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Warranty
Tom Chen
a
Elmira Popova
b,
a
i2 Technologies, Irving, TX 75039, USA
b
Graduate Program in Operations Research and Industrial Engineering,
Department of Mechanical Engineering, The University of Texas at Austin,
Austin, TX 78712, USA
Abstract
A new maintenance policy which minimizes the total expected servicing cost for an
item with twodimensional warranty is proposed. An iterative procedure to estimate
the items failure rate function from historical observations and an optimization al-
gorithm based on Monte Carlo simulation are applied to obtain the best maintenance
policy. Numerical examples and sensitivity analysis are presented.
Key words: TwoDimensional Warranty, Maintenance, Simulation-Optimization
j=1
e
1
t
3/2
j
+
2
u
3/2
j
_
_
1
t
3/2
j
+
2
u
3/2
j
_
k
j
(k
j
)!
The maximum likelihood estimators of
1
and
2
,
1
and
2
, can be obtained
by solving the following equations:
k
s
j=1
t
3/2
j
_
1
t
3/2
j
+
2
u
3/2
j
_
k
j
1
=
s
j=1
t
3/2
j
k
s
j=1
u
3/2
j
_
1
t
3/2
j
+
2
u
3/2
j
_
k
j
1
=
s
j=1
u
3/2
j
This system of equations does not have a close form solution. Bellow is the
recursive procedure recommended by Jorgeson [10].
Let V be a diagonal matrix with elements
v
j
=
1
t
3/2
j
+
2
u
3/2
j
,
X be a matrix of dimension s 2 with elements
[t
3/2
i
u
3/2
i
], i = 1, . . . , s,
and K be an s 1 vector with elements k
i
, i = 1, . . . , s.
Jorgeson [10] shows that the minimum variance linear unbiased estimator for
= (
1
,
2
) is
=
_
1
,
2
_
= (X
T
V
1
X)
1
X
T
V
1
K
Since V is unknown, the problem is to obtain an estimate of V which in turn
gives an estimate of . Let
V
m
denotes the estimate of V obtained on the m
th
iteration and let the corresponding estimate of be
b
m
= (X
T
V
1
m
X)
1
X
T
V
1
m
K
Let
V
0
be the s s identity matrix and dene
V
m+1
= diag[x
1
b
m
, x
2
b
m
, , x
s
b
m
]
6
We repeat the iterations until a convergence is achieved. At that time
b = (X
T
V
1
X)
1
X
T
V
1
K,
where
V is the matrix such that
V
m+1
=
V
m
within a certain tolerance level .
2.2 Policy analysis
The objective function of the policy dened in 2 will consist of the sum of
the replacement and maintenance cost. We would like to obtain the optimal
control limits, V
t
and V
u
, such that its minimum is obtained. Assume that
r is a random variable with probability distribution function G(.). Then the
objective function will equal to
Z (V
t
, V
u
) = min
{VtR
+
,VuR
+
}
E
r
[R
c
+R
m
] (1)
where E
r
[] is the expectation with respect to the random variable r, R
c
=
E [Replacement Cost], and R
m
= E [Minimal Repair Cost].
To reduce the dimensionality of the problem we consider the following cases:
r > max(h, s), min(h, s) < r < max(h, s), r < min(h, s). The probability of
being in each of the above cases can be easily found:
P [r > max(h, s)] = 1 G[max(h, s)] (2)
P [min(h, s) < r < max(h, s)] = G[max(h, s)] G[min(h, s)]
P [r < min(h, s)] = G[min(h, s)]
Conditional on the value of r, the objective function can be rewritten as:
Z (V
t
, V
u
) = min
{VtR
+
,VuR
+
}
{E
r
[R
c
+R
m
|r > max(h, s)] {1 G[max(h, s)]}
+E
r
[R
c
+R
m
|min(h, s) < r < max(h, s)] {G[max(h, s)] G[min(h, s)]}
+E
r
[R
c
+R
m
|r < min(h, s)] G[min(h, s)]}
For each of these cases the policy will reduce to an onedimensional problem.
Let r
i
be the ratio for customer i.
r
i
h and r
i
s: The item reaches V
u
before it reaches V
t
and reaches
W
u
before W
t
. The policy simplies to: If the item fails during [0, V
u
), then
the item is replaced. If the item fails during [V
u
, W
u
), then it is minimally
repaired.
