MODULE 1: WARRANTY – MODULE 1: WARRANTY – AN INTRODUCTIONAN INTRODUCTION

Professor D.N.P. MurthyProfessor D.N.P. Murthy

The University of QueenslandThe University of Queensland

Brisbane, AustraliaBrisbane, Australia

WARRANTY CONCEPTWARRANTY CONCEPT

Contractual agreementContractual agreement Established on sale of productEstablished on sale of product EstablishesEstablishes

Buyer responsibilityBuyer responsibilityLimitationsLimitationsSeller liabilitySeller liability

ROLE AND USES OF WARRANTYROLE AND USES OF WARRANTY

1. Protection for Seller1. Protection for Seller Specifies Buyer responsibilitiesSpecifies Buyer responsibilities Limits liabilityLimits liability Limits costLimits cost

ROLE AND USES OF WARRANTYROLE AND USES OF WARRANTY

2. Marketing tool2. Marketing tool Signal of qualitySignal of quality Competitive termsCompetitive terms

3. Protection for buyer3. Protection for buyer Remedy on failure of itemRemedy on failure of item Assurance of performanceAssurance of performance

PRODUCTS COVERED BY PRODUCTS COVERED BY WARRANTYWARRANTY

Consumer Non-durablesConsumer Non-durables Consumer DurablesConsumer Durables SoftwareSoftware ServicesServices Commercial and Industrial ProductsCommercial and Industrial Products Defense AcquisitionDefense Acquisition

Warranty policies

Single item

Involving productdevelopment

Not involving productdevelopment

Group of items

Non Renewing

SimpleB1

CombinationB2

SimpleA1

CombinationA2

SimpleA3

Renewing

CombinationA4

A

C

B

PRODUCT CATEGORIESPRODUCT CATEGORIES

1. Consumer Products1. Consumer Products Free replacement (FRW)Free replacement (FRW) Pro-rata (PRW)Pro-rata (PRW) RebateRebate CombinationCombination

PRODUCT CATEGORIESPRODUCT CATEGORIES

2. Commercial and Industrial2. Commercial and Industrial Above plus:Above plus: Cumulative warrantyCumulative warranty Fleet warrantyFleet warranty

3. Defense3. Defense Above Above Reliability ImprovementReliability Improvement

COMMON CONSUMER COMMON CONSUMER WARRANTIESWARRANTIES

NOTATIONNOTATION

W = Warranty PeriodW = Warranty Period

X = Lifetime of item (random variable)X = Lifetime of item (random variable)

C = Sale price of itemC = Sale price of item

NON-RENEWING FREE NON-RENEWING FREE REPLACEMENT POLICYREPLACEMENT POLICY

The manufacturer agrees to repair or The manufacturer agrees to repair or provide replacements for failed items provide replacements for failed items free of charge up to a time W from the free of charge up to a time W from the time of the initial purchase. The warranty time of the initial purchase. The warranty expires at time W after purchase. expires at time W after purchase. (Denoted as FRW Policy.)(Denoted as FRW Policy.)

NONRENEWING FRWNONRENEWING FRW

ApplicationsApplications Consumer productsConsumer products

Appliances, electronics, auto partsAppliances, electronics, auto parts IndustrialIndustrial

Tools, motors, heavy equipmentTools, motors, heavy equipment

PRO-RATA REBATE POLICYPRO-RATA REBATE POLICY

The manufacturer agrees to refund a The manufacturer agrees to refund a fraction of the purchase price should the fraction of the purchase price should the item fail before time W from the time of item fail before time W from the time of the initial purchase. The buyer is not the initial purchase. The buyer is not constrained to buy a replacement item. constrained to buy a replacement item.

(Denoted as PRW Policy.)(Denoted as PRW Policy.)

RENEWING PRWRENEWING PRW

Under this policy the manufacturer Under this policy the manufacturer agrees to provide a replacement item, at agrees to provide a replacement item, at pro-rated cost, for any item (including pro-rated cost, for any item (including the item originally purchased and any the item originally purchased and any replacements made under warranty) replacements made under warranty) which fails to achieve a lifetime of at which fails to achieve a lifetime of at least W.least W.

