Strategies for Reducing Warranty Costs
Warranty obligations represent both an expense and a liability to Original Equipment Manufacturers (OEMs). As a result, anything that an OEM can do to minimize warranty expenses and liabilities will have a significant impact on the balance sheet and bottom line. In the high-tech industry, warranty coverage often includes repairing defective products as opposed to crediting or replacing them.
Warranties of this nature involve three (3) cost components:
1) Warranty Terms & Conditions,
2) Service Delivery, and
3) Product Reliability and Maintainability.
Service Delivery represents the largest of these three components and comprises approximately two-thirds of warranty costs. Approximately 55% of service delivery costs are attributed to repair activities. The remaining 45% of costs are evenly distributed between parts, logistics, and overhead (e.g., customer service, IT, etc.).
Among the three (3) different categories of warranty costs, service delivery costs are the most difficult to manage and improve. By comparison, costs associated with warranty terms and conditions and product reliability and maintainability are easier to manage. OEMs can reduce warranty expense and liabilities by adjusting terms and conditions to make them more favorable from a cost-burden perspective. OEMs can also design and engineer better products thus reducing product reliability and maintainability costs. In addition, the time frame and investment required to plan and implement these types of improvements are smaller when compared to service delivery. On the other hand, these improvements may have a limited life span. In other words, an OEM needs to revisit terms and conditions as well as product reliability and maintainability issues with every new product release.
• Automating warranty claims-management processes to reduce warranty processing costs
• Improving call management procedures to validate entitlement, troubleshoot and diagnose calls remotely, and avoid costly field service visits
• Implementing dynamic scheduling software to improve field-engineer productivity and reduce travel costs
• Adopting a Variable Workforce (VWF) model to lower field-service and associated overhead labor costs
• Utilizing knowledge-management tools to improve resolution times, reduce No Fault Found rates, increase first time fix rate, and improve labor efficiency
• Implementing advanced planning and forecasting tools to optimize spare parts stock levels and reduce inventory costs
• Making it easier for field engineers to identify, locate and order spare parts thereby improving service efficiency and avoiding repeat calls due to lack of parts
In summary, the challenges associated with reducing service-delivery costs should not prevent a company from making the necessary systemic and procedural improvements since the gains in cost savings, service productivity, operating efficiency, and customer experience can be significant.
Author: Michal R. Blumberg.