How does the manufacturing world look at warranty cost today

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Nabuath Khan

Assistant Vice President, Analytics and Research

September 25, 2016 - A study by Warranty Week in 2015 stated that worldwide, warranty reserves are estimated at more than $100 billion. In the US alone, corporations set aside $40 billion to cover the projected cost of warranty claims. The automotive sector accounts for just under half of all warranty claims, while the telecom and IT sectors account for another third.

Warranty cost is one of the major expense for every manufacturing business, and has always been regarded as cost of doing business, however, somewhere down the line, it is also perceived as one of the critical element for product strategy that not only provides an assurance to the end consumer, but also serves as a very effective promotional tool.

The average warranty cost varies from 1% to 5% of the sale price, depending on the manufacturer and the product. This can easily run into billions of dollars annually for large businesses, having a direct bottom-line impact.

Organizations choose either to work towards reducing the amount of money spent on warranty failures, or to live with the expenses, tagging it as the cost of doing business and not act upon it unless they see a mean shift compared to past years.

What they often do not notice, however, with such a narrow horizon, is the presence of other key factors that increase indirect costs arising from customer dissatisfaction, degrade brand image, result in lost sales, and even lead to legal liability.

OEMs (original equipment manufacturers) that decide to work on taming the warranty cost, and go beyond the standard target, face complicated issues such as the unpredictability of warranty expenses due to the slow process of defect identification, and the even slower process of problem resolution. As a result, the general phenomena seen across industries is they either overestimate their warranty expenses—leading to unwanted allocation of funds, blocking or increasing the working capital—or they set low expense estimates and risk questions about their accounting standards.

In addition to the unpredictability factor, manufacturing organizations also fall into the trap of working in silos with minimal interaction between departments. This creates a non-cohesive approach to problem solving, losing time and the opportunity to tame warranty-related issues when small.

To help organizations break these boundaries and age-old stigmas, a change in their approach to warranty management is very much required.

The proposed approach, which can help transform and change views, is a step-wise implementation process covering the following key phases:

Phase 1: Review company's current approach to warranty management, determine the maturity level, and draft a roadmap to next level

Phase 2: Set up a central warranty management department within the organization, sponsored by an executive leadership team member

Phase 3: Trickle down the thought process of an ideal warranty management, promoting attributes like collaboration, farsightedness, the ability to lead cross-functional changes, a willingness to accept responsibility, sharing, and rewards

Phase 4: Audit existing data and management systems to determine the type of data being collated and assess overall relevance to strategic warranty management

Phase 5: Set up a central warranty management system that can collect all required data in a single place and make necessary provisions for continuous updates of this new warranty management system to effectively manage warranty for new products

Phase 6: Initiate programs to ensure that the skills needed at all levels (senior, middle, and junior) exist

Phase 7: Leverage domain and industry skills, backed with analytics and digital, to unearth the hidden patterns much faster, leading to savings

Setting up warranty management systems based on these phases would benefit many organizations. Below is a use case from my experience with a major hi-tech organization, which continues to enjoy the transformation journey and reap benefits.

The following are a few high-level benefits, apart from direct warranty cost reduction:

  • Increased total return to shareholders by reducing blocked capital and improving operating margins
  • Tightened integration of warranty function with engineering, manufacturing, and procurement
  • Faster detection of real quality issues with more extensive analysis of warranty claims
  • More consistent enforcement of policies and procedures in the field and with suppliers

Watch this blog for more information on warranty. The next series of this blog will describe each phase, or a combination of phases, in greater detail.