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Live from Warranty Chain Management 2009 – The Strategic Importance of Warranty


I am at the Warranty Chain Management conference this week and blogging more or less live. Despite the economy there are over 180 attendees as well as a solid core of sponsors. Marc McKenzie, Global Director of Corporate Warranty & Governance from Hewlett Packard gave the opening presentation on the strategic importance of warranty.

HP spends $3B – $3.5B on warranty – a huge sum – so warranty is really important to HP and constantly improves the process. Mark began by talking about what he calls “the warranty elephant”. Warranty is a classic example of different groups seeing things differently – customers see warranty as part of their product, service delivery sees warranty as somewhere to bill costs, senior management sees it as a profit improvement opportunity and so on. Warranty is an implied part of the product and can be extended and upgraded as part of the “whole product”. Warranty should be considered part of the base factory cost of the product.

Warranty is a business system with drivers (market, competition) that drive components like product attributes, warranty service delivery, costs and those drive the customer experience and thus revenue, margin etc. To make this work both IT systems and operational processes must be in place to handle offers and pricing, planning, delivering, customer experience and so on. Warranty is also a planning process where various inputs or constraints (customer satisfaction, engineering and manufacturing processes, warranty affordability) drive various outputs in terms of product design, warranty terms, delivery models, reserving and more. Finally Warranty is also a financial element in terms of both income statement and balance sheet – revenue and expenses appear on the income statement while warranty receivables, supplier receivables, reserves and inventory appear on the balance sheet.

Warranty governance is critical in a larger business, even in smaller ones where management and authority is spread out over multiple groups. At HP they have created a warranty council. This was a significant organizational change project but has helped bring everything together. The council has a warranty program management office, the various product business units, the service business unit and folks from IT, consumer delivery, service operations as necessary. It also has executive committee sponsorship and a senior executive sponsor. Key roles are the corporate leadership for coordination and strategy, a program management office to manage small number of important projects, service/IT for end-to-end entitlement.

To get serious about Warranty it was essential to balance economic feasibility and a true end-to-end process orientation. HP has broken down the end-to-end process into various steps including product design, warranty offer management, product shipments, installed base management, warranty entitlement, warranty service delivery, billing, reserve, product quality metrics and reporting. Each of these steps has been mapped out to several levels of detail both for current and future state.

Marc discussed a few key success factors:

  • Design for serviceability
    Making products that are easy to repair and differentiate products through lower costs and better end user experience. This involves awareness, process change and more. HP sees an increasing desire on the part of customers to self-serve, to fix things themselves. The current macro-economic climate is going to reinforce this. You see this in pumping your own gas, grocery store checkouts, banking and financial products, medical test, photo printing… This has led HP to develop a lot more media aimed at helping people solve their own problems. But it was also necessary to design products for self-repair. This was contentious because there were concerns about this eliminating service revenue. However it ends up being a win-win as it helps the service organization too.
  • Remote support tools
    Serviceability and manageability for customers has become a focus also with more remote support tools that can be integrated into a customer’s environment. HP is clearly moving in the direction of the same kind of preventative support than Sun developed using Fair Isaac’s Blaze Advisor product (see the interview here).
  • Improving warranty entitlement and reducing leakage
    Ongoing six-sigma like focus on warranty entitlement accuracy, on identifying and addressing root causes. Warranty leakage was pretty high in some units with up to 15% warranty claims being paid even though HP had the data to know that they should not have been. Driving this down towards their target of 1% business unit by business unit. Interestingly this has improved customer satisfaction (they mostly knew they were not entitled to the warranty repair and so just thought the company was stupid) as well as given them a much better picture of their installed base.
  • Incident reduction
    Improve quality and get proactive on monitoring and prevention. This obviously makes products more supportable and improves customer satisfaction while reducing costs. This is a real win/win as it reduces costs and improves customer satisfaction. It’s also greener.

Warranty Chain Management is a journey. You need the right people, processes and measures and alignment across groups to make progress as well as a focus on ongoing improvement.

Don’t forget to check out the white paper I have at decisionmanagementsolutions.com/warranty