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Warranty management best practices sorely needed, report says

By applying workflow tools and analytics and making warranty management a priority, manufacturers could save millions, but few even have the metrics to gauge performance, says IDC.

A new study says few manufacturers know how to use the warranty management best practices, business intelligence...

and analytics that could reduce their service costs and improve customer satisfaction. And while most companies appreciate the impact warranties have on their bottom lines, fewer than 20% even bother to benchmark themselves.

The findings from a survey of 100 manufacturers by Framingham, Mass., research firm IDC Manufacturing Insights were just released in a report titled Methods and Practices: Warranty Capabilities Maturity Model.

Billions of dollars are at stake. IDC said manufacturers spend 0.5% to 7% of their product revenue on warranty claims, depending on the industry – $23 billion in the U.S. alone. The figures come from the survey responses and companies' U.S. Securities and Exchange Commission (SEC) filings, which since 2003 have been required to report warranty costs.

“In the U.S., warranty providers have to set aside money for warranty claims,” said Joe Barkai, an IDC practice director and co-author of the report. “Having a rigorous way to anticipate and manage warranty costs helps them manage their money better.”

Warranty management best practices

Companies proficient at warranty management are more likely to use tools that automate workflows and enforce, or at least track, compliance with business rules. They also measure their warranty performance against internal and external benchmarks on a regular basis, using metrics such as incident cost per product, or total claim costs for certain time periods. Warranty management is more likely to be subject to a continuous improvement process backed by senior management, instead of being delegated to a junior administrator, an approach commonly used by lagging companies.

Companies that have advanced warranty management systems in place are also much more likely to have a process for improving management of warranty accruals (liabilities for outstanding warranties) and warranty cycle times. They also tend to link warranty management to the quality control process and to include suppliers in the effort.

The most advanced manufacturers employ analytics and complex statistical methods to predict future warranty claims and spot fraudulent ones, according to Barkai. Analytics can also help them decide whether to cover questionable claims to retain the goodwill of high-value customers, he said.

They also have better systems for documenting claims, which enables them to apply analytics to confirm that customers are entitled to warranty coverage and spot red flags such as unnecessary parts ordered by third-party service providers. Manufacturers of expensive items like cars and factory equipment are more prone to inflated claims by service providers than are consumer electronics makers, which typically replace products instead of repairing them, Barkai said.

Yet, many companies have a long way to go to reach that level of proficiency.

“We found that they make very poor use of information technologies, and that they still have many manual processes,” Barkai said. “Communication with external stakeholders [customers and warranty service providers] tends to be very paper-based and fax-driven.”

Warranty management software lacks integration

In fact, the report found the manufacturers’ use of IT tools for warranty transactions, analytics and financial management to be “highly inconsistent.” Many companies use home-grown systems that don’t scale well and aren’t integrated with the systems of companies they have acquired. Barkai said some also use customer relationship management (CRM) software, but usually just for the customer-service side of the equation.

“There are so many missed opportunities because you don’t have visibility to the [entire] installed base,” Barkai said. “Some companies are trying to consolidate and standardize those systems, but it’s a very, very painful process.”

Some dedicated software exists, but it’s not as well integrated as it could be, and the small market is fragmented, Barkai said. Major ERP vendors including Oracle and SAP have warranty management modules, “but they’re not making it a priority.” The vendors that do – including 4CS, Entigo and Tavant Technologies Inc. – are small, niche players.

And those tools are mostly for managing warranty transactions and workflows, not for doing analytics. SAS, which claims its Warranty Analysis software can detect fraudulent claims, is probably the leader, Barkai said.

He advised manufacturers to “close the quality loop” and incorporate warranty analysis into their product designs. With better integration to their product lifecycle management systems, they can use analytics to spot early warning signs of defective products, avoiding not just service costs, but expensive recalls.

IDC has a stake in getting manufacturers to take warranty management more seriously. Barkai said the company offers the maturity model to consulting clients and is trying to get it adopted as a best practice of the nonprofit Institute of Warranty Chain Management. He said companies have no industry standard to rely on for their external benchmarking, and must instead use public data, conferences, and other informal methods. "We hope that our effort will help change that," he said.

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