Maintenance outsourcing contracts based on bargaining theory

Abstract

We address a maintenance outsourcing problem where the owner of a piece of critical equipment plans on outsourcing preventive and failure replacement services to a service agent. The owner (i.e., customer) and the agent negotiate on the maintenance policy and spare part ordering strategy in the service contract. We first provide the classical Nash bargaining solution to the problem and analytically determine the optimal threat values the decision makers can use in negotiation. We then extend the model and show how the decision makers can increase their profits through a price discount scheme, which requires the total profit to be achieved at the maximum level. The total maximum profit is analytically determined, and the effects of the price discount scheme and threats on the individual and total profits are illustrated through a numerical study.