Optimal Preventive Replacement Under Minimal Repair and Random Repair Cost

A repair/replacement problem for a single unit system with random repair cost is considered. When the unit fails, the repair cost is observed and a decision is made whether to replace the unit or repair it. We assume that the repair is minimal, i.e., the unit is restored to its functioning condition just prior to failure, without changing its age. The unit can be preventively replaced at any time. The problem is formulated as a continuous time decision problem and reduced to an optimal stopping problem in discrete time by applying results from the thoery of jump processes. The existence of the optimal policy is proved and its structure is found using semimartingale decomposition and λ-maximization technique. It is shown that the optimal policy is an age replacement, repair-cost-limit policy, and the optimal preventive replacement time and the repair cost limits can be obtained by solving a system of ordinary differential equations with boundary conditions.