Warranty management and product manufacture

Purchasers of manufactured goods need assurance that they will perform well over their expected life. Warranties play a vital role in this. With proper management, warranty terms provide a promise of protection in case of product failure, while warranty service can assure customer satisfaction in the event of a claim.

The authors have developed "Stage-3" warranty management, viewing warranties from a strategic perspective, starting with a strategy linked to technical and commercial planning from the start of product development.

Warranty management aims to achieve business objectives by focusing on product performance assurance and customer satisfaction, the goal of warranty management; guidelines are provided for achieving this goal.

Written by leading experts, this book details current thinking in product manufacture. It will be a valuable guide for managers in product development, production and marketing as well as graduate students in business and operations management and industrial engineering.

Author Notes

D. N. P. Murthy is the Professor of Engineering and Operations Management in the Department of Mechanical Engineering at the University of Queensland and a Senior Scientific Advisor to the Norwegian University of Science and Technology. He has held visiting appointments at several universities in the USA, Europe and Asia. His current research interests include various aspects of technology management (new product development, strategic management of technology), operations management (lot sizing, quality, reliability, maintenance), and post-sale support (warranties, service contracts). He has authored or co-authored 15 book chapters, 140 journal papers and 130 conference papers.

Wallace R. Blischke was a member of the faculty of The Marshall School of Business, University of Southern California, for 27 years. He is currently Professor Emeritus at the Marshall School and Consultant in Statistical Analysis. His specialities include design of experiments, data analysis, reliability, quality assurance, design of sample surveys, estimation theory, and management science. He is co-author of two books.

