Don't TREAD On Me:

The problem is, while the major automobile companies may have computerized long ago, many in the RV and trailer industries that saw Ezsak's presentations had just a few PCs sitting around the front office and no sophisticated warranty claims management packages inside them. The few applications that had been computerized were focused on sales, payroll, and shipping, not aftermarket service -- repair, parts and warranty. Many of those records were in boxes, on fax paper, or even handwritten.

Paper-based Record-keeping

"The vast majority of the companies that are subject to these provisions have lagged well behind many other industrial and commercial segments in terms of their proliferation of integrated systems. So there's a great deal of information that was managed via fax," Ezsak said. One potential client has its warranty claims data neatly printed in 68,000 file folders.

Solanki ran into the same problem at Infogain. The problem he sees is that most of the computer systems now in place within the automotive industry are there for transactions, not analysis. Even many of the warranty claims systems now in place are used to manage the paperwork and expedite the payments, not to derive business intelligence from the raw data.

The TREAD Act may have changed that. Towards the end of 2002, Infogain began leveraging its experience with business intelligence services and customer relationship management into a new TREAD Act compliance offering. At the behest of major customer Kia Motors America Inc., Infogain developed an expertise in TREAD Act reporting that it has now turned into a major new business opportunity.

Solanki sees two kinds of companies complying with the TREAD Act: those who prepare the quarterly reports to keep the government happy, and those who see the benefits of investing in an early warning system that also happens to produce reports. Companies that make the investment will be able to analyze not only NHTSA-related safety and defect issues, but also to analyze warranty claims by region, by dealership, by production date, or by model, he said. That ability could just as easily lead to a company uncovering warranty fraud, or problems with a call center. Or, it might allow a company to justify a change of suppliers.

"NHTSA's true intent with the TREAD Act is to encourage companies to proactively monitor the product that they sell," Solanki said. "NHTSA is hoping that companies will be able to identify defect trends earlier, and to correct these defects sooner." In a perfect world, consumer safety increases, manufacturing costs decrease, and NHTSA is applauded for helping it all happen. The only losers are the litigators who bring product liability lawsuits.

Compliance Is Not Enough

IBM Corp. and SAS Institute Inc. jointly launched a TREAD Act compliance solution last month. Now Thomas Roehm, director of the manufacturing practice at SAS, is going to customers with the message that "compliance is not enough."

"Providing NHTSA reports is the compliance issue," Roehm said. He said he sees that as a fairly simple and straightforward process of filling out an Excel spreadsheet and uploading or emailing it to the government once per quarter. "It really isn't that complicated. The challenge is when they come back and ask questions. If they see something and they want additional information -- how efficiently and how quickly can the manufacturer get it out?"

Even then, the ability to answer the government's questions is only one benefit of the early warning system. Answering internal questions and fixing internal problems long before the government gets wind of them has to be the primary benefit of the system, Roehm said.

"By mining that data, and pulling out alerts of issues -- both those that come in a textual context and those that come in as safety issues or claims -- a company can then feed that information back to manufacturing engineers very quickly and efficiently, getting to the root cause and getting fixes in place," he said.

Early Warning Savings

"We've worked with a number of companies around this early warning emerging issue," Roehm added. "And I can tell you that just in single companies alone we've found $9 million in savings."

With an early warning system in place, Roehm said manufacturing issues that typically took six months to two years to resolve can be done 60 to 90 days faster. "We've found issues in that data that they didn't even know about," he said. "We were able to alert them, and that's one of the reasons they then went with our software: because we could find those issues for them."

Roehm said SAS is now working with a major tire manufacturer and some of the major U.S. and Japanese automakers on TREAD Act compliance solutions. Roehm said the company is even working with an appliance manufacturer which is not subject to the TREAD Act, but which nevertheless wants to implement an early warning system to cut defects and increase reliability.

Then there is the benefit of avoiding fines. Companies have five days to answer a NHTSA inquiry, then the late fees begin accumulating. The theory is that an automotive manufacturer, for fear of incurring the wrath of NHTSA, will detect problems before the government can, and will have corrected a manufacturing defect long before the government mandates a recall. In other words, if you're preparing reports for the government to analyze, wouldn't you first analyze the data yourself?

Like an IRS Audit?

Enforcement is another issue. Ezsak said that NHTSA probably will take a page out of the procedures manual of the Internal Revenue Service, and enforce by example. There is simply no way the IRS can do more than a perfunctory analysis of each and every tax return. However, the fear of getting caught cheating is enough to dissuade most filers from taking advantage of that fact.

