European Journal of Operational Research 156 (2004) 110–126

www.elsevier.com/locate/dsw

Production, Manufacturing and Logistics

Product warranty logistics: Issues and challenges

a,b b,* c
D.N.P. Murthy , O. Solem , T. Roren
a
Division of Mechanical Engineering, The University of Queensland, Q 4067, Australia
b
Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology,
A. Getz v 1, Trondheim 7491, Norway
c
Intentia, 
Alesund 6022, Norway
Received 6 May 2002; accepted 3 December 2002

Abstract

Warranty is an important element of marketing new products. The servicing of warranty results in additional costs
to the manufacturer. Warranty logistics deals with various issues relating to the servicing of warranty. Proper man-
agement of warranty logistics is needed not only to reduce the warranty servicing cost but also to ensure customer
satisfaction as customer dissatisfaction has a negative impact on sales and revenue. Unfortunately, warranty logistics
has received very little attention. The paper links the literature on warranty and on logistics and then discusses the
different issues in warranty logistics. It highlights the challenges and identifies some research topics of potential interest
to operational researchers.

2003 Elsevier B.V. All rights reserved.

Keywords: Product warranty; Logistics; Strategic management; Operational management

1. Introduction life when operated properly. This is achieved

through post-sale support (also called product
Modern industrialised societies are character- support) provided by the manufacturer. Post-sale
ised by (i) new products (consumer durable, in- support includes installation, warranties, extended
dustrial and commercial products) appearing at an warranties, maintenance service contracts, provi-
ever-increasing rate on the market, (ii) products sion of spares, training programs, product up-
getting more complex (due to technology ad- grades to name a few. Some of these (for example
vances), (iii) more demanding customers, and (iv) warranty) are integral part of the sale whereas
more stringent government regulations regarding others (for example extended warranty) are op-
product liability. tional for which the buyer pays an extra amount.
Buyers of product want assurance that the Products and post-sale support are bundled to-
product will perform satisfactorily over its useful gether and offered as a package with the buyer
often having the option to choose from different
bundles.
*
Corresponding author. Fax: +47-7359-3565. Post-sale support not only provides assurance
E-mail address: [email protected] (O. Solem). to buyers but can contribute significantly to the

0377-2217/$ - see front matter
2003 Elsevier B.V. All rights reserved.
doi:10.1016/S0377-2217(02)00912-8
 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126 111

profits of the manufacturer. Typically, the profit warranty logistics. We finally conclude with some
margin for post-sale service is roughly 30% as comments in Section 8.
opposed to 10% on the initial sale. Due to the
fierce competition, most electronic and automobile
manufacturers are surviving due to the profits 2. Product warranty: An overview
made on offering extended warranties. However,
these profit margins are shrinking as the competi- 2.1. Warranty concept and role
tion in post-sale support gets more intensive. Post-
sale support has become a powerful instrument for A warranty is a manufacturerÕs assurance to a
product differentiation when the products by dif- buyer that a product or service is or shall be as
ferent manufacturers are very nearly similar in represented. It may be considered to be a con-
terms of their characteristics. Delivery of post-sale tractual agreement between the buyer and manu-
service in a cost efficient manner becomes critical facturer entered into upon the sale of the product
for business survival and a critical element of this or service. A warranty may be implicit or it may be
is the logistics needed to provide the service. explicitly stated.
Product warranty serves many roles and many In broad terms, the purpose of a warranty is to
different types of warranty policies can be found in establish liability among the two parties (manu-
Blischke and Murthy (1994, 1996). Offering better facturer and buyer) in the event that an item fails.
warranty terms convey greater assurance to buyers An item is said to fail when it is unable to perform
and can result in greater sales. However, this in- satisfactorily its intended function when properly
creases the cost of servicing the warranty. Failure used. The contract specifies both the performance
to deliver proper warranty service can have a that is to be expected and the redress available to
negative impact on sales and hence negate the the buyer if a failure occurs.
reasons for offering the warranty in the first place. Most products are sold with some form of
This implies that product warranty logistic is very warranty. The type of warranty offered depends on
important from customer satisfaction as well from the product type. Warranties serve a somewhat
the manufacturerÕs profitability point of view. different purpose for buyer and seller. From the
The logistics of warranty servicing is a topic buyerÕs point of view, the main role of a warranty
that has received very little attention. This is sur- is protectional; it provides a means of redress if the
prising, as both warranty and logistics literature item, when properly used, fails to perform as in-
are vast. There are several issues in logistics that tended or as specified by the seller. Specifically, the
are relevant to warranty servicing but there are warranty assures the buyer that a faulty item will
many new issues that are unique. either be repaired or replaced at no cost or at re-
The aim of the paper is twofold. Firstly, to link duced cost. A second role is informational. Many
the warranty and logistics literature and secondly, buyers infer that a product with a relatively long
to discuss the different product warranty servicing warranty period is a more reliable and long-lasting
issues and highlight the new challenges to OR re- product than one with a shorter warranty period.
searchers. One of the roles of warranty from the manu-
The outline of the paper is as follows. Sections 2 facturerÕs point of view is also protectional. War-
and 3 give a brief introduction to product war- ranty terms may and often do specify the use and
ranty and logistics so as to set the background for conditions of use for which the product is intended
the main topic of the paper discussed in the next and provide for limited coverage or no coverage at
four sections. Section 4 deals with product war- all in the event of misuse of the product. The
ranty servicing. The logistic issues in the servicing manufacturer may be provided further protection
at the strategic level and subsequently at the op- by specification of requirements for care and
erational and tactical levels are discussed in Sec- maintenance of the product. Another important
tions 5 and 6, respectively. Section 7 deals with purpose of warranties for the manufacturer is
some other related topics of relevance to product promotional. Since buyers often infer a more
112 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126

