Successful Warranty Management Captures Funds

EP Editorial Staff | July 1, 2004

Establishing claims process requires multi-department cooperation.

Warranty management is a task that has no predetermined home. It is a materials issue, a finance issue, a maintenance issue, and a contract issue. But frequently the maintenance management team is tasked with managing asset warranty issues.

Fine tuning the warranty claims process will have a positive financial impact and boost asset management data. Understanding the warranty management process is easy and will recoup money due to an organization.

Hurdles to success
Successfully filing and winning claims requires multi-department cooperation. This is the primary reason many organizations pass on warranty management. Warranty claims are easily missed by management teams in many locations; with managers stretched as far as they can go, there are often more tasks to do than can be accomplished.

It is also understood that organizations must turn over every rock for opportunities to save money and stretch budgets; warranty claims represent an opportunity that can reap a return for the effort and have a low impact on daily duties. These dollars are already due to the organization yet rarely collected.

Establishing a warranty program is essential for a new facility, but the constant refurbishing of older assets and facilities also will reap a return if the warranties are maintained, including work completed during a shutdown and new additions to an existing plant.

The primary cost of having a warranty program for the average manufacturing plant is the cost to establish the program and get the assets lined up in a depository or database. The ongoing training and cost of performing the claim process is minimal and will pay for itself many times over. Here are examples of data points that may be required to file a claim:
• Unique ID number
• Date and proof of sale
• Copy of warranty guidelines
• Date of asset being commissioned
• Past work orders of PMs completed
• Digital photo of asset as used

What kinds of assets could potentially develop into a claim? Computers, vehicles, buildings, and major plant system components such as steam, electrical, and air pressure systems are all examples of items worth tracking to make sure the vendor is backing up its products. There is also the production equipment such as steel presses, ovens, injection molders, printing presses, lift-cranes, or whatever is used in the business.

Often the largest claim is not the pieces and parts but the labor cost to replace or repair these items. Depending on the vendor, the work may be done by in-house technicians or by vendor representatives who come on site and complete the work. The protocol for who will conduct the warranty work should be established in the original purchase contract.

Establishing the purchase contract
The warranty process begins with the contract for the asset or service being purchased. The language in the contract determines the potential benefit that can be awarded to an organization. Most transactions occur without due diligence on the guarantee or warranty. Here is a short list of items that should be inserted into the purchase agreement when possible:
• Length of warranty period
• Length of time a claim/dispute can go on and its consequences
• Vendor response time to the issue
• Necessary backup data to support a claim
• Protocol for conducting the actual warranty work
• Collateral damage (roof leaks into warehouse, gas leak into environment)
• Labor rates (matching current costs)
• Loss of production revenue due to equipment failure
• Who pays for shipping if a part has to be shipped
• Reimbursement type: replacement parts, cash, or store credit
• The choice to upgrade the equipment if it is being replaced
• Restocking fees if the vendor uses parts out of the storeroom
• Temporary replacement parts while the dispute is ongoing

Take the time to define the warranty contract language. Even if the vendor rejects some of the language submitted as the wish list for warranty management, it will be useful for negotiations in the future.

Organizing the claim process
Once the best warranty language has been developed and used in the contracts, it is time to organize the claim filing process within your organization.

Depending on the size and complexity of an organization, the number of people involved will grow or decline. Regardless of organization size, these tasks must be completed to have claims awarded some level of return:
• Ensure there is a purchase contract with specific language
• Identify that an asset in need of repair is still under warranty
• Write the actual claim and file it with the vendor
• Acquire, store, and present the actual item under warranty
• Present adequate historical data to support the claim
• Manage communications from the vendor
• Receive result (no award, cash, parts, store credit, labor hours)

The average plant will probably require the assistance of many departments to get the preceding list completed: executive management and purchasing to provide contract language; maintenance to provide the identification of warranty, actual part, and PM work order history; IT or materials to provide historical data to support the claim; maintenance to provide the claim filing and vendor communications; and, finally, finance to register the return if it is cash or store credit, or materials or storeroom personnel if the return is actual parts and pieces.

Figure 1 depicts the information flow that occurs to provide a repeatable warranty process for an organization with a high volume of maintenance repairs and a corresponding number of parts.

When comparing other organizations to Fig. 1 remember that this is the best practice for a high-volume repair organization. The best practices for other organizations will likely have some variation. Consider the importance of each connecting line. If one of these transactions works improperly, the whole process suffers. If one of the most important transactions fails, all claims could fail. Reviewing the manner in which an organization conducts these 20 transactions will reveal the strengths and weaknesses.

Measuring return on investment
Many organizations require that each internal project have a return on investment (ROI). The level of return often helps to prioritize the opportunities. Measuring the return on investment will again need cooperation from a number of areas. There needs to be an initial effort to organize some reports that collect the necessary data:
• Number of contractor hours repairing or replacing items under warranty
• Claim dollars returned form all asset types
• Warrented replacement parts and their corresponding values
• Claims that resulted in store credits
• Hours of warranty work completed on computer and IT systems.

This original collection of data, perhaps from the past 2 years, will provide a baseline of how well the warranty process has performed and how the same measurements will work in the future. To capture the real ROI, the organization also should record the hours now being spent on claims processing. This will help justify the progress and show where there may be a need for further process improvements. This data can be used in the future to justify the purchase of an extended warranty of a new asset.

It is common to have an organization look over the past few years and have only a few big claims to show for its efforts. Perhaps the real savings were higher than reports show, but if the data is not captured, there will be no evidence to judge how well warranty management is working. Document what has been collected over the past few years and use that as the benchmark.

Warranty returns run in cycles and, depending on the age of the infrastructure and age of the primary equipment, the return will fluctuate. Because last year brought $96,500 in warranty returns does not mean this year will necessarily provide $99,000. It may be higher or lower, but if the organization does not make an effort to improve the warranty claim process the result is likely to be significantly lower than its potential.

Overall, the competitive nature within manufacturing today requires that any opportunity to save money should be evaluated. The process of establishing and auditing the warranty process is relatively simple. Very few claims ever need serious negotiation skills so the money or return is there for each plant to capture. Given the value of the return, managing the warranty process for all purchases is a smart move. MT

Joe Mikes is an operations and asset consultant. He can be reached at 8534 Tambor Way, Elk Grove, CA 95758; telephone (916) 682-9294


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