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Looking upstream for warranty cost savings

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Kjell Hammerstrom of Sun presented on warranty costs. Product management teams specify warranty term duration and terms of warranties on products while procurment teams negotiate warranty terms with equipment manufacturers (many of Sun’s products are built by a manufacturer like Qunta, Mitac, Celestica). However the process was not collaborative – products would be released with 1 year warranties where procurement had neogitated a 3 year warranty with the manufacturer. This represented waste and to address this they put together a cross-functional team to manage warranty criteria across the whole product lifecycle.

The idea was to get the lowest total cost for the warranty that was desired. Sometimes this was about negotiating warranty terms with the manufacturer, sometimes it was about agreeing to pay for each repair, sometimes it was about the price of the warranty and so on. A longer warranty with the manufacturer might be good if Sun can sell extended warranties but not otherwise. Similarly, what does the item cost and how often does it fail? Perhaps it is not worth repairing or returning a part for service. This required the development of a tool to manage these calculations – Sun’s Vendor Warranty Calculator. This spreadsheet tool allows the costs of repairs, the likely rate of failure, warranty terms etc to be varied and compared.

They tried it on 15 products and, in the first 5, they found $2M of opportunities of which they managed to save nearlty $1M a year. This got the initial procurement team engaged and so they developed online training for other procurement teams to use the tool.

An interesting example of getting savings by developing a tool that allows different groups to see the same cost model and manipulate it.

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