kulkarni
Affiliation:
Department of Statistics and Operations Research, University of North Carolina at Chapel Hill, E-mail: [email protected]; [email protected]
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Abstract

We consider funding an interest-bearing warranty reserve with contributions after each sale. The problem for the manufacturer is to determine the initial level of the reserve fund and the amount to be put in after each sale, so as to ensure that the reserve fund covers all of the warranty liabilities with a prespecified probability over a fixed period of time. We assume a nonhomogeneous Poisson sales process, random warranty periods, and a constant failure rate for items under warranty. We derive the mean and variance of the reserve level as a function of time and provide a robust heuristic to aid the manufacturer in its decision.

Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 20 , Issue 3 , July 2006 , pp. 497 - 515
Copyright
© 2006 Cambridge University Press

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