Optimal pricing and spare parts manufacturing strategy for EOL (end-of life) services

We study the firm's strategy to price its products and plan the spare parts manufacturing so as to maximize its profit and at the same time to fulfill its commitment to providing the customers with the key parts continuously over the relevant decision time horizon, i.e., the production plus warrantee period. To examine the research question, we developed and solved a two-stage optimal control theory model. Our analysis suggests that if the cost to produce the spare part during the warrantee period is more expensive than that during the production period, the firm should increase its sales price gradually throughout the production period to control its sales. In addition, during the production period it is optimal for the firm to produce the spare parts more than needed so that the overproduced spare parts can be used to partially meet the demand during the warrantee period. We conducted numerical analysis to investigate the sensitivity dynamics among key variables and parameters such as inventory holding cost, unit spare part production costs, part failure rate, and parameters in the demand function.