Opportunity Study on the Adoption of an Extended Warranty Based on Use and Environment Conditions

This paper addresses the problem related to the adoption of an extended warranty period for randomly failing products sold under warranty. The possibility of buying an extended warranty for a given additional cost is often offered to the buyer by the manufacturer. The buyer has then to decide to take the extended warranty or not when purchasing the product. We develop in this paper a mathematical model to study the opportunity provided by the extended warranty for the buyer as well as for the manufacturer. The total expected cost incurred by each side during the product’s life cycle is expressed in order to determine the maximum extra cost the consumer should pay and the minimum price at which the manufacturer should sell the extended warranty. This is done under different options in terms of maintenance strategies adopted during the product’s lifecycle. We also take into account the effects of usage and environment conditions on the failure rate of the product. Numerical results are presented and discussed for the case of a water pump. Key-words: Extended warranty, Preventive maintenance, Use conditions, Environment conditions