reliable product when a long warranty is offered, pro-rata (PRW) are two simple policies. A com-
this has been used as an effective advertising tool. bination policy is a simple policy combined with
This is often particularly important when mar- some additional features or a policy, which com-
keting new and innovative products, which may be bines the terms of two or more simple policies.
viewed with a degree of uncertainty by many Group C policies are used principally in in-
potential consumers. In addition, warranty has dustry and government acquisition of large, com-
become an instrument, similar to product perfor- plex items––for example locomotives, power
mance and price, used in competition with other plants, aircraft or military equipment. Such war-
manufacturers in the marketplace. ranties involve several different characteristics
According to Priest (1981), a warranty serves as (some of which are reliability oriented) that change
both an insurance policy and a repair contract. As over time. One such class of policies is the reli-
an insurance policy, a warranty ensures that the ability improvement warranty (RIW) policies.
manufacturer will compensate the buyer for the The basic idea of a RIW is to extend the notion
loss by repair, replacement, or refund of the pur- of a basic consumer warranty (usually the FRW)
chase price, if the product fails within the specified to include guarantees on the reliability of the item
warranty period. As a repair contract, a warranty and not just on its immediate or short-term per-
fixes an obligation upon the manufacturer for formance. This is particularly appropriate in the
some period of time to provide, without a charge, purchase of complex, repairable equipment that is
services necessary to repair a defect in order to intended for relatively long use. The intent of re-
prolong the useful capacity of the product. liability improvement warranties is to negotiate
warranty terms that will motivate a manufacturer
2.2. Warranty policies: Taxonomy to continue improvements in reliability after a
product is delivered.
Blischke and Murthy (1991) proposed a taxo- Consumer durables are sold with warranty
nomy for classification of warranties. The first policies from Group A as they are bought as single
criterion for classification of a warranty is whether items. Industrial and commercial products are sold
or not the warranty requires development after with policies from Group A if bought individually
sale of the product. Policies which do not involve or with policies from Group B if bought in lots.
product development can be further divided into Finally, specialised industrial and defence prod-
two groups––Group A, consisting of policies ap- ucts built to customer requirements (and often
plicable for single item sales, and Group B, policies involving new and cutting edge technologies) are
used in the sale of groups of items (called lot or sold with warranty policies belonging to Group C.
batch sales). Group C policies involve develop- Blischke and Murthy (1991, 1994) give details
ment subsequent to the sale. of several different warranty policies belonging to
Policies in Group A can be subdivided into two each of the three groups. Another related concept
sub-groups, based on whether the policy is renew- is that of an ‘‘extended warranty’’ or a ‘‘service
ing or non-renewing. In the case of one-dimen- contract’’. The difference between a warranty and
sional renewing warranty policy, the warranty gets a service contract is that the latter is entered into
renewed with each failure occurring within the voluntarily and is purchased separately––the buyer
warranty interval so that the warranty ceases only may even have a choice of terms, whereas a war-
when an item operates satisfactorily with no fail- ranty is part of product purchase and integral to
ures over the warranty interval. In the case of the sale.
two-dimensional warranties, the warranty is chara-
cterised by a region over a two-dimensional plane 2.3. A brief review of warranty literature
with the two axes representing the age and usage
of item. A further subdivision comes about in Warranties have been studied by researchers
that warranties may be classified as ‘‘simple’’ or from many different disciplines and deal with a
‘‘combination’’. The free replacement (FRW) and diverse range of issues. These include historical,
 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126 113

legal, legislative, economic, behavioural, consu- • The tactical level typically includes decisions
merist, engineering, statistical modelling and that are updated anywhere between once every
analysis, operations research, accounting, mar- quarter and once every year. This embraces
keting, management and societal. Blischke and purchasing decisions, inventory policies and
Murthy (1996) is a collection of papers written by transportation strategies including the fre-
researchers from different disciplines and deals quency with which the retailers are visited.
with the different issues listed above. These issues • The operational level refers to day-to-day deci-
are interlinked and hence proper study of warranty sions such as scheduling, routing trucks, and
requires an interdisciplinary approach. As men- measuring performance.
tioned in the Introduction, warranty logistics has a
significant impact on the warranty servicing cost. Several papers deal with models that integrate
Blischke and Murthy (1994) deals with the study two or more of the issues such as location, inven-
of the cost analysis and the effect of engineering tory, transportation, service quality etc. (inte-
(design and manufacturing) decisions and war- grated models). Bowersox (1991), Jayaraman and
ranty servicing (repair versus replace) on the Srivastava (1995), Klimberg and Van Bennekom
warranty servicing cost. We will discuss this fur- (1997), Alfredsson (1997), Erenguc et al. (1999),
ther in a later section. Murthy and Djamaludin and Nozick and Turnquist (2001) are illustrative
(2002) review the warranty literature from 1990 to samples.
2001 and cite earlier review papers.
3.2. Categorisation of logistics

3. Logistics: An overview Logistics can be broadly divided into four cat-

egories, which we will briefly describe and discuss
3.1. Concept and evolution in the following sub-sections.

