Warranty costs and its phases
Updated: Nov 8, 2019
Every new product goes through multiple phases during its life cycle. Each phase is unique and poses new challenges from warranty claims raised to customer satisfaction to costs incurred by the manufacturer. Warranty claims directly impact profitability. Naturally one wonders when is the right time to invest in productivity tools. Although the answer is clear that one should invest as soon as possible, human tendencies are contrary to that. In this short article, we explain various phases of the sales cycle and its relationship with internal investments.
Any new major product comes with a lot of hype. New features are exciting. Competitors are kept at bay. Public sentiment is high and so are the management sentiments. Sales grow reasonably well. Less attention is paid to warranty claims related costs since a new product takes time to iron out all issues.
Below is a graph showing this growth phase in sales along with an increase in units under warranty. Typically warranty costs also show a similar trend. The y-axis scale on the right is for units under warranty and the one on the left is for monthly sales.
Since everyone is happy about the launch, very little attention is paid to warranty costs. In reality, it is better to control costs at this phase so as to avoid further erosion of profits.
Once the hype of the new product is over it shows some signs of approaching a plateau phase. During this period, the organization gets busy collecting warranty claims data, analyzing the data, understanding the trends in part failure, and fixing the issues. There is still less attention paid on warranty costs and engineering redesign of appropriate parts.
Warranty Period Validity:
Each product comes with a specified period over which warranty is valid. In the following example, it is considered that the warranty period is 24 months. In our example, this period is over in Feb - 2016. Thus, the number of units under warranty starts coming down after this month. If the total sale for Feb - 2016 were to be greater than the units sold in Jan - 2014 or 24 months ago, the number of units under warranty would have increased. However, in this case, the sales have gone down and thus the number comes down.
It is widely believed that during sluggish economic conditions one should cut spending. This rule is used indiscriminately for any new purchases as well as any developmental funding.
If the company sales are as shown in the graph above, one would think of cost-cutting measures. Ironically very few companies would focus on warranty claims. That is a big mistake. Warranty claims do not start coming down as soon as monthly sales are down since they are cumulative based on previous sales. The right way to tackle this situation is to focus on the right tools for root cause analysis and fixing parts by redesigning them. It is possible to reduce warranty costs. In fact, every dollar saved by reducing the claims cost goes straight into the company's bottom line. There is hardly any other focus that could reward you 100% by increasing the focus.
Warranty claims costs affect the bottom line. One should not feel helpless about it. On the other hand, it is the type of cost, when reduced, can add 100% to the bottom line. Focus on warranty claims is important in all phases of sales including during the decline phase. This should include:
1) Identification of parts leading to high costs, 2) Prioritization of engineering redesign of the parts, 3) Knowing and adhering to the best practices while designing parts.
It is high time that we come out of the myth that during economic slump one should cut costs. What is needed is investing in the right tools, improving the processes, and reducing warranty costs thereby increasing profitability.