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Connected Customer Experience

Warranty Management Cost Containment

Author Tim Nissen on Oct-6-2020


Manufacturer's warranties play an essential role in business cycles. They can be critical to a product's sales and marketing, building market share and customer goodwill, but also add significantly to product pricing and pose accounting and cost estimation challenges. Maintaining transactional level detail is critical for manufacturers to provide meaningful management reports and data for pricing analysis and liability estimation, as well as enhancement of quality control and dealer/distributor performance monitoring.

It Starts with Data

For more extensive warranty programs, a company can have thousands of warranty transactions every day. Working with such large volumes of data requires automated systems to collect and extract key points, perform workflow operations and statistical analysis, and provide summaries by meaningful groupings, such as business unit, location, or product type.

Companies track an array of transactional information. This information not only helps companies refine liability estimates, but it also enhances quality control and performance monitoring of service providers, dealers, and distributors, some of whose motivations may not align with the manufacturers. For example, tracking claims frequency by part and service provider may help a company identify high-frequency servicers and aid in future loss mitigation efforts.

Information tracked includes both product (exposure) information and claim (loss) information:

  • Product information, which may include make, model, model year, component pairing, build location (including country), build date, and in-service date, is highly variable. For heavy equipment, machinery, and transportation products, this information is easily attainable by automating warranty registration. In contrast, a meager percentage of buyers of building and consumer products category complete registrations, which significantly limits the available datasets. Here, automation is especially beneficial to capture their information at or near the point of sale.
  • Claim information provides a means for tracking warranty performance and may include time-in-service, labor code, part code, labor cost, part cost, transaction code, and repair location. This information is valuable both for tracking costs and for understanding the dynamics of cost emergence.

Cost Estimations

Adequate estimation of warranty costs is critical for durable goods manufacturers to maintain profitability. These typically rely on the following basic methods:

  • Total losses by product type and in-service date. This method tracks products by the date a company places a product into service, which typically is the trigger date for coverage. This method develops losses using actuarial techniques to estimate the full cost by the end of the warranty period. This data grouping will not be reliable if different warranty terms (such as both three- and five-year terms) could apply to the same product.
  • Total losses, by product type, in-service date, and warranty term. One of the basic tenets of warranty cost estimation is a consideration of the underlying warranty term. Grouping by term (for example, three-year terms in one group and five-year terms in another) directly addresses the cut-off point of warranty coverage.
  • Cost per unit, by product type, in-service date, and warranty term. This procedure enhances the above methods by identifying specific per-unit warranty costs.
  • Frequency and severity, by product type, in-service date, and warranty term. This data segmentation provides a complete picture of the components of warranty costs. This model generates information on how often products break (frequency) and how much each breakage costs (severity). For larger items, the analysis may identify trends in frequency and severity over the life of the warranty. For example, the frequency of auto warranty claims generally increases as the warranty ages, and the resulting claim severity also may increase.

Volatility Sources in Warranty Costs and Potential Solutions

Warranty costs aren't static - the introduction of new products, modification of existing products, regulatory changes, and coverage modifications all work to increase the variability and uncertainty of warranty costs. However, there are several ways to address such changes and work effectively in a dynamic environment.

  • New products. The most common way to cost out new products is to look at similar products, perhaps in terms of usage, price, or both, and apply a cost equivalent to the existing product. Companies often provide a conservative cost estimate to new products or apply an implicit risk charge to reflect unproven technologies.
  • Limitations in warranty coverage. While rare, companies may decide to shorten the warranty coverage time. In this case, estimation methods could utilize historical cost experience and cut off coverage for product failures that occur after a specified time before the end of the original warranty coverage. In estimating warranty liabilities, it is crucial to recognize that a reduction in the warranty period could lead to an acceleration of customers filing warranty claims, especially for big-ticket items. Service providers also may encourage customers to file claims before the new warranty expiration date, reducing the benefit of the reduction in warranty term.
  • Expansion of warranty coverage. Changes created a high level of uncertainty when no manufacturer's warranty data existed to provide a clear indication of the increased costs related to the expanded coverage. However, various techniques can address this issue. Statistical models can leverage distributions applicable to existing warranty claim experience under the prior coverage to estimate future reporting and payout patterns under the revised coverage. Alternatively, manufacturers often have access to extended service contract data. Segmented correctly and adjusted for coverage terms, the ESC data may provide a reasonable indication of loss emergence after the original warranty expires; however, it can be challenging to align information such as coverage terms and contract length properly.
  • Global presence. Manufacturers increasingly sell products globally. Associated warranties may vary from country to country based on regulation, custom, and customer behavior. Additionally, the same product may perform much differently from one climate to another. Therefore, contract and claims groupings and underlying warranty performance and costs may differ from market to market.

