Contracting for system availability with zero ownership cost via redundancy, maintenance and repairable inventory

Abstract

Though various types of availability-based contract models have been developed, there is a lack of studies in which reliability-redundancy and maintenance service logistics are jointly considered. This paper proposes a principal-agent model to manage performance-based contract for zero ownership cost and no moral hazard. The equipment supplier plays as an agent who determines redundant units, maintenance time, spares inventory and repair capacity to maximize the service profit. The customer plays as a principal who stipulates system availability target and the payment scheme for attaining zero cost of asset ownership. The novelty of the model lies in two aspects: a) it represents a first-of-its-kind in designing system availability-based contract in an integrated redundancy-maintenance-inventory optimization framework; and b) the customer bears zero ownership cost while the supplier's profit margin is guaranteed. Three major findings are obtained. First, the supplier's actions are proved to be fully observable to the customer, hence a first-best contract solution is obtained. Second, if the customer imposes the cost limit on individual systems, the supplier opts to increase the system availability for reaping a larger profit. Third, one emergency repair server is generally sufficient to remedy the spares stockout situation regardless of the fleet size.