Insert Figure 2(a) here
7
r
i
h and r
i
< s: The item reaches V
u
before it reaches V
t
and reaches W
t
before W
u
.In this case the onedimensional policy is : If the item fails during
(0, V
u
/r
i
), then the item is replaced. If the item fails during (V
u
/r
i
, W
t
), then
it is minimally repaired.
Insert Figure 2(b) here
r
i
< h and r
i
s: The item reaches V
t
before it reaches V
u
and reaches W
u
before W
t
. The policy simplies to: If the item fails during (0, r
i
V
t
), then
the item is replaced. If the item fails during (r
i
V
t
, W
u
), then it is minimally
repaired.
Insert Figure 2(c) here
r
i
< h and r
i
< s: The item reaches V
t
before it reaches V
u
and reaches
W
t
before W
u
.The policy simplies to: If the item fails during (0, V
t
), then
the item is replaced. If the item fails during (V
t
, W
t
), then it is minimally
repaired.
Insert Figure 2(d) here
To obtain the formulae for R
c
and R
m
let us dene N
1
(t, u) to be the process
for the number of replacements in the box (0, t) (0, u) and N
2
(t, u) to be the
process for the number of minimal repairs. The objective function becomes:
min
{VtR
+
,VuR
+
}
E
r
{C
m
E [N
1
(t, u)|(t, u) A] (3)
+C
r
E
_
N
2
(t, u)|(t, u) B, S
N
1
(t,u)
B
_
P
_
S
N
1
(t,u)
B
_
+C
r
E
_
N
2
(t, u)|(t, u) B, S
N
1
(t,u)
A
_
P
_
S
N
1
(t,u)
A
__
where S
N
1
(t,u)
is the time of the last replacement prior to (t, u).
The times of replacement will follow a renewal process since we are replacing
the failed item with a brand new one, i.e. each time we reset the lifetime
clock of the process to 0. The expected number of replacements will equal
to the expected number of renewals. Let m(t, u) be the expected number of
replacements(renewals) from time 0 to t and usage from 0 to u.
If F denotes the distribution function of the time between replacements and
F
n
its n-fold convolution, then m(t) =
n=0
F
n
(t), see Ross ([22], page 56).
Very few distributions have closed form of the renewal function m(t). There are
some authors who use Phase-type distributions to approximate it(see Neuts
[18] and Dekker [6]).
The item is minimally repaired if it fails during the remaining warranty region
B. Then, keep using the repaired item if no other failures occurred till the end
of the warranty region. The expected number of minimal repairs from 0 to
t equals to
_
t
0
h(x)dx, where h(x) is the failure rate function (see Florez and
Feldman [7], page 216.)
8
To obtain a formula for the associated minimal repair cost we need to condition
of the time of the last renewal/replacement, S
N
1
(t,u)
:
R
m
=C
r
_
E
_
N
2
(t, u)|V
t
< t < W
t
, V
u
< u < W
u
, S
N
1
(t,u)
B
_
(4)
P
_
S
N
1
(t,u)
B
_
+E
_
N
2
(t, u)|V
t
< t < W
t
, V
u
< u < W
u
, S
N
1
(t,u)
A
_
P
_
S
N
1
(t,u)
A
__
where the rst term can be simplied as follows:
E
_
N
2
(t, u)|V
t
< t < W
t
, V
u
< u < W
u
, S
N
1
(t,u)
B
_
= (5)
E [N
2
(t, u)|V
t
< t < W
t
, V
u
< u < W
u
, N
1
(V
t
, V
u
) = 0] =
_
A
(t, u)d(t, u)
and
P
_
S
N
1
(t,u)
B
_
= P [N
1
(V
t
, V
u
) = 0] = 1 F(V
t
, V
u
) (6)
The second term in the expected minimal repair cost involves the time of the
last replacement, S
N
1
(t,u)
being inside the rectangle A. Dene (t
0
, u
0
) to be the
coordinates of S
N
1
(t,u)
. Then,
E
_
N
2
(t, u)|V
t
< t < W
t
, V
u
< u < W
u
, S
N
1
(t,u)
A
_
= (7)
_
C
(t, u)d(t, u)
The set C is dened as {(0, W
t
) (0, W
u
)} \ {(0, t
0
) (0, u
0
)}. Following the
key renewal theorem we get the distribution of S
N
1
(t,u)
:
P
_
S
N
1
(t,u)
A
_
= [1 F(V
t
, V
u
)] +
_
A
[1 F(t x, u y)] dm(x, y) (8)
To obtain the complete formula for the expected minimal repair cost we need to
substitute (5), (6), (7), and (8) into (4). The above analysis provides complete
formula for the objective function. Obviously the minimum solution cannot
be obtained with conventional means. For that reason we will nd the optimal
control limits using simulationoptimization algorithm.
