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Making Warranty Management A Competitive Advantage

During the 2003 holiday season, consumers continued their love affair with electronics — particularly high-end A/V and computing products.

However, while strong sales figures for such items certainly are good news for CE manufacturers and retailers alike, they also raise tough questions: What happens when the products people buy don’t perform to expectations? With millions of new warranties issued last holiday season alone, are manufacturers and dealers fully prepared to administer and honor them? And, perhaps most important, how much profit are companies frittering away because of highly inefficient warranty management practices?

The fact is that companies are leaving a lot of money on the table because they’re: spending too much to administer warranties; missing other important cost-reduction opportunities in the areas of fraud avoidance, supplier recovery and improved product quality; and not maximizing the revenue they could generate from the sale of extended warranties that are increasingly popular among consumers.

The root of the problem is that CE manufacturers generally treat their warranty operations as a collection of stand-alone, often manual, activities. Instead, they should recognize that these activities are really part of a larger warranty “life cycle” that comprises key warranty management processes. Once a company makes that mindset shift, it then can apply a number of crucial technologies to integrate these processes, streamline the flow of work through them, and help relevant parties more efficiently and effectively execute their day-to-day warranty responsibilities.

How could such an approach affect the bottom line? Consider the case of a hypothetical $10 billion “industry average” CE manufacturer. Given that the average company spends approximately 3 percent of revenue annually on warranties, this manufacturer would have $300 million in total warranty expense. Because it’s an “average” company, it has limited fraud detection, supplier recovery and product quality analysis capabilities.

Conservative estimates show that this hypothetical manufacturer could cut its spending by nearly half if it adopted the approach just described. This company could reduce administrative expenses by $5 million; save $19 million in fraud reduction and $56 million in supplier recovery costs; and pocket an additional $60 million in detection and prevention of future product issues due to a better understanding of past defects.

These savings could be greater if the company outsourced the entire warranty management lifecycle to a third party — a trend that’s beginning to gain momentum in some circles.

Companies must recognize that there’s much more to warranty management than simply registering products and resolving claims. This is especially true as products become more complex, supplier relationships grow broader and deeper, and customer demand for better coverage through extended warranties intensifies. Indeed, a superior warranty management lifecycle is a potent competitive weapon that can substantially reduce a company’s operating costs as well as boost customer satisfaction and revenue.