Last time buy decisions for products sold under warranty

Manufacturers supplying products under warranty need a strategy to deal with failures during the warranty period: repair the product or replace it by a new one, depending on e.g. age and/or usage of the failed product. An (implicit) assumption in virtually all models is that new products to replace the failed ones are immediately available at given replacement costs. Because of the short life cycles of many products, manufacturing may be discontinued before the end of the warranty period. At that point in time, the supplier has to decide how many products to put on the shelf to replace failed products under warranty that will be returned from the field (the last time buy decision). This is a trade‐off between product availability for replacement and costs of product obsolescence. In this paper, we consider the joint optimization of repair‐replacement decisions and the last time buy quantity for products sold under warranty. We develop approximations to estimate the total relevant costs and service levels for this problem, and show that we can easily find near‐optimal last time buy quantities using a numerical search. Comparison to discrete event simulation results shows an excellent performance of our methods.