Maintenance outsourcing coordination with risk-averse contractors

Fu-Shiang Tseng and Yingchieh Yeh
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Fu-Shiang Tseng: National Central University, Jhongli City, Taiwan
Yingchieh Yeh: National Central University, Jhongli City, Taiwan

Journal of the Operational Research Society, 2014, vol. 65, issue 11, 1760-1769

Abstract: Under a maintenance outsourcing contract, an external contractor receives a fixed payment from a manufacturer for periodically performing preventive maintenance and for performing minimal repairs whenever process failures occur. If the contractor’s maintenance policy results in a process uptime above a target level specified in the contract, the contractor receives a bonus payment based on the difference between the uptime and the target levels. We study the optimal designs of maintenance outsourcing contracts for achieving channel coordination when the contractor is risk averse towards uncertain repair costs caused by process failures. We find cases in which channel coordination cannot be achieved because of the contractor’s risk preference. Furthermore, the contractor’s risk preference may make channel coordination more difficult or easier, depending on the parameters considered in the model.

Date: 2014
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