Maintenance Outsourcing Contracts for New Technology Adoptions

Abstract

An external contractor receives a payment from a manufacturer for periodically performing preventive maintenance and for performing minimal repairs whenever process failures occur. Suppose a new technology will be available in the future, but the timing is uncertain. We propose specifying one or multiple time points in a maintenance contract, at which the manufacturer can adopt (switch to) the new technology, if it becomes available, and change the preventive maintenance schedule for the remaining time in the contract period. A model is developed to determine the value of using these (switch) points in a maintenance contract to the manufacturer. The numerical results show that, with a higher arrival rate of the new technology, the value becomes greater, and thus, the optimal switch point should be set earlier. Furthermore, if the new technology reduces maintenance costs, using switch points adds more value to a cost-plus-margin method than either the fixed payment or cost-plus-fixed-fee methods. On the other hand, if adopting the new technology results in higher maintenance costs, the value using switch points is higher for the fixed payment method.