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Warranties 101: A “Why & How To” Guide

Posted under Blog by Bob Stallard, Senior Consultant

Many people are of the belief that warranty programs exist simply to repair products, as a purchase incentive, during a defined time period. While that is somewhat true, it is not the primary reason why warranty programs were created.

Magnuson – Moss Act – Enacted in 1975, this US federal statute governs warranties on consumer products. The law does not require a product to have a warranty (it may be sold “as is”), but if a product does have a warranty, the warranty must comply with this law. This law was created to address problems as a result of manufacturers using disclaimers on warranties in an unfair or misleading manner. While the act only pertains to individual consumer transactions, over the years the same legal principals, laid out in Magnuson – Moss, have largely become the de facto standard for business to business warranty policies.

The fundamental concept behind a warranty is to determine where design and manufacturing flaws exist so that a company can improve product quality. Warranty claims are the primary source of that critical failure data. A warranty claim requires the customer, or authorized servicing party, to accurately record the details around the failure & repair event and return failed assemblies or components to the manufacturer. The manufacturer then gathers the failure data from claims submitted across the entire installed product base, analyzes the data for failure trends, and if necessary, makes corrective changes in product designs (Engineering Change Notices) or manufacturing processes, to reduce the likelihood of those specific failures, thus improving their product.

An example:  An electronics control assembly was a primary component of an industrial machine. Only weeks into a new product launch, Maintenance & Repair started to see a large number of warranty claims for these units which would fail after being powered on for the first time. This “infant mortality” problem became so prevalent that the maintenance team had to pull and test all in stock manufactured units (thousands). Of the failures encountered during testing, the same subassembly (power supply) failed in those products and was linked back to a single lot of power supplies manufactured within a given date range. Engineering further analyzed the failed power supplies and discovered that a single capacitor, of incorrect value, had been installed in error and had not been caught by quality checkpoints. ALL the affected power supplies would eventually fail due to this manufacturing flaw.

The result: The failure cost the company in many ways: First was the direct warranty labor and parts reimbursement for the failures, which was minor. The second was in lost sales due to unprecedented product returns and cancelled orders, which was massive. The third was in perceived company reputation or product/brand confidence as a result of the widespread failure rate. Then add in the field labor, engineering time, product rework, overnight shipping charges, and management time spent to identify, manage and fully resolve the problem. Upon post-mortem analysis of the event it was determined that this single failure had cost the company approximately seven (7) million dollars. However, without the timely and critical information from the warranty claims, it could have taken much longer to isolate the problem and apply corrective measures which may have proven to be even more devastating to the company. 

So, what changed as a result?  Additional quality control checkpoints & tests were instituted in the manufacturing process to catch possible quality issues before they left the factory.

Who benefits from this? The Consumer receives a better product, much more likely to provide the work or benefit for which they purchased it. The manufacturer lowered their cost, produced a more competitive product in the marketplace, and rebuilt their reputation for quality.  Everyone won because the Warranty program made the required information readily available!

Since we have established that many positive results come from warranty claims, for both the consumer and the company, why are warranties so often avoided, rejected, or ignored? One reason may be the requirements set by the manufacturer for submitting valid warranty claims.  Work order documentation, parts tagging and return, proof of proper maintenance and more may be required to receive warranty reimbursement. Warranties can be difficult to manage and understand. In addition to this, there are many clauses and conditions that can void a warranty claim.

Common Warranty Limitation, Terms, & Conditions:

A warranty offered on a product is expected to be honored under a given set of terms & conditions, as laid down by the manufacturer. Some of these common conditions or limitations include, but are by no means limited to:

Common Reasons Warranty Claims are DeniedUnintended use:

If you buy a washing machine, you will likely use it to launder clothing. This is the designed purpose of the product. If you decide to use it to wash gravel for your budding rock garden business, you will likely ruin the machine. If your washer fails, you call for warranty service, and the “gravel use” is determined to have caused the failure, the unit will likely not qualify for warranty repair. This is called “unintended use”. Most industrial warranty agreements have an unintended, or destructive use, clause.

This becomes particularly important in an industrial setting where a product may be “pressed into service” for an unintended use. For example, a pump designed to move water is employed to move a more viscous material, a purpose for which it was not designed. The excessive stress on the pump would likely cause premature failure. Items returned for warranty repair or replacement are carefully inspected to determine the possible cause of the failure. The work order submitted will also either support or refute the evidence of the failed item returned.  Almost all failed items will give a clear indication of the nature of that failure. When repeated claims come from the same customer location, for the same type of failure, the manufacturer may request more data, or even ask to visit the site.  Those requests are not for the purpose of denying the claim, rather they are meant to assure that the product is being used as intended and to reduce failures where possible.

Operating outside specified limits: 

All products are designed to perform within a given operating range for an estimated time before normal “wear & tear” can cause failure. If a motor is designed to operate continuously at 1750 rpms, and is overdriven to operate at 2500 rpms, premature failure is likely. It has been employed for a use beyond its design specifications. This can happen when machine operators or production managers decide to “run at max” to gain production quantities above the normal run rates.  Usually control safeguards make this scenario unlikely, however, it does happen. The cause of failure is usually evident on the affected part or subassembly when a failure from running beyond specifications occurs.  

Unauthorized modification:

Products are designed to perform a certain function, in a manner as designed and built by the manufacturer. There are liabilities for the manufacturer from a myriad of perspectives (patent infringement, safety, intended use, etc.) which all are highly considered when a product is designed and produced.  Should you decide that you have the mechanical genius to improve the operation of a purchased device, be advised that your actions could create an unsafe operating condition and possibly damage the unit. Remember that most warranties only warrant “defects in workmanship (design & manufacturing) and materials” (parts) and that any unauthorized modification could void the warranty. 

