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.
In other cases — often involving electronic parts and controllers — a problem occurs only intermittently or in such a way that it is not easily repeated or tested for. Sometimes, customers of products such as consumer electronics simply can't figure out how to use them and return them as defective. And sometimes retailers or dealers seeking to cut their inventories return products as defective when they really are not. (See the infographic at right for common NTF causes.)
Whatever the circumstances surrounding NTF returns, however, two major trends underlie industry-wide increases in warranty and NTF claims, experts say. First, the increasing presence of electronic components makes many manufactured products more complicated to design, test, and repair. Electronic control units account for major warranty expenses in items such as automobiles, engines, and heavy equipment. And, while about 30% of all automotive returns are found to be NTF, 70% of returned automotive electronic components are deemed NTF, according to a recent study by Manufacturing Insights, a research company. Often, problems occur not because of the failure of a specific electronic component but because design engineers haven't completely tested interfaces between electronic parts and mechanical components, says Joe Barkai, practice director at Manufacturing Insights.
The other major underlying cause of NTFs, experts say, is the fact that field service personnel are often unprepared to correctly test and fix today's increasingly complex and electronics-heavy products. Indeed, many manufacturers say they are having trouble recruiting and training enough service technicians to keep up with demand.
"We're having trouble finding people to get into that business," says Brent Clever, vice president of customer service at appliance manufacturer Sub-Zero Freezer Co. "Over the last few years, we've seen the number of appliance service companies fall from 18,000 or so to 12,000. Without attracting new people to the field, it is becoming difficult to find people who are knowledgeable about sophisticated electronic control systems."
Information Capture
While manufacturers can't expect to reverse the trend toward increased product complexity or quickly train an army of new, technology-savvy service technicians, many are beginning to implement new business processes and deploy technology that can mitigate NTFs. Much of that effort is directed at pulling together data from a variety of existing systems — warranty, customer service, sales, and engineering, for example — and mining it for insights into why products are being returned NTF and what can be done about it. And many vendors of warranty and service management systems are building into their software sophisticated analytics that allow manufacturers to get to the root causes of NTFs.
Click Commerce Inc., for example, has added sophisticated analytics software to its Web-based Returns and Repair management application that allow manufacturers to capture information about products through all stages of the return chain — including outsourced functions — and to spot trends that could give clues as to the reasons for a spike in NTFs.
Similarly, warranty lifecycle management system provider 4CS includes analytics with its iWarranty applications that let manufacturers dig into the possible causes of NTFs. But 4CS also helps manufacturers head off NTFs before they ever get returned in the first place. Using standard fault codes, iWarranty helps manufacturers understand in real time the types of warranty claims that service providers are seeing in the field, and it allows them to suggest the correct repairs and to require pre-authorization of returns and repairs.
"Providing information to OEMs and service providers at the time they are considering whether to return or repair a product helps them make the right decision," says 4CS CEO Ashok Kartham.
In some cases, manufacturers need to analyze not just structured data generated by warranty and returns management transactional systems but also unstructured data generated by service technicians in the field. Clues to the nature of product failures are often found in the call notes recorded by service techs. Analyzing that information, however, can be too time-consuming to do by hand. But software providers such as Attensity and SAS Institute provide tools that help manufacturers analyze those text notes.
Sub-Zero, for example, uses SAS's Text Miner tool to search through a database of service technicians' notes in an attempt to understand failure trends. Using the tool, for example, Sub-Zero has discovered — perhaps not surprisingly — that customers sometimes have trouble using the company's increasingly high-tech refrigerators and other appliances, and may conclude that they are not operating correctly when, in fact, they are. So, Clever says, the company is considering offering a DVD of its instruction manuals in the hope that it will be easier for customers to access.
But it's not just data from traditional warranty and service systems that manufacturers need to evaluate in order to better understand NTFs. Many — particularly those whose products have high electronics content — are also beginning to dig into data generated by component test equipment in order to detect patterns in product failures and NTFs.
Last year, for example, Calix decided to attack the problem by studying failure and test information generated by two circuit boards that had been causing an unusually high number of NTFs. Using RMA Insight, an analytical tool from SigmaQuest Inc. that consolidates returns and testing information, Calix concluded that some NTFs were the result of testing procedures at the company that weren't as robust as they might have been and of software flags that made it appear that an error had occurred when it actually hadn't. By reworking the flags and beefing up testing procedures, Calix was able to cut NTFs on those two boards by 25%, Scheingold says. Now the company is planning to expand use of the tool to include returns and testing information on all of Calix's products.
Cut to the Chase
While manufacturers like Calix focus on reducing NTFs by gaining a better understanding of pre- and post-failure product test results, some are beginning to cut right to the chase by tapping directly into product performance diagnostic data generated in the field. Many manufacturers — particularly automotive OEMs — have begun to install so-called diagnostic black boxes in their products that record failure information the same way that airplane black boxes record in-flight information. AMR Research recently estimated that 65% of vehicles now include black boxes that record some level of diagnostic data. The National Highway Traffic Safety Administration is reportedly considering mandating such black boxes for the recording of safety information.
Many automotive OEMs hope that by collecting and analyzing live diagnostic information they will be able to more quickly understand and resolve failures and give service technicians solid information they can use to repair or replace the failing parts the first time. Bearing Point's Baxendale says the company has built a data warehouse system for one of the big three auto OEMs that collects diagnostic information from dealership repair centers, analyzes it, provides engineers with insights into design problems, and, ultimately, gives feedback to service technicians on how a particular failure should be addressed.
The OEM using the Bearing Point data warehouse employed the system not long ago to correctly diagnose an ignition problem that cropped up on some of its models. Initially, the problem was incorrectly attributed to control modules in the cars' ignition systems. Returned modules, however, were tagged NTF, no trouble found. The diagnostic information collected by the OEM allowed it to trace the problem to the vehicles' theft deterrent system.
But it's not just automotive manufacturers that are building diagnostic collection systems directly into their products in order to understand failures and cut down on NTFs. Sub-Zero, Clever says, is building diagnostics into all of its next-generation products. Equipped with PDAs, service technicians called in for a repair will be able to tap directly into the diagnostic data to pinpoint the cause of the problem. Eventually, Clever says, Sub-Zero's refrigerators will be able to download diagnostic information directly to the company's quality and engineering teams using wireless Internet connections.
Such technologies certainly should help manufacturers like Sub-Zero get a handle on NTF and other warranty and quality-related problems. But, experts say, technology alone won't be enough. Manufacturers also must improve some core business processes if they are to act on the NTF information that becomes available to them. For example, product development and engineering organizations — not just service departments — need to tap into diagnostic and other quality data generated by service management and warranty systems so they can design failures out of future products.
"The entire organization needs to be able to capture and act on customer experience and failure information as soon as it happens," says Manufacturing Insights' Barkai. "In this era of shorter product lifecycles, all functions need to become part of a fast, agile service organization."