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IBM Business Consulting Services

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An IBM Institute for Business Value executive brief

Component business modelingA new lens for examining warranty administration

The IBM Institute for Business Value develops fact-based strategic insights for senior

business executives around critical industry-specific and cross-industry issues. This executive

brief is based on an in-depth study created by the IBM Institute for Business Value. This

research is a part of an ongoing commitment by IBM Business Consulting Services to provide

analysis and viewpoints that help companies realize business value. You may contact the

authors or send an e-mail to [email protected] for more information.

Component business modeling IBM Business Consulting Services1

IntroductionAcross the automotive industry, escalating warranty costs are consuming hard-earned revenue. What can OEMs and suppliers do to protect their bottom lines from this growing menace? Component business modeling (CBM) offers a new way to analyze the automotive business and can suggest strategic starting points for trans-forming warranty administration.

Watching warranty costs growThe North American automotive industry spends nearly three percent of its revenue on warranty claims.1 In 2003, claims at two of the largest U.S. manufacturers totaled just under $8 billion2 – an alarming rate of about US$1 million per hour, just for these two OEMs.3 And warranty costs are expected to grow another 15 percent in 2004.4 AMR Research estimates that 20 percent of warranty claims relate to suppliers,5 and OEMs are starting to shift liability to their suppliers.

Meanwhile, risk is rising. Automakers are continuing to broaden their warranty coverage to remain competitive and strengthen sales. In the U.S. for instance, Chrysler’s power train coverage now extends to 7 years and 70,000 miles.6 At the same time, increasing vehicle complexity – driven primarily by the prevalence of in-vehicle software and electronics – is creating more opportunity for failure and making problem determination more difficult. Already, the average vehicle consists of 14,000 parts.7 Shrinking design cycles that push products to market faster only compound the quality challenge.

Escalating regulatory requirements and evolving standards are also contributing to the cost of warranty administration. With its FIN 45 instruction, the Financial Accounting Standards Board is requiring U.S. manufacturers to disclose more details on product warranty costs and reserves. The National Highway Traffic Safety Administration’s Transportation Recall Enhancement, Accountability and Documentation (TREAD) Act is mandating comprehensive tracking and reporting of product issues to the U.S. government. As part of ISO/TS16949, the International Organization for Standardization (ISO) has outlined a single set of global quality system requirements for design/development, production, installation and servicing of automotive products, aligning current American, German, French and Italian standards.

Contents

1 Introduction

1 Watching warranty costs grow

3 Component business modeling: Taking a different look at the business

5 Using CBM to reexamine the warranty administration challenge

9 Spotting where warranty administration is working well (and where it is not)

12 About the authors

12 About IBM Business Consulting Services

13 References

“A tenth of a percent may not

sound like much, but each 0.1%

drop in GM’s reported claims

rate corresponds to around $46

million in additional operating

income each quarter.”8


A primary factor that influences overall warranty costs is the length of time from initial problem report to root cause identification to corrective action. Currently, warranty claim resolution typically takes more than 160 days.9 Because faster reso-lution results in fewer claims for a given problem and lower overall warranty costs, cycle time improvement represents a major financial opportunity for automotive companies. Eliminating as few as five days from the warranty claim resolution cycle can reduce overall industry warranty costs by US$164 million (see Figure 1).

Figure 1. Faster corrective action leads to fewer claims and greater warranty savings.

Note: Based on an estimated 100 million transactions per year at estimated average cost per transaction of US$120. Savings calculations assume that 50 percent of all claims are resolved within the compressed cycle and that a cycle is approximately 180 days or 2 per year. Absolute number of transactions may increase with broader warranty coverage. Source: IBM Business Consulting Services and IBM Institute for Business Value.

However, warranty process and information technology inhibitors often limit data integration, constrain information sharing among OEMs and suppliers and delay problem diagnosis. Most automotive companies are painfully aware of these constraints but continue to struggle with what often seems to be insurmountable warranty administration hurdles. Automotive companies are often unsure where to start their transformation effort, which organization is accountable and which warranty administration changes will have the most impact on their businesses.

