Conformance quality and replacement costs under warranty

This paper investigates the impact of the conformance quality of a durable product on manufacturer’s and user’s replacement costs while the product is under warranty. It first relates conformance quality to reliability and then examines its effects on warranty costs to manufacturer and customer under both pro-rata and free-replacement warranties. In particular, the paper shows that the reduction in customer’s cost is generally contingent on more stringent quality improvement than the reduction in manufacturer’s costs. It also discusses the value of inspection, and presents an application based on real data.