Manufacturer warranty service outsourcing strategies in a dual‐channel supply chain

• Author: Shuguang He,Dongfan Wang,Yiwen Zhang,Zhen He,Keyuan Cai
• Date: 01 November 2020
• Published date: 01 November 2020
• DOI: http://doi.org/10.1111/itor.12769

Intl. Trans. in Op. Res. 27 (2020) 2899–2926

DOI: 10.1111/itor.12769

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

Manufacturer warranty service outsourcing strategies

in a dual-channel supply chain

Yiwen Zhang, Zhen He, Shuguang He∗, Keyuan Cai and Dongfan Wang

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

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

keyuancai@tju.edu.cn [Cai]; dfwang@tju.edu.cn [Wang]

Received 24 March 2019; receivedin revised form 16 December 2019; accepted 17 December 2019

Abstract

Warranty management for durable products has received increasing attention in recent years. In addition

to conventionally keeping warranty in-house, more manufacturers choose to outsource warranty service to

agents.This paper explores outsourcing strategies formanufacturer warranty services in a dual-channel supply

chain by which the demand-enhancing service can be undertaken by different supply chain parties. We show

the results of three alternative outsourcing strategies for manufacturers whereby (a) the retailer undertakes

the service, (b) a third party undertakes the service, and (c) both the retailer and a third party undertake the

service simultaneously. According to Stackelberg game theory, we build a two-echelon supply chain model

and discuss the corresponding expressions for supply chain members’ equilibrium decisions. Additionally,

we compare the profits of each supply chain member and derive interesting managerial insights. When the

base market size is relatively large, Scenario R helps the manufacturer and the retailer reach a “win-win”

situation.

Keywords:warranty service outsourcing; game theory; dual-channel supply chain; warranty cost

1. Introduction

A good warranty service can boost demand and help a company build its brand image (Guajardo

et al., 2015). Many manufacturers have resorted to providing warranty service to avoid traditional

competition that depends solely on price to lure customers (Wei et al., 2015). For instance, Dell and

Apple have gained reputation from high-quality after-sales customer service and support (Li et al.,

2016). However, these companies must realize a trade-off between the benefits and the associated

cost of providing warranty services. Like Tesla, the warranty services cost it $123 million in 2017

(Guajardo et al., 2015). Global warranty cost cannot be calculated with the same accuracy. It is

estimated to vary from 1% to 5% of the total sale price (Kurvinen et al., 2016).

∗Corresponding author.

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2900 Y. Zhang et al. / Intl. Trans. in Op. Res.27 (2020) 2899–2926

Facing huge maintenance costs, more manufacturers choose to outsource their warranty service

to a third party or retailer as a service agent, since the service outsourcing allows the companies

to avoid establishing huge costly service networks and to instead focus on its core competencies

(Kurvinen et al., 2016). Moreover, considering service agents are more specialized in after-sales

service, companies prefer to outsource the service than doing it in-house. The global outsourcing

market reached $952 billion in 2013 and continues to grow (Fersht and Snowdon, 2013; Ouyang

and Su, 2016).

Different companies use different service outsourcing strategies. And there is a considerable

variety in dual-channel supply chains. Many companies including Sony Electonics, IBM, Dell, and

KIA sell products through independent retailers such as Best Buy as wellas through their respective

e-commerce websites or Tmall.com (Ding et al., 2016; Chen et al. 2017). Consumers spent more

than $89 billion shopping online in the last quarter of 2015 in the United States alone (Chen et al.,

2017).

Facing the flourish service outsourcing industry in dual channel, some questions are raised.

How to choose the strategies from the perspective of manufacturers? Furthermore, how these

strategies benefit the companies? This program is devoted to explore and clarify. We discuss three

common warranty service outsourcing strategies in dual-channel supply chains: (a) Scenario R,

where the manufacturer outsources all the warranty service to the retailer. This is common in

automobile industry, for example, Toyota, Volkswagen consign warranty services for customers

to auto dealerships after products have been sold (Li et al., 2014); (b) Scenario 3P, where the

manufacturer outsources all the warranty services to the third party. Company such as BMW

outsources its warranty services to a third party instead of its dealerships (Esmaeili et al., 2014). A

similar strategy is also adopted by Renault for after-sales services for its electric Zoe model (Chen

and Perez, 2017); (c) Scenario 3PR, where the manufactureroutsources the warranty services of the

direct channel and the retail channel to a third party and a retailer, respectively. Some companies

adopt this hybrid warranty service outsourcing strategy. In the case of Apple, for example, its

products are insured by both resellers and third parties (Esmaeili et al., 2014).

To serve this program, we examine warranty service outsourcing strategies by establishing theo-

retical models with the Stackelberg game theory. Assuming a manufacturer sells products through

both direct and retail channels bundled with warranty service, the retailer needs to decide the retail

price for both channels. Many companies adopt the equal-pricing strategy setting the equal price

under different sales channels. Like Dell, each model of their laptops is priced the same on their

website and retail outlets. This pricing strategy can help the company to alleviate channel conflict

between the traditional and direct channels. Thus in this paper, we assume that the supply chain

adopts the equal-pricing strategy to avoid channel conflict, which is widely used in the literature

(Li et al., 2014; He et al., 2018). Although dual-channel supply chain management is discussed in

substantial literature, we examine this subject from a new perspective, service outsourcing, and we

answer the following questions:

(a) Which strategy brings the highest profits to the supply chain members?

(b) With which strategywill the customers perceive the highest warranty service level and the lowest

retail price?

(c) How do the strategies differ in terms of system parameters such as customer preferences and

service cost sensitivity?

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2020 The Authors.

International Transactionsin Operational Research C

2020 International Federation ofOperational Research Societies