Competitive and Collaborative Quality and Warranty Management in Supply Chains
Article first published online: 20 JAN 2011
© 2011 Production and Operations Management Society
Production and Operations Management
Volume 21, Issue 1, pages 129–144, January-February 2012
How to Cite
Dai, Y., Zhou, S. X. and Xu, Y. (2012), Competitive and Collaborative Quality and Warranty Management in Supply Chains. Production and Operations Management, 21: 129–144. doi: 10.1111/j.1937-5956.2011.01217.x
- Issue published online: 5 JAN 2012
- Article first published online: 20 JAN 2011
- History: Received: December 2008; Accepted: October 2010 by Michael Pinedo, after 2 revisions.
- product quality;
- warranty period;
- warranty-dependent demand;
- Nash equilibrium;
- supply chain coordination
Product quality and product warranty coverage are two important and closely related operational decisions. A longer warranty protection period can boost sales, but it may also result in dramatically increased warranty cost, if product quality is poor. To investigate how these two decisions interact with each other and influence supply chain performance, we develop a single-period model with a supplier that provides a product to an original equipment manufacturer, which in turn sells it to customers. Customer demand is random and affected by the length of the product warranty period. Warranty costs are incurred by both the supplier and the manufacturer. We analyze two different scenarios based on which party sets the warranty period: manufacturer warranty and supplier warranty. Product quality is controlled by the supplier, and the manufacturer determines the ordering quantity. We analyze these decentralized systems and provide the structural properties of the equilibrium strategies. We also compare the results of centralized and decentralized systems and identify the conditions under which one system provides a longer warranty and better product quality than the other. Our numerical study further shows that, in decentralized settings, when the warranty period is determined by the firm sharing the larger proportion of total warranty costs, the supply chain can achieve greater system-wide profit. Both parties can therefore benefit from properly delegating the warranty decision and sharing the resulting additional profit. We further design a supplier-development and buy-back contract for coordinating decentralized supply chains. Several extensions are also discussed.