February 21, 2007

Warranty Analysis Workshops:

Four pre-show workshops and an automotive warranty seminar make the day before the official opening of WCM 2007 a worthy destination, and may presage an era when advanced courses and certification become a routine feature of warranty industry events.

It's now less than three weeks until the Warranty Chain Management Conference in Tampa, so anybody looking for a discount advanced purchase airfare will need to make some decisions soon. For anyone in search of a good reason to arrive early on Tuesday -- or perhaps even late on Monday night -- below are descriptions of five events scheduled to take place on March 13, the day before WCM '07 officially opens.

WCM conference director Alison Griffiths has scheduled four pre-conference workshops for March 13, two in the morning and two in the afternoon. In addition, the Automotive Industry Action Group has taken a room in the Hyatt Regency to host an Early Warning Standards Seminar that runs from 11am until 3pm.

There are brief descriptions online, but what we wanted to do this week is ask all of the presenters who they think should be in the audience. Are they aiming their workshops at manufacturers? At finance people? Will it have more of an engineering focus? Is it more for beginners or experts? None of these additional events are free, and attendance at any would entail another day out of the office, so potential registrants would of course want to perform some kind of cost-benefit analysis before putting an X in the box.

Warranty Analysis Theme

And analysis is evidently the name of the game this year. Each of the four workshops focuses on different yet complementary aspects of warranty analysis. In the morning, Paul Swenson and Scott Morrison of Fulcrum Analytics Inc. will demonstrate tools that help companies predict claims costs and adjust reserve levels, while Nandit Soparkar, and Keith Thompson of Ubiquiti Inc. take the room down the hall to demonstrate how automotive companies stay ahead of their claims data.

In the afternoon, Greg Spraker and David Froning of SAS Institute will show how the warranty chain is part of a much longer and more intricate service chain, while Chris Soderquist of Pontifex Consulting explains how financial models can help explain the dynamics of the warranty ecosystem. For anyone in the warranty business who needs to spot trends or predict the future, it's looks like Tuesday is going to be a busy day.

The opening workshop is entitled "Warranty & Extended Service Plan Loss Costs: Tools to Understand, Reduce & Optimize." In that rather lengthy title, the two key words are loss cost. Anyone familiar with insurance industry terminology or the extended warranty business will recognize it as the ratio between premiums and payments. And at least in the extended warranty business, it is perhaps one of the most important and least publicized metrics of a given program's success.

Fulcrum Analytics, the presenters of the workshop, have made a business out of advising companies who sell extended warranties about metrics such as loss cost and reserve levels. In fact, from 1993 until 2002, Paul Swenson, who is now Fulcrum's president, was actually working for the client that asked Fulcrum for some help with warranty metrics. Scott Morrison, Fulcrum's executive vice president and client partner, was Swenson's key contact.

Morrison said Fulcrum got into the claims cost management business around 12 years ago at the behest of Swenson, who was then running extended warranty for Circuit City Stores Inc., a major electronics retailer. Even back then, gaining a better understanding of loss costs was Swenson's central reason for bringing Fulcrum on board.

"I engaged Fulcrum to do a number of things," Swenson said. "One of them was to build true profitability models for me for the aftermarket and renewal businesses. So Fulcrum had to do a full analysis of all the loss costs at very detailed levels: product class, age, MSRP tier, term, and so on. So they could tell me, for instance, if I was going to sell a three-year renewal on a two-year-old Sony rear projection TV that retailed for $2,400, they could tell me the exact loss cost I could expect to incur on that policy, with forward trending on the severity components."

Built for Extended Warranties

After those tools were developed, Fulcrum built a business for itself in their application to the ESP operations of other clients in addition to Circuit City. Eventually, some of the manufacturers using the tools on their ESP side wanted to bring them over to the product warranty side too. And they wanted all that data tied together, so they can see claim emergence patterns from launch date out to the expiration date of the longest extended warranty.

At its core, this workshop should help attendees answer a rather fundamental question: what percentage of revenue can I expect to spend on warranty? Swenson said the goal is to show attendees how to evaluate both their product warranty and extended warranty reserves in two ways. "One is to evaluate the adequacy of the current reserves that are in force, and two is to also evaluate the reserve rates for liabilities going forward from that point in time," he said.