Logistics as an area of study began to gain at- 3.2.1. Supply chain logistics
tention in the early 1900s in the distribution of Supply chain management deals with the lo-
farm products (Lambert and Stock, 1993). There gistics of the delivery of inputs from suppliers to
are many different definitions of logistics based on the manufacturing plant and the delivery of fini-
different perspectives. These include the seven RÕs shed goods to various demand centres. It deals
(Shapiro and Heskett, 1985), life cycle approach with raw materials and components on the input
(Coyle et al., 1992), system perspective (Bowersox side and finished products on the output side. As
and Closs, 1996), channel/value-oriented (Chris- such the issues involved are as follows:
topher, 1998), and several others. Some of these
are more strategic while others are more tactical or • Selection of suppliers (input side).
operational and, some focus on a few issues of • Location of warehouses (output side––single or
logistics whilst others are more comprehensive. multi-echelon).
The literature on logistics and on logistics • Channels of distribution (retailers on the output
management is vast with many papers and books side).
dealing with various issues. Logistics management • Inventory levels (input and output side).
involves three levels of decision making as indi- • Transportation of goods (input and output
cated below. side).
• Contracts with external parties involved (input
• The strategic level deals with decisions that have and output side).
long-lasting effect on the firm. This includes de-
cisions regarding the number, location and ca- Logistics management is concerned with
pacities of warehouses and manufacturing achieving a more cost-effective satisfaction of end
plants. customer requirements through buyer–supplier
114 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126

integration. Such integration is achieved through 3.2.3. Product support logistics

the sharing of information. This way, the supply Complex products (such as an aircraft or an
chain perspective shifts the channel arrange- industrial plant) degrade and fail due to age and/or
ment from a loosely linked group of independent usage. As such, they need to be maintained over
businesses to a synchronised effort focused on ef- the life of the product (which can vary from 30 to
ficiency improvement and increased competitive- 50 years or more in some cases). This involves a
ness. In essence, overall orientation is shifted from spectrum of maintenance (corrective and preven-
inventory management (by each individual par- tive) activities. Product support logistics deals with
ticipant) to a pipeline perspective. the provisioning, procurement, materials handling,
transportation and distribution, and warehousing
3.2.2. Service response logistics of items and the support infrastructure needed for
Service response logistics is the process of co- carrying out these activities over the life of the
ordinating non-material activities necessary for the product. The main elements of logistics support
fulfilment of the service in an effective way. See are indicated in Fig. 2.
Davis and Mandrodt (1996). Blanchard et al. (1995) deals with maintenance
Service response logistics has different focus management and Blanchard (1998) with some re-
from supply chain logistics and this difference is lated logistical issues. Karmarkar and Lele (1983)
effectively illustrated in Fig. 1. Simply put, one can discuss the link between product support and its
say that supply chain logistics focuses on physical importance in the context of marketing products.
supply and distribution of products, while service
response logistics emphasises building responsive 3.2.4. Industry support logistics
organisations, which can respond to individual According to Barros et al. (2001), industry
customer requests. support logistics includes more global issues that

SUPPLY CHAIN LOGISTICS

Manu-
Supplier Product Product Retailer Product Customer
facturer

SERVICE RESPONSE LOGISTICS

Fig. 1. Supply chain logistics and service response logistics.

LOGISTICS SUPPORT

Support technology Maintenance facilities Supply support

Information systems Maintenance Test and Packaging,

and computer and support support handling, storage,
resources personnel equipment and distribution

Fig. 2. Elements of logistics support.

 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126 115

affect the industry as a whole such as transporta- 4.1. Warranty claims

tion policy, location incentives and globalisation
issues. This type of logistics provides the infra- This topic was first discussed by Gerner and
structure for the production process (transporta- Bryant (1980). Let L denote the product life cycle.
tion and communication needs, intra-modal links, This is the period from the time the product is first
etc.). introduced into the market to the instant when it is
withdrawn from the market due to the appearance
4. Product warranty servicing of a new and better product that replaces it. A
typical form for the sales rate (sales per unit time)
Offering a warranty implies that the manufac- is as shown in Fig. 4. It increases initially and then
turer must service claims over the warranty period starts decreasing over time.
resulting from product failures. The nature of Let W denote the warranty period. In the case
servicing depends on the type of the warranty. For where items are sold with non-renewing FRW
consumer durables and standard industrial and policy, the warranty claims occur over the period
commercial products, the servicing involves either ½0; L þ W Þ. These occur as random points along
refund (in the case of PRW) policy or repair or the time axis and are a function of the reliability.
replacement of failed component (for FRW and Let F ðtÞ denote distribution function for the time
other policies). In the case of RIW policies, the to first failure and the failed item is made opera-
servicing can also involve design modifications and tional by minimal repair (see Barlow and Hunter,
replacing all the components that have been re- 1960) with the failure rate just after repair being
designed. The warranty servicing process is shown
in Fig. 3.
Failures are a function of several variables and Product Sales Warranty Claims
these include product reliability (influenced by
design and manufacturing decisions of the manu-
facturer) and the usage mode and environment
(influenced by the consumer). As a result, claims
under warranty are a function of product reli-
ability, usage mode and environment, the number
of items sold and the warranty terms. The servic-
ing of warranty requires service channels, repair
Time L L+W
facilities, spares, equipment to carry our repair/
replacement etc. Fig. 4. Sale rate and EWC.

