Calculating the reserve for a time and usage indexed warranty

Calculating the reserve for a time and usage indexed warranty

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Article ID: iaor19982678
Country: United States
Volume: 43
Issue: 7
Start Page Number: 966
End Page Number: 975
Publication Date: Jul 1997
Journal: Management Science
Authors: , ,
Keywords: decision theory
Abstract:

Many products carry a warranty that offers protection for the consumer against low quality. These warranties are often two dimensional, such as an automobile warranty that guarantees repair up to a certain time and mileage after sale. This paper considers the problem of assessing the size of a reserve needed by the manufacturer to meet future claims for such a two-dimensional warranty. To do this, a class of failure models that describe failure by two scales – time and mileage, for example – must be developed. The first half of the paper is devoted to this development. Then the warranty reserve problem is considered in more detail. The problem is described and a decision-theoretic solution, making use of the newly developed reliability model, is proposed.

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