Strengthening Warranty with Supplier Recovery Programs

Warranty mandates have never been more important in manufacturing. Whether it is the automobile industry, which is transforming with the EV revolution, or heavy machinery where ‘servitization’ is gaining ground, warranty is one of the pillars on which new business models are pivoting on. A solid warranty program is what offers confidence to customers to become early adopters of new technologies, and this has to continue and evolve after these technologies become mainstream.

Suppliers should have a stake in it too

While the importance of warranty increases and has been seeing transformational strides, the fact remains that component suppliers have high stakes in warranty and performance too. This stake is seldom leveraged, and the cost of warranty falls completely on the manufacturer. This poses challenges to profitability, as warranty costs can spiral and impact investment and future product lines of manufacturers. As we surge ahead into a more connected world and machines become smarter, quality issues become complex, and failures can become unpredictable. It is thus pertinent to ensure suppliers are brought under the warranty net, obligating them to share part of warranty costs. This is where supplier recovery programs come in.

What is Supplier Recovery?

A supplier recovery program is one in which a manufacturer’s supplier is contractually bound to compensate the manufacturer for warranty failures, given certain conditions. Such programs instill confidence among manufacturers about the market-worthiness of products and has a cascading effect to the customer

Challenges are complex and manifold

While warranty costs are high (some sources estimate this at 5 percent of product revenue), recovery of these costs from suppliers poses a challenge. McKinsey estimates suppliers add 80 percent of value to a product (credit has be to given where due!), are responsible for up to 40 percent of claims, yet bear only 15 percent of the warranty costs. Even with such high stakes, many manufacturers have limited resources or processes for supplier recovery. Analysis of failed components to determine no trouble found (NTF) require detailed analysis, which many manufacturers do not perform today. Failure analysis would need investigation into product components combined with scenario simulations which can be a daunting task for most. Supplier contracts too do not have clauses to cover recovery, in many cases. Again, machinery being more than the sum total of different components (mechanical, electrical, electronic), there is no one size fits all approach manufacturers can take to attribute failures to a certain part.

Transforming Supplier Recovery through Digital Transformation

With a strong supplier recovery program backed by modern systems, we estimate the share of suppliers in warranty recovery can go up to 30 percent. Complete coverage of supplier recovery – defining recovery rules, identifying failures, and affected parts, batches and suppliers, processing parts returns, calculating recovery amount, workflows to manage information flow, and others are today possible with digital platforms coupled with strong engineering/re-engineering capabilities. Systemic information sharing between manufacturers and suppliers brings in much-needed transparency, leading to improved product quality. Such bilateral information exchange also offers suppliers the chance to present their analyses, improving consensus between parties. These recovery programs can also be brought under supplier performance reviews as a parameter to evaluate manufacturers’ suppliers. Thus, with supplier collaboration, customers will be able to enjoy improved products and services without worry of breakdowns.

With the necessary digital infrastructure and n-tier penetration, supplier recovery thus becomes a concerted approach where the manufacturer and multi-tier suppliers together work towards improving products and services and extending their lifecycles. This leads to longer periods of usage, which in turn leads to revenue maximization in the entire value chain.