Number of sales Product reliability

Warranty
claims
Product usage Warranty terms

Warranty Provisioning of
service products/spares

Inventory Repair Service

Customer location capacity level
Satisfaction

Fig. 3. Warranty servicing process.

116 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126

the same as that just before failure. This is justified This life cycle begins with the launch of the
as the product is composed of many components product onto the marketplace and ends when
and the failure is due to failure of one (or very few) it is withdrawn.
component(s) and the failed item is restored to 4. Cost per unit time: This is useful for managing
operational state by either repairing or replacing warranty servicing resources such as parts in-
the failed components. If the time to repair is small ventories, labour and costs over time with dy-
relative to the time between failures, then warranty namic sales.
claims over the warranty period for a single item
occur according to a point process with intensity The cost per unit time is the most relevant from
function kðtÞ that is the same as the failure rate the warranty logistics perspective. This cost is a
rðtÞ ¼ f ðtÞ=½1  F ðtÞ. Then with sales rate given random variable as claims occur in an uncertain
by sðtÞ, the warranty claims occur according to a manner and cost of each repair is also a random
point process with intensity function mðtÞ given by variable. The costs comprise of fixed costs (inde-
(see Blischke and Murthy (1996) for details) pendent of claims rate) and variable costs (de-
Z t pendent on claims rate). They include the costs
mðtÞ ¼ sðxÞrðt  xÞ dx ð1Þ associated with the operation of service centres
w (equipment), spare part inventory (materials nee-
where ded for servicing) and for the servicing of claims
(material and labour).
w ¼ maxf0; t  W g ð2Þ
for 0 < t < L þ W . Note that mðtÞ is also the ex- 4.3. Warranty logistics
pected claims rate (expected claims per unit time)
has a shape as indicated in Fig. 4. It is similar to Warranty logistics deals with all the issues re-
that for the sales rate but with a lag. The total lating to warranty servicing. As mentioned earlier,
expected warranty claims (EWC) over the life cycle it has a significant impact not only on the warranty
is given by servicing cost but also on customer satisfaction.
Z W þL Proper management of warranty logistics is very
EWC ¼ mðtÞ dt: ð3Þ critical for business survival and success. This is
0
becoming more important as customers demand
Wasserman (1992) uses a time-series approach greater assurance and most countries have either
to predict warranty claims. enacted or are in the process of enacting stricter
legislation to protect consumer interests.
4.2. Warranty servicing costs The manufacturerÕs ability to service warranty
is affected by the geographical distribution of
Blischke and Murthy (1994) define several costs customers and by their demand for prompt res-
of interest to manufacturers and buyers. They in- ponse. The manufacturer needs a dispersed net-
clude the following: work of service facilities that store spare parts and
provide a base for field service. The service deliv-
1. Warranty cost per unit sale. ery network requires a diverse collection of human
2. Warranty cost over the lifetime of an item (life and capital resources and careful attention must be
cycle cost––LCC-I): This is buyer oriented and paid to both the design and the control of the
includes elements such as purchase cost, main- service delivery system. This involves several stra-
tenance and repair costs following expiration tegic and operational issues.
of the warranty coverage, operating costs and The strategic issues are (i) the number of service
disposal costs. centres and their location, (ii) the capacity and
3. Warranty cost over the product lifecycle (life cy- manning for each service centre (to ensure desired
cle cost––LCC-II): This is dependent on the in- response time for customer satisfaction), and (iii)
terval over which buyers purchase the product. whether to own these centres or outsource them so
 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126 117

that the service is carried out by independent ering, total system cost, utilization of the facilities
agents. The tactical and operational issues are (i) and so on. Mirchandani and Francis (1990),
transportation of the material needed for warranty Dresner (1992), Daskin (1995), and Beckmann
servicing, (ii) spare parts inventory management, (1999) these are sample of the books dealing with
(iii) scheduling of jobs, and (iv) optimal repair/re- the location problem. A small illustrative sample
place decisions. of the journal papers is as follows: Daskin and
The four different types of logistics discussed in Stern (1981) deals with location of emergency
Section 3 are all of relevance in the context of medical services, Alfredsson (1997) with location
warranty logistics and the management of war- of repair facilities, and Dasci and Verter (2001)
ranty servicing logistics requires input from many with location in the context of production–distri-
disciplines. In the following three sections some of bution system. Schilling et al. (1993) deals with
the important issues will be discussed and the covering models to decide on facility location and
challenges highlighted. Owen and Daskin (1998) with strategic facility
location.
The location of both service centres (for carry-
5. Warranty logistics: Strategic issues ing out repairs) and warehouses (for stocking
spares needed) depend on the geographical distri-
The main strategic issues are the location of bution of customers who have bought the product
warehouses and service centres, and the channels and the type of product and its reliability charac-
for warranty servicing. When the channel involves teristics as described in the next two sub-points.
an independent agent, several problems arise and
these need to be understood and resolved properly. 5.1.2. Location of service centres
In general, most products are complex systems
5.1. Location of material stocking points, service that can be decomposed into many different levels.
centres and warehouses When an item fails, the first task is to determine
and identify the most likely cause of failure. For
5.1.1. Location of material stocking points certain products (such as a lift in a multi-storey
The geographical placement of material stock- building) this requires on-site evaluation of the
ing points is an important element of logistics failed item. For others, the failed item is brought
strategy. In the context of supply chain logistics, to either the retailer (in the case of most consumer
fixing the number, location, and size of the ware- durables) or to some designated service centre. For
houses, and assigning market demand to them, most products, the failed item is made operational
determines the paths by which products are di- through appropriate actions at this level. How-
rected to the marketplace. As a result, one has a ever, in some instances, it is not possible to rectify
distribution network with warehouses and manu- all failures at this level due to lack of resources
facturing plants being the nodes. Decisions with such as special equipment and/or an appropriately
regards to warehouse location must include all trained workforce. In this case, the failed compo-
product movements and associated costs as they nent needs to be removed and shipped to a higher-
take place from plant location through interme- level service centre for rectification. Often, there
diate stocking points to customer locations, and can be more than two levels depending on the
finally back to the manufacturer for repair or re- complexity of the product and the type of re-
placement. sources needed for rectification. For example, in
Handler and Mirchandani (1979) classify the the case of a jet engine, it might involve a service
location problems in several ways based on the facility at major airports (level 1) followed by a
objective function, the point of demand, the po- national (or regional) service centre (level 2) and a
tential facility site and the number of facilities to service centre at the manufacturing plant (level 3).
be located. The objective function can be average This problem has received some attention in the lo-
travel time, maximum travel time, territory cov- gistic literature and is referred to as level-of-repair
118 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126