$900

$800

$700

$600

$500

$400

$300

$200

$100

$05

Indu

stry

war

rant

y sa

ving

s ($

in m

illio

ns)

10 15 20 24

50%

40%

30%

20%

10%

0%

Number of days eliminated from claim cycle time processing

Perc

ent o

f tot

al

trans

actio

ns a

void

ed

Total warranty savings

Percent of total transactions avoided


Component business modeling: Taking a different look at the businessAlthough process reengineering helps companies analyze and improve workflow, it focuses only on this one dimension of the business. Component business modeling (CBM), however, allows analysis from multiple perspectives – and the intersection of those views offers improved insights for decision-making. Because CBM groups like activities together without regard to organizational, geographic or process bound-aries, companies can more readily spot redundancy – similar business activities that are duplicated in other corners of the company, as well as redundant resources (people, assets and technology) used to support those activities. CBM also helps clarify a company’s focus on strategic, differentiating capabilities, enabling more straightforward prioritization of improvement plans.

A business component – the fundamental building block of a component business model – consists of a group of cohesive business activities that serve a unique purpose. It includes the resources – people, technology and know-how – necessary to accomplish that purpose. Its boundaries are defined by the services it receives as inputs and those it offers as outputs (see Figure 2). These boundaries serve as logical separation points that allow the component to be managed independently (even as a separate company) while still being integrated with the whole. Typically, a single business component can be decomposed into several layers of business activities (see Figure 3).

Figure 2. Because a business component is bounded by the services it uses and offers, it has the potential to operate autonomously, for example, as a separate company or as part of another company.

Component nameMarket segment planning

DescriptionTo analyze markets and

derive targets

Services offered

Services used

Source: IBM Business Consulting Services and IBM Institute for Business Value.

Product portfolio updates

Segment tracking models and targets

Business planning

Market event tracking


Figure 3. A company’s component business model is decomposed into multiple layers of detail.

Through CBM, companies can determine each component’s contribution to the business and evaluate return on investment based on each particular component’s costs. Knowing the business value associated with each component makes it easier to set transformational priorities.

Business administration

Financial management

Product/process Production Supply chain

Marketing and sales

Services and aftersales

Direct

Control

Execute


policies

Alliance strategies

Human capital management

Legal and regulatory

Knowledge and learning

Building/facilities and equipment

IT systems and operations

Financial

Capital appropriation

planning

Risk manage-ment and

internal audit

Accounting and general

ledger

Cost management

Portfolio strategy and

planning

Research and development

Design rules and policies

Program management

Confi guration

design

Tool design and build

Process design

Product scheduling

Maintenance management

pp

Supply chain performance monitoring

management

Procurement

Relationship monitoring

management

Customer relationship

management

Warranty management

Quality

Parts

Vehicle service

End-of-life vehicle

Business competenciesA large business area with skills and capabilities

Operational levelThe scope and intent of activity and decision-making

A componentConsists of data, process, people and systems. Each component is defi ned by its contribution to business performance

Identify quality issuesMonitor/diagnose partsAnalyze early warning dataProvide feedback to enterpriseComply with regulatory requirements

Quality management

Each component expands into a hierarchy of activities


CBM establishes several views of the business:

• Strategic view – distinguishes which components offer opportunity for clear competitive differentiation, which are required for competitive parity and which are basic necessities

• Financial view – highlights which components are associated with high capital investments, which carry high costs and which have both

• Transformational view – assesses the overall level of business improvement oppor-tunity present in each business component.

Using CBM to reexamine the warranty administration challengeAlthough each company’s component business model will vary somewhat, the stan-dard automotive model built by the IBM Institute for Business Value illustrates how companies can use CBM to guide their warranty administration transformation effort.

When evaluated against the standard model, the claims administration process involves 16 different business components. With such pervasive impact, it is not always obvious how or where to start making improvements.

However, through in-depth CBM analysis and its multidimensional purview, a path becomes more obvious. For instance, comparing a company’s strategic CBM view with its financial view can highlight areas that are not strategic and yet involve large capital investments. These components may be candidates for consolidation or sourcing from external providers. By combining CBM views, a company may find strategic components that indicate high potential for business improvement or carry high costs. Such combinations would suggest near-term, high-priority changes. When warranty-related components (and associated activities) are examined through these various CBM views, transformational priorities can become more evident (see Figure 4).


Figure 4. Components are analyzed in increasing detail, across all views, to identify opportunities and set priorities.

