Strategies for warranty service in a dual-channel supply chain with value-added service competition
Bin Dan a, b, Shuguang Zhang a, b, Maosen Zhou c
a.School of Economics and Business Administration, Chongqing University, Chongqing, China; b.Chongqing Key Laboratory of Logistics at Chongqing University, Chongqing, China; c.College of Management, Shenzhen University, Shenzhen, China.
Abstract: This paper studies a dual-channel supply chain composed of a manufacturer and a retailer. The manufacturer and the retailer sell homogeneous durable goods bundled with warrantyservice that is provided by the manufacturer, and they compete for customers by offering free value-added service. Both the warranty and value-added servicescan affect the purchasing behaviour of customers. We examine the warranty service decision of the manufacturer and the value-added service competition between the manufacturer and the retailer. Three types of warranty service strategies thatcan affect the value-added service competitionare proposed. By analysing the equilibriumsof the value-added service level decisions of the manufacturer and the retailer, we findthat whenthe manufacturer increases itswarranty service level, the value-added service competition will be weakened,and when the warranty service level is high enough, there is no value-added service competition.In addition, we examine the optimal warranty service strategy and warranty service level of the manufacturer under different conditions, andwefind that the stronger the manufacturer’s bargaining power is,or the stronger the value-added service competition intensityis,the more motivation the manufacturer has toprovide ahigh warranty service level. Numerical examples reveal that differentiation strategy in value-added service may hurtthe profits of the manufacturer, the retailer and the entiresupply chain.
Key word:dual-channel supply chain; warranty service; value-added service; service level decision; service competition
1 Introduction
The products in many durable goods industries have become homogeneous (Li et al.2014). Therefore, an increasing number of companies are realizing that their competitive advantage relies not only on price and product quality but also on services (Armony and Haviv, 2003), and that they must compete on services rather than simply lowering their prices (Lu, Tsao, and Charoensiriwath, 2011). Services have played an important role in customers’ purchasedecisions (Cohen, Agrawal, and Agrawal, 2006; Chou, 2014). For example, the major concerns of household appliance buyers are not only the price and the quality but also the services they will receive along with the product. Warranty and value-added services are two main product-service categories that are taken seriously by both the enterprises and consumers (Kurata and Nam, 2010; Dai, Zhou, and Xu, 2012;Zhang, et al., 2015).
Warranty service is often bundled with the product as a way to help manufacturers build brand loyalty and increase sales (Fisk, 1970; Dai, Zhou, and Xu, 2012; Yang, and Xiao,2017). Warranty service is defined as a manufacturer’s promise that a product or its certain performance characteristics will be free from defects in materials and workmanship, and it is a commitment to correct problems if the product fails during the warranty period (Menezes and Quelch, 1990). Numerous scholars have demonstrated that warranty service has a positive effect on the demand for product by applying empirical methods (Chu and Chintagunta, 2009; Guajardo, Cohen, and Netessine, 2015; etc.). A lot of companies have realized the significance of warranty service, and continue to increase warranty service investment. In the personal computer (PC) industry, IBM and HP are famous for their customer service which is mainly composed of warranty service, and this reputation gives them an edge over their competitors (Li et al., 2015). Another example can be seen in the household appliance industry. Haier promises to respond to requests for customerservice within 24 hours, has developed a set of high-level customer service standards, and guarantees the warranty period for its products. To guarantee the high level of warranty service, Haier has established a large number of after-sale service outlets that are able to meet the service requirements in the promised response time. High-quality warranty service improves Haier brand performance.
Compared with the warranty service that is bundled with the product, value-added service is provided by enterprises as an option.Value-added service is another means for companies to gain a competitive advantage after their products start to become commodities (Reinartz and Ulaga, 2008). Many scholars have defined the concept of value-added service (e.g., Szeinbach, Barnes, and Garner, 1997; Belvedere, Grando, and Bielli, 2013; Zhang, et al., 2015). In this paper, we cite the concept presented by Zhang, et al. (2015). They define value-added service as the activities that add value to products, meet consumers’ demand, provide a competitive advantage to companies and improve their profits. It consists of multiple kinds of services such as design, delivery, installation, training, maintenance and financial service. In general, value-added service covers most services offered by both manufacturers and retailers, except for the warranty service that is bundled with the product.
In general, warranty service, value-added service, price and quality are often used as important elementsof supply chain competition.In reality, however, product quality and warranty service level are usually controlled by the manufacturer. In our research, we focus on a dual-channel supply chain where the manufacturer sells homogeneous products bundled with the same warranty service through its direct channel and retail channel. Note that both product quality and warranty service levelare determined by the manufacturer regardless of which channel consumers will buy from.Therefore, product quality and warranty service are not considered to be competitive strategies between the manufacturer and the retailer.To weaken channel conflict, more and moremanufacturers keep prices in their direct channel and retail channel equal. For example, Apple keeps the prices of its products equal in its direct channel and retail channel. Therefore, free value-added service is the main competition method for the manufacturer and the retailer in a dual-channel supply chain.For example, Haier sells its products bundled with warranty service through its direct channel and retailers such as Suning (the number one home electronic appliance retailer in China) and JD.COM (the number one e-commerce retailer in China), and competes withthem by offering free value-added service. In particular, Haier provides free value-added services such as delivery, installation, and experience before payment when customers buy products from its direct channel. Suning offers free value-added services such as delivery, installation, customization, custodial service and cleaning to customers when they buy Haier's products in its stores. JD.COM also offers a series of free value-added services to customers when they buy Haier's products on its website.