analysis (LORA). This basically deals with the these are called ‘‘discardables’’. Depending on the
task of determining whether an item is to be geographical area of the market, the manufacturer
treated as discardable (also called consumable) or might need to have a network of warehouses with
as repairable. If the item is to be treated as re- a multi-echelon structure involving one or more
pairable, the objective is to determine where it levels. For example, a multi-national manufacturer
should be repaired in a multi-echelon repair facil- might have a regional warehouse (level 3) receiving
ity. Alfredsson (1997) deals with decisions with parts for the different component manufacturers
regards to LORA and the spare parts and test and feeding to national warehouses (level 2) which
equipment needed to support a system. Barros and in turn might feed to local distributed warehouses
Riley (2001) deal with the optimisation of the (level 1) which in turn feed parts to service centres.
LORA. A related issue is the choice of best Two key issues are the location of the warehouses
maintenance action from a set of desirable main- and the capacity of each warehouse defined
tenance actions and this is discussed in Cassady through the quantities of different components
et al. (2001). These have implications for spare that need to be stocked. As mentioned in Section
parts and Fortuin and Martin (1999) deals with 3, this problem has received some attention in the
this topic. logistic literature. However, the models need to be
Models to determine the number of levels, the modified to take into account the location of the
location of the service centres and their capacities service centres and the reliability characteristics of
must take into account the following: the product. The optimal location must take into
account the following:
• Transportation time and cost for moving failed
and repaired items between service centres. • Transportation time and cost for moving parts
• The cost of operating the service centres (equip- between warehouses (in the case of multi-eche-
ment and skilled persons needed at each centre). lon warehouses) and from warehouses to service
• The capacity needed at each service centre de- centres.
pends on the demand for the services at the cen- • The cost of operating the warehouses.
tre. This in turn depends on the geographical • The capacity of each warehouse based on the
distribution of sales and product reliability. demand for spares from the various service cen-
tres that are serviced by the warehouse.
The location problem needs to address the fol-
lowing issues: 5.2. Demand for spares

1. Coverage (so that all the customers are cov- The management of inventory levels for both
ered). supply chain and service support logistics deal
2. Distance that a failed item needs to travel. with the ordering policies. There is a trade-off be-
3. Distance that a repairman has to travel in case tween the cost associated with, and the benefits
of a field visit or a customer has to travel to derived from, having an inventory, and several
bring failed item to a service centre or collection strategies have been proposed and studied.
point. Several methods have been developed to control
the reordering of items. These include the reorder
Given the coverage, the model discussed in point control, fixed interval control, and the min–
Section 4.1 can be used to determine the demand max-control, see for example, Hadley and Whitin
and the service capacity of the centre. (1963), Candea and Hax (1984), Sherbrooke
(1992), and Gupta and Korugan (1998). Mucks-
5.1.3. Location of warehouses tadt (1973) deals with multi-item, multi-echelon,
Warehouses are needed to stock spare parts for multi-indentured inventory system.
components that are non-repairable and need to At the highest level of warehouse, the total
be replaced on failure. In the logistic literature, demand for spares (of a component) over the
 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126 119

