Note—Determination of Warranty Reserves: An Extension

Abstract

This paper extends a previously accepted model, used to estimate the warranty reserves required for nonrepayable products, by discounting future warranty costs to their present value, and by adjusting for expected changes in the general price level. The estimation equations are derived and their implications are discussed.

Engineering Economic Decisions and Warranties

“…Menke [22] proposed a similar model for irrepairable products with exponentially failure times. Amato and Anderson [1] extended this model to include discounted costs and other reserving strategies incorporating various conditions of failure times followed by Pantankar and Worm [26], Ritchken et al [28], Tapiero and Posner [34], and Thomas [36].…”

Warranty Economic Decision Models: A Summary and Some Suggested Directions for Future Research

“…Harty (1971) was the ÿrst to propose a life-cycle cost approach for establishing the average cost of ownership for an item under an FRW policy. While it is necessary for management to be able to accurately account for the costs associated with warranties, it is also important to be able to predict and estimate these costs (see Brown 1974, Amato et al 1976, Yun and Kalivoda 1977, Frees 1988, Springer 1977. Indeed, many of the di culties in capturing the costs of warranties are because of management and accounting practices, but further complications are intrinsic with the particular product or service and its associated failure characteristics.…”

“…Menke (1969) developed a model for predicting warranty reserves for irrepairable products having exponential failure time distributions, allowing for both FRW and PRW policies. Amato and Anderson (1976) extended Menke's model to include discounted costs. Implicitly, it is assumed in these models that the probability of multiple claims during a single ÿxed warranty period is negligible.…”

“…PRW policies are applied to items that are signiÿcantly in uenced by aging, such as tires. These policies became of interest as the e orts in developing warranty models for predicting manufacturing capability and costs evolved (see e.g., Menke 1969, Blischke and Scheuer 1975, Amato et al 1976, Patankar and Worm 1981, Mamer 1982a, 1982b. Other policies can be constructed by combining the FRW and PRW policies into a single plan, as was done by Heschel (1971).…”

“…For example, product performance is important, even after the warranty expires, because of its e ect on the manufacturer's reputation, product evaluation for future purchases by consumers, employee motivation, and quality improvement throughout the design, manufacturing, and administrative areas. Several papers have dealt with the quantiÿcation of warranties for basic accountability (Heck 1963, Fisk 1970, Brown 1974, marketing strategy (Dorfman and Steiner 1954, Udell and Anderson 1968, Glickman and Berger 1976, and the determination of reserve funds to cover expenditures for warranty claims (Lowerre 1968, Menke 1969, Amato and Anderson 1976. The rapidly developing and changing high technology throughout the 1970s further accelerated the need for research focus on even higher quality product development, which today further includes an emphasis on customer satisfaction.…”