We should add that due to the four cases described above and the linear
relationship between time and usage we have to solve only one dimensional
9
problem. For instance, if the original failure rate function equals to (t, u) =
t +u, then for the rst case it reduces to (t, u) = (u/r
i
, u) = (/r
i
) u +
u =
1
(u). If r
i
h, then the item would reach V
u
before it reached V
t
and the
expected number of replacements will equal to: m(V
t
, V
u
) = m[(1/r
i
)V
u
, V
u
] =
m(V
u
). If r
i
< h, then the item would reach V
t
before it reaches V
u
and
the expected number of replacements will equal to m(V
t
, V
u
) = m[V
t
, r
i
V
t
] =
m(V
u
).
3 Simulation-optimization procedure for obtaining the optimal con-
trol limits
In this section we propose a simulation solution to the optimization prob-
lem dened in (3) given the initial twodimensional warranty region [0, W
t
]
[0, W
u
].
First we x the values of the decision variables (V
t
, V
u
) to (V
t1
, V
u1
). Then, we
simulate values of r
i
by sampling from its distribution. (Note that r
i
equals
to the ratio of the usage and time.) Given a value of r
i
we fall into one of
the four cases described above. Given a case we simulate N failure times and
obtain the average cost. Next we take a dierent set of values for (V
t
, V
u
) and
follow the same procedure to get the average warranty cost. The (V
t
, V
u
) which
gives the minimum average cost is the optimal control limit. We use a grid
algorithm with step sizes
t
and
u
to obtain the optimal solution.
The computational examples attempt to show the sensitivity of the objective
function with respect to one of the cost parameters, C
m
, and the failure rate
function, (t, u). The last set of computations show the robustness of the
optimal control limits when the random number seeds change.
3.1 Maintenance cost sensitivity analysis
Assume that the warranty region is dened by W
t
= 3 and W
u
= 4 and
the failure rate function is (t, u)=1.5t
3
2
+ 0.75u
3
2
. In the next examples, we
increase the replacement cost C
m
and keep everything else unchanged.
Example 3.1 C
m
= 2.5, C
r
=1, and r (3, 2), where (3, 2) is the Gamma
distribution with parameters 3 and 2.
From Table 1, the optimal control limits are in the neighborhood of (V
t
=
2.5, V
u
= 3.5). The zoom in results are listed in Tables 2 and 3. The sim-
ulation results show that when V
t
= 2.4 and V
u
= 3.3, the average cost is
10
minimized at 6.7. The average number of replacements is 2.3. As seen in Ta-
ble 3, the values of the neighboring points of (V
t
= 2.4, V
u
= 3.3) are consistent
with the optimal value.
Example 3.2 C
m
= 3, C
r
=1, and r (3, 2).
Similar to Example 3.1 we obtain that the optimal control limits equal to (see
Table 4)
(V
t
, V
u
) = (2.2, 3.1)
The zoom in results are given in Table 5 and the neighboring points analysis
in Table 6.
Example 3.3 C
m
= 3.5, C
r
=1, and r (3, 2).
From Table 7 the control limits are (V
t
, V
u
) = (2.1, 2.9), the zoom in results
are in Table 8 and Table 9.
A summary of the above three examples is given in Table 11. We can make the
following observation: Let V
t
and V
u
be the original optimal control limits.
If the new optimal control limits are V
new
t
and V
new
u
, respectively when C
m
decreases, then they lie outside of the region dened by (0, V
t
) (0, V
u
).
3.2 Comparison of dierent failure rates
Assume that the warranty is dened by W
t
= 3 and W
u
= 4. The replacement
costs are C
m
= 4,C
r
=1 and r (3, 2). The optimal control limits for the
following three dierent failure rates are compared.