product lifecycle can be modelled as follows. If the Similarly, for the warranty servicing a manufac-
replacement time (of a failed component) is small turer can choose between the following two options:
relative to the mean life of the component, then the
demand for replacements over the warranty period 1. Service provided by the manufacturer (through
occur according to a point process with intensity retail or service centres owned and operated by
function (see Blischke and Murthy (1996) for de- the manufacturer).
tails) qðtÞ given by 2. Service provided by an independent agent.
Z t
5.3.1. Independent service agents
qðtÞ ¼ sðxÞmðt  xÞ dx ð4Þ
w Many manufacturers employ independent ser-
vice agents to carry out the warranty servicing
for 0 < t < L þ W , where mðtÞ is the renewal den- under a properly drafted contract. This raises
sity function associated with the component fail- several new issues as the interests of the two parties
ure density function gðtÞ and is given by are different. We highlight these issues by consid-
Z ering the following two contracts as illustrative:
t
mðtÞ ¼ gðtÞ þ mðt  xÞgðxÞ dx: ð5Þ
0 Contract A: The manufacturer pays a lump sum
to the agent and in return the agent
The expected replacement (or demand) rate is also has to service all claims during the
given by mðtÞ. The expected total spares (ETS) warranty period at no additional cost
required over the product life cycle is given by to the manufacturer.
Z Contract B: The service agent charges the manu-
LþW
facturer for each warranty service.
ETS ¼ qðtÞ dt: ð6Þ
0
• Informational asymmetry: The manufacturer
For further discussion on spares in the context of has better knowledge of product reliability com-
post-sale support, see Cohen and Lee (1990). pared to the agent and similarly the agent has
better information regarding field failures than
5.3. Service channels the manufacturer. This asymmetry can lead to
each party deciding on actions that are optimal
A manufacturer can choose between four main from their own individual perspective but over-
distribution channels for getting the product from all sub-optimal.
the factory to customers. These are (i) manufac- • Moral hazard: This situation arises when the
turer direct, (ii) company-owned dealerships, (iii) agent shirks in the effort expended (under Con-
independent retailer and, (iv) some combination of tract A) or carries out over-servicing (under
the first three. The co-ordination between the dif- Contract B) and the manufacturer is unable to
ferent elements (manufacturer, wholesaler and re- observe the service agentÕs effort. In the former
tailer) has received considerable attention in the case, it can lead to customer dissatisfaction and
marketing literature in the context of both supply thus affecting the manufacturerÕs reputation
chain and service response logistics. Books on and sales.
management of marketing channels, for example • Monitoring: The manufacturer can obtain new
Lewis (1968) and Rosenbloom (1995), deal with information by monitoring the agentÕs actions.
this topic in more detail. The linkage between Such information will allow the manufacturer
product distribution and service support channels to assess the warranty servicing carried out by
is discussed in Loomba (1996). the agent. However, this results in additional ef-
As indicated above a manufacturer can choose fort and cost to the manufacturer.
between many different distribution channels for • Adverse selection: This issue arises when the
getting the product from the factory to customers. manufacturer has to choose one or more service
120 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126

agents to carry out the warranty servicing from 2. What should be the inventory levels?
a pool of service agents. The service agents can 3. When should the spares be reordered?
misrepresent their ability and competencies and 4. What quantities of spares must be ordered?
the manufacturer is unable to assess them prior
to the signing of the contract. This can lead to These need to be linked to failures of compo-
the selection of inappropriate agents to service nents over time and these in turn are related to the
warranty. sales over time and component reliability.
• Incentives: The manufacturer can provide prop- The literature on inventory management is vast.
er incentives to the service agents so that the ac- Most models dealing with spare part inventory
tions of the agents are in the best interests of the assume very simple forms for the depletion of in-
manufacturer and avoid the need for monitor- ventory. In the warranty-servicing context, the
ing. A proper contract provides the right incen- depletion (of a particular component) occurs ac-
tives for the service agent to provide the optimal cording to a point process formulation with the
effort. intensity function related to the dynamic sales over
• Agency cost: The structuring, administering, the region serviced by the servicing centre and the
and enforcing of contracts causes cost which is reliability of the product. This intensity function
referred to as the agency cost. can be obtained in a manner similar to that for the
• Risks: In general, the manufacturer and the ser- demand discussed in Section 5.2. Optimal deci-
vice agents have partly differing goals and risk sions with regards to inventory levels and ordering
preferences and these impact on their individual policies require taking into account this stochastic
actions. nature of depletion.
Finally, most products are complex systems
The ‘‘agency theory’’ provides the framework to involving many components and they differ in
deal with the above issues. The agency theory has their failure characteristics. These add extra com-
been studied extensively and the literature is vast, plexity to the modelling process.
see for example, Eisenhardt (1989) and Ackere
(1993). The study of warranty servicing logistics 6.2. Material transportation
based on agency theory is a topic that has not
received any attention and offers scope for con- The supply chain logistics requires transpor-
siderable new research. tation of raw material and components from
suppliers to manufacturing plants and the trans-
6. Warranty logistics: Tactical and operational portation of finished products from plants to retail
issues markets via a hierarchy of warehouses and retail
outlets. Similarly, service logistics and product
The tactical and operational issues deal mainly support logistics also require transportation of
with activities at the service centre level and issues material (parts, failed items etc.) from one location
such as spare part inventory levels, transportation to another.
of spares from warehouses to service centres, Transportation of material has received a lot
scheduling of jobs and repair versus replacement of attention. Many books on materials manage-
decisions. ment and on operations management deal with
transportation, for example Tersine (1994) and
6.1. Spare part inventory Nahmias (1997). Several different issues relating to
transportation have been studied and an illustra-
The key issues in spare parts inventories are the tive sample is as follows. Yano (1992) deals with
following: transportation contracts, Qu et al. (1999) deals
with integrating inventory and transportation,
1. Which components should be carried as spare and Evers (2001) deals with emergency tranship-
parts? ments.
 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126 121

