January 5, 2004
Editor's Note: This column by David Froning
of the SAS Institute Inc. is the third in a series of
contributed editorial columns. Readers interested in
authoring a future contributed column can click here
to read the Guidelines for Editorial Submissions page.

Controlling Warranty Costs and Exposure:
Using Early Warning Systems,
Warranty Becomes a Board-level Issue

By David Froning
SAS Warranty Analysis Product Manager

Historically, warranty has always been an area of focus for manufacturers. Today, however, two key pieces of legislation have combined to make controlling warranty costs and exposure a critical business factor. In fact, they are conspiring to move warranty quickly up the list of priorities at organizations across the automotive, durable goods and other industries.

For manufacturers and suppliers of automobiles, trucks, motorcycles, buses, trailers, tires, and child restraints, the Transportation Recall, Enhancement Accountability, and Documentation (TREAD) Act of 2000 represents an enormous challenge. Under the TREAD Act, manufacturers must report specific information regarding virtually all of their customer contact to the National Highway Traffic Safety Administration (NHTSA). This sweeping legislation requires manufacturers to record, aggregate and report a broad collection of data regarding dozens of components and safety systems. This data includes field reports, production statistics, injuries and fatalities, complaints, warranty claims, and much more. The deadline for the first quarterly reports was extended several times, but finally came on December 1st, 2003.

Facing stiff civil and criminal penalties, companies in the automotive supply chain understand that that compliance is not optional. But the warranty challenge is no longer limited just to auto makers and suppliers.

The Financial Accounting Standards Board's Interpretation No. 45 (FIN 45) brings warranty information into the public domain for all U.S. publicly traded companies. The Interpretation requires those organizations to report details about all of the guarantees they have made, including warranties.

For the first time ever, Wall Street and the investment community is now aware of the hundreds of millions of dollars that companies are spending/setting aside for warranty-related issues. This fact, coupled with the TREAD Act and the costs associated with lawsuits and lost sales, are putting intense pressure on manufacturers to rein in warranty costs.

Early Warning Systems Help Rein In Warranty Costs

In the face of TREAD, FIN 45 and lawsuits, what if you could detect problems months sooner, allowing you to avoid producing thousands of units with that potential defect? What if you could even predict problems before they occurred?

This can certainly be considered a nirvana-like premise. But it isn't fiction. The ability to detect and address emerging issues before they become major problems is possible using early warning systems.

The Anatomy of an Early Warning System

There are three essential elements of a early warning system:

  1. Building a Core System

    Warranty claims come in many different flavors. Manufacturers have claim data from product warranties across regions of the globe, through direct sales, through retailers, and on aftermarket parts. Component suppliers often have warranty data from each of their customers, as well as their own aftermarket sales. Each of these sources is valuable on its own, but integrating them gives you the power to look across business units, customers, and usage.

    But claims aren't enough. A few essentials need to be added to the claims before they are useful for anything beyond paying the dealer. Sales information allows you to look at rates instead of counts. Production information makes it possible to compare across assembly locations, build combinations, and time. Service center information enables you to look at failures across geographic regions or specific technicians.

    Customer surveys, call centers, end-of-line audits, supplier audits, and other data sources make up the core of a basic warranty analysis system. The key is to have this information available in a single repository that can be automatically interrogated using predictive analytics.

  2. Going Beyond Simple Threshold Triggers

    Whether you're trying to detect fraudulent claims or defective products, rapid identification is vital. However, with the multitude of combinations of products, plants, service centers, parts and labor operations, among others, it's not practical to search for them manually. And besides, how do you decide what you're looking for?

    Simple thresholds may be fine for safety issues, but for the vast majority of warranty issues, the answers lie in the data collected in the core systems. The next step is the use of analytics to automatically detect any changes in variation that could signal emerging issues.

    Defining failure modes quickly and accurately is essential in focusing your scarce problem-solving resources. However, determining exactly where, when, and in what combinations parts are failing is often a long and arduous process. Over the years, technology has made it easier to slice and dice the data. But the fact is warranty data are highly variable. The question isn't: "Which product/plant combination has the highest claim rate?" It's: "Is the difference significant?" By applying analytics to filter out the noise of normal variation, you can determine exactly which combinations are significantly worse and focus your resources appropriately.

    Using predictive analytic techniques, you can find patterns in the text and data that indicate where and when future failures are likely to occur. This is even more effective if you've taken the time to integrate data sources beyond warranty claims. Shop floor data, supplier audits, and call centers are all rich sources of information that can hold clues about potential warranty failures.

  3. Communicating Goals and Progress

    Every manufacturer understands the need to reduce warranty and recall costs. World-class manufacturers communicate the information that their people need to align their performance around this strategic objective. They focus on communicating two key issues:

      § The key metrics. TREAD data, for example, measures a very large range of metrics. Additionally, most companies have metrics and initiatives to support quality, customer satisfaction, and cost reduction. The secret is to identify your organization's strategic objectives and focus on the metrics that most clearly measure those objectives. If a metric isn't tied in one way or another to those strategic objectives, you don't need to focus on it.

      § How effective are warranty efforts? Now that your people know what to focus on, they need to understand the goals and current performance. Communicating this information in a hierarchical format helps them understand how individual business units, model lines and suppliers are doing and how they influence overall performance. Bringing this information together through a "scorecard" can help to align the entire organization around common goals.

Reducing Warranty Costs: From Theory to Reality

Reducing warranty costs has always been a goal of manufacturers. FIN 45 and the TREAD Act have greatly increased this focus. If reducing warranty costs is not currently on your organization's to-do list, it will be soon. Leveraging the right data, accelerating problem solving, and communicating goals and progress are key enablers for achieving that goal. In the form of an early warning system, they can help companies turn what had been a liability into a competitive advantage.

SAS Institute Inc. SAS Institute is a market leader in business intelligence and analytics. With more than 40,000 customer sites worldwide, including 90 percent of the Fortune 500, SAS ranks as the world's largest privately-held software company. Users of its supply chain analysis and warranty analysis solutions include American Honda Motor Co. and Maytag Appliances.

Webinar Note:

Recordings of all four events in the 2003 Warranty Week Webinar Series are now online and ready for playback. Readers may view and hear the Webinars by clicking on the event name listed below. The WebEx client will be needed for proper playback.

  Date   Event   Guest Speaker
Sept. 16   Warranty Benchmarking Alex Green,
TRW Automotive
Michael Blumberg, Blumberg Associates
Oct. 14   Warranty Metrics Tom Washburn, Hewlett-Packard Co.
Nov. 18   Supplier Recovery Tom Miller,
Ford Motor Co.
Dec. 17   Customer Loyalty
  through Warranty
Craig Reilly,
Sears, Roebuck & Co.

For more information or to register for the 2004 Warranty Week Webinar Series, please click here.

To automatically receive invitations for upcoming events, click here to be added to the mailing list.

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