Track: Supply Chain Management

Abstract

This study demonstrates that an extended warranty is a signal of product quality and an improvement strategy in the supply chain. As one of the after-sales services, it assures customers and significantly contributes to the profits of manufacturers and retailers with a more extended warranty period than the base warranty. However, the extended warranty period imposes additional costs for the manufacturer and the retailer that might influence their profits. We address this concern by considering a manufacturer that offers base warranties to two retailers in the identical market segment. We propose two different strategies in this study. The first strategy is that retailers do not apply an extended warranty, while the second applies the contrary. Assuming that customers are risk-prone to an extended warranty, the results explain that the extended warranty strategy provides the supply chain with a higher profit than a strategy without an extended warranty. A manufacturer and retailers also benefit significantly from implementing an extended warranty strategy. Furthermore, numerical illustration and sensitivity analysis is performed for model verification and better understanding.