Related more specifically to warranty servicing et al. (1986), Yang (1989) and Agnihothri (1998).
logistics, one can define three kinds of material In this case, the scheduling of jobs is important to
transportation as indicated below: reduce the time spent in travelling between jobs.
For products that are brought to the service centre
1. Transportation of failed units from lower level (or retail outlet) this is not a problem as items are
to higher level in the case of multi-echelon ser- processed using the first come first served rule.
vice structure. However, should the warranty include penalties
2. Transportation of repaired items from service for delays then the scheduling needs to take this
centres to customers or pick up points where into account.
customers can collect them.
3. Transportation of spares to and from ware- 6.4. Replace versus repair strategies
houses.
Whenever a repairable item fails under war-
The quantities to be moved are random vari- ranty, the manufacturer has the option of either
ables and are related to sales and product reli- repairing the failed item or replacing it by a new
ability. The transportation can be carried out item. In the case of repair, the manufacturer needs
either by the manufacturer or by an independent to choose between different repair actions and this
agent. In the latter case, a contract between the impacts on the customer satisfaction as well as the
manufacturer and the independent agent needs to warranty servicing cost.
take into account the following: cost of transpor-
tation, frequency of transportation, upper limits 6.4.1. Strategies based on age (and/or usage) at
on quantities to be transported, time limits, pen- failure
alties for delays in delivery and breaches of con- Here the decision to repair or replace is based
tract, and so on. on the age of the item at failure (in the case of one-
Note that the agency problems discussed in dimensional warranties) and on the age and/or
Section 5.3 are also relevant in this case and there usage (in the case of two-dimensional warranties).
is considerable scope for research into different The optimal strategy is selected to minimise the
contract options using the agency theory frame- expected cost of servicing the warranty over the
work. Another topic is ‘‘emergency transhipment’’ warranty period. Blischke and Murthy (1994,
of material and optimal decision making with re- 1996) discuss the two sub-optimal strategies for
gards to such shipments. one-dimensional warranties and Jack and Van der
Duyn Schouten (2000) deals with the optimal
6.3. Scheduling of jobs, repairs and travelling strategy. Jack and Murthy (2001) examines a sub-
repairman problem optimal policy that is very close to the optimal
strategy and involves at most one replacement
Product support involves repairing failed items. over the warranty period. Iskandar and Murthy
Products can be differentiated based on whether a (in press) extends the results of Blischke and
failed item is brought to a service centre or a re- Murthy (1994, 1996) to two-dimensional warran-
pairman needs to go the failed item. In the former ties. Iskandar et al. (submitted for publication)
case, the scheduling of jobs is an important issue deals with a strategy similar to that in Jack and
that not only has an impact on the overall cost of Murthy (2001) in the context of two-dimensional
providing the service but also on customer satis- warranties.
faction. There is a vast literature dealing with the
scheduling of jobs, see for example Hajri et al. 6.4.2. Cost repair limit strategy
(2000), Jianer and Miranda (2001), and Pon- In general, the cost to repair a failed item is a
nambalam et al. (2001). The latter case results in random variable, which can be characterised by a
the travelling repairman problem. This has re- distribution function H ðzÞ. Analogous to the no-
ceived some attention; see for example, Afrati tion of a failure rate, one can define a repair cost
122 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126

rate given by fhðzÞ=½1  H ðzÞg, where hðzÞ is the very important that manufacturer avoids this oc-
derivative of H ðzÞ. Depending on the form of H ðzÞ, curring in the first instance.
the repair cost rate can increase, decrease or re- Fig. 5 shows the key issues involved and their
main constant with z. A decreasing repair cost rate impact on the customer satisfaction. A proper
is usually an appropriate characterisation for the contract between the manufacturer and service
repair cost distribution, see Mahon and Bailey agents and the monitoring of the agentsÕ actions
(1975). Optimal repair limit strategies are dis- are very critical for ensuring high level customer
cussed in Blischke and Murthy (1994, 1996) and satisfaction.
Zuo et al. (2000). Service quality has received a lot of attention in
the literature; see for example Haugen and Hill
(1999). There are several dimensions to service
7. Warranty logistics: Other issues quality and many of these are intangible and can
vary significantly from customer to customer. Of-
In this section we briefly discuss several other ten customers can have undue expectations re-
issues of importance in the context of product garding product performance for a variety of
warranty logistics. reasons (exaggerated statements made during
promotion, customer being not fully informed
7.1. Customer satisfaction etc.). However, other dimensions are more tangi-
ble and can be objectively assessed. These include
Customer dissatisfaction can arise due to poor response time to attend to a warranty claim, the
performance of the purchased item and/or the time for rectify a failed item, delays resulting from
quality of warranty service provided by the manu- lack of spares, workshop resources etc. Through
facturer. In either case, it results in a negative effective warranty logistics the negative impacts
impact on the overall business performance. This resulting from these can be minimised.
could be either due to the dissatisfied customers
switching to a competitor or loosing potential new 7.2. Dispute resolution
customers due to negative word-of-mouth effect.
The consequence of poor warranty servicing is Disputes in the context of warranties arise
more difficult and costly to rectify and hence it is when the manufacturer (or service agent) refuses

Manufacturer

Component Product Service Customers

manufacturer warranty Agents

Customer
Information satisfaction
Incentives asymmetry Monitoring

Customer
loyalty
Agency
cost

= Contract

Fig. 5. Customer satisfaction.

