See and Avoid Saves Profits: The High Cost of Warranties
On average, it takes up to 120 days to recognize and correct a warranty problem in the auto industry, with each day costing up to $1 million in service, labor, parts and brand impact. The financially challenged Big Three automakers spent more than $4 billion in warranty claims during the first half of 2005 alone. With more than 16 million recalls last year, that means almost as many cars were recalled as sold in the United States.
Given the high production volumes, the complexity of the components and subassemblies, and the harsh conditions in which automobiles are used, it's inevitable that some defects or failures will occur. In fact, many auto industry executives consider warranty claims to be a fact of life.
However, more and more companies are focusing attention on detection-to-correction time, the time from when a manufacturer is first made aware of a quality issue until it corrects that issue. Suppliers and OEMs are also implementing early warning systems to reduce the amount of time it takes to correct a defect.
Since the Transportation Recall, Enhancement, Accountability and Documentation (TREAD) Act was introduced 2 years ago, OEMs and suppliers have devoted more time and resources to parts traceability and production data tracking. The early warning reporting system, enforced by the National Highway Traffic Safety Administration (NHTSA, Washington, DC), is intended to identify a wide variety of defects in vehicles. Noncompliance can result in severe penalties for automakers.
According to the Center for Automotive Research (CAR, Ann Arbor, MI), 80 percent to 85 percent of all recalls are traceable to supplier components. As a result, there is increasing pressure on suppliers to bear a larger portion of the financial responsibility for failures.
"Currently, it is common practice for the component supplier to be responsible for the manufacturing cost of the failed part covered under warranty, plus some portion of the logistics and labor cost," says Brett Smith, CAR assistant director of manufacturing, engineering and technology, who recently concluded a 4 -year research project on the topic.
"However, the vehicle manufacturer must cover the remaining costs, including transportation, part replacement labor and information processing," adds Smith. And, OEMs are now shifting an increased portion of those nonmanufacturing costs to their suppliers as well.