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Issue of August 2006 

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“Optimised warranty processes are the gift that keeps on giving”

Ron Ezasak, Practice Head, Manufacturing and Warranty Practice, Tavent Technologies, emphasises the need for warranty management solutions in a conversation with Dominic K.

Ron Ezasak

How would you define warranty management? Why is it important and what are the basic premises behind the concept?

There are two basic categories of warranty, the revenue side of warranty and the liability side of warranty. The revenue side is most commonly expressed as extended warranty. This functions much like an insurance policy and can generate significant cash. The liability side of warranty is the OEM or product warranty that is generally offered by the manufacturer when a product is purchased.

Warranty could be defined in a number of ways. For the consumer, warranty fulfils the brand promise. To the OEM it is a liability, the consequence of a negative customer experience, a quality issue and an added expense. Marketing sees a warranty as something that creates a competitive advantage. For example, contemporary automobile advertisements are incomplete if they do not prominently feature the standard OEM warranty.

Warranty represents the financial side of customer service. Typically 1 percent to as much as 17 percent of top-line revenues can be consumed by warranty and related expenses.

How much is the OEM and ODM industry losing on account of warranty claims?

$30 billion is the projected warranty expense for the United States in 2006.

Could you elaborate on how the entire warranty management process functions? For example, how do aspects like warranty claims and adjudication function?

The majority of companies have defined warranty management as a transaction. The inherent limitations of this approach encumber warranty management’s footprint to claim validation. Essentially, a claim is either accepted for payment or rejected.

Best practices in warranty management function differently. Like most optimised processes, improvement is not limited to the task but rather to the impact of the task. This requires connecting the dots and incorporating the interests of a broad variety of constituents and stakeholders.

When properly approached, claims processing becomes the final area of focus and is thus optimised. Warranty submissions become a service communication that is then exploited by various interests in a bi-directional way. Trade relationships, production, quality, service, design engineering, marketing and finance all participate in the knowledge generated, and therefore have much greater insight to support their decisions. Ultimately, this approach transforms a claims processing transaction into a problem processing process which in turn supports problem resolution.

With respect to claims and adjudication, most companies are focussed upon validation i.e. to justify whether or not to pay a claim as opposed to adjudication. Tremendous value and opportunity is lost when this approach is employed.

Adjudication is the ability to make a judgement based on discrete criteria. For example, is this customer of greater value to my business and therefore worthy of good will? Or perhaps this dealer has demonstrated very good citizenship and could benefit from some relief?

Conversely, there are circumstances where fraud may be an issue and discretion may need to be tightened down. This is how true automated adjudication functions. However, most firms simply create a manual step where a labour-intensive review is conducted, which unfortunately is not truly extensible in value.

What are the possible challenges that organisations face when it comes to warranty management?

The fundamental challenge is knowledge. It is difficult to see further than you have been. It is equally difficult for management and staff to view this challenge as an opportunity.

Those familiar with help-desk operations understand that for most part people describe their encounter with a problem, not the problem itself. Then there is the selection of priority prior to discovery. Any Six Sigma Black Belt will share what a slippery slope this approach truly is. Again, there is the IT compromise, where what is required is limited to the expertise of those who are tasked with process design. Companies often fail to make the distinction between home-grown and home-designed.

Essentially, companies do not understand what optimised warranty processes look like. Consequently, they are destined to achieve something else or lengthen the time and expense to achieve warranty optimisation. Given that a great deal of money and customers are affected, it’s a wonder why companies choose to approach something so strategic in such an informal manner.

What is the need for a warranty management solution as opposed to using tools like Excel spreadsheets, which are simpler and less expensive to use?

Excel has become the duct tape of operations. It seems to be employed wherever process and / or systems are absent or inadequate. The very notion that issues as strategic as customers, finance, quality, production, supply and marketing could be managed together on a static manually-administered spreadsheet itself proves the need.

Do these systems offer benefits that are not available from asset management tools?

The difference is profound. These systems are designed to manage the lifecycle of something you have as an asset, as opposed to managing something you do not want to have, a liability.

What would be the expected ROI post-implementation of warranty management software solutions? What are the different heads from where these returns will come?

These returns would vary somewhat from industry to industry. Generally— though this depends on the scale and scope of an organisation—ROI is usually achieved within a year of initial deployment. The good part is that optimised warranty processes are the gift that keeps on giving. Claim overpayment is the first to go, typically around 10-15 percent of claims. Omission and commission are abated, creating reduced cycle times.

The supplier recovery kicks in, and for many companies this is the big payoff. The ability to syndicate financial risk into the supply chain creates the opportunity to drive the remedy into the supply chain. This can have an enormous and positive impact financially. All stakeholders could benefit from process-driven exposure to the service communication that properly managed warranty achieves.

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