Failure Rates Are Higher Than Expected
Financial Implications of No Warranty
Packaging and Failure Rates of Sub-Assembly Components
Replacement Parts Demand
Replacement Parts Sourcing With Different Suppliers Across Regions
Warranties and Replacement Parts Demand
Warranties and Sub-Assembly Component Failure Rates
“Why are our failure rates so high (e.g., more than 20% in the current round)? The failure rates seem much higher than the base rates described in the LINKS participant's manual.”
"Failure Rate" is defined as total replacement parts demand in the current round divided by current sales volume. Thus, a high Failure Rate can be due to high replacement-parts demand or low sales volume.
Replacement-parts demand is principally based on failure rates of sub-assemblies provided by suppliers. Note that a strategy of using low-priced suppliers might reduce procurement costs but lead to higher replacement-parts demand (and higher associated replacement-parts costs).
Changes in sales volume affect Failure Rate. For example, a LINKS Supply Chain Management Fundamentals Simulation firm’s sales volume changed from 72,287 to 41,844 units from round #6 to round #7 (apparently due to a set of price increases), resulting in a substantial increase in Failure Rate. But, total replacement-parts demand decreased from 5,436 to 5,006 units from round #6 to round #7. So, the round #7 Failure Rate of 12.0% (compared to the round #6 Failure Rate of 7.5%) was due to the dramatic sales volume drop, not to an increase in replacement-parts demand.
Your firm is responsible for providing free replacement parts for sub-assembly component failures within your warranty period as per the original configuration of products when they are sold. Thus, with a warranty=3, sub-assembly component failures from sales for the current round and the previous three rounds are reflected in your current-round replacement parts demand. This warranty-period effect leads to much higher levels of sub-assembly component failures than indicated by the base rates described in the LINKS participant's manual. In addition, natural random variation can occasionally yield particularly high failure rates in sub-assembly components.
“What are the financial implications associated with not offering a warranty (i.e., of setting warranty equal to zero for a product)?”
There are no financial implications associated with not offering a warranty (i.e., of setting warranty equal to zero for a product). A warranty level of zero reduces upfront product costs and also reduces the downstream costs associated with replacement parts demand. Replacement parts demand doesn’t exist if warranty equals zero. Of course, end-users might view such a product configuration as less attractive than other competing products offering warranties.
“Does a higher "grade" of packaging reduce the failure rates of sub-assembly components?”
“How is demand determined for replacement parts?”
Replacement parts demand depends on a product's warranty, actual demand during the warranty period, and the failure rates of sub-assembly components that comprise the product. If a warranty is offered, the length of a product's warranty is the just-completed LINKS round plus the number of LINKS rounds specified in the warranty. There's also a degree of randomness inherent in replacement parts demand since the failure rates of sub-assemblies are expressed in averages and the actual realized values will naturally vary a bit through time. Thus, it's only possible to "forecast" replacement parts demand, not "calculate" replacement parts demand exactly (except after the fact).
“Do we have to use the same supplier for a replacement part as originally used in the product's manufacture?”
Sub-assembly components from alternative suppliers are fully interchangeable within manufacturing and for the purposes of meeting replacement parts demand. Thus, any supplier's sub-assembly component may be used as to meet replacement parts demand, even if the original failing part was from a different supplier.
“Does warranty level influence replacement parts demand?”
Yes. Warranties provide free replacement to end-users for failures of set-top box sub-assembly components throughout the warranty period. Thus, a longer warranty has associated with it a longer period of time in which replacement parts demand will exist. If you choose to have no warranties (i.e., Warranty=0 a set-top box product), then you will, by definition, have no replacement parts demand for that set-top box product.
“Does having a warranty (i.e., warranty>0) reduce the failure rates of the gamma, delta, and epsilon sub-assembly components?”
No. Warranties exist to reduce the risks that end-users face with products that fail shortly after purchase. Warranties don't reduce the failure rates of set-top box products or of any set-top box product’s sub-assembly components.