Abstract

When a company decides to outsource a service, the most important reasons for doing so usually are to focus on core business, to be able to access high-quality services at lower costs, or to benefit from risk sharing. However, service contracts typically follow a structure whereby both owner and contractor attempt to maximize expected profits in a noncoordinated way. Previous research has considered supply chain coordination by means of contracts but is based on unrealistic assumptions such as perfect maintenance and infinite time-span contracts. In this work, these limitations are overcome by defining the supply chain through a preventive maintenance strategy that maximizes the total expected profit for both parties in a finite time-span contract. Thispaperpresents a model to establish such conditions when maintenance is imperfect, and the contract duration is fixed through a number of preventive maintenance actions along a significant part of the asset life cycle under consideration. This formulation leads to a win-win coordination under a set of restrictions that can be evaluated a priori. The proposed contract conditions motivate stakeholders to continually improve their maintenance services to reach channel coordination in which both parties obtain higher rewards. © 2012 John Wiley & Sons, Ltd.