Look under the Hood-Taking Warranty Management to the Next Level

Look under the Hood-Taking Warranty Management to the Next Level

Look under the Hood-Taking Warranty Management to the Next Level
Look under the Hood-Taking Warranty Management to the Next Level

Relevance and Specifics of Warranty Management for the Automotive Industry 

At the foundation of warranty claims lies an everyday example. This could be as simple as a customer driving her recently bought car recognizing a dull noise near the tires. The customer returns her car to the next OEM dealership from which she receives a temporary replacement and fuel coupons out of goodwill. The car is checked for quality issues, but no fault can be found. In fact, the noise went away after removing and refitting the dampers. 
A big data analysis conducted at the OEM’s headquarter with global metadata correlated to external variables like climate and location data indicates indeed a suboptimal subassembly process to be the noise’s source, which grows louder when the car is driven in a speedy manner during cold weather. How should the OEM and the supplier proceed with such cases, especially regarding the cost incurred and improvements in quality—balancing resources and relationships along the supply chain? 

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Exhibit 1 shows the typical automotive warranty process, beginning at failure detection (1) to fixes in production (8a) or service (8b). Best-in-class organizations follow a stringent logic once the repair process (2) is completed: To generate a stringent starting point, powerful advanced analytics utilizing big data techniques (3) are now able to holistically arrange and assess information about similar error patterns. Subsequently, the dealer decides whether returning the parts for technical in-depth analyses to the OEM (4), who processes the claim (5) and assesses whether the cost can be recovered (6). For risk containment, the OEM evaluates possible measures for warranty spend reduction (7) such as active vehicle recalls or field service actions before sustainable technical solutions are implemented (8), which happens in parallel to any potential warranty recovery. 
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Exhibit 1 – Overview of typical warranty process  In general, there are three possible origins for warranty issues, (i) the OEM, (ii) the supplier, and (iii) the customer.  (i) First, the OEM could have made an error, such as implementing a production step incorrectly. An example would be improperly connected ECUs that trigger a dry run of fuel pumps without fuel in tanks, causing high pump failure rates.  (ii) The second potential source of technical warranty issues is the suppliers. One example might be fuel tank sensors for which the chosen glue disintegrated from exposure to gasoline, resulting in sensors failing because the internal electronics corroded.(iii) Finally, customers can also cause warranty issues. For example, driving too fast in knee-deep water could force water into the headlights, ultimately leading to them fogging up after evaporation.
  1. The resulting warranty cost incurred by such issues can be broken down into five elements.     
  2. Repair shop expenses, consisting of work hours and spare parts     
  3. Field actions, such as to support safety or emission recalls     
  4. Goodwill and nontraditional payments to reinstate customer satisfaction     
  5. Replacements and salvage costs, such as from providing customers with towing services     
  6. Opportunity costs arising if the product cannot fulfill its intended function
Today, these cost components combined make up 2.1% of the automotive industry’s revenue in what is typically a low-margin business. Excluding specific exceptional cases, this level generally varies between 1.5% and 3.0% by region and manufacturer, as shown in exhibit 2.
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Exhibit 2 – Warranty costs: Automotive industry average at 2.1% of revenue  Due to the ever-increasing complexity of electronic interfaces, software, or connectivity, the cost of warranties has become a relevant factor of success. Yet, the outlook is not promising. It is no longer a question of if but when new autonomous technologies will revolutionize the industry, increasing the number of cross-functional interfaces. This added complexity increases the number of stakeholders involved and will eventually increase the total warranty cost.

