March 14, 2006

Early Warning Standards:

Decades ago the AIAG helped set standards for electronic commerce when it developed new data interchange standards. Now it's doing similar work with warranty data communications standards, looking for ways to reduce delays, improve accuracy, and cut warranty claims costs.

During the opening plenary session of the Warranty Chain Management Conference held two weeks ago, members of the Automotive Industry Action Group provided an update on a warranty standards project that's been under way since late 2004.

Marianne Grant of ProQuest Business Solutions and four other members of the Early Warning Standards Work Group Project each took turns at the podium, explaining to a packed room how they plan to help automotive manufacturers reduce their warranty costs.

Perhaps anticipating some of the next day's discussions about warranty industry associations, Grant spoke a little about the structure that's allowed the AIAG to become so successful over the past quarter century. "I think what's unique about AIAG is it has members from the different manufacturers, suppliers, and also solution providers to the automotive industry," she said.

It's an environment in which these members are somewhat shielded from the competitive pressures of their own companies, Grant said. All the work done by the AIAG is performed for the benefit of some 1600 member companies, who each have an opportunity to also contribute. Many do. In fact, some have gone as far as to lend some of their staff members to the AIAG, continuing to pay their salary and benefits while they perform the AIAG's work.

AIAG EDI Standards

In decades past, the AIAG helped pioneer the creation of electronic data interchange standards that became widely used within the automotive industry and eventually helped serve as templates for parallel standards-making efforts in the grocery, computer, housewares, health care, and many other industries. Observers hope that the AIAG will once again place itself at the front of the wave, helping to set the standards for warranty data communications for its industry, which will eventually serve as a template for all kinds of manufacturers, retailers, dealers, suppliers, and others with a stake in the warranty chain.

Indeed, a Warranty Work Group within the AIAG's Truck & Heavy Equipment Steering Committee has worked on the deployment of an electronic warranty process for fleets that gives OEMs and suppliers a single set of warranty codes for use in EDI communications across the industry. Its current project is the creation of an XML Format for EDI Transaction Sets 141 & 142, called Warranty Claims Data Exchange.

"What we're trying to do with Early Warning is something similar, but with a much, much larger dollar number," Grant said.

According to industry data filed with the Securities and Exchange Commission and compiled by Warranty Week, just the U.S.-based members of the automotive manufacturing community are expected to report a figure approaching $12.7 billion for warranty claims paid in 2005, an amount up by more than 10% from the previous year. Warranty costs consume an average of 2.5% of the typical vehicle manufacturer's revenue, and close to 1% of their suppliers' sales. And it's a percentage that's increasing for both. So discussions about the increasing importance of warranty definitely have their attention.

TREAD Act Origins

Grant said the AIAG's current Early Warning Standards Work Group Project grew out of a previous committee's work regarding compliance with the TREAD Act, a federal law requiring comprehensive quarterly disclosures by automakers regarding injuries, deaths, safety issues, and warranty claims. The National Highway Traffic Safety Administration collects this data in spreadsheets to make it easier to analyze and therefore help it identify defects that required recalls. First NHTSA acquired historical data in order to establish a baseline of what would be considered normal levels. Then it began analyzing the incoming quarterly data to look for spikes and other anomalies that suggest the appearance of a new safety issue.

As work proceeded on the TREAD Act project, it became clear that some of the same data that had to be provided to the government also could be put to good use internally to identify trends and spot anomalies. For instance, if a pattern in current data suggested a problem with brakes on vehicles manufactured at a certain factory in the past few months, it might still be a problem with vehicles being made there now. If the data could provide engineers with an early warning of the problem, it could be fixed sooner on the production line, preventing future warranty claims from ever leaving the factory.

AIAG spent a considerable amount of time and effort educating its members about the TREAD Act and training them how to comply with the law's reporting requirements. But rather than viewing the conclusion of that effort as a final goal, it was seen as the gateway to an opportunity to reduce warranty costs by detecting problems sooner. Rather than allowing the TREAD team to disperse, they were given this new project.

"We pulled them together to look at how to best apply standards in the early warning area," Grant said, "specifically around warranty, because the numbers are so large." And so, towards the end of 2004, the TREAD Work Group Project, which had been somewhat related to warranty, became the Early Warning Standards Work Group Project, which was all about warranty.

