It's no secret that warranty costs are becoming a major and expensive headache for many manufacturers. In the first three quarters of 2006, the 50 largest U.S.-based warranty providers reported $17.1 billion in claims, up 3.5% over the same period in 2005, according to figures collected from financial reports by the U.S. Securities and Exchange Commission.

It's not unusual, in fact, for warranty claims to make a noticeable impact on the bottom line. Ford Motor Co., for example, recently reported that warranty accrual adjustments related to claims on Land Rover and Jaguar models contributed to the company's humongous $12.7 billion 2006 loss.

What often passes below the radar, however, is the fact that a high percentage of costly product returns and warranty claims are generated by incidents in which the manufacturer cannot find or duplicate the failure that supposedly prompted the return. Such mysterious events — known in some manufacturing verticals as No Trouble Found (NTF) and in others as No Fault Found (NFF) — represent 20% of warranty claims on average, experts estimate. In some industries such as automotive, NTF returns represent an estimated 30% of warranty claims. And, according to research firm WDS Global, up to 60% of cell phone and other mobile device returns are NTF, resulting in an annual global cost to manufacturers of $4.5 billion. Despite the high costs involved, many manufacturers honor even NTF claims rather than risk alienating customers and channel partners. And, experts say, the NTF problem is only getting worse — and more expensive.

"For a lot of manufacturers, NTF has become a significant problem, in part because products like automobiles are much more complex today, with lots more electronics," says Bob Baxendale, a senior manager at consultant firm Bearing Point Inc. "They're like rolling computers, and that makes it harder for technicians to always understand and diagnose exactly what's going on with them. So you get more NTFs."

Now, however, manufacturers are getting serious about both understanding what's driving NTF returns and costs and acting to prevent them. Many manufacturers are deploying a variety of data consolidation and analytical technologies that allow them to quickly understand and fix the root causes of NTF returns. And a few progressive manufacturers are even beginning to build into their products diagnostic capabilities that can be used to understand a product's operating history and where, when, and why a failure occurred in the field.

Pain in the Neck

One thing manufacturers do know about NTFs is that they can be among the most expensive and disruptive warranty return issues to deal with. Manufacturers often must spend time and money testing and retesting parts that may have nothing wrong with them. And, often, if a returned product is incorrectly identified as NTF and subsequently shipped to a new customer, it can spawn a new warranty claim if the intermittent problem returns.

NTF returns can also cause frayed relationships between manufacturers and their suppliers and dealer or retail distribution partners. Manufacturers may be reluctant to pay for service calls on products that seem to be working fine. And suppliers may balk at reimbursing OEMs for returned parts that, tests indicate, show no signs of failure.

"It's a pain in the neck for us and our customers, no doubt about it," says Harvey Scheingold, director of quality at telecommunications equipment supplier Calix Networks. "We end up spending money and time testing boards that don't have anything wrong with them. It's not a healthy situation."

A wide variety of situations can lead to NTF product returns. Sometimes, for example, service technicians who are uncertain about which part of a subsystem is causing a product to fail will replace multiple parts, hoping a shotgun approach will fix the problem, experts say. Later testing often reveals some of those returned parts are operating properly.