Incentive maintenance outsourcing contracts for channel coordination and improvement

Hakan Tarakci, Melbourne Business School
Kwei Tang, Purdue University
Herb Moskowitz, Purdue University
Robert Plante, Purdue University

Abstract

Consider a manufacturer who has a process with an increasing failure rate over time. In order to improve the process performance, the following two types of maintenance activity are outsourced to an external contractor: (i) preventive maintenance is performed periodically to improve the reliability of the process when the process is functional; and (ii) corrective maintenance is used to restore the process to a specified condition when it fails. We consider the use of incentive contracts to induce the contractor to select the maintenance policy that optimizes the total profit of the manufacturer and contractor. It is demonstrated that an incentive contract based on a combination of a target uptime level and a bonus always leads to the desired win-win coordination, and provides flexibility in allocating the extra profit generated from coordination and, importantly, an incentive to the contractor to improve the efficiency of the maintenance operations. The incentive contract can also be used to select the most economically efficient contractor frommultiple contractors with different maintenance capabilities.