If a single instrument gauge fails, would a warranty even cross your mind? What about a submersible pump? A critical gas turbine engine? Many industrial organizations spend little time pursuing warranties unless the assets involved are particularly visible or high priced. Unfortunately, taking this ad hoc approach is more costly than you think.
Warranty costs can add up. Every unrecovered asset expense has a negative impact on the bottom line. But it's not just repair or replacement costs at stake. Failing to consistently pursue and track warranties represents a lost opportunity to optimize purchasing and engineering decisions, which ultimately impact operational risk and production uptime.
Warranties usually get overlooked if there is no easy way to access and manage the details. Warranty contracts range from long and complex to brief and vague, and the terms, conditions, triggers and limits may not be readily understood. Additionally, if the contracts are not electronically accessible and searchable, there is little motivation to search through scores of paper records. Fast-paced industrial maintenance environments require quick and effective decisions and actions. Any business process that is perceived as inefficient, nonessential, or adding little value will be pushed aside unless there is a compelling reason to do otherwise.
Fortunately, warranty process improvements are simple and relatively inexpensive to implement, plus they deliver a rapid return on investment. Modest gains can be made through simple procedural changes, but for maximum business benefits, consider implementing best-practice warranty management processes supported by a warranty management and tracking system that is fully integrated with your enterprise resource planning (ERP) system. The visibility and automation provided by such systems reduce the administrative burden, speed the recovery of warranty costs and help to improve operational reliability and effectiveness.
Real-World Approaches Yield Valuable Rewards
Organizations that upgrade their warranty processes realize solid and sustainable business benefits. The following snapshots are of three companies that had different business drivers for implementing process efficiencies and are now enjoying ongoing benefits.
The cost and reliability incentive:
A heavy equipment supplier reduced its failure rates by 40 percent and increased warranty recoveries by more than $12 million per year by merging the warranty group into maintenance engineering and tracking warranties across equipment categories using modern reporting software.
Prior to introducing these changes, the supplier's warranty processes were paper-based and uncoordinated. There was very little insight into systemic problems across specific asset groups and no means of sharing the information between those who were trying to solve reliability problems and those who were trying to recover costs for warranty repairs.
The insurance rate incentive:
When a marine transportation enterprise implemented a warranty management system, payback was immediate due to insurance rate savings earned by digitizing the maintenance and warranty records. The insurer had encouraged the change to a uniform, electronic process because it knew the company's costs and repeat failures would be reduced, as would its insurance claims. The insurer's rate incentives were significant enough to pay for the system's implementation. Until then, the company used several different paper and stand-alone software processes to track work and recover warranty claims from suppliers. This contributed to poor cost and equipment reliability metrics compared to industry peers.
The process simplification incentive:
A major energy company reduced its risks by aligning all suppliers on a single warranty standard as a condition of doing business. It was a coordinated effort by the purchasing group that didn't require any systematic support. The company achieved sizable savings on claims and administration because the new process was consistent.
Before the warranty standardization mandate, the energy company had to track and manage widely divergent warranty terms, conditions and processes, hindering the ability to recover costs on a timely and efficient basis.
Warranty Management Financial Benefits
- Recover warranted costs
- Reduce claims processing costs
- Redirect repair costs
- Reduce future maintenance costs
- Achieve maintenance budget targets
- Reduce asset lifecycle costs
- Improve vendor negotiations
- Improve purchasing decisions
Multiple Challenges Threaten Financial Recovery
Big dollars are potentially involved in warranty claims. Approximately two percent of capital costs and up to five percent of maintenance, repair and operations (MRO) material costs may be warrantable. Capturing those dollars can be cumbersome if the processes and information are not properly managed.
- Complex industrial assets may have multiple types of warranties within the same asset hierarchy.
- Suppliers often record the warranty start date as the date of sale for MRO materials, while operators tend to track the install date.
- Warranty qualification may depend on specific use conditions or processes, such as routine oil changes.
- Warranty enhancements or extensions may be offered by contractors for major components installed by them.
- Mobile fleet components that are within a component exchange program may be eligible for prorated warranties if they fail earlier than the benchmark term.
Remedies Are at Your Fingertips
Any one of the following strategies represents a step up from typical warranty practices. Implementing all the recommendations will deliver holistic business benefits.
- Treat warranties as receivables. Get organized and know what you have coming to you, and request compensation in an efficient and accurate manner.
- Don't rely on paper-based systems or supplier records. Set up your own records and utilize modern solutions to track recoverable cash.
- Align warranty efforts with engineering troubleshooting. Share warranty performance information (e.g., assets with high infant mortality) with engineering and purchasing personnel so they can improve design and selection decisions.
- Use warranties as a way to improve supplier services and communication. Share with vendors any information that can drive product quality improvements and leverage the information in supplier negotiations and selection.
Each of these remedies can be implemented and optimized with the support of a comprehensive warranty management system, especially those with a warranty tracker that integrates with and extends the value of ERP-based warranty processes. These types of warranty management systems automate vendor claims for warrantable repairs and facilitates cooperation and communication with other departments, as well as the various suppliers.
Choosing a Warranty Management System
When choosing a warranty management system, look for one that allows all warranties to be tracked, including new and rebuilt assets (e.g., equipment, parts and subassemblies), as well as contract labor. It should provide an understanding of the various terms, conditions and required service processes for warranty eligibility; when the warranty clock begins (e.g., the purchase, installation, or in-service date); which assets qualify for an extended or prorated warranty; and whether a warranty's coverage includes parts and/or labor for repair, rebuilds and/or replacements. It should leverage this knowledge base to automatically and accurately generate warranty claims, which can be reviewed and processed with a click of a button.
Equally important is the human touch, which is needed to ensure warranty process success. It is necessary to designate one or more owners to establish and enforce a consistent warranty approach. The owners will be responsible for warranty notification and claims, including how the claims will be prioritized, reported and reconciled.
Whether it's through people, process or technology, the effort to improve warranty recoveries is one of the best ways to make an immediate bottom-line impact. Long-term, organizations enjoy productivity gains because they have a better understanding of their physical assets, and they improve both internal and external relationships because all sides benefit from an active and transparent approach to this asset management best practice.
Michael Currie is a globally recognized fleet management expert. He founded M.G. Currie & Company in 2004 to provide strategic advice to clients seeking to optimize industrial assets and improve maintenance performance, equipment selection, budgets and warranties. He has a degree in Civil Engineering from the University of British Columbia and an MBA from the University of Western Ontario.
For further insights about industrial warranty best practices, email Michael at email@example.com for a copy of his white paper, "Warranties Are Worth a Close Look."