In TREAD Act terms, when anomalies appear in the data, the filers better be ready to explain them. Down the road, NHTSA may find an instance where the raw data was not analyzed by the filer, or was in no shape to be analyzed, and a few selective enforcement actions with big and well-publicized penalties will make everybody more attentive.

A company will want to be able to answer an NHTSA inquiry with details on the service record, the warranty claims history, field reports, consumer complaints, plaintiff's letters and documents, insurance reports, and other supporting materials, Ezsak said. "When NHTSA comes knocking at your door, you can conveniently demonstrate that you have supplied accurate information, and you have retained all the information to support it."

"What the real game here is about, is being able to substantiate the accuracy and the efficacy of that which has been reported," Ezsak said. So those who look at this as just a reporting function are creating a mechanism of potential exposure." He likens it to filling out your tax forms and then throwing away your shoebox full of receipts. What happens if you're audited?

Lowered Damage Awards?

Another question is what happens if you're sued? Robert Kelly, Infogain's director of marketing and alliances, said in his experience, the size of a jury award depends not only upon the facts in evidence, but also upon the ability of defending attorneys to demonstrate that a manufacturer took steps to fix a defect as soon as possible.

"I can tell you that juries are very subjective in terms of payouts when cases are put in front of them," Kelly said. "A huge aspect of that is how conscientious a company has been in their safety standards. They understand that problems do occur. But if a company is perceived as negligent in managing those problems, their payouts will be significantly higher."

"Even one case could be hundreds of millions of dollars."

Not everybody sees savings in the legal domain, however. A decrease in the number of attorneys defending product liability lawsuits might correspond with an increase in the legal staff managing compliance issues.

Morris Brown, program manager for materials management at the Automotive Industry Action Group, said he thinks the increase in legal staffing requirements may equal or exceed the decrease in manufacturing costs. "I think there's a potential there in terms of increased communications throughout the supply chain," he said, "but I don't really see cost savings, to be quite honest with you."

The AIAG now has an ad hoc committee following the TREAD Act, and has already hosted a TREAD Act educational event. Brown has another online educational event scheduled for the morning of Tuesday, April 8. But AIAG isn't endorsing any specific company or software package.

Instead, Brown said the AIAG is taking on the role of educator in TREAD Act matters, helping its 1,600 members avoid having to pay stiff fines. "We have a draft that's just about completed with recommended business practices and a TREAD Act checklist," he said.

Roehm said total industry support costs may be much higher than the anticipated $1.72 million per year. "You're talking about maintaining a very large data warehouse that's pulling data from multiple sources. The textual data in particular, you're going to have to continually update your rules. Every so often, you're going to have to go in and look at the text comments as they're coming in, because the contents of interest changes over time."

Some manufacturers already were looking at their data, looking for ways to increase quality, reduce defects, and save money. But others weren't bothering. Some didn't even have the underlying systems needed to collect the data. The TREAD Act, Roehm said, forces everyone to step up to an equal level, at equal cost.

NHTSA Underestimating Impact?

Ezsak said he doesn't trust any of NHTSA's numbers -- not the $1.72 million in projected cost nor the $9 million in projected benefits. The reason, he said, is his belief that NHTSA has not been accurate in some parts of its TREAD-related industry research with which he is intimately familiar. For example, take the trailer industry. In that market segment, NHTSA said only eight companies would be subject to the more comprehensive reporting requirements mandated for large manufacturers. "The actual number is greater than a thousand," Ezsak said.

Some small trailer manufacturing companies, he said, are part-time and weekend operations that buy their components from suppliers, which they then assemble, weld, and paint. But there are hundreds of those, and many make more than 500 trailers per year. The National Association of Trailer Manufacturers has 332 member companies in its online directory. There are 22 NATM members located in just the state of Indiana. Just the NATM's board of directors includes representatives from 12 companies.

In a survey of 265 members, 154 or 58% of all respondents said they fit NHTSA's definition of a large manufacturer. The NATM estimated TREAD Act compliance would cost its members $250,000 to start up, plus one to one-and-a-half salaries per year to operate. Multiply those figures by a few hundred to account for all the trailer makers subject to EWR, and you've exceeded NHTSA's estimates for total automotive industry costs, just for the trailer industry.

Last summer, NHTSA released a table that summarized the number of companies it believes will be subject to the more comprehensive reporting requirements of the top tier of manufacturers.