Dave Baiocchi Is Warranty a Profit Center?
When it comes to dealer “best practices”, administration and control of the warranty department is normally front and center on the list of items to measure and manage. Done correctly, the warranty department can actually be a profit center.
No, that’s not a typo.
Dealers in search of profitability will normally cringe at the word “warranty”. Many dealers have adopted the idea that the job of administrating warranty coverage is an effort in simply “limiting the losses” that are customary and expected. I submit that it just doesn’t have to be that way. In the interest of full disclosure, I have to reveal that my wife is a warranty administrator for a construction equipment dealer. That said, I hear about and discuss the warranty every day in some way, shape or form. The subject is near and dear to my heart, and when I observe how unprepared most dealers are to actually MANAGE the warranty process, it really gives me heartburn. In this issue of MHW, I want to discuss how we can repair the holes in this perpetually sinking ship, and make warranty what it should be: a profitable support function for our customers.
WARRANTY – What it IS…and what it ISN’ T
Warranty losses start long before the machinery ever breaks down. Many times, we have trouble managing warranty, because we don’t truly understand it. If we don’t understand the warranty, how can we properly explain it to a customer? Everyone in your dealership that interfaces with a customer should know what a warranty is designed to do. It’s alarming to me how many people don’t know. Let me clarify the definition for all concerned.
“Replace DEFECTIVE PARTS that failed prior to the completion of their intended service life.”
That’s it. It’s no more than that and no less. If a machine failure is due to anything other than a premature failure of a defective part….it most likely will not be eligible for warranty coverage.
In addition, there are many parts on the machine that do not qualify for warranty coverage, because their service life is shorter than the warranty period. These parts are subject to failure from wear. If it wears out, it’s not defective. This is why the OEM calls their warranty a LIMITED warranty. The warranty is limited only to the parts that have an intended service life in excess of the warranty period.
This simple definition of warranty is not taught, or in many cases not even discussed in dealer sales departments. All the salesman knows about the warranty is the length of coverage (which he proudly advertises), but the discussion stops there. I understand why. Warranty “exclusions” are not exactly what you want to highlight when it comes time to close the deal. Even so, the salesperson should be aware of the warranty terms, and be held accountable for not misrepresenting warranty during and after the sale.
1. Managing customer expectations
One of the key items I teach in my Day One Delivery Program is that warranty details need to be discussed with the customer…in-depth. Costs for diagnostic time, oil or fuel sampling, travel time, hauling and freight may be limited or excluded from standard warranty coverages. Do you have a method and process for discussing this with your customers? My program introduces a document that the salesperson, CSR or service manager can use to walk a customer through what can be expected in regard to warranty support of their equipment. If we don’t INFORM THE CUSTOMER of what warranty is and what it isn’t, what will their expectation be? Yes, that’s right…they will expect that EVERYTHING is covered under warranty. It will always be an uncomfortable conversation, and most of the time your dealership will end up giving away what they could have billed to the customer because they never had a conversation that managed the customer’s expectations.
2. When should you have this conversation?
The initial delivery of equipment gives you multiple opportunities not only to manage the warranty expectations but also to position the dealership to collect all of the money generated by that machine over its lifetime. If you have not been made aware of my Day One© Delivery Program, it may serve you to look it up on my website. Not only do I help dealers EXPAND their service offerings and maintenance revenues, but I provide tools for dealers to have this very important conversation BEFORE anything breaks down. Have this conversation on DAY ONE, because it’s pretty hard to discuss warranty exclusions when the unit is leaking oil all over the floor.
3. Managing the labor hours
When it comes to recoverable warranty, the OEM many times can be parsimonious with their labor allowances. That said, the flat rate is what it is. We can moan about it…or we can manage it. Warranty work should be a point of focus for dispatchers and administrators. Do we make our technicians part of the solution? A good strategy may be to make the technician aware of the flat-rate allowance at the time that we originally assign him the job! This may not make the allowance any more reasonable, but at least we will have a field-level understanding of what the recoverable allowances are. The worst thing to do is allow warranty jobs to be a black hole, and expect your warranty manager to make a royal flush out of a pair of deuces. The warranty manager is an administrator, not a magician. They can only claim what the system allows. All of the rest is a loss. Let’s get in front of this process and engender some partnership in attaining maximum recovery. Knowledge is power!
4. Managing freight and inventory
The parts department is not exempt when it comes to being part of the warranty profit picture. Are there different order rules and freight allowances for warranty parts? Is special handling and pricing required? Are component serial numbers required? How can the parts department help to alleviate the data and administration issues prior to the work order being closed? It may be a smart idea to route all warranty orders to ONE person in the parts department who fully understands the warranty requirements, and works with the warranty manager to streamline the process.
5. Limiting returns and rejections
In most cases, the easier we make it on the OEM, the more recovery we can expect over the long term. Most OEM’s reward dealers who properly administrate warranty, and submit claims that can be processed easily. Most OEM’s require submission of warranty claims online. In most cases, they need digital photos (before, during and after the repair), serial numbers (of both machines and component parts), service logs, hour meter readings, and testing results. Submitting claims without the supporting documents, data or photos can cause the claim to be rejected, returned, or delayed. Do we have the proper tools and training in place to ensure recovery? Do we have a policy that governs the process so that all of the data is included prior to the warranty manager getting the work order?
Most warranty claims are also time-sensitive. OEM’s routinely allow only 30 days to process a claim once the repair has been completed. This time passes quickly. Situations, where a branch store has to forward warranty claims to a central processing location, are especially prone to late-arriving work orders. Some service managers in my dealership decided to review all warranty claims personally due to the time-sensitivity of the process. This may be a strategy that would work for you as well. The bottom line, however, is to put accountability measures in place to ensure that problems are detected early and that the warranty manager has ample time to supplement a work order prior to submission when needed.
Our busy season is already upon us. Let’s make this the year that we address these holes in the dealership profitability picture. We may just find that our warranty department can actually make money. It takes focus, enforcement, and dedication, but it can be done. Contact me if you want to discuss the Day One© Delivery Process. It could provide some of the answers you’ve been looking for.
Dave Baiocchi is the president of Resonant Dealer Services LLC. He has spent 37 years in the equipment business as a sales manager, aftermarket director, and dealer principal. Dave now consults with dealerships nationwide to establish and enhance best practices, especially in the area of aftermarket development and performance. E-mail [email protected] to contact Dave.
