Coordination in Maintenance Outsourcing: Analysis of Various Incentive Mechanisms

This book analyzes various incentive mechanisms that can be used to coordinate a manufacturer who has a process with an increasing failure rate over time and a contractor who performs the necessary maintenance activities. It is demonstrated that the best incentive mechanism is an incentive contract, which is based on a combination of a target uptime level and a bonus. This mechanism i) always leads to the desired win-win coordination, ii) provides flexibility in allocating the extra profit generated from coordination, iii) motivates the contractor and the manufacturer to continuously improve efficiency of maintenance operations, and iv) is able to coordinate the improved system most of the time. An extension of this study - with a manufacturer, who has a process consisting of multiple stages and multiple contractors, who perform maintenance activities for each of these stages - shows that the aforementioned target-uptime level and a bonus scheme provides benefits similar to the one manufacturer - one contractor system.