Dynamic Cash Management of Warranty Reserves

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Abstract:

The objective in warranty reserve management is to cover contingent liabilities that arise from warranty obligations. Maintaining excess reserves would cause opportunity cost, whereas depleting the reserve would necessitate finding emergency funds. In this article we propose a policy rule to guide cash management of warranty reserves for an infinite horizon that involves periodic reviews. At the beginning of each period the decision maker determines how much to add to or subtract from the fund and how much to contribute after each sale. Numerical examples show how the optimal control variables change in response to change in problem parameters.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/0013791X.2010.548908

Affiliations: Doermer School of Business, Purdue University, Fort Wayne, Indiana

Publication date: January 1, 2011

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