Optimal service decisions and channel coordination analysis with after‐sales service and quality consideration

Abstract Recently, an increasing number of firms sell product bundles with after‐sale services. It is challenging for firms to select the best product bundle of the product and services since the product and the services are intercorrelated. In this paper, we study a product service system where a manufacturer provides products to a retailer, who sells them bundled with additional after‐sales services to customers under a service‐level commitment. The market demand is uncertain and depends on the service‐level commitment and product quality. We derive the optimal product (production quantity and product quality) and service (service‐level commitment and service capacity) decisions for this supply system under demand uncertainty. Additionally, this paper designs a coordination mechanism with the service‐level commitment and cost sharing. The coordination mechanism can achieve a Pareto improvement (i.e., both manufacturer and retailer can be better off) and render a higher service‐level commitment and product quality, resulting in a win‒win situation for both the firms and customers. The analytical results demonstrate that service‐level commitment and product quality are substitutes for the firm's profit. Namely, the impact of the commitment of the service level on the firm's profitability increases as product quality decreases. Conversely, service capacity and product quality are complements to the firm's profit. Namely, the better the product quality is, the higher the marginal effect of larger service capacity on profitability.