1
(t, u) =t
3
2
+ 0.5u
3
2
2
(t, u) =1.5t
3
2
+ 0.75u
3
2
3
(t, u) =2t
3
2
+u
3
2
The failure rates are such that
2
(t, u) = 1.5
1
(t, u) and
3
(t, u) = 2
1
(t, u).
The optimal control limits for the above failure rates are summarized in Table
10. It appears that the parallel shifts of the failure rate function result into
bigger total warranty cost and number of replacements.
3.3 Stability of the control limits
Next we investigate the stability of the control limits for dierent random
seeds. Dierent random number seeds may lead to dierent control limits. If
11
the dierence between control limits is relatively small, we will condence in
the optimal control limits obtained by the simulation. To test their stability
dierent random number seeds are used for the following example:
Example 3.4 C
m
= 3, C
r
= 1, r (3, 2), and (t, u) = 1.5t
3
2
+ 0.75u
3
2
From the simulation results in Table 6, the optimal control limits in that run
are V
t
= 2.2 and V
u
= 3.1 with average cost 7.8. Fifteen more simulation runs
are performed to obtain the new control limits. They are listed in Table 12.
Table 12 shows that the points are close to each other. Figure 3 gives the
scatter plot of the optimal control limits for dierent random number seeds.
4 Conclusion
In this paper we present a maintenance/replacement policy under two dimen-
sional warranty. If the item fails during the region dened by [0, V
t
) [0, V
u
),
the item is replaced. If the item fails during the rest of the warranty region,
the item is minimally repaired.
This policy is very easy to implement. Once the optimal control limits are
obtained, the manufacturers only need to check the actual item usage and time
after purchase and compare that with (V
t
, V
u
) to determine which actions to
take. For those manufacturers that have many branches around the world (like
car dealers), it is particularly attractive. Getting the customers cooperation
is also very important for maintenance/replacement policies under warranty.
This policy can get the customers support very easily. The policy requires
repairs or replacements only if when item fails. Customers regular operations
would not be interrupted.
We study several cases with dierent cost structures and failure rates. Other
than just comparing the simulation results, we empirically show that if the
maintenance cost C
m
increase (minimal repair cost C
r
unchanged), the new
optimal control limits must lie outside of the region dened by the origin
and the original optimal control limits. Similarly, if the maintenance cost C
m
decreases with minimal repair cost C
r
unchanged, the new optimal control
limits must lie outside of the region dened by original optimal control limits
and the warranty limit. We also investigate the stability of the control limits.
Overall, this policy is easy to implement. The control limits are easy to nd. It
provides a good way to serve maintenance interventions under two-dimensional
warranty.
12
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14
