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Making warranty management manageable.

The 25 largest manufacturers in the United States spend a total of about $15 billion per year on warranty claims. In the auto industry alone, $8.5 billion in warranty claims is processed annually, and roughly $500 million in profit is lost on vehicles that incur warranty-related costs. For companies across all industries, warranty claims processing is believed to consume 2.5 percent to 4.5 percent of revenues.

With numbers like these, it shouldn't be surprising that many companies have started to rethink their approaches to warranty management. However, the incentives actually go far beyond cost savings: Warranty improvements have been shown to boost revenues, enhance customer satisfaction and loyalty, and even drive up the quality of products.

Warranty management is a business process that includes warranty registration, claims submission, claims processing and settlement, fraud detection, returns management, supplier management, extended warranty marketing, replacement-parts logistics, and inventory management. Although warranty issues touch many functions, claims typically are addressed in isolation, with the emphasis on administration, review, and payment rather than on the impact the warranty program has on a company's manufacturing, quality, sales, and after-market customer-care processes.

Some companies have been slow to change this approach because warranty processing is so labor-intensive and because it is undersupported technologically--often by the limited, batch-based functionality of enterprise resource planning (ERP) systems. Lacking more effective tools, companies can miss important insights into the performance of products--products that continue to siphon away profits because they generate warranty claims and dissatisfied customers.

The actual management of warranties is another sore spot. Original equipment manufacturers (OEMs) frequently cover warranty costs, even when quality shortcomings are the fault of suppliers. Warranty policies are often poorly enforced, resulting in unnecessary payments. And drawn-out claims-review and reimbursement cycles exacerbate the situation.

As shown in the table, companies seeking to improve their warranty management performance have three basic ways to address the problem: They can reduce warranty costs, identify and implement new forms of warranty-derived revenue, and/or leverage warranty-related information to improve product quality. The goal of all three approaches is to strategically integrate warranty management within the company.

Central to improving warranty management performance is a claims management system linked to sophisticated analytic solutions. These solutions help provide business intelligence about product quality and performance by compiling data from warranty claims, production data, dealer information, and customer surveys.

The right strategy and greater access to high-powered technology are the cornerstones of a viable warranty-improvement program. Companies also must work to achieve the following:

* Increase warranty registration to gain greater customer insight and hike revenue.

* Develop extended warranty or service programs to boost revenue from the existing customer base.

* Automate claims processing and settlement to reduce administrative costs.

* Accelerate processing time and increase data quality with online, real-time validation and claims submissions.

* Please customers and cut costs with timely warranty repairs, made possible by a simplified replacement-parts ordering process and improved availability of parts.

* Streamline the returns process by using digital images and exception-based returns.

* Apply rule-based monitoring of incoming claims, combined with fraud reporting and field audits, to reduce overpayments.

* Analyze warranty claims alongside other product, engineering, or manufacturing data to identify and minimize quality problems.

* Pursue a supplier recovery program, under which warranty-related costs originating from suppliers are identified and solutions are negotiated with them to improve the quality of the final products.

Between 10 and 15 percent of warranty payments are the result of fraud or invalid claims. In one unusually dramatic example, an electronics equipment manufacturer recently determined that warranty fraud was costing it an estimated $100 million per year. The company's response was to clarify and strengthen warranty policies and procedures, and to establish performance metrics, formal audit procedures, and incentives to identify fraud. Within six months, the company had identified $55 million in fraud-related costs, installed a rationalized service-provider network, and implemented a new warranty-effectiveness program for employees.

With the combined power of cost reduction, new revenue streams, superior product quality, and the elimination of fraudulent behavior, companies may transform warranty management from a curse to an asset. Simply put, better warranty management can generate improved marketplace performance by spurring greater differentiation, improving competitive advantage, and even enhancing revenues.

Core perspectives for addressing warranty management concerns

Cost Reductions

* Lower warranty, recall, and goodwill costs due to early problem detection

* Lower cost of fraud and overpayments

* Increased recovery of warranty cost from suppliers

New revenue streams

* New revenues from extended warranties and service plans

* Better pricing and management of extended warranties

* Cross-/Upselling based on warranty and product registration data

Superior product quality

* Warranty data used as source of information for quality improvements

* Rapid resolutions to known product issues

Patrick M. Byrne is managing partner for the Accenture Supply Chain Management service line, which provides consulting and outsourcing services for strategic sourcing, procurement, product design, manufacturing, logistics, fulfillment, inventory management, and supply chain planning and collaboration. Based in Reston, Va., he can be reached at
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Title Annotation:Byrne on Excellence
Author:Byrne, Patrick M.
Publication:Logistics Management (Highlands Ranch, Co.)
Date:Aug 1, 2004
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