Communicate warranty - transactionCommunicate warranty - notifi cation/recallMonitor, track warranty and repairsManage claimsIdentify quality issuesMonitor/diagnose partsAnalyze early warning dataProvide feedback to enterpriseRegulatory complianceDevelop/distribute service proceduresDevelop service technology, parametersTrain service providersArbitrate with dealersResolve tech issuesCollisionManage consumer contacts/call centerFollow-up on consumer delivery/salesProvide value add servicesCustomer 360Provide telematics serviceRetail/direct managementManage relationship contactsDevelop sourcing strategiesMonitor supplier performanceManage supplier relationshipsManage certifi cation/trainingManage supplier communicationsMaintain supplier informationAdvanced product quality planningAdvanced product quality trackingSupplier performance monitoringTrain suppliers

Warranty management

Quality management

Vehicle service

Consumer relationship management

Supplier relationship management

Supplier quality

management

WCP components Activity level 1 Strategic

impactFinancial impact

Transformation potential

Basic

Competitive parity

Competitive parity

Differenti-ating

Competitive parity

High cost

High cost

High cost

High cost

Limited

Limited

High potential

High potential

Medium potential

High potential

High potential

Medium potential

Differenti-ating



As the components related to warranty administration are defined and decomposed into successive layers, overlaps and gaps in capabilities are discovered. A critical part of this assessment involves defining the IT requirements for each business component and mapping them to the enterprise’s existing IT architecture and appli-cation portfolio. When evaluating the business components associated with warranty administration, companies will likely identify shortcomings such as:

• Limited access channels for key participants – Manufacturing personnel often lack a comprehensive view of all warranty information, while suppliers cannot access their own particular view of warranty information because of inadequate security features.

• Duplication of application functions – Analysis and reporting mechanisms are often duplicated within and among OEM and supplier organizations, leading to conflicting views and different analytical capabilities.

• Inconsistent data capture mechanisms – Since warranty data is frequently captured by service code or subassembly part number, it may not reflect the indi-vidual part number that actually failed. In addition, when other parts are broken and replaced in the repair process, the reason may not be tracked or associated with the replacement part. Because part-related data is not captured and tracked in a consistent manner, traceability breaks down, and parts cannot be linked to the appropriate manufacturing or service data.

As part of the warranty CBM analysis performed at the IBM Institute for Business Value, specific IT capabilities emerged consistently as high-priority capabilities for adequate warranty claims management.

• Collaboration, data sharing and data privacy – To administer claims effectively, automotive companies need the ability to exchange information easily among manufacturers and suppliers and work together collaboratively to pinpoint the root cause of problems. Realtime communication among multiple teams is crucial, and capturing the collective intellectual capital produced during claim resolution allows greater re-use and faster resolution in the future. With multiple suppliers involved, data privacy is a top priority; each party should see only the information relevant to their particular role.

• Part traceability – Tracking down the root cause of a failure requires the ability to trace a particular part back through its entire life: how it performed in the vehicle (through vehicle data transmitted to the OEM); when, where and how it was serviced; and when and where it was manufactured.


• Early warning system triggers – With technological support, automotive compa-nies can recognize problems earlier and systematically issue warnings to affected OEM and supplier teams such as service, quality and engineering. With quicker notification, teams can start analysis work earlier, resolve the issue sooner and reduce the overall number of claims submitted for a given problem.

• Root cause and trend analysis – To accelerate identification of a problem’s root cause, automotive companies need the ability to analyze manufacturing, service and quality information in multiple ways. Advanced analytics can also help highlight trends that point to potential problems, allowing the business to take proactive steps to avoid or reduce warranty claims.

A technologically advanced warranty management environment benefits every participant in the automotive value chain. With the appropriate collaboration and integration technology in place, OEMs can capture more information from dealers when a problem is initially reported, expand root cause analysis and automatically send early warning signals internally and to suppliers. With access to current, in-depth warranty information, dealers are more capable of resolving claims through part replacement as opposed to costly system overhauls – and they can achieve a higher first-pass repair percentage. Dealers also become a key link to improved product quality and faster claim resolution by contributing their service technicians’ observations. For their part, suppliers gain access to near realtime claim data and collaborative environments that speed root cause analysis and help parties recon-cile warranty payments. With advanced technological support throughout the claim lifecycle, suppliers and OEMs alike can more easily comply with regulatory require-ments – and extend mandated data capture activities to help improve product and service quality.

Based on the priorities defined in their own CBM analysis, companies can begin to develop a roadmap comprising short-, mid- and long-term IT solutions that system-atically move the company toward desired warranty capability levels (see Figure 5).


Figure 5. Roadmaps (like this sample) plot the course toward more mature warranty administration capabilities.

Spotting where warranty administration is working well (and where it is not)Automotive companies face an overwhelming challenge during the next few years as vehicles become more complex, warranty guarantees more extensive and regula-tory oversight more intrusive. Those who can substantially mitigate warranty risk and reduce warranty costs will enjoy distinct competitive advantages – both in terms of margin and brand reputation. Here are some key questions that can help you gauge the current maturity of your own warranty administration function (see Figure 6).

