End-of-Life Inventory Decisions for Consumer Electronics Service Parts

We consider a consumer electronics (CE) manufacturer’s problem of controlling the inventory of spare parts in the final phase of the service life cycle. The final phase starts when the part production is terminated and continues until the last service contract or warranty period expires. Placing final orders for service parts is considered to be a popular tactic to satisfy demand during this period and to mitigate the effect of part obsolescence at the end of the service life cycle. To satisfy demand for service in the final phase, previous research focuses on repairing defective products by replacing the defective parts with properly functioning spare ones. However, for consumer electronic products there is a remarkable price erosion while repair costs may stay steady over time. As a consequence, this introduces the idea that there might be a point in time at which the unit price of the product is lower than repair associated costs. Therefore, it would be more cost effective to adopt an alternative policy to meet demands for service such as offering customers a replacement of the defective product with a new one or giving a discount on the next generation of the product. This paper examines the cost trade-offs of implementing alternative policies for the repair policy and develops an exact formulation for the expected total cost function. Based on this developed cost function we propose policies to simultaneously find the optimal final order quantity and the time to switch from the repair to an alternative replacement policy. Numerical analysis of a real world case study sheds light over the effectiveness and advantage of these policies in terms of cost reduction and also yields insights into the quantitative importance of the various cost parameters.