Analyzing manufacturer and the insurance-based risk mitigation policy with equipment service contracting

ABSTRACT

Manufacturing are recently investing in performance provision for customers focusing on equipment availability. However, performance-based contracts (PBC) between them suffer from the risks of downtime, opportunistic behavior, financial distress etc. We study the PBC strategy considering insurance-based risk mitigation policy. The service process with increasing failure rate is focused on where manufacturers decide to repair and replace by the equipment retirement age. The business interruption (BI) insurance is jointly purchased. Results show that insurance and PBC incentive exist partial substitutes and interactions. BI insurance not only mitigates PBC-induced risks but also provides a feasible way for improving the usage life.