Solution

Expand inter-enterprise collaborative capabilities through increased warranty data sharing (e.g., detailed claim data, part/subsystem interfaces and part interoperability)

• Portal capabilities for OEM/supplier data sharing

• Workfl ow engine with event triggers

• Optimized use of text mining tools

• Contained warranty reserves as a percent of revenues

• Improved accuracy of claim data to facility cost recovery with suppliers

• Reduced parts inventory associated with fewer claims

Orchestrate business events in an on demand fashion through full integration of business rules among OEM, supplier and dealer

• Service oriented integration of infrastructure, data management and analytical capabilities

• Grid/utility service for variable infrastructure model

• Autonomic technology to support analytical capabilities

• Improved quality management through module/system integration versus component performance

• Warranty performance integrated to supplier overall performance

• Improved customer satisfaction and brand impact

• Variable investment in warranty application management solutions

Short term

Technology evolution

Benefi ts

Mid term Long term

Through integration of disparate data, signifi cantly reduce processing and transaction cycle time throughout the enterprise and speed claim resolution

• Collaborative applications to integrate data repository (avoid duplication of data)

• Normalization of data for data interpretation

• Compressed time to process claims resulting in fewer incidents for a given problem



Figure 6. Warranty administration maturity levels vary widely among automotive companies.

Governance is ad hoc; processes are not formally linked to strategy

Relatively infl exible and diffi cult to change

20 percent versus 80 percent

Information visibility is dependent on manual processes

Partnerships and outsourcing decisions are made by individual business units and not necessarily optimized enterprisewide

Only a few partners have assumed an adequate share of risk

Partial view available but infrequently updated. Extensive effort required to provide tailored views among partners

Governance is adaptive – managing and adapting to change as environment changes; measurements and management approach is consistent across enterprise and with key suppliers

Processes designed for fl exibility; skills, IT capabilities and supplier relationships evaluated and updated frequently

80 percent versus 20 percent

Realtime information is shared electronically – and often systematically – across the enterprise and with key suppliers

All capabilities, whether sourced internally or through partners, are best-in-class as demonstrated by independent benchmarks

Every partner is fully accountable and shares in warranty risk

A comprehensive view of both structured and unstructured warranty data is available any time by OEM, supplier or dealer – with security features to fi lter views as appropriate

Question Less mature More mature

How do you measure warranty success?

How adaptive is your warranty process?

What percentage of time and expense is invested in strategic issues versus reporting and transaction processing?

How automated and immediate is the process for converting dealer, OEM and supplier claims data into useful information?

How rapidly and easily can you tap into external resources to solve a particular problem?

How effectively do you distribute warranty risk among strategic partners?

How complete, up-to-date and accessible is global customer, part and supplier data to both you and your partners?



As this decade unfolds, warranty administration management will become even more critical. To discuss strategies for improving warranty administration processes and technology, or to learn more about how component business modeling can help, please contact us at [email protected]. You can also browse through other resources for business executives by visiting our Web site:

ibm.com/bcs

About the authorPenny Koppinger is a Managing Consultant within IBM Business Consulting Services. She is a member of the Automotive Team at the IBM Institute for Business Value. She can be contacted at [email protected].

ContributorsLinda Ban, Global Industrial Sector Team Leader, IBM Institute for Business Value

Ben Stanley, Strategic Analyst, Global Automotive On Demand Team, IBM Business Consulting Services

About IBM Business Consulting ServicesWith consultants and professional staff in more than 160 countries globally, IBM Business Consulting Services is the world’s largest consulting services organiza-tion. IBM Business Consulting Services provides clients with business process and industry expertise, a deep understanding of technology solutions that address specific industry issues and the ability to design, build and run those solutions in a way that delivers bottom-line business value.

Consumer products 2010 IBM Business Consulting Services12

References1 Arnum, Eric. “Automotive Warranties.” Warranty Week. April 13, 2004.2 Ibid.3 Ibid. 4 McCluskey, Marc. “Looking for Cash: Warranty Management Is a Good Place to

Start.” AMR Research Report. August 28, 2003.5 Ibid. 6 “Warranty Coverage on 2004 Models.” Automotive News. November 3, 2003.7 Mixer, Kevin. “Early Warning: An Automotive Industry Imperative.” AMR Research

Report. November 24, 2003.8 Arnum, Eric. “GM’s Warranty Reserves.” Warranty Week. August 18, 2003.9 Arnum, Eric. “Don’t TREAD on ME.” Warranty Week. April 27, 2004.

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