RENEWING PRWRENEWING PRW

ApplicationsApplications Nonrepairable itemsNonrepairable items

Batteries, tires, plasticsBatteries, tires, plastics Alternative to FRW to reduce costsAlternative to FRW to reduce costs

Less reliable productsLess reliable products

COMBINATION FRW/PRWCOMBINATION FRW/PRW

TThe manufacturer agrees to provide a he manufacturer agrees to provide a replacement or repair free of charge up replacement or repair free of charge up to time Wto time W11 from the initial purchase; any from the initial purchase; any

failure in the interval Wfailure in the interval W11 to W (where W to W (where W11 < <

W) results in a pro-rated refund. The W) results in a pro-rated refund. The warranty does not renew.warranty does not renew.

TWO-DIMENSIONAL WARRANTIESTWO-DIMENSIONAL WARRANTIES

In the case of two-dimensional In the case of two-dimensional warranties, a warranty is characterized warranties, a warranty is characterized by a region in a two-dimensional plane by a region in a two-dimensional plane with one axis representing time or age with one axis representing time or age and the other representing item usage.and the other representing item usage.

Notation: Age (W) and Usage (U)Notation: Age (W) and Usage (U)

W

U

W

U

U2

U1

W1 W2 W

U

(a) (b)

(c)(d)

TWO-DIMENSIONAL FRW TWO-DIMENSIONAL FRW

The manufacturer agrees to repair or The manufacturer agrees to repair or provide a replacement for failed items provide a replacement for failed items free of charge up to a time W or up to a free of charge up to a time W or up to a usage U, which ever occurs first, from usage U, which ever occurs first, from the time of the initial purchase. W is the time of the initial purchase. W is called the warranty period and U the called the warranty period and U the usage limit. The warranty region is the usage limit. The warranty region is the rectangle shown in Figure 2 (a). rectangle shown in Figure 2 (a).

RELIABILITY IMPROVEMENT RELIABILITY IMPROVEMENT WARRANTIESWARRANTIES

The basic idea of a Reliability Improvement The basic idea of a Reliability Improvement Warranty (RIW) is to extend the notion of a Warranty (RIW) is to extend the notion of a basic consumer warranty (usually the basic consumer warranty (usually the FRW) to include guarantees on the FRW) to include guarantees on the reliability of the item and not just on its reliability of the item and not just on its immediate or short-term performance. This immediate or short-term performance. This is particularly appropriate in the purchase is particularly appropriate in the purchase of complex, repairable equipment that is of complex, repairable equipment that is intended for relatively long use.intended for relatively long use.

RELIABILITY IMPROVEMENT RELIABILITY IMPROVEMENT WARRANTIES WARRANTIES

The intent of reliability improvement The intent of reliability improvement warranties is to negotiate warranty terms warranties is to negotiate warranty terms that will motivate a manufacturer to that will motivate a manufacturer to continue improvements in reliability after continue improvements in reliability after a product is delivered.a product is delivered.

The contractor's fee is based on his The contractor's fee is based on his ability to meet the warranty reliability ability to meet the warranty reliability requirements (e.g., mean time between requirements (e.g., mean time between failures).failures).

RIW POLICYRIW POLICY

Under this policy, the manufacturer agrees to Under this policy, the manufacturer agrees to repair or provide replacements free of charge repair or provide replacements free of charge for any failed parts or units until time W after for any failed parts or units until time W after purchase. In addition, the manufacturer purchase. In addition, the manufacturer guarantees the MTBF of the purchased guarantees the MTBF of the purchased equipment to be at least M.equipment to be at least M.

[Cont.][Cont.]

RIW POLICY RIW POLICY

If the computed MTBF is less than M, the If the computed MTBF is less than M, the manufacturer will provide, at no cost to the manufacturer will provide, at no cost to the buyer, (1) engineering analysis to determine buyer, (1) engineering analysis to determine the cause of failure to meet the guaranteed the cause of failure to meet the guaranteed MTBF requirement, (2) Engineering Change MTBF requirement, (2) Engineering Change Proposals, (3) modification of all existing units Proposals, (3) modification of all existing units in accordance with approved engineering in accordance with approved engineering changes, and (4) consignment spares for buyer changes, and (4) consignment spares for buyer use until such time as it is shown that the use until such time as it is shown that the MTBF is at least M.MTBF is at least M.

