IBV report looks at reducing warranty costs

IBV Warranty Study

Cristene Gonzalez-Wertz, Electronics Research Lead, IBM Institute for Business Value
Cristene Gonzalez-Wertz, Electronics Research Lead, IBM Institute for Business Value

The IBM Institute for Business Value (IBV) has published a study focusing on reducing the costs of warranty management. Entitled Powering Warranty Reinvention, the study says that warranties are not just something to be bundled with products. Instead, electronics companies should see them as a differentiator. In order to do that they need effective warranty management.

According to Cristene Gonzalez-Wertz, Electronics Research Lead, IBM Institute for Business Value: “Effective warranty management does not only improve your bottom line, it can also can have a direct impact on customer satisfaction and retention. If consumers believe a company treats them fairly when products fail to live up to expectations, they are more likely to buy the company’s products in the future, building brand loyalty.”

IBV highlights savings and best practice

The current cost of running warranty programmes will surprise many people. The survey says that warranty costs are close to 3% of revenue. Less than 1% of that is actually spent on repairing or replacing defective goods. This means that there is a significant cost in just running the warranty programme. The study says that this means a company with $1 billion in turnover is spending at least $20 million managing its warranty programme.

Many companies see making those programmes more effective as a real challenge. The study shows that the gap between the worst and best performers is significant. Costs for those who are struggling to improve are more than twice those with highly tuned programmes. Using the numbers from the study that means underperforming companies are spending $27 million more than the best performing companies.

Consumer and sales law in many countries requires that these programmes exist. So how do you take out costs and still make warranties a competitive differentiation? The study suggests three things:

  1. Standardized processes and improved communication across organizations to reduce cost and improve insight.
  2. Increased traceability back from warranty management into manufacturing and the supply chain.
  3. Broadened interactions and information sharing across the ecosystem, including support for customers, service providers and the original equipment manufacturer (OEM).

Five steps to improve warranty management

IBM also recommends that electronics companies start improving their warranty management systems by taking the following steps:

  1. Simplify and standardize warranty processes across products, divisions and repair teams
  2. Increase process automation
  3. Communicate warranty and service information to business functions
  4. Use technology and big data to improve accrual management
  5. Use advanced analytics for fraud detection

The role of IoT

Unsurprisingly one of the key elements to come out of this study was the role of the Internet of Thing (IoT). The technology industry has been using instrumentation for some time to send data back to support teams. That data is used in predictive analytics programmes to detect when a disk drive or server in a data centre is failing. This allows data centre engineers to react before SLAs are breached through unplanned downtime.

A similar approach is in place in jet engines. At a CapGemini event in the US last year, GE talked about their use of embedded sensors to lower airline costs. Like their competitors they have been embedding sensors in jet engines for some time. That data is used to create a digital twin that allows them to model the health of the engine. It means that healthy engines can run longer than previous maintenance schedules allowed. It also means that failure can be quickly spotted and proactive maintenance can prevent catastrophic failure.

One of the challenges is how to extend this to other fields of electronics. It is not just about the amount of data that an electronics company could end up gathering but the use of that data. A company selling 1 billion devices will not want to create a highly expensive big data analytics environment. While the scope of this report was limited to the electronics industry, other industries will find the report of use as well.

Gathering data means dealing with security. In a highly competitive market the increased cost of Internet connectivity means there is often no money for cyber security. This is already causing problems for manufacturers.

That isn’t stopping organisations from exploring IoT. Only 4% of companies in the study were not actively engaged in IoT. Meanwhile 33% saw it as enabling perpetual improvements including new business and operational opportunities.

Conclusion

Cutting costs out of a business has to be done carefully. Get it wrong and the impact for the company can be serious. Poor warranty programmes lead to bad press and reputational damage, especially on social media. This, in turn, will lead to lower sales. This may be why so many organisations are slow to deal with the costs incurred in managing warranties.

Get it right and the benefits can be substantial. It is not just about lower costs. Social media is full of examples of companies who “did the right thing”. This creates a positive buzz and leads to increased sales and increased profitability.

However, all of this requires the right business processes and planning. If the IBM repeats this study next year, it will be interesting to see if the gap between the worst and best performers closes.

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