Preface	p. vii
1 Introduction and Overview	p. 1
1.1 Introduction	p. 1
1.2 Historical Perspective	p. 2
1.2.1 Pre-Industrial Revolution	p. 2
1.2.2 Post-Industrial Revolution	p. 3
1.3 Theories of Warranty	p. 5
1.3.1 Exploitative Theory	p. 5
1.3.2 Signal Theory	p. 5
1.3.3 Investment Theory	p. 6
1.4 Warranty and Manufacturing	p. 6
1.4.1 Impact of Warranty	p. 6
1.4.2 Warranty Decisions	p. 7
1.4.3 Warranty Management	p. 8
1.5 Objectives of the Book	p. 10
1.6 Outline of the Book	p. 10
References	p. 13
2 Products and Product Quality	p. 15
2.1 Introduction	p. 15
2.2 Products	p. 15
2.2.1 Product Classification	p. 16
2.2.2 Product Decomposition	p. 20
2.2.3 Perspectives	p. 22
2.2.4 Product-Service Bundling	p. 22
2.3 Product Quality	p. 23
2.3.1 Perspectives	p. 23
2.3.2 Definitions of Quality	p. 23
2.3.3 Notions of Quality	p. 24
2.3.4 Product Quality and Customer Satisfaction	p. 25
2.4 Product Life Cycle	p. 27
2.4.1 Manufacturer's Point of View	p. 27
2.4.2 Buyer's Point of View	p. 28
2.4.3 Product Performance	p. 29
2.4.4 Product Cost	p. 29
2.5 Product Reliability	p. 30
2.5.1 Definition	p. 30
2.5.2 Product Life Cycle Perspective	p. 31
References	p. 32
3 Product Warranty	p. 35
3.1 Introduction	p. 35
3.2 Warranty Concept	p. 36
3.3 Role of Warranty	p. 40
3.3.1 Buyer's Viewpoint	p. 40
3.3.2 Manufacturer's Viewpoint	p. 40
3.3.3 Warranty in Government Contracting	p. 40
3.3.4 Societal Viewpoint	p. 41
3.4 Description of Warranty Policies	p. 41
3.4.1 One-dimensional Policies	p. 42
3.4.2 Two-dimensional Policies	p. 46
3.4.3 Cumulative Warranties	p. 50
3.4.4 Reliability Improvement Warranties	p. 51
3.5 Classification of Warranties	p. 52
3.6 Extended Warranties	p. 54
3.7 Study of Warranty	p. 55
Appendix Selected Warranty Policies	p. 56
References	p. 60
4 Warranty Management	p. 63
4.1 Introduction	p. 63
4.2 Framework for Strategic Warranty Management	p. 65
4.2.1 Technical Issues	p. 67
4.2.2 Commercial Issues	p. 68
4.2.3 Interaction of Technological and Commercial Issues	p. 69
4.2.4 Product Life Cycle Approach to Warranty Management	p. 70
4.2.5 Formulation of Warranty Strategy	p. 71
4.2.6 Strategy Implementation	p. 72
4.3 Pre-Launch Stage	p. 72
4.3.1 Front-End [Pre-Design or Feasibility] Phase	p. 72
4.3.2 Design and Development Phase	p. 74
4.3.3 Production Phase	p. 76
4.3.4 Formulating Warranty Strategy in the Pre-Launch Stage	p. 76
4.4 Launch Window	p. 78
4.5 Post-Launch Stage	p. 79
4.5.1 Warranty as a Marketing Strategy	p. 79
4.5.2 Warranty Servicing Strategy	p. 79
4.5.3 Other Issues	p. 80
4.5.4 Warranty Related Data	p. 80
4.5.5 Use of Warranty Claims Data	p. 81
4.5.6 Modifications to Warranty Policy	p. 82
4.5.7 Dealing with Customer Dissatisfaction	p. 82
4.5.8 Warranty Administration	p. 83
4.6 Conclusions	p. 84
References	p. 84
5 Systems Approach to Warranty Management	p. 87
5.1 Introduction	p. 87
5.2 The Systems Approach	p. 87
5.2.1 Step 1: Define the Objective	p. 88
5.2.2 Step 2: System Characterization	p. 89
5.2.3 Step 3: Build Models	p. 89
5.2.4 Step 4: Derive Solutions	p. 90
5.2.5 Step 5: Implement Solution	p. 90
5.2.6 Step 6: Measure Outcomes and Evaluate Modifications	p. 90
5.3 Characterizing Uncertainty	p. 90
5.4 Decision-making in the Front-end Phase	p. 92
5.4.1 Define Objective	p. 92
5.4.2 System Characterization	p. 93
5.4.3 Modeling	p. 95
5.5 Systems Approach to Warranty Cost Analysis	p. 97
5.5.1 Define Objective	p. 97
5.5.2 System Characterization	p. 97
5.6 Modeling Product Failures	p. 98
5.6.1 The Black-box Approach	p. 100
5.6.2 The White-box Approach	p. 102
5.6.3 Modeling Component and System Failures	p. 103
References	p. 106
6 The Role and Use of Data in Warranty Management	p. 109
6.1 Introduction	p. 109
6.2 Types of Data	p. 110
6.2.1 Data on Earlier Similar Products	p. 111
6.2.2 Data from External Sources	p. 111
6.2.3 Product and Process Related Data	p. 111
6.3 Sources of Data	p. 112
6.3.1 Historical (Archival) Records	p. 112
