Information sharing under different warranty policies with cost sharing in supply chains

• Date: 01 May 2020
• Published date: 01 May 2020
• Author: Zhen He,Shuguang He,Keyuan Cai
• DOI: http://doi.org/10.1111/itor.12597

Intl. Trans. in Op. Res. 27 (2020) 1550–1572

DOI: 10.1111/itor.12597

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

Information sharing under different warranty policies

with cost sharing in supply chains

Keyuan Cai, Shuguang He and Zhen He

College of Management and Economics, Tianjin University, Tianjin 300072, China

E-mail: keyuancai@tju.edu.cn [Cai]; shuguanghe@tju.edu.cn [S. He]; zhhe@tju.edu.cn [Z. He]

Received 27 February2018; received in revised form 1 July 2018; accepted 29 August 2018

Abstract

In practice, it is found thata product warranty can be provided by either the supplier or the manufacturer. As

supply chains are increasingly integrated today, warranty costs are usually shared between the supplier and

the manufacturer. In this paper, we model two different warranty policies based on which party provides the

warranty: manufacturer warranty and supplier warranty. Considering the demand uncertainty and demand

forecast, we analyze the informationsharing strategy under these two warranty policies. Our resultsshow that

the manufacturer has an incentive to share the demand forecast information under both warranty policies

when the cost efficiency in providing a warranty is high, which is different from the existing literature on the

incentive for demand information sharing in the supply chain. Moreover, we find that it will hurt the party

who determines the warranty period but benefit the other party.

Keywords:cost sharing; information sharing; supply chain; warranty policy

1. Introduction

In today’s fiercely competitive markets, more and more firms resort to dependence on services

to build brand loyalty and increase profits. For instance, IBM and Dell enjoy a good reputa-

tion in terms of their customer services and support (Chen et al., 2012). Warranty, as the after-

sales service, is essentially an agreement with consumers under which the provider promises to

repair or replace for free the purchased product if it fails in the warranty period. Warranty ac-

tually reduces the potential risk for consumers, thereby stimulating demand. Therefore, a lot of

firms, especially those in consumer-electronics industries, often adopt the warranty policy as a

marketing promotion tool. For example, to attract more customers, GOME (one leading home

appliance retailer in China) has made its flat TV products more attractive than that of its com-

petitors by providing additional warranty (beyond the manufacturers’ warranty) for up to three

years. A similar phenomenon can be observed in many businesses/industries around the world

C

2018 The Authors.

International Transactionsin Operational Research C

2018 International Federation ofOperational Research Societies

Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St, Malden, MA02148,

USA.

K. Cai et al. / Intl. Trans. in Op. Res. 27 (2020) 1550–1572 1551

(Chen et al., 2012). Though warranty can enhance the product sales and marketing competitive-

ness, it also incurs the corresponding warranty cost. Taking the Tesla as an example, the warranty

cost to the company incurred in 2017 was $123 million, a 55% increase from the previous year’s

$79 million (Sarasota Herald-Tribune, 2018). Hence, firms have to make a trade-off between the

warranty cost and the benefit from the warranty when they make decisions on the warranty policy.

We consider a supply chain with one supplier and one original equipment manufacturer (OEM).

The manufacturer purchases parts or final products from the supplier and then sells them to the

consumers. The considered products are covered by a warranty policy. In practice, the warranty is

often provided by either the manufacturer or the supplier. Taking the PC market as an example,

some PC OEMs may purchase hard disks from the suppliers without a warranty, but provide a

warranty for the entire PC when selling to consumers. Thus the hard disk is covered by an OEM

warranty. Others, although the OEM provides a warranty for the entire PC, the warranty period

is often shorter (commonly one to two years) than that provided by the supplier on the hard disk

(commonly three to four years). Hence, the hard disk can be considered to have a supplier warranty.

Similar phenomenon can also be observed in the supply chain of other PC components, such as

memory chips, optical drives, and even CPUs (The PC Guide, 2008).

When a firm sets its warranty policy, warranty cost is an important issue that should be con-

sidered. When a product is returned for corrective actions in the warranty period, it will incur the

warranty costs including managerial costs, transportation costs, material costs, and labor/repair

costs. Specifically, an OEM often needs to process customer claims initially, thereby incurring the

handling and managerial costs. In most cases, the failed products are transported back to the

supplier for repairs, or the original parts are transported from the supplier to the OEM who is

responsible for repairs. Consequently, the transportation costs, material costs, and labor/repair

costs are incurred in this process. As the supply chains are increasingly integrated today, these costs

are usually shared by both the firms (Dai et al., 2012). For instance, in 2009, in order to respond

to “the improved standard of after-sale service for flat panel TV” announced by the Ministry of

Industry and Information Technology in China, several LCD panel suppliers (e.g., Chimei Innolux,

AU Optronics Corp.) and flat panel TV manufacturers (e.g., TCL, Hisense, and Haier) agree to

share the after-sales service responsibility and warranty costs. As a result, the warranty period of

the LCD panel is prolonged from one year to three years.

Based on the previous examples,we find that there exist manufacturer warranty and supplier war-

ranty with cost sharing in practice. In addition, rapid changes in economic and business conditions

have led to increased market demand uncertainty, resulting in the demand information becoming

a critical resource (Raju and Roy, 2000). Many manufacturers such as large computer manufactur-

ers like IBM and Hewlett-Packard routinely ask for sell-through data from the resellers (Lee and

Whang, 2000). They make a market demand forecast based on these sales data, and the forecast

information is private. Conventional wisdom suggests that the downstream manufacturer has no

incentive to share the forecast information when the upstream supplier’s decision variable is only

the wholesale price in a make-to-order supply chain system (Li and Zhang, 2002). Recently, several

scholars point out that the incentive for information sharing in the supply chain can be impacted by

some other factors, forexample, the magnitude of demand uncertainty (Li and Zhang, 2015), manu-

facturer’s production economy or diseconomy (Shang et al., 2016), and manufacturer’s efficiency in

production cost reduction (Ha et al., 2017). However, the impact of the product warranty policy on

the incentive for information sharing has not been explored in the literature. To fill this gap and build

C

2018 The Authors.

International Transactionsin Operational Research C

2018 International Federation of OperationalResearch Societies