Optimizing a Hybrid Warranty Policy with Remanufactured Parts and Service Enhancement

Increasing value and complexity in warranty contract design has made policy optimization necessary for manufacturers. This paper investigates a one-dimensional, non-renewing hybrid warranty with “as-good-as-new” (AGAN) replacements. The warranty spans two periods. AGAN remanufactured second-hand parts are used as replacements in the first period, while minimal repairs are provided in the second period. However, customers may pay a premium to instead extend the AGAN replacements into the second period. A nonlinear optimization model is proposed for maximizing manufacturer profit based on the ratio between first and second warranty period length, the ratio between base unit price and enhanced warranty cost, and the age at which second-hand parts are salvaged rather than remanufactured. The proposed warranty is a novel extension in sustainable manufacturing and has its value demonstrated via numerical experiments while linking basic product aspects to warranty design.