The first step to improving your warranty claims process is to have an in-depth understanding of metrics that can tell you what needs to be worked upon. In addition to the total number of claims and warranty costs, these five key warranty metrics help you drive performance and product quality.
What are some important warranty metrics and terms to track?
Product return rate
How many of your customers are returning products? If you're not tracking this metric, you're missing out on a lot of important information about your business.
The product return rate is the percentage of your customers who are returning products. You can calculate it by dividing the number of returns by the total number of units sold. For example, if you sell 100 units, and 15% of those units are returned, then your product return rate would be 15/100 = 14%.
This metric tells you how many customers believe that their item is defective or not what they expected. If 1% of your sales are returned, it means that each customer has experienced a problem in some way, and most likely no one else will buy from you again if they have had an issue with any part of their purchase experience.
Labour cost per repair
The labour cost per repair is the cost of labour required to perform a repair or maintenance. If a technician has to replace a part or add a new component, it will be counted as a repair. If someone needs to do some diagnostics on the equipment, that will also be counted as labour.
Labour cost per repair is important because it tells you how efficient your technicians are at fixing problems. If they're not very efficient in their work, then they won't be able to fix many problems in one visit and you'll have to keep hiring them more often than necessary.
Warranty reserves and accruals
Warranty Reserve is a fund maintained by the manufacturer to meet warranty expenses. The warranty reserve balance is the balance left after deductions of claim expenses for the year.
The accrual rate is usually a fixed percentage of sales and is managed by the finance department of the company. The finance department can adjust the accrual rate to manage company earnings.
Hence, the management of warranty reserve and its accrual rates becomes crucial for a company.
Percentage Supplier recovery
Supplier recovery/total warranty cost
As companies source, most of the components from suppliers, percentages of the warranty recovered from suppliers is a very important part of managing warranty costs and supplier quality. Supplier warranty and recovery amounts can help measure the supplier performance and help with discussions on parts pricing and warranty terms & conditions with suppliers.
Warranty Cost as % of sales
Annual warranty cost / Annual sales
Warranty as a percentage of sales may vary from 0.5% to 5% of sales for different industries. This metric will help companies easily define the impact of a warranty on the company’s bottom line.
This measure calculates warranty costs (repair and replacement) as a percentage of sales. Warranty costs include materials, labour, and problem diagnosis for products returned for repair or refurbishment. This measure is part of a set of Process Efficiency measures that help companies optimize the performance of their "produce/manufacture/deliver product" process by minimizing waste and refining resource consumption.
Understanding these warranty metrics is the first step in improving your warranty management process. Try doing a self-audit using the above formulas, what are the results?
Do you think you are not performing to your best abilities? Do you think you have very high warranty costs?
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