It's aimed at both retailers and manufacturers, and should prove useful to both companies that run warranty themselves and those that outsource it to third party administrators and/or underwriters. It's aimed at retailers because they're usually the party selling extended warranties, and it's aimed at manufacturers because they're the ones that might see the value of an analysis of failure data on products whose initial warranties have expired. And it's aimed at those who use outside underwriters simply so they can understand and fact-check what their underwriters are telling them, Swenson said.

"We had a couple of retailers and manufacturers who approached us and asked us to help them better understand their loss costs, right down to the SKU level," Swenson said, "so that we can understand what changes we need to make to our programs, to keep our underwriter happy, and to keep our rates where they need to be, so our margins are improved." Others are carrying the risk on their own books, but they need help to understand whether their reserves are adequate.

Morrison said he also sees a potential appeal for the people who need to put together financial reports for their bosses. "My gut feel is it would be the manager responsible for the overall profitability of aftermarket programs, or who's responsible for warranty cost containment," he said. "At the highest level it's the people responsible for the financials, both on revenue and cost containment in the aftermarket. The other people I think would be helped are the senior analysts who have to actually execute the decision support to supply that information to their managers."

Enhanced for Product Warranties

Fulcrum is now ready to launch the tool set as a commercial product, and this workshop will serve as a preview of what they plan to formally announce during the subsequent two days at their WCM exhibitor booth. Morrison said he is still shocked to see how separate and disconnected the product warranty and extended warranty sides of many companies remain. "The data structures are different. It sits on separate databases and has separate reporting structures." This tool set could help change that, changing the way data is captured in the first place, he said.

"CFOs love us," Swenson said. "And they love this set of tools. We've met with several retail and manufacturing clients, and their CFOs understand and 'get this' right away. It's not a beginner course, but the tool set is so logical when you look at it -- and we start from the ground up and explain what a loss triangle is, how loss triangles are calculated, and how they're utilized in the business, what the math tells you when you're all done, and how to build business intelligence behind that, so the actuarial expertise can be overlaid with business intelligence. So we build from the ground up, so that actually, someone who is responsible for this area will be able to pick it up and understand it pretty easily."

External auditors will also love this tool set, Swenson said, because it will help them feel comfortable with the warranty reserve levels maintained by the manufacturers and retailers they audit. "They feel confident there's the right kind of logic behind this, so that when they sign off on the reserves, that it's very buttoned up."

Automotive Warranty Analytics

Down the hall, Nandit Soparkar, CEO of Ubiquiti and Keith Thompson, his director of software and services, will jointly present a workshop entitled "Warranty Management: Operations & Analytics." Soparkar said the workshop will focus on how both automotive OEMs and their suppliers operate their warranty processes, and how they gather the data used to perform their analytical processes. It's a workshop both about and for those companies, intending to show them what some of their peers and competitors are doing in these areas. But it also might be interesting to companies outside the automotive space who simply want to know what's out there in terms of analytical tools.

"The other group which might be interested are the consultants," Soparkar said, for the same reason: so they know what's available. He said most of the major automotive suppliers and OEMs have already seen the Ubiquiti demonstrations and heard the sales pitches, so there won't be as much for them. But still, the workshop will include some real world examples of what is being done now by Ubiquiti customers such as Dura Automotive, Autoliv, Lear, Yazaki, Freudenberg-NOK, and General Motors, so it should appeal to anyone who wants to keep abreast of the market.

"We have not done this before at WCM, so we don't know what kind of a group to expect," he noted. "But from what we hear from Alison [Griffiths, the conference director,] a lot of the competitors may be sitting in. We don't put a lot of information about ourselves on the Internet. So I'm sure they want to know more about us, which is fine. A rising tide lifts all boats."

Soparkar said the workshop might also appeal to members of the high-tech manufacturing community, although he noted that they don't usually have as large a problem with unformatted free-form text or poorly-formatted raw data as do the automotive companies. "Much of their information is already online," he said, "so they have the potential to leverage that information. But surprisingly, the degree to which they do it is relatively low."

Also Appeals to Medical Device Makers?

There may also be some appeal for the workshop among manufacturers of medical devices, Soparkar said. "Not only are they interested in the warranty issues; they're also interested in the regulatory issues -- the equivalent of the TREAD Act on the medical side," he said. "So they have to be very concerned about that."