Typical Opportunities and Pain Points for Cost Recovery of Automotive Warranties  

The high warranty cost lends both case avoidance and cost recovery urgency. The decomposition of the total cost of warranty and goodwill (WGW) defines the path forward in addressing costs subject to recovery (see exhibit 3).  
A. Legal framework: The legal situation stipulates repair shop margins not be passed on, so approximately one-third of the cost cannot be recovered.  
B. OEM-related costs: These are substantiated by faulty parts developed by the OEM and by repairs in OEM-owned repair shops not solving the underlying problem. Obviously, cost recovery is not applicable within the OEM network – such costs can only be avoided in the future.  
C. Contract-related costs: We need to distinguish between two possible reasons for these costs. First, supplier contracts June limit the recovery possibilities. And second, warranty costs, such as goodwill occurring after the legally defined period of product liability or shorter contractual periods of suppliers leave room for disagreement along the supply chain.  
D.Technical costs: “No fault found” cases, such as the damper example at the beginning, together with imprecise specifications, are additional drains on warranty recovery potential. 
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Exhibit 3 – Decomposition of total cost of warranty and goodwill  In regards to addressing warranty costs, we see in our projects typical improvement opportunities from both OEMs and suppliers in the automotive industry. We split these most common pain points into five segments.
Target system
  • Overall low warranty cost recovery rate     
  • Lack of consistent KPI system for relevant process steps  
  • Processes and organization      
  • Limited practice of systematic issue identification, prioritization, tracking, and implementation     
  • Little organizational collaboration in warranty recovery process     
  • Long duration of bug fix releases  Dealer enabling and control      
  • High approval rate of warranty claims with substantial goodwill agreements
  • Poor description of claims with long duration of defective parts returned from dealers     High percentage of “no fault found” cases  Supplier management      
  • High degree of warranty limitations in contract agreements     
  • New supplier landscape demand special warranty terms (e.g., for software content)     Lack of experience in warranty-related negotiations both on OEM and on supplier side 
Central warranty and goodwill costs data management and IT system support
  • Late detection of potentially significant warranty incidents without advanced analytics     
  • Lack of standardized documentation of contract agreements
BCG has consistently seen these pain points and therefore developed a comprehensive framework to take warranty management to the next level.

Orchestrating Optimized Warranty Management  

A consistent target system to reduce warranty costs is realized by three pillars: (I) processes & organization, (II) dealer enabling and control, (III) and supplier management. As a foundation, optimized warranty management requires the central management of warranty and goodwill cost data as well as IT-system support, as shown in exhibit 4.
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Exhibit 4 – BCG’s comprehensive framework for warranty management  This proposed warranty structure allows OEMs to implement state-of-the-art warranty management, ultimately boosting quality along the value chain. To add that value, companies must make each field a management priority and pursue a concerted approach to advance existing regimes. 

Implementing a consistent target system

The first step is to review and optimize KPIs that can be used with existing data systems. This includes pragmatic KPIs for the OEM, dealers, and suppliers. The OEM’s performance in warranty management is best quantified with the average duration of the recovery process. Similarly, key performance indicators for dealers could include the percentage of correct defect capture or the average duration thereof. Finally, suppliers’ performance can be captured with KPIs such as the average rate of error identification for their diagnostic process to solve “no fault found” cases.  Success factors encompass the integration of warranty and goodwill targets throughout the value chain, the derivation of specific targets for each process step, and the balance among costs and quality ambitions. These cross-functional KPIs allow for steering the collaboration in reducing warranty costs.

Upgrading processes and organization

The next step is to set up the warranty organization and define clear responsibilities. That includes analyzing existing processes and implementing end-to-end responsibilities for warranty issues where applicable. Only by defining roles and ownership for each involved party can all internal departments achieve transparent ambition levels, thus optimizing the warranty process holistically. Top management buy-in is key to success for supporting the warranty process.

Enabling and controlling dealers

Enabling dealers is crucial to ensuring superior warranty management, as they not only interact directly with customers but can also provide critical hints to identify an issue’s root cause and accelerate the work of quality engineers. The latter depends on clear and full documentation provided by the dealer’s repair shop. Joint efforts initiated through regular audits can ensure the execution of all steps of diagnosis at a predefined level of quality and avoid reimbursement refusals. Experience shows that even in mature states, auditors typically identify joint savings potential of €20,000 per dealership. 

Managing suppliers in a collaborative manner

Close collaboration between OEM and supplier is key to success, especially in the case of error analyses. It is key to involve the supplier of an affected part quickly to complement the OEM’s system know-how with the component know-how of the supplier. The supplier examines the defect in detail on a component level and reports back to the OEM, typically followed by a joint failure mode and effect analysis on a vehicle level. In cases in which no fault can be found, both the supplier and the OEM intensify their efforts to detect the underlying cause, including possible examinations with dedicated test vehicles jointly conducted at the supplier site. Avoiding potentially large warranty costs from defects detected later, a stronger relationship with the OEM, and quality advances early on add real value for suppliers.

Analyzing central warranty and goodwill costs data management

At the foundation of every successful cost data management lies the smart application of digital analytics, deeply embedded within the existing system landscape. The value creation and all enablers of BCG’s warranty management framework are strongly dependent on a solid data foundation and can only unleash their full potential if that foundation has a smart design. Digital analytics detects anomalies, patterns of seemingly sporadic cases, to predict warranty costs and high-spend issues, and develop quality engineers to make smarter, better-informed decisions than ever before. In the near future, selected decisions will even be made independently by analytical models to relieve warranty managers; for example, of repetitive tasks. All this directly supports the three aforementioned pillars together with the target system to achieve an optimized warranty management. 