OTHER WARRANTIESOTHER WARRANTIES

Many other Many other – Combination WarrantiesCombination Warranties– Cumulative WarrantiesCumulative Warranties– Reliability Improvement WarrantiesReliability Improvement Warranties

Extended WarrantiesExtended Warranties Multi-dimensional WarrantiesMulti-dimensional Warranties Multi-attribute WarrantiesMulti-attribute Warranties

THREE PERSPECTIVES ON THREE PERSPECTIVES ON WARRANTYWARRANTY

1. Seller1. Seller ManufacturerManufacturer RetailerRetailer Third party (insurer, credit card)Third party (insurer, credit card)

2. Buyer2. BuyerConsumerConsumerCommercial/government Commercial/government

THREE PERSPECTIVES ON THREE PERSPECTIVES ON WARRANTY WARRANTY

3. Society3. SocietyCommunityCommunityPublic policyPublic policyLegislationLegislationCourt actionsCourt actions

PROBLEMS OF INTEREST TO PROBLEMS OF INTEREST TO MANUFACTURERMANUFACTURER

What is the cost of offering a specific What is the cost of offering a specific warranty policy?warranty policy?

How does this compare with other How does this compare with other warranty policies?warranty policies?

How does the warranty cost change with How does the warranty cost change with the parameters (for example, duration, the parameters (for example, duration, form of warranty payoff) of the policy?form of warranty payoff) of the policy?

PROBLEMS OF INTEREST TO PROBLEMS OF INTEREST TO MANUFACTURERMANUFACTURER

How does one optimize the choice of How does one optimize the choice of warranty when multiple business warranty when multiple business objectives are involved?objectives are involved?

What is the optimal strategy for servicing What is the optimal strategy for servicing warranty? (This would involve, for warranty? (This would involve, for example establishing a policy with example establishing a policy with regard to repair/replace decisions in the regard to repair/replace decisions in the case of repairable items.)case of repairable items.)

PROBLEMS OF INTEREST TO PROBLEMS OF INTEREST TO MANUFACTURER MANUFACTURER

What kinds of data (laboratory, field etc) What kinds of data (laboratory, field etc) are needed and how should the data be are needed and how should the data be analysed? analysed?

What are the optimal decisions with What are the optimal decisions with regard to product design and regard to product design and manufacture given that the product must manufacture given that the product must be sold with a specific type of warranty be sold with a specific type of warranty policy dictated by the market place?policy dictated by the market place?

WARRANTY STUDIES -- WARRANTY STUDIES -- DIFFERENT VIEWPOINTSDIFFERENT VIEWPOINTS

HistoricalHistorical LegalLegal LegislativeLegislative EconomicEconomic BehavioralBehavioral ConsumeristConsumerist

WARRANTY STUDIES --WARRANTY STUDIES --DIFFERENT VIEWPOINTSDIFFERENT VIEWPOINTS

StatisticalStatistical EngineeringEngineering Operations ResearchOperations Research AccountingAccounting ManagementManagement SocietySociety

TopManagement Finance

Design

Purchasing

Manufacturing

Accounting

Warranty

Marketing

R & D

Post-SaleSupport

ENGINEERING ASPECTSENGINEERING ASPECTS

DesignDesign Reliability choiceReliability choice Reliability allocationReliability allocation Reliability improvementReliability improvement

ManufacturingManufacturing ConformanceConformance Quality controlQuality control

ENGINEERING ASPECTSENGINEERING ASPECTS

Pre-sale testingPre-sale testing Cost analysisCost analysis OptimizationOptimization

DESIGN /DEVELOPMENT

PRODUCTION

MARKETINGPOST-SALESUPPORT

WARRANTY

LEGISLATIVE

JUDICIAL

CUSTOMERS

MANUFACTURER

MANUFACTURING SYSTEM

FURTHER READINGFURTHER READING

Blischke, W. R., and D. N. P. Murthy Blischke, W. R., and D. N. P. Murthy (1994), (1994), Warranty Cost AnalysisWarranty Cost Analysis, Marcel , Marcel Dekker, Inc., New York Dekker, Inc., New York

________________, (Eds.) (1996), ________________, (Eds.) (1996), Product Product Warranty HandbookWarranty Handbook, Marcel Dekker, Inc., , Marcel Dekker, Inc., New YorkNew York