What matters most is whether the manufacturer must make frequent and costly warranty repairs for their customers. If they sell only a few dozen machines a year, or if it's usually multiple years between repairs, perhaps they can get by with manual processes and so they don't need to hear about Ubiquiti's automated approach to warranty analytics.

"We provide software for doing analytics," Soparkar said. "And we handle text narrative comments that technicians might provide. Most importantly, we provide an unconditional guarantee," he said: a warranty on the warranty software. "I think many software companies should get into that line of thinking. Otherwise, all kinds of hype is generated about its abilities."

Both of the morning workshops start on March 13 at 9am. The AIAG event starts at 11am. Registration for the workshops can be done as part of the general conference registration. The AIAG EWS Seminar requires a separate registration through the AIAG Web site, and is open to both AIAG members and non-members. Readers can contact the AIAG's Tami Rozovics at trozovics@aiag.org for details.

Different from the AIAG Standards Panel

Marianne Grant, director of Snap-on Business Solutions and one of the primary organizers of the AIAG seminar, noted that this Tuesday event will be both separate and different from the panel discussion scheduled for Thursday morning. It's not at all a Part One and a Part Two. The panel discussion will explain the AIAG's recent warranty standards-making activities, while the seminar will provide attendees with a series of snapshots of global trends in automotive warranty.

"Following Tami [Rozovics' welcoming comments], I will be giving just a very brief introduction to the Early Warning Standards initiative," Grant said. But, since many of the attendees will be very familiar with that initiative, and since it will be covered in-depth during the Thursday morning panel discussion, she will keep her comments as short as possible.

The next presenter will be Eric Arnum, editor of Warranty Week, speaking about global automotive warranty trends. That hour-long presentation is to be followed by a working lunch, during which it is hoped that the discussion will continue in smaller and more informal groups. After lunch, Grant said presentations will be given by representatives of the automotive OEM and Tier One supplier community. "Both of those perspectives will be focused on issues and opportunities that those two speakers see in the fact that they are global companies," she added.

Grant said anybody who is interested in understanding more about the state of automotive warranty is encouraged to attend -- even those whose companies are not AIAG members. Though the meeting is not an official AIAG EWS work team meeting, many of the most active contributors will be there, and as such it will be an excellent opportunity to meet them in an informal setting.

"I think it is an important chance to network with people in our community," Grant said, "some of whom you may not have met before, or may not have had an opportunity to talk with before. And as this time it's over lunch, it will feature a little bit more social networking and a little bit deeper discussion."

Last year's pre-show AIAG meeting featured a freewheeling discussion by 30 or so attendees seated around a small U-shaped conference table, with the presenter standing in the middle, his back to the projector screen. This year will be similar, and will once again try to enhance rather than duplicate the agenda expected to be covered during the main WCM conference. This pre-show Tuesday meeting will concentrate upon the financial aspects of automotive warranty, while the Thursday panel will update attendees on the automotive warranty standards-making project.

Globalization of Warranty Standards

During that panel discussion on Thursday, the AIAG group will give an update on its progress over the past year "First of all, we will be talking about the proof of concept projects, which are in process to validate some of the Phase 1 recommendations and findings of the group. Secondly, we will be talking briefly about the global perspective of our group," Grant said.

As noted in last week's newsletter, globalization is the theme of this year's WCM Conference. The AIAG already was global, Grant noted, in terms of including members from companies based all over the world. "One thing that's changed a lot in the last year, however, is that we've benefited from very active participation from Europe, and we're now seeing some initiatives kicking off in Europe, which will both leverage and benefit from the work that AIAG has done, but it will also return benefits to us."

After lunch, three members of SAS Institute will present a workshop entitled "Netting It Out: Warranty Benchmarking & Value Assessment." But really, the workshop will be much broader than its title suggests, according to SAS account manager Greg Spraker, who'll be presenting along with David Froning, SAS product manager for warranty solutions, and Greg Link, SAS warranty solutions architect.

"We want to be higher-level than just warranty," Spraker said. "We want to be able to talk about warranty, but we also want to be able to talk about service revenue. We also touch on other things such as suspect claims and predictive maintenance."

Spraker said after presenting a high-level overview, he and Froning will stop and ask the attendees where they want to spend the most time. "We can spend time in any of the areas of the service intelligence wheel, but we want to make sure we're letting them influence the process," he said.

