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.
Similar content being viewed by others
References
Agrawal V and Seshadri S (2000). Impact of uncertainty and risk aversion on price and order quantity in the newsvendor problem. Manufacturing & Service Operations Management 2 (4): 410–423.
de Almeida AT (2001). Multicriteria decision making on maintenance: Spares and contracts planning. European Journal of Operational Research 129 (2): 235–241.
Bouakiz M and Sobel MJ (1992). Inventory control with an exponential utility criterion. Operations Research 40 (3): 603–608.
Cachon GP (2003). Supply chain coordination with contracts. In: Graves SC and de Kok AG (eds). Handbooks in Operations Research and Management Science: Supply Chain Management. Elsevier, Amsterdam, pp 229–332.
Corbett CJ and de Groote X (2000). A supplier’s optimal quantity discount policy under asymmetric information. Management Science 46 (3): 444–450.
Cox DR (1962). Renewal Theory. Methuen: London.
Eeckhoudt L, Gollier C and Schlesinger H (1995). The risk-averse (and prudent) newsboy. Management Science 41 (5): 786–794.
Elsayed EA (2012). Reliability Engineering. Addison Wesley Longman: Reading.
Federal Aviation Administration (2008). Air carriers’ outsourcing of aircraft maintenance, Report Number AV-2008-090. http://www.oig.dot.gov/sites/dot/files/pdfdocs/WEB_FILE_Review_of_Air_ Carriers_ Outsourced_Maintenance_AV2008090.pdf.
Gan X, Sethi S and Yan H (2004). Coordination of supply chains with risk-averse agents. Production and Operations Management 13 (2): 135–149.
Gan X, Sethi S and Yan H (2005). Channel coordination with a risk-neutral supplier and a downside-risk-averse retailer. Production and Operations Management 14 (1): 80–89.
Gaur V and Seshadri S (2005). Hedging inventory risk through market instruments. Manufacturing & Service Operations Management 7 (2): 103–120.
Gupta D, Günalay Y and Srinivasan MM (2001). The relationship between preventive maintenance and manufacturing system performance. European Journal of Operational Research 132 (1): 146–162.
Huang CC and Yuan J (2010). A two-stage preventive maintenance policy for a multi-state deterioration system. Reliability Engineering & System Safety 95 (11): 1255–1260.
Juran JM and Gryna FM (1993). Quality Planning and Analysis. McGraw-Hill: New York.
Keeney RL and Raiffa H (1993). Decisions with Multiple Objectives: References and Value Tradeoffs. Cambridge University Press: Cambridge, UK.
Kirkwood CW (1992). An overview of methods for applied decision analysis. Interfaces 22 (6): 28–39.
Li CL and Kouvelis P (1999). Flexible and risk-sharing supply contracts under price uncertainty. Management Science 45 (10): 1378–1398.
Moskowitz H and Plante R (1984). Effect of risk aversion on single sample attribute inspection plans. Management Science 30 (10): 1226–1237.
Roux O, Duvivier D, Quesnel G and Ramat E (2013). Optimization of preventive maintenance through a combined maintenance-production simulation model. International Journal of Production Economics 143 (1): 3–12.
Safra Z, Segal U and Spivak A (1990). Preference reversal and nonexpected utility behavior. American Economic Review 80 (4): 922–930.
Selden L (1978). A new representation of preferences over ‘certain × uncertain’ consumption pairs: The ‘ordinal certainty equivalent’ hypothesis. Econometrica 46 (5): 1045–1060.
Shah R and Ward PT (2003). Lean manufacturing: Context, practice bundles, and performance. Journal of Operations Management 21 (2): 129–149.
Tarakci H, Tang K, Moskowitz H and Plante R (2006). Incentive maintenance outsourcing contracts for channel coordination and improvement. IIE Transactions 38 (8): 671–684.
Teresko J (2009). Maintenance outsourcing as a global strategy. Industry Week 258 (5): 22.
Tsay AA (2002). Risk sensitivity in distribution channel partnerships: Implications for manufacturer return policies. Journal of Retailing 78 (2): 147–160.
Tsay AA, Nahmias S and Agrawal N (1999). Modeling supply chain contracts: A review. In: Tayur S, Ganeshan R and Magazine M (eds). Quantitative Models for Supply Chain Management. Kluwer: Boston, MA, pp 299–336.
Wang H (2002). A survey of maintenance policies of deteriorating systems. European Journal of Operational Research 139 (3): 469–489.
Wang Y and Pham H (2013). Maintenance modeling and policies. In: Dohi T and Nakagawa T (eds). Stochastic Reliability and Maintenance Modeling. Springer-Verlag: London, pp 141–158.
Webster S and Weng Z (2000). A risk-free perishable item returns policy. Manufacturing & Service Operations Management 2 (1): 100–106.
Wei Y and Choi TM (2010). Mean-variance analysis of supply chains under wholesale pricing and profit sharing schemes. European Journal of Operational Research 204 (2): 255–262.
Author information
Authors and Affiliations
Corresponding author
Additional information
Supplementary information accompanies this article on the Journal of the Operational Research Society website (www.palgrave-journals.com/jors)
Electronic supplementary material
Rights and permissions
About this article
Cite this article
Tseng, FS., Yeh, Y. Maintenance outsourcing coordination with risk-averse contractors. J Oper Res Soc 65, 1760–1769 (2014). https://doi.org/10.1057/jors.2013.143
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1057/jors.2013.143