What the Automotive Industry Can Learn from Warranty Recovery in Different Industries  

At the core of an optimized warranty management lie warranty recovery rates. Rates vary widely depending on the industry, from as low as about 10% in automotive up to around 70% in the aerospace sector. Admittedly, the automotive sector is structurally different, as described in exhibit 5. However, best practices are generally worth analyzing and evaluating in terms of their applicability to the automotive industry. 
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Exhibit 5 – Warranty recovery rates vary widely across industries  We have summarized selected key insights from different industries:

Aerospace: Self-diagnostic capabilities enable transparent and early detection of faults  

The aerospace industry relies on detailed documentation along the whole value chain, extensive case-by-case assessments of faults and early warnings by diagnostic systems. Documentation of all information, such as agreements or correspondence, is typically held in central databases. This transparency allows for a clear allocation of costs and leads to generally high recovery rates.

Large-scale engines: Close cooperation and proactive quality management along value chain  

Since large-scale engine failures can cause high additional warranty and goodwill costs, e.g. a yacht that first needs to be towed into a harbor to be repaired, suppliers and OEMs focus on detailed quality assessments in production with deliberate clean points, like end-of-line tests. Additionally, subparts can be traced down to their production batch, ensuring variations in production quality and other possibly affected products can be identified. Finally, typically longstanding relationships between OEMs and suppliers facilitate a joint and transparent fault analysis of final products.

Trains: Quality enablement of suppliers and focus on win-win situations in warranty recovery

Similar to the aerospace and large-scale engines industry, train manufacturers also employ strict quality controls with a final certification of every single train, normally carried out by external inspectors. Train operators specify needed functionalities in detail, including procedures to be followed for each component in case of quality issues. This approach creates transparency on the ranked importance of functionalities for train manufacturers and in general leads to close collaboration in an OEM and supplier oligopoly. The overall aim is to create win-win situations, even in case of quality issues, to ensure going concern for all involved parties.

Electronics: High traceability and close exchange with affected end users  

Clear system interfaces between components usually allow the industry to identify defective parts quickly. However, a detailed root cause analysis of specific supplier parts at reasonable costs, especially compared to the price of the defective component, is typically difficult. By comparison, OEMs are especially advanced in identifying affected products as their in-house data provides detail down to end user IDs with contact details and affected models including dates of production.

Don’t Just Hope for, Ensure a Better Tomorrow

Exhibit 6 illustrates our vision for future ways of working in warranty recovery. Optimized warranty management will automatically identify and prioritize warranty cases by applying advanced analytics and trimming down huge amounts of unstructured data from top cases for detailed examination. Quality managers will then orchestrate fast and targeted collaboration with partners along the whole value chain to detect and eliminate the failure’s root cause. Joint fault examinations of OEMs and suppliers will become the new normal as tomorrow’s warranty management will act on optimized contractual foundations, emphasizing transparent terms for cost allocation. Additionally, transparent standards will be set in place on which efficient issue processing and consistent reporting can act. 
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Exhibit 6 – Our vision for future ways of working in warranty recovery  We encourage decision-makers in warranty management to orchestrate improvements along the full value chain by adopting all segments of BCG’s framework. To get there, our “think big, start small, grow fast” approach has proven successful at transforming existing warranty systems, see exhibit 7. This procedure translates to implementing a pilot trial to test new ways of working early on. 

Exhibit 7 – How to create impact: Think big, start small, grow fast  With the technological transformation gaining more traction and increasing competition in the supplier landscape, 
the typical warranty process in automotive is ready for an upgrade. 
Dr. Florian Burgdorf  
Dr. Rolf Kilian  
Florian Lerchbammer  
Daniel Weise

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The Author: Daniel Weise
                                        Daniel Weise
I am a procurement enthusiast and have the privilege to lead BCGs procurement business line globally. Supporting my clients globally and across industries, I focus on value delivery - beyond cost and including resilient supply chains and sustainability, operating model redesign and digitization programs. 
I have also supported many of my clients in PMI and restructuring settings. Recently, I have published my first book summarizing my experiences in digitizing procurement functions: "Jumpstart to Digital Procurement". In BCG, I am also part of our global Operations Practice Area leadership team.

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