OEM‐Servicizing with a Multi‐usecycle Product: Model analysis and insights

Abstract

Abstract Customers of many original equipment manufacturers (OEMs) in business‐to‐business markets today demand product servicizing in which instead of buying the product from the OEM they buy the use of a product during a lease. During the lease, (i) the customer uses the product and returns it to the OEM after the use reaches a specific level, (ii) the OEM remanufactures the product in a costly process and sends it back to the customer, and this usecycle is repeated multiple times. The lease terms typically involve a use‐based payment. While a greater product use by a customer brings a larger revenue to the OEM, it also increases the remanufacturing cost incurred by the OEM. We investigate this trade‐off using an analytical model for a contract that is used extensively in industry. For the case of homogeneous customers with a common use rate of the product, we optimize lease payment terms and identify market and product‐remanufacturing characteristics for which the OEM should servicize the product instead of selling it. We show that an OEM should not servicize a product when the customers' use rate exceeds a threshold. This is because, beyond this threshold, the remanufacturing cost increases disproportionably, exceeding the higher usage‐based revenue. Subsequently, we consider a market with two segments with different use rates. We consider two servicizing modes: (i) servicize both market segments or (ii) selectively servicize only one segment and sell the product to the other segment, and the default mode of selling in both segments. We develop optimal lease payment terms for these use‐based servicizing modes, identify thresholds of product and market characteristics for the optimality of these modes. Finally, we extend the results to a market with more than two segments and compare the environmental impacts of the servicizing or sell decision. Numerical results informed by empirical data show that the OEM's loss of profit from choosing a suboptimal servicizing/sell decision can be significant.