 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126 123

to admit a warranty claim as a valid (or legitimate) and is discovered only after the items have been
claim for a variety of reasons (for example, misuse produced and sold. In such cases, the manufac-
of product) or the customer is unhappy with the turer can be held responsible for damages caused
warranty service provided. In either case, the under the terms of warranty for fitness and the
problem needs to be resolved. The former is a legal recall is to replace one or more old components by
issue and has been discussed extensively in the newly designed ones.
legal literature. The latter is influenced by the
warranty logistics and poor warranty logistics can 7.5. Data collection and analysis
lead to greater number of disputes that need to be
resolved. The resolution can involve a third party During the servicing of warranty a lot of data is
(small claims tribunal for relative inexpensive generated. The data can be classified into different
claims or the highest legal institution in the case of categories as indicated below.
very costly claims). This topic has received some
attention, see, for example Steele (1975), Palfrey • Product related: Modes of failures, time be-
and Romer (1983) and, Cooter and Rubenfeld tween failures, operating environment etc.
(1989). • Customer related: Satisfaction with regards
product, warranty service etc.
• Servicing: Spare parts inventories, utilisation of
7.3. Use of loaners
service centres, transportation of material etc.
• Economic: Costs associated with different as-
A critical issue in warranty servicing is the time
pects of warranty servicing.
to service a warranty claim. Quality warranty
service requires that this should not exceed some
The data needs to be collected properly and
specified value. In some warranty contracts there is
analysed to extract useful information that can be
a penalty should this happen. One way for the
used for improvement activities. Technical data is
manufacturer (or agent) to reduce the probability
relevant for design changes, servicing data impor-
of this happening is to have a stock of loaners
tant in the context of improving the warranty lo-
which are issued to the owners of failed items when
gistics and, customer and financial data is useful
they are undergoing repair. This implies additional
for improving the overall business performance.
servicing costs and the manufacturer must opti-
Lyons and Murthy (submitted for publication)
mally decide on the number of loaners to be held
discuss a warranty management system to help
in stock. Karmakar and Kubat (1983) deals with a
manufacturer to manage warranty from the
simple model for decision making in the context of
product lifecycle perspective and a critical element
loaners.
of it is a data collection system. Proper data col-
lection during warranty servicing is important for
7.4. Product recall this purpose.

Occasionally, a manufacturer finds it necessary

to recall either a fraction or all of the items sold, 8. Conclusions
for some rectification action as a way of reducing
the overall warranty servicing costs. The recall of Product warranty logistics is important in the
only a fraction of the total production arises when context of new product sales. Effective logistics
items are produced in batches and some of the ensures higher customer satisfaction and lower
batches are defective due to inferior component(s) warranty servicing cost. This paper links the lo-
having been used and this is not detected under gistics literature and the product warranty litera-
quality control. A total recall situation usually ture and identifies several issues and challenges in
arises because of poor design specifications that the context of product warranty logistics. There is
can lead to malfunction under certain conditions considerable scope for operations researchers to
124 D.N.P. Murthy et al. / European Journal of Operational Research 156 (2004) 110–126

carry out new research on a range of topics vary- Beckmann, M.J., 1999. Lectures on Location Theory. Springer,
ing from narrow discipline specific to broad com- Berlin.
Blanchard, B.S., 1998. Logistics Engineering and Manage-
plex ones involving multi-disciplines. On the ment, fifth ed. Prentice-Hall International, Englewood
strategic level the main issues are the location of Cliffs, NJ.
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for warranty servicing. When the channel involves ability: A Key to Effective Serviceability and Maintenance
an independent agent, several problems arise and Management. John Wiley & Sons, New York.
Blischke, W.R., Murthy, D.N.P., 1991. Product warranty
where the ‘‘agency theory’’ provides the frame- management––I, a taxonomy for warranty policies. Euro-
work to deal with the relevant issues. On the tac- pean Journal of Operational Research 62, 127–148.
tical and operational level warranty logistics deals Blischke, W.R., Murthy, D.N.P., 1994. Warranty Cost Anal-
mainly with activities at the service centres and ysis. Marcel Dekker, New York.
issues such as spare part inventory, transportation Blischke, W.R., Murthy, D.N.P., 1996. Product Warranty
Handbook. Marcel Dekker, New York.
of spares from warehouses to service centres, Bowersox, D.J., 1991. Improving the logistics/marketing/sales
scheduling of jobs and repair versus replacement interface. In: Proceedings of the Annual Conference of the
decisions. Other issues of importance in the con- Council of Logistics Management vol. 1, pp. 243–255.
text of warranty logistics include, for instance, Bowersox, D.J., Closs, D.J., 1996. Logistical Management: The
customer satisfaction, dispute resolution, use of Integrated Supply Chain Process, first ed. McGraw-Hill
Companies, New York.
loaners, product recall and last, but not least data Candea, D., Hax, A.C., 1984. Production and Inventory
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lenges facing operations researchers within the NJ.
area of warranty logistics. Cassady, C.R., Murdock, W.P., Pohl, E.A., 2001. Selective
maintenance of support equipment involving multiple
maintenance actions. European Journal of Operational
Research 129, 252–258.
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Cooter, R.D., Rubenfeld, D.L., 1989. Economic analysis of
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