Rethinking Warranty Management to Achieve High Performance and Differentiation
Warranty management is a critical business function that has received little management attention in the past - unless significant problems came to the fore. Traditionally treated as an aftermarket concern handled by a customer service department, warranty management is gaining the attention of chief financial officers in a number of manufacturing industries, which is not surprising given that the 25 largest manufacturers in the United States combined spend approximately $15 billion a year on warranty claims.
But more than the cost of warranty claim payouts is at work. Companies seeking high performance are changing the conventional approach to the warranty management function. The drivers of this change include market forces, technology, and even the regulatory environment as financial analysts concern themselves with previously undisclosed warranty-related information. U.S. manufacturers' 10-K and 10-Q reports to the Securities and Exchange Commission (SEC), for instance, now must include detailed information on product warranty costs and accruals, warranty reserve fund balances, and changes in warranty estimates.
Warranty management is no longer simply a question of managing problems experienced by purchasers of manufactured goods. Rather, Accenture believes warranty management presents a powerful opportunity to achieve high performance and generate significant value through cost reduction, improved revenue streams, and superior product quality. It also can drive improved customer satisfaction and loyalty. New warranty processes, software, and tools can reach through the entire demand chain from end customer to supplier, and those who move early can exploit warranty management as a source of competitive differentiation.
Warranty Costs Add Up
Broadly defined, warranty management is the business process that manages warranty and post-warranty support activities. These include warranty registration, claims submission, claims processing and settlement, fraud detection, returns management, supplier recovery, extended warranty marketing, replacement parts logistics, and inventory management.
There is significant room for improvement. Typically totalling 2.5 to 4.5 percent of total revenues, warranty management has a significant and direct impact on profits and customer loyalty. For example, Accenture analysis shows that U.S. car manufacturers spend $8.5 billion on warranty claims every year. Some $400 million of that is on administration, and $500 in profit is lost on every vehicle that enters the warranty management process.
In addition to claims expenses, lawsuits resulting from poor product quality have become frequent and costly. Furthermore, Accenture typically finds 10 to 15 percent of warranty payments are the result of either fraud or invalid claims.
Blinkered, Disjointed Approaches
Accenture experience indicates that warranty claims are typically looked at in isolation, with a focus on administration, review, and payment, rather than on the impact of warranty management on the overall manufacturing, quality, sales, and aftercare processes. The only warranty claims that traditionally receive management attention are those with large liability.
This approach is problematic because warranty processing is labor-intensive and is generally supported by the limited, often batch-based functionality of an enterprise resource planning package. Because many companies lack more effective tools, they can miss important insights into product performance. This, in turn, means companies continue to design and manufacture products that cost them both in terms of warranty claims and, more importantly, dissatisfied customers.
Another issue is the effective management of warranties. Original equipment manufacturers often end up covering warranty costs, even when quality issues stem from suppliers. Also, warranty policies are often ineffectively enforced, resulting in unnecessary payments.
The cost issue is exacerbated by lengthy claims review and reimbursement cycles, often lasting several months. Unfortunately, identifying quality issues brought to light by warranty claims is difficult and sometimes only takes place after financial or legal damage has occurred.
Powerful Value Proposition
By working with companies from a wide range of industries, Accenture has developed a comprehensive approach to help manufacturers generate value from warranty management to achieve higher performance in three areas: cost reduction, new revenue streams, and superior product quality (see Figure 1). To accomplish this, Accenture has identified leading practices, systems and tools, sample metrics, and sources of business value.
Accenture has assisted a number of leading companies in rethinking their approach to managing warranty. The approach applies warranty expertise, a company's existing warranty process, marketplace benchmarks, and new technologies and applications. The goal is to remove warranty management from its isolation and strategically integrate it within the company as a whole.
Central to improving warranty management performance is a claims management system linked to sophisticated analytic solutions. These solutions provide business intelligence about product quality and performance by pulling together data from warranty claims, production data, dealer information, and customer surveys.
Revenue, Cost Reduction, and Customer Satisfaction
To go beyond superficial improvements, Accenture believes a comprehensive effort to improve warranty performance requires pursuing performance improvements by:
- Gaining customer insight and additional revenues starting with warranty registration;
- Creating additional revenue from the existing customer base through extended warranties or service plans;
- Automating claims processing and settlements to minimize administrative costs;
- Speeding up processing time and increasing data quality with online, real-time validation and claims submissions;
- Pleasing customers and cutting costs with timely warranty repairs made possible by a simplified replacement parts ordering process and improved availability of parts;
- Streamlining the return process of parts by using digital images and exception-based returns;
- Applying rule-based monitoring of incoming claims combined with fraud reporting and field audits to reduce overpayments;
- Mining warranty claims with other product, engineering, or manufacturing data to help identify and minimize quality issues; and o Pursuing a supplier recovery program to improve quality of the final product and minimize costs.
Catching Warranty Fraud
Many company executives despair over the high cost of warranty fraud. They may be missing an opportunity to greatly reduce the problem by rethinking their warranty processes. For example, an electronics equipment manufacturer had a costly warranty program that was experiencing significant warranty fraud, estimated to be upward of $100 million a year.
Accenture worked with the company to clarify and strengthen warranty policies and procedures, and establish performance metrics, formal audit procedures, and incentives to identify fraud and implement a penalty program. A strategic goal to reduce fraud by $77 million was established. Improved performance results included identifying $55 million in fraud within six months, a rationalized service provider network, and the improved effectiveness of employees whose work involved warranty management.
Accenture's experience has demonstrated that warranty management can be a source of higher performance by achieving greater differentiation, improved competitive advantage, and additional profits. Realizing the value of proper warranty management requires a new, strategic approach with supporting processes, technology, and organization. The approach is implemented by extending warranty management processes to customers, distribution networks, and suppliers largely through the application of new technologies.
This article was originally published as an Outlook Point of View, an Accenture publication.
©2004 Accenture. All rights reserved. Reprinted by permission.
