Warranty is as precious as a diamond. When it is appropriately managed, it can give a big dividend and joy in terms of customer loyalty. However, if it is not managed well, it can lead to financial losses. Every amount spent on warranty claims takes away dollars from the company profits. Thus, ‘product, performance and reliability’ is an important topic. Product reliability creates everlasting impressions on consumer minds. Consumer impressions determine company reputation. The company’s reputation decides future sales. Future sales decide company growth or survival.
A warranty claim analysis is a subset of product performance and reliability analysis. Warranty is limited in duration. Performance and reliability also encompass the period after the warranty is over. One cannot keep customers happy by only managing product reliability only during the warranty period. Reliability has to be maintained throughout the product lifetime.
Introduction to warranty claim analysis
Complex products come with a manufacturer’s warranty. This gives assurance to customers that the manufacturer stands by what they have built. The flip side of it is that it poses a challenge to the manufacturer. Potentially, it can drain millions of dollars. At times, warranty claims may necessitate a change in the product design. This could lead to a disruption in the assembly line. This is especially true in the industrial equipment business. A disruption in a production line causes a lot of damage to the company’s reputation, along with financial losses.
The challenge of warranty claims further increases with the complexity of the product. On one hand, the product manufacturer has to pay for the cost of repair, and on the other hand, they have to ensure customer satisfaction. Every warranty claim not only erodes the manufacturer’s profits but also impacts the customer’s perception of the product and the company. This puts in a lot of pressure on manufacturers. They not only have to analyse a large number of claims data to find out what needs to be fixed, but they also have to ensure a quick fix.
The three generations of warranty analysis
Manufacturing industries all over the world have one or the other method of analysing warranty claims data coming from service centers from across the globe. Some industries use basic techniques, such as using a spreadsheet. With spreadsheets as the only tool, the best analysis that is often conducted is to observe and track part defect count, part types that fail and corrective measures taken. Usually, the teams are very busy and overloaded with many tasks, and thus, have no time left to do anything more. Before one knows, the month is over. The next month’s data awaits the same analysis. This is what we call the first generation or 1G model of warranty claims analysis.
To gain deeper insights, we turn our focus on the cost of warranty claims in addition to defects. This leads one to find the financial root cause of high warranty claims. Best practices often tell one how to design a new product. These unique designs have a big chance of succeeding in the market since the word of good quality also spreads fast.
Putting a focus on cost, deriving inferential statistics, prioritising component inspection, calculating statistics for new product development are some of the main features of the 2G model of warranty claims analysis. Collectively, these advancements are termed as the second generation.
When an organisation matures to the 2G level, the next advancement comes from predictions. Warranty budget fluctuations are the hardest to manage. Thus, can one predict monthly warranty costs? How about predicting the number of parts that would fail in the next few months? Taking this further, would it not be nice to know partwise failures on a monthly basis?
Predictions of what defect is going to occur, which part is going to fail, the total warranty claims cost, form the part of the third generation or 3G warranty analysis.
Warranty costs & its phases under changing sales conditions
Every new product goes through multiple phases during its lifecycle. Each stage is unique and poses new challenges from warranty claims raised, to customer satisfaction, to costs incurred by the manufacturer. Naturally, one wonders when is the right time to invest in productivity tools. Although the answer is clear that one should invest as soon as possible, human tendencies are contrary to that. Following, we explain various phases of the sales cycle and its relationship with internal investments.
Any new major product comes with a lot of hype. New features are exciting. Competitors are kept at bay. Public sentiment is high and so are the management sentiments. Sales grow reasonably well. Less attention is paid to warranty claims related costs, since a new product takes time to iron out all issues.
Figure 2 is a graph showing this growth phase in sales along with an increase in units under warranty. Typically warranty costs also show a similar trend. The y-axis scale on the right is for units under warranty, and the one on the left is for monthly sales.
Since everyone is happy about the launch, very little attention is paid to warranty costs. In reality, it is better to control expenses at this phase so as to avoid further erosion of profits.
Once the hype of the new product is over, it shows some signs of approaching a plateau phase. During this period, the organisation gets busy collecting warranty claims data, analysing the data, understanding the trends in part failure and fixing the issues. There is still less attention paid to warranty costs and engineering redesign of appropriate parts.
Warranty period validity
Each product comes with a specified period over which warranty is valid. In the following example, it is considered that the warranty period is 24 months. As the warranty comes to the end, the number of units under warranty starts declining.
The decline in sales
It is widely believed that during sluggish economic conditions, one should cut spending. This rule is used indiscriminately for any new purchases, as well as any new development.
If the company sales are as shown in Figure 5, one would think of cost-cutting measures. Ironically, very few companies would focus on warranty claims reduction. That is not the right approach. Warranty claims do not start coming down as soon as monthly sales are down, since they are cumulative based on previous sales. The right way to tackle this situation is to focus on the right tools for root cause analysis and fixing parts by redesigning them. It is possible to reduce warranty costs. Every dollar saved by reducing the claims cost goes straight into the company’s bottom line. There is hardly any other focus that could reward one 100% by increasing the focus.
Seven facets of the diamond
Analysis of product service data is like cutting a diamond. A well-cut diamond has the appropriate number of facets – not too many, not too few. This appropriate number of facets decides the value of a diamond. So is the case with proper data analysis.
For warranty claim data, more the facets, deeper are the insights. We certainly want to look at warranty claim data from all different facets. Yet, we want to be consistent every single time.
Every CEO has a set of questions in mind about their after-sale product performance. Unfortunately, these questions are not always answered quickly. Since they remain unanswered, parts with low reliability continue to infiltrate in complex products, and they continue to fail, especially when they shouldn’t. Any reliability-related perceptions leave a mark on the customer’s mind, and they vow to either buy the same product next time or to never buy it again. Thus, it is in the interest of the manufacturer to identify problems and fix them as soon as possible.
Unfortunately, only wishful thinking doesn’t help one achieve their goals. The reality is that the analysis of the service center data takes time. Often, it takes a month. By the time the analysis is ready, the next month rolls in, and the data for it is ready for analysis. Even if the analysis is completed in a month, there is no guarantee that all different facets have been looked through. Often, there is no consistency in the way the data is analysed.
Nevertheless, the questions are very important. They are grouped into three categories – cost reduction, quality improvement and strategic inventory management. The questions are:
Cost Reduction Strategies (CRS)
1. How can the warranty costs be reduced? What strategies should one use to reduce the cash outflow?
2. How much warranty budget should one allocate in the upcoming months?
3. When we produce a product and ship it out of the factory, can we tell five most likely failures that would occur in the field? What is the cost of not redesigning those failed parts?
Quality Improvement Plan (QIP)
4. Are there any potential process issues? How can the periods of process deviation be identified? How can they be fixed to avoid further incidences?
5. Out of the list of parts to be fixed, how can one prioritise the worklist?
6. How to find the best practices for part design and to minimise further financial losses?
Strategic Inventory Management (SIM)
7. How can we proactively distribute inventory to various service centers to ensure quick product fix and ensure customer delight?
These are all research questions. Answer to the warranty costs reduction lies in answering the seven questions. The clues followed by right and timely actions lead to high standards of product performance and reliability. The appropriate steps eventually lead to winning the hearts of customers. Customer satisfaction ultimately culminates in the company’s profitability and growth.
A major part of this article first appeared as blogs on www.piinnovate.com. One of the blogs was co-authored by You Mishima.