Digital Transformation in Warranty Management Holds Great Benefits for Aftermarket

Technology is causing waves of digital transformation in businesses today, and warranty management is a traditional area not to be left behind in this evolution.
Aftermarket sale of spare parts and services is a predictable revenue stream across industries. The share of revenue from this segment has varied from single digits to more across sectors and geographies. The transformation happening today provides an opportunity to take a fresh look at warranty management, the analytical engine for aftermarket services. A transformed warranty offering can increase the revenue share from aftermarket by effective deployment of appropriate technologies in the value chain.
As an example, according to consultancy firm Arthur D. Little, the automotive aftermarket segment in Germany typically generates more than 50% of the profits while accounting for only 23% of revenues. Aftermarket generates better profit margins since spare parts are sold at a premium. The global economy is seeing a shift to an as-a-service economy, especially for asset intensive industries. Consumers will prefer to hire a product for a fixed period of usage and pay only for that usage instead of investing upfront and procuring the asset in their name.
Technology integrated with business process management makes this situation a win-win value proposition for the equipment maker and the consumer. There is no revenue leakage since the usage of the product can be accurately monitored in a foolproof manner with Internet of Things (IoT) making it a fleet of ‘connected products’. It is also a reliable source of income compared to lumpy sale of new products, in a stagnant global economy. If the available technologies and business models like warranty management are used efficiently, it can be a game changer for businesses. For consumers, it is an improved uptime of products at an economical price and a pay-per-use model taking away the burden of upfront investment in case of service.

Challenges Faced in the Aftermarket Phase
The following are the challenges faced by enterprises today in the aftermarket phase of the product life-cycle:

• Increasing regulatory, quality and environmental compliance needs
• Seamless and timely information flow from the field to the dealer network and further upstream departments all the way to product design
• Impactful consumption of data streams where available, to come up with actionable insights
• Long cycle time for ‘detection to correction’ in case of issues to be resolved
• Inefficient charge back to suppliers in case of issues attributed to the supplier
• Revenue leakage to spurious spare parts in the market
• Lack of feedback system for gauging the effectiveness of change management, warranty management

A real time feedback loop from the customer location to the enterprise involving others in the ecosystem from customers to dealers, suppliers, vendors, and partners can help address the above challenges, if used effectively.

Scope of Work
Warranty management is a niche area of focus in the product life-cycle post shipment to improve the aftermarket segment. It cannot be handled as a practice in isolation but with other integrated functions as shown in the flow below, across multiple digital channels.

An outsourcing partner can own the end-to-end management of the aftermarket phase of products front-ending with customers while being integrated with the internal departments at the back-end.
The figure below shows how technology is enabling “connected products” making them closed-loop for monitoring their performance at the customer’s location. This has extended the realm of warranty management beyond just signing of contracts and claims processing. Valuable information from the field can be consumed all the way upstream up until the product design team in the engineering function.
Proactive analysis of a product’s performance under specific conditions can be monitored for timely alerts and to help future design. Inventory management can be optimized to enable shipment of spare parts on time. Product recalls and managing of returns with logistics can be better planned. The traditional area of warranty management that includes claims processing, supplier charge back and field support can be managed efficiently with two-way flow of information. A dedicated support team can oversee this 24×7 near real-time flow of information and can leverage the inputs to enable fact-based quick decision making, cutting across departments with transparency. The data is from multiple sources, both structured and unstructured in format, within the enterprise and outside from the installed base plus market dynamics. A central team with end-to-end perspective of the aftermarket scenario can go a long way in making it a profitable business.

Fig.1 The aftermarket phase in the life-cycle of a product.

The specific benefits that can be achieved in warranty management are described below along with the levers that can be used for each. The estimates are based on historical estimates. Actual numbers will vary based on the level of maturity of the warranty management process itself and how technology is used to create a transformation.

• Increase in revenue and profit from the aftermarket segment. Focus on the aftermarket segment pushes organizations for closer customer engagement to understand their usage of the products and services and goes all the way to timely renewal of warranty contracts, healthy management of contracts, extended warranty, new customers, and a growing installed base covered under warranty
• Up to 30% increase in claim processing cycle time. Products that have moving parts are subject to wear and tear. This is an opportunity to predict consumption of parts and replace them on time with limited downtime at the customer end. A reduction in the cycle time for processing of claims will lead to an efficient dealer network and eventually happy customers and partners. BPO partners can implement process automation, fool proofing, process standardization, and application of lean principles to reduce the processing cycle time.
• Up to 25% decrease in processing cost. An efficient warranty management process needs investment in a skilled team and necessary digital tools. Optimized deployment of remote offshore/nearshore teams with appropriate digitization will lead to a reduction in the cost of running the operations.
• A 3-4% reduction in warranty claims. Dealer support and training and identification of fraudulent claims upstream can lead to reduction of the number of claims processed.
• Substantial improvement in supplier chargeback by timely completion of Root Cause Analysis for field complaints and issues.
• Reduction in customer center interaction with omni-channel implementation enabling e-commerce, m-commerce.

Aftermarket is a multi-disciplinary area with measurable benefits to be achieved for each stake holder. The table below shows impactful metrics that can be improved for each department. It is important not to get into silos, but to work as a well-oiled machine for a profitable aftersales market segment.

Fig. 2 Technology enabling 2-way information flow with ‘connected products’.

Case study
Infosys BPO has been managing warranty for a Fortune 500 industrial equipment manufacturer since 2009, processing up to 20,000 claims per month along with the associated activities. The team has achieved a reduction in processing time from 15 to 5 days with continuous improvement initiatives. There has been an improvement in the accuracy of claims processing from a target of 95% to a 99% accuracy level with a 10 times increase in the approval limit for claims. An analytics based approach was adopted to analyze claims, warranty bulletin updates, denials and dealer behavior.

Summary
According to warrantyweek.com, automotive warranty claims in the U.S. totaled $15.65 billion in 2014, seeing the biggest annual increase of 20% and the highest total in a decade. This will be an area of concern for business leaders because it was caused primarily by product recalls, hurting the bottom line, customer satisfaction, and the brand name.
Warranty management is an opportunity for manufacturing enterprises to re-look at the aftermarket revenue stream on how it can make effective usage of technology to be proactive and not wait for unplanned product issues from the field.
A pure technology implementation without a dedicated team to effectively consume the data, irrespective of the level of automation, will not be effective. A central team overlooking at end-to-end aftermarket with warranty management as the fulcrum will be an impactful implementation. It can overlook the spectrum of interconnected activities across contract management, product performance from the field, customer interaction, logistics, and the analytics supporting decision making to eventually increase the top line and revenue share from aftermarket segment.