6.3.2 Business Management Systems	p. 112
6.3.3 Scientific Journals and Conference Papers	p. 112
6.3.4 Vendors	p. 112
6.3.5 Test and Experimental Results	p. 113
6.3.6 Scientific and Technical Handbooks	p. 113
6.3.7 Experts	p. 113
6.3.8 Market Surveys	p. 113
6.3.9 Warranty Servicing and Field Support	p. 113
6.3.10 Consumer Reports and Magazines	p. 114
6.4 The Nature of Data	p. 114
6.4.1 Randomness	p. 114
6.4.2 Probability and Statistics	p. 115
6.4.3 Modeling Randomness	p. 115
6.5 Summarization of Data	p. 116
6.5.1 Data Structures	p. 116
6.5.2 Graphical Presentation of Data	p. 117
6.5.3 Averages	p. 120
6.5.4 Measures of Variability	p. 121
6.5.5 Measures of Relationship and Trend	p. 122
6.6 Inferences from Data	p. 124
6.6.1 The Role and Methods of Statistical Inference	p. 124
6.6.2 Parameter Estimation	p. 124
6.6.3 Hypothesis Testing	p. 126
6.7 Data-based Decision Models	p. 129
6.8 Analysis of Warranty Claims Data	p. 132
6.8.1 Warranty Data	p. 132
6.8.2 Data Analysis	p. 133
6.9 Computerized Data Analysis	p. 134
Appendix Data for Example 1	p. 136
References	p. 137
7 Warranty Cost Analysis	p. 139
7.1 Introduction	p. 139
7.2 Basis for Warranty Cost Analysis	p. 139
7.2.1 Warranty Cost per Unit Sale	p. 140
7.2.2 Life Cycle Cost per Unit Sale	p. 141
7.2.3 Life Cycle Cost over Repeat Purchases	p. 141
7.3 Methodology for Warranty Cost Analysis	p. 142
7.3.1 System Characterization	p. 142
7.3.2 Modeling	p. 143
7.3.3 Some Comments on Analysis	p. 145
7.4 Warranty Cost Analysis - Cost per Unit Sold	p. 146
7.4.1 Cost Analysis of the Non-renewing FRW Policy	p. 147
7.4.2 Cost Analysis of the Non-renewing PRW Policy	p. 151
7.4.3 Cost Analysis of the Non-renewing Two-dimensional FRW	p. 153
7.5 Life Cycle Cost Analysis	p. 155
7.5.1 Life Cycle Cost, Non-renewing FRW Policy	p. 156
7.5.2 Life Cycle Cost, Non-renewing PRW Policy	p. 157
7.5.3 Life Cycle Cost - Dynamic Sales Model	p. 157
References	p. 157
8 Warranty Considerations in Product Design and Development	p. 159
8.1 Introduction	p. 159
8.2 The Design-Development Process	p. 160
8.2.1 Product Performance / Specification	p. 161
8.3 Conceptual Design	p. 163
8.3.1 Product Reliability Specification	p. 163
8.3.2 Alternate Design Options	p. 165
8.4 Detail Design	p. 166
8.4.1 Reliability Allocation	p. 166
8.4.2 Achieving Desired Component Reliability	p. 167
8.4.3 Additional Topics	p. 169
8.5 Development Process	p. 170
8.5.1 Component-level Development	p. 170
8.5.2 Product-level Development	p. 171
8.5.3 Development Testing	p. 171
8.5.4 Testability	p. 172
8.5.5 Reliability Assessment	p. 172
8.5.6 Decision Problems	p. 172
8.6 Some Illustrative Examples	p. 173
References	p. 176
9 Implications of Warranty on Production Decisions	p. 179
9.1 Introduction	p. 179
9.2 Product Nonconformance	p. 180
9.2.1 Types of Nonconformance	p. 180
9.2.2 Implication of Nonconformance	p. 182
9.3 Effect of Production Process on Nonconformance	p. 184
9.3.1 Production Process	p. 184
9.3.2 Process State	p. 185
9.3.3 Process Design	p. 186
9.4 Quality Control	p. 186
9.5 Input Control	p. 186
9.6 Process Control	p. 188
9.7 Output Control	p. 191
9.7.1 Burn-in	p. 191
9.7.2 Releasing with No Testing	p. 192
9.8 Optimal Quality Control	p. 193
9.9 Illustrative Examples	p. 193
References	p. 195
10 The Role of Warranty in Marketing	p. 197
10.1 Introduction	p. 197
10.2 An Overview	p. 198
10.3 Consumer Purchase Process	p. 199
10.4 Pre-purchase Behavior	p. 200
10.4.1 Purchase Uncertainty and Perceived Risks	p. 201
10.4.2 Information, Cues and Signals	p. 202
10.4.3 Warranty and Product Choice	p. 202
10.4.4 Warranty and Brand	p. 204
10.4.5 Warranty and Reputation	p. 204
10.4.6 Warranty and Hybrid Products	p. 204
10.5 Post-purchase Behavior and Warranty	p. 205
10.5.1 Evaluation of Product and Service	p. 205
10.5.2 Satisfaction and Dissatisfaction	p. 206
10.5.3 Intentions of Consumers	p. 208
10.5.4 Customer Loyalty	p. 209