V
u
|V
t
0.0 0.5 1.0 1.5 2.0 2.5 3.0
0.0 14.931 14.958 14.973 15.038 14.914 15.030 14.964
0.5 14.870 14.735 14.540 14.412 14.370 14.461 14.470
1.0 14.855 14.160 12.899 12.399 12.286 12.309 12.399
1.5 14.946 13.924 11.303 10.156 9.920 9.918 9.814
2.0 15.004 13.807 10.532 8.694 8.204 8.066 8.190
2.5 14.969 13.829 10.338 8.165 7.320 7.216 7.362
3.0 14.907 13.772 10.384 7.969 6.979 6.879 7.006
3.5 14.934 13.758 10.356 7.998 6.975 6.810 6.983
4.0 14.878 13.848 10.301 8.017 7.133 7.004 7.301
Table 1
The costs for servicing the warranty for C
m
= 2.5, C
r
=1, and r (3, 2)
V
u
|V
t
2.2 2.3 2.4 2.5 2.6 2.7
3.1 6.853 6.852 6.821 6.837 6.841 6.858
3.2 6.851 6.780 6.776 6.799 6.794 6.826
3.3 6.849 6.780 6.776 6.817 6.817 6.824
3.4 6.820 6.829 6.774 6.776 6.799 6.826
3.5 6.820 6.830 6.807 6.800 6.816 6.829
3.6 6.851 6.827 6.784 6.805 6.816 6.889
3.7 6.925 6.836 6.853 6.837 6.905 6.921
Table 2
Zoom in results for C
m
= 2.5, C
r
=1, and r (3, 2)
V
u
|V
t
2.4000 2.4125 2.4250 2.4375 2.4500 2.4625
3.2250 6.844 6.799 6.752 6.810 6.786 6.781
3.2375 6.765 6.798 6.818 6.778 6.779 6.781
3.2500 6.794 6.798 6.768 6.792 6.783 6.835
3.2625 6.834 6.788 6.713 6.758 6.778 6.768
3.2750 6.775 6.789 6.762 6.803 6.791 6.772
3.2875 6.761 6.816 6.811 6.767 6.807 6.800
3.3000 6.760 6.792 6.795 6.741 6.773 6.770
Table 3
Neighboring points for the optimal control limit for C
m
= 2.5, C
r
=1, and r (3, 2)
15
V
u
|V
t
0.0 0.5 1.0 1.5 2.0 2.5 3.0
0.0 14.931 14.958 14.973 15.038 14.914 15.030 14.964
0.5 14.870 14.788 14.629 14.513 14.472 14.570 14.577
1.0 14.855 14.281 13.147 12.707 12.625 12.661 12.749
1.5 14.946 14.070 11.674 10.647 10.477 10.509 10.431
2.0 15.004 13.958 10.982 9.319 8.935 8.862 9.028
2.5 14.969 13.985 10.817 8.879 8.185 8.175 8.389
3.0 14.907 13.932 10.874 8.744 7.943 7.976 8.202
3.5 14.934 13.913 10.861 8.820 8.018 8.023 8.308
4.0 14.878 14.004 10.810 8.866 8.241 8.309 8.762
Table 4
The Costs for servicing the warranty for C
m
= 3, C
r
=1 and dierent values of V
t
and V
u
V
u
|V
t
2.0 2.1 2.2 2.3 2.4 2.5
2.7 8.098 8.004 7.997 8.044 8.011 8.047
2.8 8.072 8.002 7.966 7.935 8.003 8.033
2.9 8.004 7.979 7.891 7.899 7.892 7.993
3.0 7.952 7.931 7.933 7.921 7.931 7.942
3.1 7.989 7.910 7.943 7.880 7.918 7.965
3.2 7.959 7.892 7.866 7.929 7.933 7.967
3.3 7.979 7.977 7.916 7.938 7.902 7.988
3.4 8.011 7.939 7.915 7.957 7.935 7.961
Table 5
Zoom in table for C
m
= 3 and C
r
=1
16
V
u
|V
t
2.1750 2.1875 2.2000 2.2125 2.2250 2.2375
3.0750 7.908 7.912 7.894 7.859 7.950 7.871
3.0875 7.883 7.906 7.925 7.916 7.875 7.881
3.1000 7.880 7.915 7.943 7.882 7.887 7.917
3.1125 7.865 7.905 7.839 7.889 7.901 7.894
3.1250 7.918 7.891 7.860 7.922 7.875 7.892
3.1375 7.918 7.912 7.914 7.892 7.893 7.890
3.1500 7.886 7.896 7.877 7.929 7.879 7.893
Table 6
Costs for the neighboring points around the optimal value for C
m
= 3 and C
r
=1
V
u
|V
t
0.0 0.5 1.0 1.5 2.0 2.5 3.0
0.0 14.931 14.958 14.973 15.038 14.914 15.303 14.964
0.5 14.870 14.842 14.717 14.614 14.573 14.679 14.684