To see how automation facilitates warranty management cost containment, see Mize.


Why Automate Your Service Contract Program?

Author Tim Nissen on Aug-19-2020


Most durable goods manufacturers are mired in manual service contract administration – from initial offering to servicing, through to renewals. While being a strain on operations, it’s a drain on revenue stream maximization: most OEMs realize less than 15% of potential service contract revenue.

The typical cause of this is an environment of multiple systems and databases housing relevant information, each requiring repetitive information keying. This also creates a lack of each contract’s status, touchpoints, customer engagement, and P&L visibility. Operational costs rise while income opportunities fall.

For OEMs selling through distribution or reseller channels, there are even more complications. Manufacturers struggle with attach rates with a degree of customer separation. Also, when service programs are offered, initial Service Contract sales rates remain low, mainly because the channel partner’s focus is on initial product sales and a lack of offerings beyond standardized warranties. This causes customers to either miss the first opportunity to buy a contract or not value a stock contract versus one tailored to their needs and expectations. Considering contract servicing, whether an OEM has their service team, outsources, or utilizes a hybrid of both, lack of knowledge and parts access further complicates operations and customer’s confidence in the product brand.

Going back to the root of these problems, a single source of information management provides the solution for contract operations and revenue optimization.

Here’s a workable answer: automating the entire Service Contracts Management (SCM) lifecycle, from the initial sale, all service touchpoints, and renewals/upsells of Extended Warranty, Maintenance, Subscription, and Service Programs. This engages OEMs, Third Party Administrators, Resellers, and Service Partners uniformly to create, sell, administer, track, and analyze service programs, with every step visible and controlled by the OEM to simplify operations, reduce costs and maximize revenue for all parties involved.

Choosing an automated SCM platform provides manufacturers the ideal opportunity to revaluate their processes. As they configure their configured, integrated single-source system, they’ll uncover many legacy practices that they’ll want to update, aligning with their current and upcoming marketplace conditions.

Here are components and functionality to review:

Policy Management Service Plan offers, terms and conditions, priced according to demand.

Sales and Marketing Data hygiene for customer’s current contact information, automated marketing/email campaigning, and content management with invitation control for new solicitations, reminders, and renewals, flexible email trigger configuration maintenance, and direct mail file generation and export or API to 3rd party mail house vendors.

Contract Sales Website links and landing page development, customer self-service plan inquiry, selection, and purchase, telemarketing desktop app, plan pricing availability query by product model and purchase/registration date, and provision to input promotion code and present offers for specific resellers and their customers.

PCI Compliant Plan Payment Process Payment gateway integration, including credit/debit card process, pay in full or monthly installments options, expired/credit limit issues management, with email notifications and link to update and verify card details.

Service Administration My Customer Portal for self-service, consumer validation of service plan terms and conditions, consumer online service request for self-service, consumer validation of service plan terms and conditions, consumer online service request, and appointment booking with a qualified authorized service provider. This is a strong trend – customers expect this capability.

Also encompassed are customer telephony system integration, complete jobs dispatch management, with job authorization process from technician mobile app, and Service Parts Management – addressing needs for parts ordering via an app with supply partner integrations.

Claims Administration Service provider claims submission and rules validation, and embedded logic for product replacement or buyout-versus-repair designation.

Analytics Track revenue generation, including Attachment Rates, Renewals, Non-Renewal, Claims Severity, and Plan Profitability, with dashboards and user-defined custom report generation.

OEM’s considering automating their Service Contracts Management can have a real-world look at how this is accomplished. Contact Mize and request a demo today.

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