Benchmark Study Results

Froning said he will talk a little about problem detection and definition, but then he plans to go deeper into other aspects of the service chain. He said he plans to discuss some best practices, before presenting the latest results of an ongoing SAS Institute benchmark study. That study, which follows the warranty and service practices of roughly 25 companies, is focused on high-tech manufacturers, white goods manufacturers, and industrial manufacturers (which includes everything from autos to oil drilling equipment).

"We finished up Phase One of the benchmark study, which was around detection, prioritization, and definition," Froning said. "And then we have some initial findings from the second phase of that benchmark study, which is around reserve forecasting. And we'll be talking a little bit about the next phases that we're going into in that benchmark study as well."

Froning said the strongest appeal of the workshop will be for engineering, reliability, and quality people, "but it's a pretty broad appeal across the supply chain, generally more at a management level. And as far as the industry goes, it's pretty general, although the people who will get the most out of it are those with repairable products."

Last year, Froning and Spraker made a similar presentation to a warranty conference in Chicago. "We had a huge crowd," Spraker said. "We had quite a few finance people in our session. We also had high-tech people, industrial manufacturing people, and a couple of white goods people."

This time, Spraker said he hopes the additional focus on reserve forecasting will bring in even more finance people. "If you are in finance related to product performance, warranty, extended warranty, service contracts, anything of that nature, I think we would have enough to interest you," he said.

Intro to Dynamic Modeling

The other afternoon workshop is entitled "Dynamic Modeling for Developing Warranty Strategies & Systems," and is the only one of the four to be presented by one and only one person. Chris Soderquist, president of Pontifex Consulting, will fly solo as he explains how simulations can help a company choose the best warranty strategy possible.

Years ago, Soderquist was a government statistician in the quality department of the Bureau of Engraving and Printing, which prints all American currency. In 1995 he went into the field of systems dynamics consulting, and three years later he started Pontifex Consulting, choosing the company's name from a Latin word meaning "bridge builder." His job now, he said, is to build bridges between the hard and rigorous mathematical and analytical tools that he uses in his simulations and the "soft" human processes and consensus-building approaches.

While dynamic modeling can be used for numerous tasks that have absolutely nothing to do with warranty (and in fact another Pontifex client is engaged in a project to reduce malnutrition in Peru), Soderquist said this WCM workshop will be geared specifically towards the needs and interests of warranty professionals.

"I will reiterate some of the challenges that people in this business face," he said, "and then use some case studies to describe how dynamic modeling can help deal with and transcend those types of challenges. And then we'll go through some of the skill sets you would need to develop, and actually do some exercises where people will get an opportunity to practice these skill sets around dynamic modeling."

So how did he become involved in warranty? Several years ago, Soderquist said, "I was doing some work at Hewlett-Packard on a warranty chain dynamic model, and was recommended to Alison Griffiths." That turned into a speaking role at the inaugural 2005 Warranty Chain Management show in San Francisco, and a return invitation for this year's show.

For this workshop, he said the target audience includes "anyone who is involved with product development, customer management, or is working on warranty strategy in one way or another, where they are trying to think through some options -- what are going to be the impacts, both in the long and the short term, of some of the choices they're making. Those folks would see in this approach, something that might help them get through some of those difficult issues, where there's a lot of risk and uncertainty around some of the choices they make."

In other words, this workshop might also be called "Introduction to Dynamic Modeling," but it's not exactly for beginners when it comes to warranty. Then again, it's not for experts either, and attendees aren't going to emerge from the ballroom with a complete and thorough understanding of all the mathematics involved.

"Obviously, they're not going to learn to be modelers in this session, but rather they'll get an understanding of the value proposition and I'll describe some of the tools and the ways they can build this capacity in their organization in the future," Soderquist said.

Professional Development

A few hours later, the main conference gets under way with a SAS-sponsored cocktail reception, followed by a math exam. Only kidding. Actually, the math test comes first, and you have to get at least a passing grade in order to get any cocktails at all.

Seriously, though, among these five events are numerous items of interest to warranty professionals who need to size, predict, or report their warranty financials. And it's a great lead-in to some of the plans the organizers of the WCM Conference have to launch professional education and certification activities for the warranty industry. More on that in a future newsletter.

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