An example would be as simple as bolting a bracket and idler wheel for additional tension, to an assembly to keep a belt from slipping. This type of “well-intentioned“ field modification is all too common. The increased tension eventually causes a failure of a pully bearing, which is submitted for warranty replacement, along with pictures of the modification. The claim is probably rejected since the modification is most likely responsible for the premature bearing failure. A little digging into the poor-tension problem, with the support of the manufacturer, may have resolved the problem through a simple adjustment or an engineering change, without the need for an unauthorized modification. 

Required Maintenance:

We all know if you purchase and operate an automobile that it requires maintenance to keep it running. If you fail to add oil and the crankcase runs dry, the engine will cease up. If you then have it towed to the dealership and ask for warranty service, your claim will likely be denied since you failed to perform the required lubrication & maintenance. Industrial warranties are similar but may be more complicated when it comes to required maintenance, especially when combined with the intended use mentioned above.

Proof of required maintenance may be critical when submitting warranty claims for Industrial equipment failures. If the machine costs several million dollars, a single warranty claim (parts & labor) could easily be in the tens of thousands of dollars. A clear, accurate, and COMPLETE preventive maintenance work order history must accompany the returned parts and must be submitted within the terms of the warranty agreement. Again, this is not about denying the warranty claim, it’s about assuring that proper maintenance is accomplished and that failures are reduced.

Submitting Qualified Warranty Claims:

All warranty claims have a few things in common.  First, if you consider what warranties are for, as detailed earlier, you understand that a failure description of “it broke”, a failure code of “poor design”, and a repair code of “replaced part” is NOT the information the manufacturer is looking for in a warranty claim. But that said, a poor Work Order is better than none.

Industry averages for administering warranty claims showed that about 40% of all rejected claims were the result of no work order submitted and just a part was returned for replacement. Another 15% were submitted outside the claim time window. This is NOT the warranty period, rather it is the time period from the repair event to claim submission, which varies by manufacturer and is usually very flexible. Some manufacturers have seen warranty claims for products where the repair was accomplished during the warranty period, yet a year or more transpired before the claim was submitted. It is the value of the TIMELY FAILURE DATA that the manufacturer is seeking to recover. Yet another 20% are rejected from work orders submitted but with no parts returned. The remaining 25 % of rejections vary by individual claim and can fall into the following categories:

  • Expired Warranty period
  • Operation outside of manufactures specifications
  • Non-intended use.
  • Unauthorized Modification
  • Failure to perform required maintenance

Parts are the “hard evidence” and the Work Order is the supporting information. Both need to be submitted accurately, in a timely fashion, for a valid reimbursable warranty claim.

What is generally required for a successful warranty claim?

The information expected in most Warranty Repair Work Order claims:  

  • Model number
  • Serial number
  • Date of install or purchase
  • PM records, if required
  • Photos or other visual records
  • Hours/cycles run
  • Other metered information
  • A clear detailed account of the failure event, failure symptom, what condition was found, and what remedy was applied to resolve the failure
  • Parts tagged to the associated Work Order
  • Manufacturers return material authorization (RMA) number or tag.

If all the information above is included in the submission, the person analyzing the claim will have a very complete picture of the failure and will quickly determine if the claim qualifies for reimbursement. If the evidence is inconsistent with the claim data, then more information or an explanation discussion may be requested.  Again, most claims are denied due to poorly completed work orders and lack of returned parts.

Warranty Benefits for the Consumer Company:

Direct Monetary Recovery:

It is apparent that recouping warranty parts and labor are good practices for most companies. In fact, the industry average for warranty cost reclamation is between 3% and 5% of total annual maintenance spending. Regardless of maintenance budget size, that represents significant dollars to recover.

Supplier Relationship:

Customers who routinely recover warranty parts and labor tend to have a closer working relationship with that manufacturer/supplier and see a direct benefit from those increased communications. Warranty claims make both the customer and the manufacturer “aware” of failures which may require modifications in product design or manufacturing. Both parties are also “aware” of the level of repairs and whether those are low, within reasonable limits, low, or high.   Customers who “don’t bother” with warranty claims tend to be slow or unresponsive in reporting failures. They talk and complain internally about failures yet only mention them to the manufacturer when the situation becomes intolerable or when negotiating new purchases with the vendor. The manufacturer is completely, and unfairly, blindsided by these failures since they had no prior information on them.

The quicker that product problems are resolved, the more uptime and production the equipment will deliver, which is the goal of both the customer maintenance organization and the manufacturer. Customers who have good failure data use that when evaluating current suppliers or in negotiating future contracts. 

In summary:

The goal of a Warranty program is to continually improve product quality. Warranties have proven beneficial for both customers and manufacturers.  Warranty reimbursement programs provide the manufacturer with critical feedback on product failures so that those issues can be quickly resolved and thus improve product quality. Your company benefits from a closer working relationship with the vendor, direct reimbursement of failure repair costs, a constantly improving product, and decreased asset downtime.

The challenge is to:

  • Work within the confines of the manufacturers’ warranty terms & conditions
  • Accurately record all PM work and Repair Work details required for reimbursement.
  • Tag and hold parts for return and reimbursement
  • Track warranty claims as “receivables” so that the value of the recovery effort is recognized
  • Analyze the warranty related failure data to identify trends ( root cause)  

VIZIYA specializes in simplifying the warranty claim process with our WorkAlign® Warranty Tracker. If you’re interested in learning more about how we can help you gain the most from your asset warranties, request a demo now, or click here to watch our “Warranty Tracking and Recovery – A missed Opportunity” webcast.

 

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