Skip to main content
SpringerLink
Log in

Planning performance based contracts considering reliability and uncertain system usage

  • General Paper
  • Published:
Journal of the Operational Research Society

Abstract

This paper investigates a novel quantitative approach for planning and contracting performance-based logistics in the presence of uncertain system usage. Our efforts focus on an integrated service delivery environment where the manufacturer develops capital-intensive systems and also provides after-sales support. We propose an analytical model to characterize system operational availability by comprehending five performance drivers: inherent failure rate, usage rate, spare parts inventory, repair time, and the fleet size. This analytical insight into the system performance allows the service supplier to minimize the total cost across system design, production, maintenance, and repair. Two contracting schemes are investigated under cost minimization and profit maximization schemes. For the first time in literature, reliability design and service parts logistics are seamlessly integrated into one decision support model for improving operational availability while lowering the lifecycle cost. Numerical examples are provided to demonstrate the applicability and the effectiveness of the proposed decision support tool.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1
Figure 2
Figure 3

Similar content being viewed by others

References

  • Axsäter S (1990). Modelling emergency lateral transshipments in inventory systems. Management Science 36 (11): 1329–1338.

    Article  Google Scholar 

  • Cochran JK and Lewis TP (2002). Computing small-fleet aircraft availabilities including redundancy and spares. Computers and Operations Research 29 (5): 529–540.

    Article  Google Scholar 

  • Coit DW, Jin T and Wattanapongsakorn N (2004). System optimization considering component reliability estimation uncertainty: A multi-criteria approach. IEEE Transactions on Reliability 53 (3): 369–380.

    Article  Google Scholar 

  • Elsayed EA (1996). Reliability Engineering. Chapter 9, Addison Wesley Longman Publisher: Reading, MA.

    Google Scholar 

  • Graves SC (1985). A multi-echelon inventory model for a repairable item with one-for-one replenishment. Management Science 31 (10): 1247–1256.

    Article  Google Scholar 

  • Gupta OK and Ravindran A (1985). Branch and bound experiments in convex nonlinear integer programming. Management Science 31 (12): 1533–1546.

    Article  Google Scholar 

  • Huang H-Z, Liu HJ and Murthy DNP (2007). Optimal reliability, warranty and price for new products. IIE Transactions 39 (8): 819–827.

    Article  Google Scholar 

  • Jin T and Liao H (2009). Spare parts inventory control considering stochastic growth of an installed base. Computers & Industrial Engineering 56 (1): 452–460.

    Article  Google Scholar 

  • Kang K and McDonald M (2010). Impact of logistics on readiness and life cycle cost: A design of experiments approach. In: S. Johansson, J. Montoya-Torres, J. Hugan, and E. Yücesan(eds.) Proceedings of Winter Simulation Conference, IEEE Xplore database, pp 1336–1346.

  • Kim SH, Cohen MA and Netessine S (2007). Performance contracting in after-sales service supply chains. Management Science 53 (12): 1843–1858.

    Article  Google Scholar 

  • Kim SH, Cohen MA and Netessine S (2010). Reliability or inventory? Analysis of product support contracts in the defense industry. Working Paper, Yale University, www.som.yale.edu/faculty/sangkim/ReliabilityInventory.pdf, accessed 8 January 2011.

  • Kuo W and Wan R (2007). Recent advances in optimal reliability allocation. IEEE Transactions on Systems, Man, and Cybernetics 37 (2): 143–156.

    Article  Google Scholar 

  • Lee HL (1987). A multi-echelon inventory model for repairable items with emergency lateral transshipments. Management Science 33 (10): 1302–1316.

    Article  Google Scholar 

  • Loerch AG (1999). Incorporating learning curve costs in acquisition strategy optimization. Naval Research Logistics 46: 255–271.

    Article  Google Scholar 

  • Marseguerra M, Zio E and Podofillini L (2005). Multiobjective spare part allocation by means of genetic algorithms and Monte Carlo simulations. Reliability Engineering and System Safety 87 (3): 325–335.

    Article  Google Scholar 

  • Mettas A (2000). Reliability allocation and optimization for complex systems. Proceedings of Reliability and Maintainability Symposium. IEEE Xplore database, pp. 216–221.

  • Moreno FJ (1990). MTBF warranty/guarantee for multiple user avionics. Proceedings of Annual Reliability and Maintainability Symposium, IEEE Xplore database, pp 113–119.

  • Muckstadt JA (1973). A model for a multi-item, multi-echelon, multi-indenture inventory system. Management Science 20 (4): 472–481.

    Article  Google Scholar 

  • Nowicki D, Kumar UD, Steudel HJ and Verma D (2008). Spares provisioning under performance-based logistics contract: Profit-centric approach. The Journal of the Operational Research Society 59 (3): 342–352.

    Article  Google Scholar 

  • Oliva R and Kallenberg R (2003). Managing the transition from products to services. International Journal of Service Industry Management 14 (2): 160–172.

    Article  Google Scholar 

  • Öner KB, Kiesmüller GP and van Houtum GJ (2010). Optimization of component reliability in the design phase of capital goods. European Journal of Operational Research 205 (3): 615–624.

    Article  Google Scholar 

  • Randall WS, Pohlen TL and Hanna JB (2010). Evolving a theory of performance-based logistics using insights from service dominant logic. Journal of Business Logistics 31 (2): 35–62.

    Article  Google Scholar 

  • Richardson D and Jacopino A (2006). Use of R&M measures in Australian defense aerospace performance based contracts. Proceedings of Reliability and Maintainability Symposium, IEEE Xplore database, pp 331–336.

  • Sherbrooke CC (1968). METRIC: A multi-echelon technique for recoverable item control. Operations Research 16 (1): 122–141.

    Article  Google Scholar 

  • Sherbrooke CC (1992). Multiechelon inventory systems with lateral supply. Naval Research Logistics 39 (1): 29–40.

    Article  Google Scholar 

  • Telcordia Technologies (2001). Special Report SR-332: Reliability Prediction Procedure for Electronic Equipment (Issue 1). Telcordia Customer Service: Piscataway, New Jersey.

  • US Department of Defense (2005). DoD guide for achieving reliability, availability, and maintainability. US Department of Defense, Washington, DC, http://www.acq.osd.mil/dte/docs/RAM_Guide_080305.pdf, accessed 22 November 2011.

  • Wise R and Baumgartner P (1999). Go downstream: The new imperative in manufacturing. Harvard Business Review 77 (5): 133–141.

    Google Scholar 

  • Wong H, van Houtum GJ, Cattrysse D and van Oudheusden D (2006). Multi-item spare parts systems with lateral transshipments and waiting time constraints. European Journal of Operational Research 171 (3): 1071–1093.

    Article  Google Scholar 

  • Yeh W-C and Lin C-H (2009). A squeeze response surface methodology for finding symbolic network reliability functions. IEEE Transactions on Reliability 58 (2): 374–382.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Texas State University, TX, USA

    T Jin

  2. Hamilton Sundstrand Power Systems, CA, USA

    P Wang

Authors
  1. T Jin
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. P Wang
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Jin, T., Wang, P. Planning performance based contracts considering reliability and uncertain system usage. J Oper Res Soc 63, 1467–1478 (2012). https://doi.org/10.1057/jors.2011.144

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/jors.2011.144

Keywords

Search

Navigation