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Connected Customer Experience

Warranty Management Cost Containment

Author Tim Nissen on Oct-6-2020

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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.

 

Analyst View: Why Manufacturers Automate Warranty and Service Contract Management

Author Tim Nissen on Jun-30-2020

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Manufacturers have experienced an evolutionary shift in how they manage service interactions after the original product sale. Having considered the warranty initially as a necessary cost, they had to keep customers happy, resolve product failures, and obtain critical data required to improve product quality.   Manufacturers no longer view the provision warranty and aftermarket service as a cost of doing business. It's now seen as an opportunity to add value, obtain critical insights to drive product innovation, and generate incremental revenue and profits.

To take advantage of these opportunities, manufacturers must be active at managing warranties and service contracts.   Having the right software partner is critical to streamlining the warranty processes and driving profitable growth from service contracts. Warranty Managers face challenges with obtaining the budget required to implement new warranty software while dealing with an IT or a corporate mandate to adapt an existing ERP or CRM platform for the warranty process.

In December 2019, Industry Analyst firm IDC published the IDC MarketScape: Worldwide Manufacturing Warranty and Service Contract Management Applications 2019-2020 Vendor Assessment. This study provides an assessment of the capabilities and strategies of software vendors.

IDC indicated focus on focused on vendors they deemed to be notable based on these must-haves:

  • At least 40 warranty and service contract management customers
  • Customers in at least five manufacturing sub-vertical industry segments
  • A warranty and service contract management application in the marketplace for at least five years
  • Capabilities to support end-to-end warranty and service contract management activities and processes, and
  • Demonstrable track record of innovation within their warranty and service contract management application.

Based on a rigorous evaluation of Mize capabilities and strategies, the IDC MarketScape placed Mize in the Leader's category worldwide, citing:

  • The product is modular and can be deployed in the cloud, private or public, or on-premise and sits on top of Mize's Connected CX Platform, enabling integration with other corporate systems and applications
  • Domain expertise and the ability to provide capabilities for a range of warranty needs across a maturity spectrum enable manufacturers of varying sizes to leverage the Mize products
  • High level of customer support which has been able to meet the evolving needs of its customers across a variety of industries
  • The Mize Warranty Management product enables an approach to digital transformation, which builds on a journey approach to service excellence.

IDC Analyst, Aly Pinder, summarizes, "Mize has a track record and a leadership team that has built a product, a set of functionalities, and a platform that delivers advanced capabilities across the varied processes. It supports excellence in warranty management going beyond the basics of claims processing."

See how Mize streamlines and automates warranty processes through a Closed Loop Warranty Lifecycle Management solution that results in improved customer experience, reduced warranty costs, and higher revenue from a satisfied customer base. Request a demo today.

IDC MarketScape Guidance for Manufacturers and Service Organizations

For manufacturers and service organizations exploring warranty and service contract management applications, products, and platforms, the IDC MarketScape offers the following guidance:

  • Assess gaps in the warranty claims process and focus on areas for quick wins and improvement
  • Ensure warranty and service contract management systems are integrated with other SLM applications to support seamless service experience
  • Reassess digital maturity and service processes periodically
  • Focus on delivering enhanced value to the end customer and the service network of dealers, distributors, and partners
  • Work with partners that understand the service-specific nature of operations and industry verticals
  • Establish a set of metrics to measure success across a variety of stakeholders: customer, dealer, operational, and profitability.

Warranty and Service Contracts Management Optimized with Mize

While most Warranty Management companies focus only on claims processing, Mize enables all stakeholders, including customers, service technicians, channel partners, OEMs, and suppliers to deliver better customer experience and generate service revenues from the install base. Mize specialization, focus, and flexibility offer companies innovative warranty and service contract management capabilities to customers while integrating seamlessly with enterprise ERP and CRM systems.

Manufacturers are increasingly turning toward warranty and service to provide increased strategic value to their organization and stakeholders (e.g., dealer channel, service provider networks, etc.). Mize provides warranty and service contract solutions that improve channel relationships, enhance customer service, and generate additional revenue.

Mize enables manufacturers to streamline and automate warranty processes through a Closed Loop Warranty Lifecycle Management solution that results in improved customer experience, reduced warranty costs, and higher revenue from a satisfied customer base.

Mize's leading connected customer experience platform orchestrates standard warranty, service contracts, maintenance programs, and subscription models to service the customer throughout the lifecycle and maximize customer lifetime value.

Mize Warranty Management and Service Contracts Management solutions enable customer-centric manufacturers to deliver differentiated warranty experience and grow service contract attach and renewal rates.

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