Speaking for the AIAG

One thing which Grant didn't explain to the audience at the WCM Conference was that she and the other AIAG work group members were speaking for themselves and on behalf of the AIAG work group, but they were not necessarily speaking on behalf of their own companies. It's not mandatory for AIAG member companies to implement any of the standards and policy recommendations of the AIAG's various work groups.

Therefore, what follows are the personal views of four individuals who are doing groundbreaking work on behalf of the AIAG and who just happen to work at some very well-known automotive companies. So we'll identify their companies but not their job titles, because each was really speaking as a member of the AIAG work group.

After explaining who they were and how they got there, Grant, who serves as co-chair of the work group, then introduced the other co-chair, Marcia Mason of the consulting company Gedas USA Inc., a spin-off of Volkswagen AG. It was Mason's job to take the audience through a timeline of the past, present, and future activities of the work group.

The work group has finished documenting the "as is" status of warranty systems, and has mapped detailed process flows for the comprehensive warranty process. That includes detailed explanations of everything that happens: from how a problem is detected in a single vehicle to how a team of engineers tackles a list of the top emerging issues.

As an example, Mason showed the audience how in a "use case" concerning a data collection, various people such as the dealer's technician and warranty clerk would interact with the manufacturer's field support and design engineers. The use case follows how a work order is created, how the vehicle is repaired, what authorizations are required, and how paperwork supporting the warranty claim is prepared and submitted.

Digital Photos

In addition to simply mapping the processes as they exist now, the group also identified some of the problems, challenges, and pain points of the systems involved. For instance, in the above "use case," the suggestion was made to require the inclusion in the claim of digital photos of the failed parts, while they're still in the vehicle. Another suggestion was made to reduce the reliance on industry jargon and acronyms that some people further up the warranty chain might not understand and worse, therefore might not pass on in their summaries and interpretations.

Yet another pain point identified was the small size of the space set aside by many legacy warranty systems for the input of explanatory text and other comments. Usually, the limit is four lines of up to 80 characters each. This, the "use case" concludes, actually promotes the use of the acronyms and jargon that others find difficult to understand and analyze.

"What this did," Mason said of the "as is" mapping effort, "was provide us with an excellent base for our data analysis for our "to be." It keeps us grounded in what we all are currently doing, and then when we make recommendations for our "to be," going back to the "as is," we can identify how big of an issue it is going to be to make the change."

Now they are moving forward with that effort to define and set priorities for the "to be" processes. Mason said a "huge and robust set of ideas" for improvement was collected, so the list has to be prioritized and subject to some kind of cost-benefit analysis.

"What we did once we got all of these hundreds and hundreds of pain points," Mason said, "we noticed that they nicely grouped into three major categories." These categories included, she said, 1) issues regarding data availability and data quality, 2) issues regarding the process, and 3) issues regarding the systems and formats used by those systems. There also were some legal issues identified, such as those related to product liability, and then a wide range of other issues.

"We were able to identify two primary objectives for our 'to be,'" Mason said. "We want to reduce latency in getting the data, and we want to increase the accuracy of the data." As soon as the committee gets a good handle on what suggestions advance those objectives and what they think they might add to the "to be" process, she said, they'll begin looking for solution providers and manufacturers willing to build pilot projects that can test and validate the new processes. Based on the feedback received from those tests, they'll begin deploying real solutions.

Solutions Expected in 2006

"We're hoping by the end of 2006 to actually have some solutions that we can offer," she said. "It has been slow, and we recognize that we need to pick up the pace, so we're going to do that in the next 12 months. It's a very timely topic, because Early Warning is one of the tools that we're going to use in the future to decrease our warranty cost."

Darlene McClure of parts supplier Dura Automotive Systems then took her turn at the podium to explain some of the key "trigger points" and "fixes" identified by the AIAG work group. The "trigger points," she said, are steps in the business process at which the group believes latency can be reduced and/or the accuracy and availability of data can be increased. The "fixes" are tools, technologies, and strategies that the group believes would be beneficial to those goals if applied at one of the "trigger points."

"Trigger points" can include anything from a customer bringing a vehicle back to a dealership to the reliability reports issued by J.D. Power and Associates. McClure said an accident report also may occasionally prove to be a "trigger point." While most accidents are caused by driver error and are therefore beyond the realm of warranty claims, some accidents could be caused by defects or failures in the equipment.

