Using Warranty Claims for Product Quality Improvement

Author(s):

Rodney N. Doerr
Rodney N. Doerr, Manager - Warranty, Union Pacific Railroad, Omaha, NE 68179, 402/271-3405.

80th Annual International Conference Proceedings - 1995 - Anaheim, California

ABSTRACT.
The paper describes in detail an inexpensive method - requiring limited expertise - utilized in determining whether failed products or services are within the warranty period as defined in the procurement contract. Once the component has been determined to have failed within the warranty period, the paper describes how data from the failure is compiled and utilized to monitor the incurred direct and estimated hidden costs associated with the failure. These failure data are used to evaluate both product and supplier performance. Finally, the paper describes how the product and supplier evaluation data are utilized to improve product quality.

DEFINING QUALITY IMPROVEMENT EXPECTATIONS.
Without question, much has been written in recent years regarding product and service quality. In general, quality is often defined as meeting customer or end-user expectations. Defining these expectations has become perhaps the most important aspect of Purchasing's function regarding the interface between the buying company's quality improvement process and that of the supplier. Purchasing, however, not only requires expectations to be clearly delineated within procurement contracts, but also certain objective measures be agreed upon regarding product reliability, quality, and supplier performance evaluation.

One of the most widely accepted examples of an objective measure is the Component or Service Failure Rate. The Failure Rate is defined as the total number of failures within an item [or service event] population, divided by the total number of [items utilized or events experienced] during a particular measurement interval (Dovich 2).

Three explicit failure rate phases manifest themselves when analyzing a population of components or service events over time. The first phase, normally referred to as the infant mortality period, is shown as a decreasing failure rate throughout an items burn-in service-life (See Figure 1). The second phase, referred to as the random cause failure period shown in Figure (1) as the flat portion of the curve, is where the failure rate remains relatively constant. The final phase, that of wear-out, is shown on the right side of Figure (1) as an increasing failure rate (Dovich 9).

WARRANTY FAILURE RATE.
For purposes of this paper, the failure rate described within the infant mortality period is often indicative of poor design, manufacturing defects, and/or [incompatible tolerance limits] (Nelson 3). While failure data during the infant mortality period is an invaluable tool to ensure a supplier's quality deficiencies are addressed, rarely is this type of information available to Purchasing before a significant proportion of defective components or services are utilized. Therefore, this paper will describe an adjunct measure similar, and in some cases equivalent, to the infant mortality failure rate as well as an inexpensive method for determining whether a failed product is within warranty. Additionally, it will address how claims data are generated, compiled, and utilized to improve supplier product quality.

Most companies have mechanisms in place by which to file warranty claims with their suppliers. In most cases, suppliers only offer warranties during the early phases of a product or service event's life-cycle. Presumably, the supplier has determined the probability of failure to be low during the warranty period. Therefore, should claims be filed with frequency during the warranty period, failure data approximating the infant mortality rate is likewise being compiled in the form of a Warranty Failure Rate. The Warranty Failure Rate is defined as the number of failed components or service events submitted for warranty consideration during a stated period, divided by the component usage or service events experienced during that same period.

Obviously for a warranty claim to be initiated, not only must the product or service cease to function, but the item or service must be recognized by those closest to the failure to have occurred within the warranty period. The first factor, failure, is in most cases easy to determine. The second factor, however, can be far more difficult to accurately determine. To assist those closest to the product or service in verifying the warranty period, a date-stamp label such as the one shown in Figure (2) may be used.

The date-stamp label is affixed to the component and contains the manufacturer's or repair company's identification, date the component was built or rebuilt, the warranty expiration date, and other pertinent information. The label has many advantages as it tends to be inexpensive, requires limited expertise or training to interpret, and requires most suppliers to implement limited changes since most are already labeling their products to minimize product liability risks (Juran 19.14). As for services, reply or mail-in cards may be provided for the same purpose.

Once the Warranty Failure Rate is calculated, this statistic is used to generate a Warranty Failure Cost. The Warranty Failure Cost includes the repair cost of the failed component, replacement or change-out labor cost, a standard transportation charge to move the material into and out of a maintenance/repair facility, an inventory holding cost, and a lost utilization cost.

Once the Warranty Failure Cost is determined per failure incident, a Warranty Penalty Account is charged. The charge is comprised of the costs accumulated within the Warranty Failure Account for each warranty claim; therefore, the charge is supplier specific. Should the Warranty claim be accepted by the supplier, the Warranty Penalty Account is reduced by the value of the component, with the residual portion of the charge remaining in the Penalty Account. Conversely, if the claim is denied by the supplier, the Warranty Penalty Account is charged the total Warranty Failure Cost. These accumulated data are then utilized within the Supplier Evaluation Process and ultimately, for future sourcing decisions.

