Because of the rapid technological change, new products are appearing on the market at an ever increasing pace. Improvements in technologies have resulted in increased product life. Frequently, sale of new products is often tied to trade-ins resulting in a market for second-hand products.
The importance of warranty for second-hand products is increasing because consumers are demanding more protection against poor quality second-hand products and potential high costs of failures occurring shortly after purchase. Public policy makers have started responding to this consumer demand by enacting laws relating to warranties for second-hand cars. These laws require that dealers offer warranties and provide for mechanisms to ensure that dealers effectively service the warranty claims. This is now spreading throughout the market place; dealers have started offering warranties for other second-hand consumer durables, electrical and electronics goods.
Cost analysis of many different types of warranty policies have been carried out for new products, in the book "Warranty Cost Analysis'" by Blischke and Murthy. However, there is no study that deals with the formulation and analysis of warranties for second hand products.
Many of the warranty policies established for new products can also be applicable to second hand products. In this thesis we consider two such policies. These are (i) Free Replacement Warranty (FRW) and (ii) Pro-rata Warranty. The warranty for many second hand products is often negotiated by the buyer prior to the sale; dealers many offer many different options from which the buyer can select one that suits his/her interests. As a result, the warranty policies for second hand products vary considerably and include features such as cost sharing, exclusions, cost limits (for either each claim and/ or total claims over the warranty period) and buy-back options. Thus the range of warranty policies for second hand products is much wider than that for new products.
The thesis formulates 21 different policies. These include the well known FRW and PRW policies and the following:
Cost sharing warranty (CSW),
Cost limit warranty (CLW),
Buy-back warranty (BBW), and
Combinations of the above.
Dealers need to factor the warranty cost into the sale price when an item is sold with warranty. The cost analysis of warranties for second hand products is different from that for new products. The reasons for this are as follows:
1) In the case of new products all items are statistically similar. In contrast, each second hand item is unique. Its reliability characteristics are a function of several factors, for instance the age of the item, its past usage and maintenance history.
2) Dealers do not always have complete information regarding such factors for second hand items. To take a simple example, the exact age of an item may be unknown.
3) Dealers of second hand products often have the option to upgrade an item to improve its reliability. This reduces the expected warranty cost but incurs the cost of carrying out the upgrade action. Upgrade is worthwhile only if the cost of upgrade is less than the expected reduction in the warranty cost. The warranty cost analysis requires building models for claims over the warranty period, cost of rectifying each claim, and cost of upgrade action (if applicable).
In this thesis we develop several different models (4 at the system level and 8 at the component level) to model claims over the warranty period. These reflect the different scenarios with respect to issues such as information about item age, upgrade action and so on. Analysis of the 21 different policies based on one or more of these models is carried out and illustrated with several numerical examples.
The application of the results of the thesis to a real world problem is illustrated with a case study. The study deals with second hand cars sold under the FRW policy. It highlights the difficulties associated with data collection and their implications for model building and parameter estimation. Nevertheless, the model (based on real data) yields an expected warranty cost which is fairly close to the real average cost.
The thesis concludes with a brief summary of the contributions that it makes to this field and suggestions for future research into warranties for second hand products.