The Warranty Cost Challenge

May 22, 2008
With many companies besieged by high claim rates, more stringent regulations mandating disclosure of warranty data and frequent recalls, warranty management has become a high focus area.

It is common knowledge that warranty cost poses a significant problem in many capital goods manufacturing enterprises, especially in the automotive and hi-tech sectors. How big is the problem? Consider this -- according to recent estimates, global warranty spending in the automotive Industry alone surpasses $25 billion annually.

With many companies besieged by high claim rates, more stringent regulations mandating disclosure of warranty data and frequent recalls, warranty management has become a high focus area. What really hurts during a period of economic slowdown is that in addition to direct cost, manufacturers incur indirect costs such as:

  • Cost of providing monumental warranty reserves
  • Attrition in brand loyalty
  • Reduction in market share and
  • Increased customer dissatisfaction.

Warranty management provides both a challenge and an opportunity for gaining competitive advantage.

Warranty Transformation Focus Areas

We recommend the following steps for a company in its Warranty transformation journey:

  1. Formulate a focused warranty management strategy. This strategy will cover different types of warranty coverage to be provided for competitive advantage, sharing of warranty costs and implementation of an enterprise wide warranty application.
  2. Design and implement effective and transparent warranty management processes across the value chain.
  3. Implement a warranty management system to enable the processes. Processes cannot be implemented consistently unless they are technology-enabled. Companies need to exploit state-of-the-art technology for implementing an enterprise warranty management system.

Obtaining Inputs to Redesign the Warranty Management Processes

The first challenge -- troubleshoot and identify problem areas. The warranty management diagnostic will have the following three key elements:

1. Warranty Data Analysis
To get a good handle on the warranty performance of the company, it is necessary to examine the available warranty data on various dimensions. This enables determination of the pain points.

2. Key Performance Indices (KPI) Benchmarking
KPIs that are critical to the company need to be identified. The objective is to design processes for enhancing the performance across the identified KPIs.

3. Warranty Policy, Process and System Capabilities Assessment:
In the context of the high level warranty strategic objectives and/or KPIs targeted by management, the warranty management maturity level of the organization must be assessed. The outcome of the warranty data analysis, KPI benchmarking and the analysis of the warranty functionalities will provide the necessary input.

Warranty Management Framework

Once the processes are redesigned, the company will need to develop and deploy an enterprise warranty management system to enable them.

We have developed a comprehensive Warranty Management Framework that will provide the basic building blocks for the implementation of the enterprise warranty management solution. The conceptual underpinning of the framework is to enable a seamless flow of real-time, accurate and relevant information across enterprise applications, allowing management to take quick corrective actions and spot a warranty claim trend in its early stage.

At the core of the framework is a Web-based global enterprise warranty management application providing functionalities in:

  • Dealer Network
  • Claims Management
  • Financial Management
  • Supplier Collaboration
  • Warranty Analytics

We elaborate on the functionalities provided by Claims Management module, as an illustration:

1) Claim Validation:
Once a dealer submits a claim, the system conducts a validation to ensure all mandatory information has been entered correctly. The system will check that all defective codes depicting the condition of the vehicle and the concerns of the customers have been entered correctly.

Predefined repairs -- For all repairs which are common, the dealer need not fill in the claim details. The claim can be pre-defined and stored against a particular number where the dealer has to simply select the code.

2) Claim Adjudication:
Once the claim validation is complete, the system will adjudicate the claim. Depending on the outcome, it can allocate a status to the claim. The system can also perform various checks.

  • Odometer rollback check --This ensures the current odometer reading entered by the dealer is greater than the last odometer reading available in the system.
  • Repeat repair check --- The system will ensure that the same dealer has not made a claim on the same vehicle for the same causal part for a specified time period.
  • Statistical check -- The system can find out the average claim value for similar claims in a recent historical time period. The system can recommend manual adjudication of all claims which are of high value.

3) Flexible Rules Engine:
A flexible rules engine can be incorporated into the system. This will facilitate rules specific to markets, dealers, models, parts, repair types and time periods based on which claim needs to be adjudicated.

4) Flexible Taxation Rules Selection:
This is one area requiring special attention. Taxation rules are different across markets and flexibility has to be incorporated at the design stage itself.

Finally, information needs to flow from the enterprise warranty management application to the following systems:

  • quality / engineering / manufacturing system
  • analytics for top management
  • finance / accounts

This will enable a seamless, real-time flow of information along the entire warranty value chain and provide the capabilities to carry out trend analysis and provide automatic, continuous, feedback. The framework enables early preventive measures thereby reducing warranty costs substantially.

We recently assisted one of our clients, a large European heavy vehicles manufacturer in the development and implementation of a warranty solution that conformed to the framework above.

The company identified the pain points within its warranty management operations as follows:

  • No market specific flexibility available in the legacy mainframe systems of the company
  • Long lead times for claim detection to correction cycle.
  • Poor quality of data available -- wrong or incomplete data leading to erroneous analysis
  • Lack of business process maturity; inconsistent deployment of the processes
  • Lack of visibility into the warranty management operations due to poor quality data and non-availability of real time information on relevant KPIs

The Warranty Management Solution automated claims handling with the least amount of manual intervention, installed user friendly features in the system to provide a comfort level to the end user, built in intelligence for the system using claim validation and processing business rules and provided flexible features which can be modified according the requirements specific to the market where it is being implemented. A customized business logic and presentation layer based on country of operation was also used. Application functionalities spanned across the entire warranty management value chain.

The solution covered the modules of dealer network, claims management, financial management and warranty analytics. It also integrated with the dealer and the enterprise systems and provided for a seamless flow of information in real-time.

Business Benefits

The solution resulted in immediate business benefits which were visible within a very short time. Some of the significant benefits realized were immense flexibility with little manual intervention, cost savings due to less required effort and time in administration at all stages in the claim process, cost savings, correct follow-up of recall and refit cases, global access to vehicle information leading to early detection in defect trends, ease of defining business rules for automatic claim processing and reduced lead time for claim processing.

Vikram Amaranath is the Vice-President and Head of the Manufacturing Industry Group at MindTree Limited. A.V.Krishna Rao is a Program Director and looks after the automotive group in the Manufacturing Industry Group. MindTree Limited is a global IT and R&D Services company co-headquartered in the U.S. and India. Please visit us at

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