Analysing performance-based contract for manufacturing systems using absorbing state markov chain

Abstract

We have analysed a performance-based contract (PBC) scenario, where the customer procures product manufacturing equipment from an original equipment manufacturer (OEM). Subsequently, the OEM is rewarded or penalised on basis of the 'outcome', i.e., conformance of manufactured products to target specifications. In the scenario where target specifications are not met, the OEM needs to rework and repair the equipment at his/her own cost. The rework and repair phase continues until the target specifications are satisfied. We use an absorbing state Markov chain to model and analyse the rework and repair phase. We provide long-term probability of satisfying the target specifications, the average number of steps (rework and repair) required to meet target specifications. We also provide the optimal equipment design specification parameter (for example, design reliability) that the OEM should set. Further, the optimal revenue earned by the OEM under this PBC is discussed.