An examples of a "fix" cited by McClure include establishing a searchable database of all technical service bulletins, and making sure that suppliers as well as dealers and repair facilities have access. The TSBs should be searchable by model, platform, part, complaint, symptom, and suggested corrective action, among others. Another "fix" is to cross-index supplier and OEM part numbers in catalogs, speeding up the identification of specific parts on specific vehicles.

Need for Text Analysis Tools

McClure also strongly advocated the use of text analysis tools to automate the reading, coding, and categorizing of claims data. "I can't tell you how valuable text analysis can be," she said. "Prior to use a form of text analysis, I used to read every verbatim and classify them."

Another suggested "fix" which plays into the historical strength of the AIAG in terms of standards-making is to create a standardized template for the communication of warranty data, not only between the OEM and its top suppliers, but also elsewhere throughout the warranty chain. In addition, new warranty data should be transmitted directly to both the OEM and the relevant supplier, she said.

Charles Barnes of Toyota Motor Manufacturing North America followed McClure to the podium, to talk about a proposal for a standard template for the interchange of warranty data. "We share a lot of suppliers," he said, "so the issue is we all deliver information one way or another to our suppliers, but we all do it in different ways. Some may deliver partial. Some may deliver totals. Some may deliver daily, real time, weekly -- whatever the case may be.

"So the first point is that we need more than the traditional claim," he continued. "We'd also like to incorporate data that is currently in other systems," he said, such as all the details about customers and their vehicles that's loaded into dealer management systems. "If we can capture that, again it goes to that earlier identification of issues."

Barnes said a way needs to be found that allows faster transfers of accurate warranty data between and among all the players in the warranty chain. To do that now requires a lot of effort, he said, frequently involving the re-keying of data into new systems, and other times involving the translation of codes and protocols from one system to the next. Meanwhile, manufacturers could be finishing vehicles at a rate of one per minute, so every day's delay can mean hundreds more defects entering the installed base.

Common Template for Suppliers

He said he doesn't necessarily want to see other vehicle manufacturers' data. However, some of his suppliers may do work for multiple OEMs, and therefore they may not only want to see the data of multiple OEMs, but actually may need to do so if they supply similar parts to each. "If we can set them up so that they have a common format, a common template," Barnes said, "it makes it very practical for solution providers to develop industry-standard tools that even the smallest suppliers can afford."

Such a common template would begin with the Vehicle Identification Number, of course, but would also include data about production dates, repair dates, and mileage. But it also would supplement those common fields with data coming in from call centers, Internet forms, NHTSA reports, and other sources. "And again, all this goes to an earlier understanding of what is the problem," he said. "Before we can solve the problem, we have to know what it is. And the earlier we can understand that, the sooner we can get it solved."

Terrance Stewart from Navistar International Corp. then took his turn at the podium, talking about the work group's plans in regards to the parts return process and equally important, the return of data about that part. The process usually starts with the dealer, and it usually takes a long time to reach the supplier. "That doesn't do anybody any good when it comes to trying to find out where our root cause is, or where our issues are," he said.

It's also challenging to keep the parts and the data together, Stewart said. "A lot of times, we'll send electronic invoices to a supplier. He'll have some claim verbiage on it. But the parts won't come until a couple of weeks later, in the form of a box full of his parts. And he can't figure out which part goes with what claim."

Meanwhile, dealers are already complaining that too much is being expected of them. And customers want their vehicles back fixed as soon as possible. So it's unlikely that either dealers or customers will agree to new processes that add time and effort to the warranty work. Yet it's important to evaluate and diagnose these failures, preferably while the parts are still on the vehicle. In fact, many times parts are damaged further as they're taken out of a vehicle, which further frustrates the root cause analysis.

Further Study Needed

It's a huge issue with no easy fix. Stewart said this is an issue the AIAG is probably going to take up with the National Automobile Dealers Association, perhaps by working out some kind of arrangement whereby specific dealers that are strategically located near an OEM's own facilities would have to call in specific repairs, so that somebody can drop by quickly to have a first-hand look. And although freight costs can be high for large metal parts, the AIAG also is looking at the possibility of improving the online tracking capabilities of return parts packages from the time they leave a dealership until a freight forwarder delivers them to either an OEM or a supplier. And the Early Warning Standards Work Group plans to leverage the warranty EDI standards developed by the AIAG's Truck & Heavy Equipment Steering Committee to improve the whole parts return process, he added.

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