10/1/2001 | 4 MINUTE READ

I.T. and Warranty Claims

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Massive vehicle recalls, high warranty costs, and expensive product liability suits have become all too commonplace in the auto industry.


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Massive vehicle recalls, high warranty costs, and expensive product liability suits have become all too commonplace in the auto industry. Their price tag to the industry is over $8-billion a year. In lean years, this cost of bad quality exceeds the profits for the Big Three automakers combined.

A look at how warranty problems are handled reveals why this area is so expensive to the industry. It may soon become worse. Significant business changes, rising consumer expectations and potentially high-risk, e-business practices are all seemingly conspiring to make this area even more fraught with risk and expense.

Obviously, better designs and higher-quality manufacturing practices catch potential flaws before they become million-dollar or billion-dollar problems. In addition, new information technology (I.T.) approaches can also cut costs by more rapidly detecting problems.

In the I.T. area, manufacturers must more closely integrate and correlate their data and systems. Only in this way can patterns of failures be quickly identified and rectified. Because multiple firms are involved, this requires more rapid data sharing and collaboration among trading partners. However, more open access introduces potentially more unauthorized intrusions into one of the most sensitive areas of the business.

The auto industry is not proud of liability suits and recalls. They keep its chief executives awake at night. Certainly the worst recent example is the Ford Explorer rollovers. Replacing the 13 million tires and settling the suits will cost Ford billions. Bridgestone, maker of the Firestone Wilderness AT tires, is also facing a multitude of expensive suits.

For Ford the fallout may have seriously hobbled the most successful sport utility vehicle (SUV) model in the history of SUVs. The loss of future sales to the company is in the billions of dollars. Furthermore, Ford’s reputation is tarnished.

Even when horrific accidents do not occur, defects hurt badly. The pain is not evenly felt everywhere. In particular, the Big Three domestic makers incur twice the warranty costs of their Japanese rivals. In tough economic times, this difference can be deadly.

Faster problem detection would greatly reduce warranty and product liability costs. The current warranty process begins with the dealer filing a claim. Some original equipment manufacturers (OEMs) then go through a time-consuming process to determine whether to honor the claim. Warranty admini-stration alone costs the industry $200-million per year.

The industry appears to make no systemic attempt at finding potential patterns of defects. With millions of repairs and accidents per year, to do so is no simple feat. Adding to the challenge is that the necessary data to find such patterns is scattered across multiple databases owned by multiple firms. Within the OEM, the warranty area has its own database. Relevant data, however, also resides in the OEM’s manufacturing and quality databases, as well as at the various suppliers.

The OEM, consequently, may learn it has a problem only by happenstance. A keen-eyed employee may suspect a pattern of claims. However, the systems and databases are not structured to quickly analyze data that could reject or confirm a hypothesis. The mountains of data at Ford required a supercomputer to analyze the Explorer/Firestone tire combination, for instance.

In 1960 this may not have been a problem. Today, consumers and courts expect far higher quality standards and levels of corporate responsibility. Not immediately detecting and fixing faulty vehicles itself is being taken as grounds for litigation against some manufacturers.

Adding to the complexity is that OEMs now are pushing warranty responsibilities out to their suppliers. This can greatly confuse legal responsibility for product performance. A supplier’s isolated component can be at fault. Alternately, it may be the larger system embedding the part that is the culprit.

Plaintiff attorneys have a field day when they have multiple targets to take to court. Needless to say suppliers are extremely unhappy about having this kind of legal and financial exposure “foisted” onto them. Further aggravating the situation is that new, e-business practices are creating mountains of electronic data that plaintiff attorneys can tap to press their cases. For instance, collaborative engineering systems create a detailed log of design decisions made in product development. Specifically, they can show where quality, cost and safety tradeoffs were made—much to the delight of plaintiff attorneys.

Previously, product development work was done almost exclusively on paper and within the OEM’s four walls. Consequently, an OEM could have “deniability.” Furthermore, it was almost impossible for a plaintiff attorney to get access to and analyze mountains of blueprints in the discovery process. Today, with greater engineering and design outsourcing to suppliers, more parties have electronic records documenting the decision-making process. Archived email, for instance, has been a bonanza for the opposing attorneys, as Microsoft can painfully attest. Electronic media is ideal for searching, as well.

Aside from the obvious of not building defective products to begin with, the auto industry can exploit an I.T. technique already deployed successfully in other areas. Data mining has proven invaluable in customer relationship management systems. By continuously monitoring and analyzing warranty data for patterns, incipient problems can be caught, hopefully before they mushroom into headline-grabbing disasters.

Emphasizing the fast detection of root causes and then pressing for rapid problem resolution is the best course for the industry.


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