Optimal redesign decisions through failure rate estimates

To reduce the time‐to‐market of newly developed systems, manufacturers increasingly adopt strategies where systems are brought to market while system field reliability is still uncertain. These systems are typically sold under performance‐based contracts, which incentivizes potential customers to invest in them despite reliability uncertainty. Such contracts make the manufacturer (partly) responsible for the availability of the system. Subsequently, when field reliability is lower than anticipated, the manufacturer may choose to redesign the system to avoid high contract penalties. Redesign is a costly effort which may substantially increase field reliability. Deciding when to redesign is challenging, especially because the initial failure rate estimate by the system's engineers is refined over time as failure data accrues. We propose a model that endogenizes the failure rate updating to analyze this tactical redesign decision. We study additive and multiplicative redesigns and show that the optimal policy has a control limit structure. We benchmark our optimal policy against a static counterpart numerically, and conclude that basing redesign decisions on the updated estimate of the failure rate can substantially reduce costs.