Maintenance Capacity Design and Quality Improvement in the Presence of Outsourcing of Maintenance Service

With increasing competition and rising consumer expectations, manufacturers face growing pressures to manage defective product returns. In this paper, we develop a game-theoretical model to explore how a manufacturer should design its maintenance capabilities for returned defective products and determine whether to outsource maintenance services and invest in product quality improvements. We consider two types of supply chains: one with a monopolistic retailer and another with competing retailers. For each type, we analyze both a benchmark model and a quality improvement model. Our analysis explicitly characterizes the manufacturer’s trade-offs and identifies the conditions under which outsourcing maintenance services is optimal. We find that higher external market repair costs and higher defective product rates always have a negative impact on retailers. However, while the manufacturer’s profit decreases with an increase in the product defect rate, it does not necessarily decrease with rising external market repair costs. Moreover, our findings indicate that the manufacturer’s quality improvement can yield a Pareto improvement for all players in the supply chain. Additionally, it is insightful to show that channel coordination is achievable if all players can properly design a quality improvement cost-sharing contract. These findings provide valuable insights into how manufacturers can strategically balance maintenance capacity design and quality improvement investments to enhance overall supply chain performance.