Conceptually, Figure (3) demonstrates how failure data are used to determine the failure rate. The failure rate is needed to calculate the Warranty Failure Cost and Warranty Penalty Account. These two figures are then employed in the Supplier Evaluation Process and eventually used in sourcing decisions.

IMPLEMENTATION.
Ultimately, the goal of managing warranty claims is to eliminate premature component or service failures. To accomplish this, the methodology detailed above can be used by the purchasing organization to create an environment where continuous product or service improvement is in the supplier's commercial interest. This strategy is designed to monitor the cost incurred each time a supplier's product fails within the warranty period. Armed with this information, the Purchasing Manager/Agent is in a better position to determine the true cost of the supplier's product and award business accordingly. Therefore, the suppliers, best means by which to reduce losses associated with premature component failures is to concentrate on improving product quality so as to reduce the number of failures occurring during a warranty period. This concept is illustrated in Figure (4).

For a company to collect and utilize the data detailed above, it should exercise its purchasing volume and the Uniform Commercial Code as leverage to negotiate:

  1. Longer warranty periods;
  2. Component labels indicating the supplier's identification, date the component was built or rebuilt, and the warranty expiration date;
  3. Clear definitions of the supplier's responsibility for repair or replacement of the defective part regarding change-out labor and material;
  4. Financial incentives for the supplier to enhance product quality and thereby, decrease component failures during the warranty period.

Purchasing Managers/Agents have extensive legal support when securing quality assurance from suppliers concerning the goods to be purchased. Consistent with Section 2-313 of the Uniform Commercial Code (UCC), suppliers may offer warranties regarding product quality via one of two modes: express or implied (Ritterskamp 28).

Express warranties may be created through the following different means regarding the goods or services in question: statements of fact, description, and sample or model alternatives. As for implied warranties, Section 2-314 of the UCC describes warranty of merchantability (suitable to be sold), whereas Section 2-315 details warranty of fitness (suitable for a particular purpose) (Ritterskamp 20).

While all warranties have commercial consequences, the two most influenced by the Purchasing Manager/Agent are express warranties by statement of fact and description. Any affirmation of fact by a supplier about the products they sell constitutes an express warranty. Specifically, Section 2-313, paragraph i(a) states: "Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of a bargain creates an express warranty that the goods shall conform to the affirmation of promise."

The previous section allows the supplier to make statements regarding a product's attributes as long as one offers an opinion or appraisal which does not serve to create a warranty. Only statements of fact create express warranties and so the Purchasing Manager/Agent must ensure facts are discussed during negotiations.

In addition, Section 2-313 goes on to say in paragraph i(b), "Express warranties by the seller are created as follows ... Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description (Ritterskamp 28)"

This subsection makes any description of the goods by the seller an express warranty. A description made on the supplier's proposal (an offer to sell) becomes an express warranty when the proposal is accepted. The portion of the paragraph indicating, "Any description..." and "... which is made part of the basis of the bargain..." makes clear that express warranties do not have to be authored by the supplier. Any person's description of the product can become an express warranty provided it is agreed to by the supplier and is included in the final contract. Therefore, while only the supplier can extend express warranties due to their direct control over the quality of the goods involved, it does not follow that only the supplier can propose express warranties. The Purchasing Manager/Agent can influence the warranty clause of the contract by proposing the warranty statement and influencing the supplier to accept the statement.

Thus, the Purchasing manager/Agent should modify the supplier's "Standard Warranty Statement" as defined in the Terms and Conditions section of most contracts to include: a definitive statement regarding the length of the warranty expiration period, a statement requiring components to be date-stamped, an affirmation of the supplier's responsibility regarding repair or replacement of defective components as well as an allotment for change-out labor, and finally, a clear definition of the Warranty Penalty Account and the supplier's responsibility thereto. In essence, by compiling product performance data and analyzing said data for either failure rate patterns or inconsistencies, financial incentives may be established with Suppliers to fulfill not only warranty expectations but, improve product quality as well.

REFERENCES

  1. Dovich, Robert A., Reliability Statistics. Milwaukee: ASQC Quality Press, 1990.
  2. Juran, J. M. and Frank M. Gryna, Juran's Quality Control Handbook. Fourth Edition. New York: McGraw-Hill Book Company, 1988.
  3. Nelson, Wayne, How To Analyze Reliability Data. Milwaukee: American Society for Quality Control, 1983.
  4. Ritterskamp, James J., C.P.M. "Purchasing And The Law." Purchasing Management, August 1988, 14-15.
  5. Ritterskamp, James J., C.P.M. "Purchasing And The Law." Purchasing Management, September 1988, 28-29.
  6. Ritterskamp, James J., C.P.M. "Purchasing And The Law." Purchasing Management, September 1989, 20-21.

** This article is missing charts. Call the NAPM Information Center for a hard copy of the article with charts.


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