1.0 14.855 14.402 13.394 13.015 12.963 13.012 13.099
1.5 14.946 14.216 12.045 11.139 11.034 11.101 11.049
2.0 15.004 14.110 11.432 9.944 9.667 9.658 9.865
2.5 14.969 14.140 11.296 9.588 9.049 9.134 9.415
3.0 13.932 14.091 11.365 9.520 8.907 9.074 9.397
3.5 14.934 14.072 11.367 9.642 9.061 9.236 9.633
4.0 14.878 14.160 11.318 9.714 9.349 9.614 10.222
Table 7
The maintenance costs for C
m
= 3.5, C
r
=1 and dierent values of V
t
and V
u
V
u
|V
t
1.8 1.9 2.0 2.1 2.2 2.3
2.7 9.060 9.034 8.964 9.004 8.948 9.040
2.8 9.044 9.012 8.945 8.908 8.956 8.953
2.9 9.064 9.009 8.904 8.948 8.926 8.934
3.0 9.058 8.941 8.981 9.002 8.909 8.937
3.1 9.107 8.999 9.006 8.977 8.966 8.975
3.2 9.107 8.999 9.006 8.977 8.966 8.975
3.3 9.078 9.071 9.000 8.973 8.973 9.007
Table 8
Zoom in table for C
m
= 3.5 and C
r
=1
17
V
u
|V
t
2.0500 2.0625 2.0750 2.0875 2.1000 2.1125
2.8250 8.906 8.951 8.951 8.940 8.922 8.962
2.8375 8.964 8.941 8.925 8.910 8.934 8.980
2.8500 8.936 8.955 8.954 8.942 8.908 8.908
2.8625 8.968 8.892 8.872 8.940 8.899 8.965
2.8750 8.929 8.964 8.912 8.900 8.966 8.939
2.8875 8.960 8.951 8.923 8.942 8.904 8.926
2.9000 9.007 8.903 8.966 8.959 8.948 8.915
Table 9
Maintenance costs for the neighboring points around the optimal control limits for
C
m
= 3.5 and C
r
=1
= t
3
2
+ 0.5u
3
2
= 1.5t
3
2
+ u
3
2
= 2t
3
2
+ u
3
2
Control Limit V
t
1.8875 1.9875 2.1500
Control Limit V
u
2.4875 2.8750 2.9250
Average Cost 7.823 9.811 11.418
Avg. of Replacements 1.342 1.860 2.272
Table 10
Summary of the control limits for dierent failure rates
C
m
= 2.5 C
m
= 3.0 C
m
= 3.5
Control Limit V
t
2.4 2.2 2.1
Control Limit V
u
3.3 3.1 2.9
Average Cost 6.7 7.8 8.9
Average of Replacements 2.2 2.1 2.0
Table 11
Summary of the simulation output for dierent cost structures
18
V
t
V
u
Cost of replacements of repairs
1 2.2378 3.0875 7.8306 2.0937 0.7647
2 2.1500 3.0500 7.8330 2.0207 0.9409
3 2.2750 3.1500 7.8346 2.1303 0.7478
4 2.2625 3.1000 7.8354 2.0994 0.7532
5 2.2750 3.0750 7.8326 2.1107 0.7505
6 2.2125 3.1750 7.8282 2.1011 0.8244
7 2.1125 3.0625 7.8370 1.9915 1.0364
8 2.2750 3.1625 7.8472 2.1435 0.7466
9 2.2750 3.0750 7.8326 2.1107 0.7163
10 2.2500 3.0875 7.8310 2.0922 0.7730
11 2.2500 3.1750 7.8280 2.1327 0.7521
12 2.2375 3.1500 7.8296 2.1174 0.7763
13 2.2500 3.1750 7.8220 2.1327 0.7521
14 2.2750 3.1375 7.8301 2.1228 0.7509
15 2.2500 3.1125 7.8399 2.1028 0.7796
Table 12
Control limits for dierent seeds
19
Usage Salespersons car
Wu
Repair
Vu
Replacement Grandmothers car
Vt Wt
Figure 1 : Maintenance policy and the effect of different users
Usage U=r
i
T
Wu
(Wu/r
i
, Wu)
(Vu/r
i
, Vu)
Vu
Vt Wt Time
Figure 2(a) r
i
? h and r
i
? s
Usage
Wu
U=r
i
T
(Wt, r
i
Wt)
(Vu/r
i
, Vu)
Vu
Vt Wt Time
Figure 2(b) r
i
? h and r
i
< s
Usage U=r
i
T
Wu
(Wu/r
i
,Wu)
Vu
(Vt, r
i
Vt)
Vt Wt Time
Figure 2(c) r
i
< h and r
i
? s
Usage
Wu
Vu
U=r
i
T
(Wt, r
i
Wt)
(Vt, r
i
Vt)
Vt Wt Time
Figure 2(d) r
i
<s and r
i
<h
0
0.5
1
1.5
2
2.5
3
3.5
4
0 0.5 1 1.5 2 2.5 3
Vt
Figure 3. Scatter plot of the control limits