Warranty Risk Management For the Consumer Durable Manufacturers

Warranty is a contractual obligation for maintenance upon failures of sold items during a warranty period. Warrantors utilise warranty as a strong promotional tool. Although warranty can bring some benefits, it involves various types of risks that may lead to negative impact (such as economic loss) on the warrantor. Systematic analysis of such risks can protect warrantors from potential losses. Based on a critical and comprehensive analysis of the existing warranty literature, very few studies discuss warranty risk management (WaRM). This thesis therefore aims to investigate WaRM from several perspectives and it makes contributions to the literature and practice, as shown below.

Firstly, a WaRM framework was developed. The framework was thoroughly analysed.

Secondly, a questionnaire was designed to gain an in-depth understanding of WaRM. From analysing the survey in the UK automotive industry, the following findings were obtained:

(a) the most commonly used tool for identifying warranty hazards is the root cause analysis technique;

(b) the most commonly used tool for assessing warranty risks is the failure mode effect and criticality analysis technique;

(c) the top contributors to warranty incidents and costs were human error related, which mainly include: (1) human error at different stages of the product life cycle; (2) product modification at suppliers and original equipment manufacturer (OEM); (3) customers' fraud (4) insufficient collaboration between parties (suppliers, OEM and warranty services providers). Based on these findings, two generic warranty hazard taxonomies were designed.

Thirdly, the selection of methods to mitigate WaR (warranty risk) is important but includes uncertainty. The thesis investigates the warranty risk mitigation process and analyses the main criteria that can be influenced. A selection method is developed based on the joint application of the cumulative prospect theory (CPT) and the analytic hierarchy process method (AHP). The new method can guide decision makers to the selection of mitigation methods over their conflicting views and their attitudes towards risks.

Fourthly, a warranty policy includes both warranty price and duration. Optimisation of warranty policies is therefore vitally important. The thesis also developed a CPT-based warranty model to optimise warranty price considering the warrantor's and buyers' risk attitudes. A numerical example is provided to illustrate the proposed models and the sensitivity of the profit to different risk attitudes for the parties. Accordingly, the main findings are: (1) The warrantor's risk attitude has less impact on the profit compared to the buyers' risk attitudes; (2) the increase in the repair cost may lead buyers to accept higher warranty price; and (3) the higher the buyers perceive the product failure rate, the more likely they will be willing to buy the extended warranty.

The theoretical implications of this thesis are listed as follows:

(a) Develop a framework for WaRM.

(b) Determine the top contributors to warranty hazards and hence two taxonomies were developed.

(c) Develop a decision model to select the optimal mitigation plan to respond to the emergent warranty risk.

(d) Develop a mathematical model to optimise warranty price considering the buyer and warrantor point of views towards the expected repair cost and claims cost, respectively.

The practical implications of this thesis are listed as follows:

(a) The WaRM framework will provide warranty practitioners with the required guidelines to manage warranty risks.

(b) The result of using the streaming data as an early warning tool has shown its efficiency in highlighting the warranty issues.

(c) The warranty hazards taxonomies might help warranty practitioners in improving the process, procedures or technologies which are required to reduce the occurrence of warranty risks.

(d) The development of WaRM-CPT model may aid the decision makers in selecting the optimal mitigation plan to respond to an emergent warranty risk.

(e) The determination of the optimal warranty price can be achieved when the warrantor and buyers views are considered. To this end, a mathematical model is provided.