Title: Analysing performance-based contract for manufacturing systems using absorbing state Markov chain

Authors: Pradipta Patra; U. Dinesh Kumar

Addresses: Narsee Monjee Institute for Management Studies, Hyderabad, 12-13-95, Street No. 3, Near Big Bazaar, Tarnaka, Secunderabad, 500017, India ' Indian Institute of Management Bangalore, Bannerghatta Road, Bangalore, 560076, India

Abstract: We have analysed a performance-based contract (PBC) scenario, where the customer procures product manufacturing equipment from an original equipment manufacturer (OEM). Subsequently, the OEM is rewarded or penalised on basis of the 'outcome', i.e., conformance of manufactured products to target specifications. In the scenario where target specifications are not met, the OEM needs to rework and repair the equipment at his/her own cost. The rework and repair phase continues until the target specifications are satisfied. We use an absorbing state Markov chain to model and analyse the rework and repair phase. We provide long-term probability of satisfying the target specifications, the average number of steps (rework and repair) required to meet target specifications. We also provide the optimal equipment design specification parameter (for example, design reliability) that the OEM should set. Further, the optimal revenue earned by the OEM under this PBC is discussed.

Keywords: maintenance; performance-based contract; PBC; reliability; absorbing state Markov chain.

DOI: 10.1504/IJAOM.2017.085631

International Journal of Advanced Operations Management, 2017 Vol.9 No.1, pp.37 - 56

Received: 23 Apr 2016
Accepted: 19 Mar 2017
Published online: 03 Aug 2017 *

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