Optimal maintenance service outsourcing strategy considering extended warranty service

Abstract

In recent years, extended warranty (EW) services are widely provided by brand firms.Given that third-party maintenance service providers have more maintenance cost advantages than brand firms, brand firms face the challenge of whether to enter the maintenance service market. To address the above challenge and issue, we develop theoretical models. The research shows that the cost coefficient of developing maintenance service plays a critical role in the optimal maintenance service operation strategy. And the base market sizes of the EW and the charged maintenance service have significant influences on the results. Moreover, we propose conditions for a win-win outcome. | INTRODUCTIONWith the increasing price competition of products, the profit space of firms has declined. To promote product competitiveness and help consumers to avoid risk, more and more firms have begun to provide extended warranty (EW) services that can bring considerable profits (Hsiao et al., 2010;Lam & Lam, 2001). Though the handsome profit brought by EWs, firms should bear the heavy cost of operating that bothers some firms. It is noteworthy that the warranty services cost of Tesla is $123 million in 2017 (Guajardo et al., 2016). In this context, though there are still many brand firms providing after-sales services by themselves, like Huawei, OPPO, and DJI (DJI, 2021;Huawei, 2021;OPPO, 2021), an increasing number of brand firms select a low investment and low responsibility way, that is, outsourcing.Outsourcing, as an efficient strategy, is widely used by majority brand firms and helps firms to avoid the heavy operating cost and to focus on their core competencies, such as Nike and Apple who outsource their production line. Besides production outsourcing, service outsourcing is particularly common nowadays, such as logistics service, pre-sale service, and after-sales service. Outsourcing aftersale services to the third-party service providers lowers the barrier of entering into the great potential EW market for some firms without enough resources and contributes to focusing on the core businesses for some giant firms by avoiding the huge costs of establishing and operating service networks and wasting limited resources (Kurvinen et al., 2016;Yoo et al., 2021). For instance, BMW outsources its warranty services to a third-party service provider (Esmaeili et al., 2014).And JD outsources the after-sales maintenance service of their brand "JD Manufacture" to a third-party service provider, Baixiubao (ITS, 2017). It also plays an important role in avoiding competition and improving the performance of the entire supply chain by allowing professionals to handle professional issues. On a whole, there is no doubt that the outsourcing after-sale services strategy is an efficient way to reduce the operating cost for firms. Besides, it is also a good way to improve service convenience.

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