10.6 Market Outcome [Marketing Perspective]	p. 210
10.6.1 Total Sales	p. 210
10.6.2 Dynamic Sales	p. 211
10.6.3 Pricing Warranty	p. 211
10.7 Market Outcome [Microeconomics Perspective]	p. 211
10.8 Warranty Strategy	p. 212
References	p. 214
11 Warranty Logistics	p. 217
11.1 Introduction	p. 217
11.2 Logistics: An Overview	p. 217
11.2.1 Classification	p. 217
11.2.2 Logistics Management	p. 218
11.3 Product Warranty Servicing	p. 220
11.3.1 Warranty Claims	p. 221
11.3.2 Warranty Logistics	p. 222
11.4 Strategic Issues	p. 222
11.4.1 Location of Service Centers and Warehouses	p. 223
11.4.2 Demand for Spares	p. 224
11.4.3 Service Channels	p. 225
11.5 Tactical and Operational Issues	p. 227
11.5.1 Spare Parts Inventory	p. 227
11.5.2 Material Transportation	p. 228
11.5.3 Scheduling of Jobs, Repairs and the Traveling Repairman Problem	p. 228
11.5.4 Replace versus Repair Strategies	p. 229
11.5.5 Strategies Bases on Age (and/or Usage) at Failure	p. 229
11.5.6 Cost Repair Limit Strategy	p. 230
11.6 Other Issues	p. 230
11.6.1 Dispute Resolution	p. 230
11.6.2 Customer Satisfaction	p. 231
11.6.3 Service Recovery	p. 232
11.6.4 Use of Loaners	p. 234
11.6.5 Product Recall	p. 234
11.6.6 Data Collection and Analysis	p. 234
References	p. 235
12 Reliability Improvement Warranties	p. 239
12.1 Introduction	p. 239
12.2 RIW Background	p. 240
12.2.1 History	p. 240
12.2.2 RIW Concept	p. 241
12.2.3 RIW Features	p. 241
12.2.4 Assurance versus Incentive Warranties	p. 242
12.3 RIW Process	p. 242
12.4 Bid Proposal [Stage 1]	p. 244
12.4.1 Contract	p. 245
12.4.2 Costs	p. 246
12.4.3 Risks	p. 246
12.4.4 Dispute Resolution	p. 247
12.4.5 Models	p. 248
12.5 ECP and Implementation [Stages 5(b) and 6]	p. 248
12.6 Management of the RIW Process	p. 250
12.6.1 Warranty Negotiations	p. 250
12.6.2 Project Management	p. 250
12.6.3 Data Management	p. 250
12.6.4 Warranty Administration	p. 250
References	p. 251
13 Financial, Societal, and Legal Aspects of Warranty	p. 253
13.1 Introduction	p. 253
13.2 Warranty and Accounting	p. 254
13.2.1 Introduction	p. 254
13.2.2 Financial Accounting and Reporting	p. 254
13.2.3 External versus Internal Accounting	p. 256
13.2.4 Product Warranty versus Quality Costs	p. 257
13.2.5 Strategic Warranty Cost Management	p. 257
13.2.6 Estimating Warranty Costs	p. 258
13.3 The Impact of Consumerism on Warranty	p. 258
13.3.1 Introduction	p. 258
13.3.2 Consumerist Warranty Concerns	p. 259
13.3.3 Impact of Consumer Movements on Product Warranty	p. 259
13.3.4 Passage of the Magnuson-Moss Act	p. 260
13.4 Warranty Legislation (USA)	p. 261
13.4.1 Introduction	p. 261
13.4.2 The Uniform Commercial Code (UCC)	p. 261
13.4.3 The Magnuson-Moss act	p. 261
13.4.4 Other Legislation	p. 262
13.4.5 The TREAD Act	p. 264
13.4.6 Implications of Warranty Legislation for Business	p. 264
13.5 Warranty-related Litigation	p. 265
13.5.1 Introduction	p. 265
13.5.2 Litigation Under the UCC and Other State Laws	p. 265
13.5.3 Litigation under Magnuson-Moss	p. 266
13.5.4 Implications for Business	p. 268
References	p. 268
14 Warranty Management Systems	p. 271
14.1 Introduction	p. 271
14.2 Warranty Management	p. 271
14.2.1 Evolution of Warranty Management	p. 271
14.2.2 Current Scene	p. 274
14.3 Designing a Warranty Management System	p. 274
14.4 Databases	p. 275
14.4.1 Database Management	p. 276
14.4.2 Data Warehousing	p. 277
14.5 Models	p. 278
14.5.1 Design and Development Stage	p. 278
14.5.2 Production Stage	p. 278
14.5.3 Marketing Stage	p. 278
14.5.4 Post-sale Servicing Stage	p. 279
14.6 Mathematical Tools and Techniques	p. 279
14.7 Interfaces	p. 280
14.7.1 User Interface	p. 280
14.7.2 Application Interface	p. 281
14.8 Commercial Software Packages	p. 281
14.8.1 WarrantyNet	p. 281
14.8.2 SAP	p. 282
14.8.3 Entigo/SAS	p. 283
14.8.4 Jetliner Warranty Management	p. 284
References	p. 284
15 Conclusion	p. 287
Author Index	p. 293
Subject Index	p. 297

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