Standard:Costs of Warranty Obligations DRAFT

Reverse Logistics Standards Committee

January 13, 2012

This document contains a listing of the costs that should be included in calculating the total costs of satisfying warranty obligations.

  1. The first section categorizes the costs according the processes involved: Authorizing the return, shipping the item back, repairing or disposing of the item, etc.
  2. The second section summarizes these costs as they might be presented in a chart of accounts: labor, IT, etc.

For any company, any of these categories might or might not apply to their situation, but the intent of the list is to create as comprehensive of a list as possible, to avoid leaving anything out.

Warranty Costs, Listed by Process

  1. RMA – Return Material Authorization
  2. Validating item should come back
  3. phone/web support to talk to customer
  4. IS to track purchase date, terms
  1. Recovering the item
  2. Instructing customer how to send product – personnel, website, 800-number
  3. Ship packaging materials to customer– materials
  4. Deliverpackaging to customer– shipping
  5. Customer sends item to center– shipping
  6. Personnel time of dealing with lost shipments
  1. Refurbishing (possibly at third party)
  2. Testing - labor
  3. Clarifying issues and questions with customer– identifying the problem
  4. Test equipment
  5. Developing procedures, verifying adequacy of
  6. Training for test and repair employees
  7. Refurbishing labor
  8. Materials for refurbishing: replacement parts and consumables
  9. Facility Costs: utilities, overhead, etc.
  10. Supplier relations (3PSP)
  1. Field Service
  2. Training
  3. Travel
  4. Diagnosis
  5. Repair
  6. Materials
  7. Trunk inventory holding costs: depreciation, opportunity cost, damage
  8. Part refurbishment of rotable stock items
  1. Shipping to customer
  2. packaging
  3. Freight
  4. Tracking systems, time fielding questions
  1. Rotable stock
  2. Holding cost of pool of items for advanced replacement
  1. Disposition
  2. Disposal/landfill costs for unsalvageable items
  1. Legal
  2. Informing customers of significant, large scale issues
  3. developing, approving warranty policies
  4. dealing with customer legal actions

2. Warranty Costs, By Category

The above items can be grouped into the following categories, roughly corresponding to the way they might be found on a chart of accounts:

Labor

-Verification item can be sent back

-Receiving item

-Refurbishing

-Shipping item

-Field employee travel time and cost

Materials

-Packaging

-Spare parts

Freight

-Send packaging to customer

-Send item to customer

-Receive item back from customer (if OEM pays)

Assets

-Spare parts inventory

-Test equipment, repair equipment

-Rotable stock inventory

Information Systems

-Warranty eligibility database

-Troubleshooting/repair step-by-step instructions system

-Customer name, address, etc. shipping info

3. Separating out Warranty Costs

For many companies, identical activities may be carried out for warranty purposes and for non-warranty purposes. Best practice would suggest that companies should use different sub-accounts for tracking warranty and non-warranty activities. For example, instead of using the same sub-accounts for all outbound shipping, use a different account for warranty shipments, to facilitate an accurate tracking of warranty costs.

If a company has not implemented separate sub-accounts for warranty costs, an effort should be made to estimate the percentage of the costs for the activity that warranties represent. For example, a company may employ a call center, and warranty issues may represent 10% of the calls but maybe 13% of call center expenses because the warranty calls take longer or are more complex than the other calls.

By identifying the percentage of each cost source attributable to warranty activity, the company can closely approximate the cost of warranty activities. But the use of sub-accounts is the preferred method of tracking.

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