Acu-Fast Solution for Warranty Analytics

The fundamental purpose of any business is to make a profit. A business makes a profit if the price it can charge for its output is greater than the costs of producing that output. Thus, the concept of the Value Creation Chain could be introduced. The customer pays for the perceived value. Hence, adding perceived value to the product increase profits. Another way of increasing profits is by reducing the cost of value creation by performing activities more efficiently. This simple, on the surface, concept becomes enormously complex in almost every manufacturing business case, where the warranty process forms an integral part of the value creation.

Warranty – important and integral part of manufacturing

The concept of warranty and associated cost management is common to every manufacturing business. However, the importance of effective warranty management until very recently was normally neglected by businesses. It was perceived as simply another necessary expense to be controlled, and no value creation was expected from this process. Hence, a reactive rather than proactive approach was followed towards warranty processes. And this in spite the fact that in 2006 USA manufacturers paid over $24B in warranty associated costs.

The sheer size of warranty costs and its direct influence on the bottom line profit require careful and pro-active management. The typical warranty pay-out for a manufacturing plant could range from 1% to 5%, and even 8% of sales.

What makes warranty management effective? Is it the control of warranty expenses? Not at all, since warranty management is not in control of the warranty payouts. Warranty expense occurs not because of poor warranty management, but rather because of poor product quality. What needs to be tightly controlled is product quality and information about product failures. The warranty business unit is clearly not responsible for product quality. The only costs warranty management is directly responsible for are the administration costs of transferring the warranty payouts to customers.

To have their warranty claims accepted, however, customers have to submit a detailed description of the product problem. This makes warranty the main repository of he incoming product problem information. The significance and the effectiveness of warranty management is then enhanced by how well and how quickly product problems could be identified and resolved. The more effective the warranty system is, the faster the process of product problem identification and resolution becomes, closing the loop and resulting in improved quality of the product. Thus, the effectiveness of a warranty management system is linked to, and is inseparable from, the effectiveness of the overall process of product problem resolution and product quality. Value is added to a product when its quality is improved, since the customer is prepared to pay a premium to the added value.

Warranty process inhibitors.

A number of things stand in a way of effective warranty management.

1. Despite being an important part of the business, the warranty processes are often considered to be a part of finance expense control, rather than an integral part of the value creation chain.
2. The common situation in the manufacturing industry is the absence of a standard warranty system available on the market. The main reason for this is that every manufacturing plant tends to have unique policies and procedures regarding the management of warranty processes. These policies depend on parameters such as available products, technological processes involved, the distribution network, quality of supplier chain, etc.
3. The absence of a standard approach to warranty management leaves warranty business unit without powerful information delivery tools developed by IT industry leaders. The common situation is for a manufacturer to have in-house built warranty system with limited functionality and ad-hoc developed reporting capabilities. Non-standard, homegrown systems are often difficult to integrate into existing production systems, since they require multiple systems and business interfaces with high associated development and maintenance costs.
4. The complexity of warranty data requires special handling, special data analysing tools and special statistical skills by warranty personnel that are not common requirement in manufacturing environment.

Warranty statistics

The main feature that sets warranty process apart from most other business processes is that warranty requires a different approach to its data analysis.

In conventional business processes, for example in accounting, the information has a transactional basis and consists of a large number of small simple-logic steps. These transactions either happened or not and seldom require anything more complex than the ability to add or subtract. All relationships between transactions are linear and could be reversed up to the initial step.

What makes warranty analytics unique and sets it apart from standard business statistics is the fact that warranty analysis use predictions and require statistics based on probability functions. This is completely different to the needs of accounting that require repeatability and traceability above anything else. Imagine the reaction of accountants, auditors, IRS, police and, in extreme cases, FBI, if one decides to utilize probability functions for the General Ledger accounting.

On the other hand, in the case of Warranty one needs to be able to predict the probability of something that might or might not happen, to ascertain its possible impact on the business, and to come up with the solution that will prevent it from happening in the future. Ironically, the majority of manufacturing businesses employ the same statistics and techniques utilized in accounting for the warranty analysis too.

The Aculocity approach to warranty data analysis.

The Acu-FAST application developed by Aculocity is an easily deployed and streamlined analytical tool that allows business managers to cover the process of problem discovery in a few easy steps. It gives the user the feeling of being a Master in Statistics without requiring it. Acu-FAST based on solid statistical principles, provides four major features:

1. Warranty drill-downs based entirely on accrual curves (warranty cost view).

This feature allows a business manager to view and analyse warranty claims by relative comparison of the trends. One could start right at the top by selecting two product lines to compare and quickly drill-down to identify a specific problem area whether this is a specific defect, or a part number, or a dealer/customer.

2. Warranty drill-downs based entirely on accrual curves (number of defects view).

This feature has similar properties to the previous section, but uses the number of defects as a base for building accrual curves, rather than the warranty costs. This provides an alternate investigation path to problem areas.

3. Provision and Budget calculations

This feature is designed to accomplish two financial functionalities:

• Calculates the amount that needs to be allocated in the Warranty Reserve (Warranty Provision) at any point in time as determined by a user (Provision calculation). The Warranty Reserve is the amount a manufacturer is required to have by the law to make sure the warranty obligations to its customers are met even if it goes out of the business. The Provision could be determined at regular intervals and the Warranty Reserve adjusted accordingly;
• Calculates the future warranty pay-outs (Warranty Budget) based on projected sales. This is different to the Provision calculations in that it does not assume a manufacturer is out of business. Instead, it calculates the warranty pay-outs by taking into consideration the change in product numbers under warranty for any future period of time. This could be used as a base for the Warranty Management performance evaluation.

“Bathtub’ function calculations.

This unique analytical feature constructs the so-called “bathtub” functions for products. Any “bathtub” function has three distinct areas:

• “Infant mortality” – a decreasing failure rate area, characterised by the high number of defects that manifest themselves in the short period right after the start of product life-cycle. They are mostly attributed to broken manufacturing processes or to wrong or defective parts fitted to the product.
• “As designed” – an almost constant failure rate, where products behave according to their design. These defects are attributed to random factors.
• “Wear-and-tear wall” – an increasing failure rates area, where products approach their end-of-life period. It is very important a manufacturer has the means to calculate this “wall” as extending the warranty period beyond it could be fatal to the business.

The ability to calculate the bathtub function is the unique feature of Acu-FAST product that sets it apart from other vendors in the area of Warranty Analytics.

Aculocity is global IT consulting and software firm based outside of Chicago IL. Our global reach extends over 3 continents.  We can be reached at Aculocity.com or directly at 847-780-0228.

Our warranty team at Aculocity prides itself on helping our business partners reach their goals one customer at a time. We understand that every customer has a unique warranty situation and concerns so that a one step, boiler plate solution is not for everyone. For this reason we take the time to listen to every nuance our partners have. We make sure that we properly diagnose what your exact needs and concerns are, before we will customize a solution that addresses your business problem, within your time line and your budget on the back end. At Aculocity our products and team are uniquely positioned to solve an array of operational issues and requirements. The simplicity of Aculocity’s tools belies the complexity of the analytic, business and programming logic built in. We understand if our tools can maximize your function within your organization, you will become our strongest allies.  Our goal is very simple, to exceed our client’s expectations every time. At Aculocity, we are in the business of making businesses run better.