WARRANTY COSTS - THE PLACE WHERE PEOPLE MEET
In the old days people met at the village pond or the village pub to exchange ideas, develop insights and make agreements about joint ventures. Recently I was asked: Where is the village pub or pond in the modern company? Where is the place where managers and employees meet every day to understand what is outside the "normal routine" of orders and tasks.
My answer is clear: It is the warranty costs of the company. People talk about them at the canteen tables, at the coffee machine and at meetings at all levels. At no other place do so many perspectives of the company meet:
- The problem must be solved now for a specific customer who by the hour loses business or satisfaction.
- Perhaps, the problem must also be handled now for customers who have not yet encountered the problem - but may or may not encounter it.
- The cause of the problem must be found and eliminated so that the same mistake does not happen again.
- The underlying causes of the problem must also be understood -and must also give rise to future preventive actions.
- The problem and its solution must be registered via an IT set-up satisfying demands according to the accounting law, ISO9000 and customers - and internal and external demands and expectations.
- The problem has considerable and assessable effects on customer reputation and loss of sales - what happened, what does it cost to have effective processes and what can be done?
All parts of the organization are involved. The service department is in charge of the final fire fighting process. The provoking factor - development, sales, production etc. must necessarily take responsibility for both the corrective and the preventive actions. The economy function is busy understanding the financial consequences and risks. The quality department is focused on responsibility and the fulfillment of internal and external quality management system demands. The sales department is obviously very busy with the question as to whether the customer and the market will regard it as "an isolated incident where the company really took responsibility" - or an example of the "brand and the organization not matching the competitors at all".
It is obvious that the management of the company is busy with the warranty costs. Here the products and the service of the company have met real life - and been a nasty disappointment to customers and employees. Here humility is at its place. Here the healthy organization is ready to learn - and act to improve.
WHAT DOES IT TAKE TO BECOME WORLD CLASS?
Of late we have often been asked: "What is World Class within warranty costs? Below we have condensed the many years' experience into six questions which, when answered convincingly, reflect World Class level.
- Good system for definitions and registration of failures and defects?
1a. Are there shared codes and definitions of
- all incidents of defects experienced at the customer's "within warranty"
- all incidents of defects experienced at the customer's "outside warranty - but within the customer's reasonable expectations"
- all "close-to defects experienced" at the customer's
1b. Are all incidents of defects or close-to defects reported and registered in an effective and disciplined fashion?
- Are there well coordinated organisation for...
- immediate remedy of the customer's negative experience - typically run by the service department?
- handling according to the accounting law - typically run by the finance function?
- correction of defects and learning - typically run by the quality department?
- How large are the reported annual warranty costs?
Typically 0.1 - 1% of turnover and clearly better than competitors. How large is the total estimated loss of sales in connection with the customer's negative experiences. Typically factors 5-10 of the reported annual warranty costs. Are these costs reported as a whole - and to each department responsible?
- Are systems generally available in the different departments facilitating easy analysis of defects, the connection of defects, environments of defects etc., thus facilitating the development and test of hypotheses in the hunt for the causes of defects?
- Is there a culture for and are systems available to learn from defects? In each department - and across the organization continuous improvements are part of the DNA. Has every part and every function a plan for reducing the number of warranty cases by 20% on an annual basis through activities carried out within the next six months? When new products and services are introduced - how is it secured that "teething troubles" are completely avoided? How are defects prevented?
- The management understands and acts out that there is always time and priority to prevent defects - and when defects still occur, because we are after all only imperfect human beings, it also has the time not only to correct defects, but also to learn from them. The management has a passion for "zero defect" and knows that a stable, low and continuously falling level of warranty cases is not only a direct source of more profit and satisfied customers - but also a source of a managerial "mental surplus" releasing energy and insight for more exciting initiatives such as innovation, sales initiatives and development of the overall total value chain of the company.
A really large amount of money is to be picked up by a reduction of warranty costs - costs are saved and new customers and new business gained. The key to success lies in perseverance. It is not sufficient to move the company from one level to the next as a once-only phenomenon. It is all about creating cycles reducing warranty costs by 15-20% each year - and raising the company step by step towards world class. We will revert to these issues in coming newsletters. If, however, you cannot wait or just want a further discussion about the great potential of this field, you are welcome to contact us.