Warranty Costs are Lot More than the Accounts Tell You

In November 2019, General Motors recalled over 640,000 pickup trucks worldwide because hot gas from a high-tech seat belt can set the carpeting on fire [1]. The recall covers 2019 and 2020Chevrolet Silverado and GMC Sierra 1500 trucks. Also included are some 2020 Silverado and Sierra 2500 and 3500 heavy-duty pickups. All have carpet as a floor covering, GM says it uses a small explosion to move a piston that tightens the belts before a crash. The explosion can release hot gas through an opening in a bracket, possibly setting the carpet on fire. The company reports two fires but no injuries.

Dealers will repair for thousands of owners at no cost to owners. Ditto with cars using faulty Takata air bags. After the injuries and deaths, manufacturers have begun to recall the vehicles to replace the airbags with working ones. So far, Subaru, BMW, and Mitsubishi have all recalled vehicles to be fixed and Nissan will be sending out a recall notice in February. Takata issued a statement on January 8,2020 saying that 10 million more vehicles would need to be recalled for the issue. They came to a settlement in 2015 that they would replace the faulty airbags, which is an issue that is still going on today. The settlement would be the final one the company would do as it went bankrupt [2].

Are the product recalls warranty costs?

The legal answer is yes, but the accountants do not classify them as warranty costs. They have a separate account with the name recall costs or some equivalent name. Therefore, they don’t show up as warranty costs.

The reason recalls costs are warranty costs is because, by law, there are two major kinds of warranty costs: the expressed warranty cost, and the implied warranty costs. The expressed warranty costs are those that promised by a company such one-year warranty or a five-year warranty. Implied warranties are unwritten promises that arise from the nature of the transaction, and the inherent understanding by the buyer, rather than from the express representations of the seller.  It covers unexpected problems such the harm from unsafe products as long as the customer uses it. The airlines typically use beyond the expected life. The law requires manufacturers to prevent safety-related failures that should have been prevented by design.

Designing for Warranty Cost Reduction

Work smart, not hard is the paradigm everyone should follow. You can work smart by doing the following:

1. Determine the historical percentage of warranty expense to sales and allocate similar percent to the new product.
2. Proactively minimize the warranty costs by designing out the failures. Brainstorm to reduce costs as much as you can in design reviews. It may take a year till cost reductions show up in accounting.
3. Avoid expensive recalls by designing right the first time!

To reduce warranty costs, we need to know what they are. Below are most common costs:

• Cost of travel to customer for disabled equipment and repair cost
• Call center operating costs
• Shipping and handling of return items
• Repair center costs
• Spare parts inventory costs
• Service center costs
• Cost of repair equipment and tools
• Cost of goodwill
• Cost of downtime to customers

Typical Mistakes in Warranty Planning

• Management fails to hold design engineers accountable for warranty costs
• Overlooking FMECA during early design
• Overlooking elimination of failure modes in previous products
• No research on competitor warranty problems
• Solving problems by seat of the pants instead of using Fault Tree Analysis
• Lack of critical thinking

Conclusion

Warranty failure prevention results in at least 1000% return on investment in my experience over 30 years. The secret is that senior management must understand this critical role of design engineers, reliability engineers, and manufacturing engineers working as a brainstorming team.

References

[1] ABC News, GM Recalls 640K Pickups; Seat Belts Can Cause Carpet Fires, November 21, 2019,

https://abcnews.go.com › wireStory › gm-recalls-640k-pickups-seat-belts-car…

[2] Duffer, Robert, Takata Airbags Recall Expands as Nissan, BMW, Ferrari Call Back Already Repaired Vehicles, The Car Connection, January 20, 2020, https://www.thecarconnection.com/news/1126756_takata-airbag-recall-expands-as-nissan-bmw-gm-ferrari-call-back-already-repaired-vehicles