BUSINESS TOOLS FOR SERVICE MANAGERS

Warranty Performance.

Maurizio Bonacchi Caterpillar 1

Geneva

Warranty Performance

To monitor Dealer Process Management of CAT Warranty Claims

CAT pays 90% of all claims within average of 12 days

Warranty is a shared cost between Dealer & CAT.(& in some case Customer)

Dealer administers all the WARRANTY process

Maurizio Bonacchi Caterpillar 2

Geneva

1
 Warranty Performance

INVOICING: Dealer Invoice (warranty W.O)

CLAIM:Claim to CAT

PAID or Settlement: CAT Pays to Dealer

Warranty Recovery Performance = PAID / CLAIM

Cat Goal: 95% 90% 85%

Maurizio Bonacchi Caterpillar 3

Geneva

Warranty Performance
ANALYSIS CRITERIA

• WP>95% Tendency (Dealer claiming too little)

• WP<85% Tendency (Dealer claiming too much)
• WP 95% to 85% ideal range
• UCW: Un-Claimable Warranty: Invoice – Claim
• WC: Warranty Cost : Invoice – Paid
• URW: Un-Recoverable Warranty: Claim – Paid

Example SAME WARRANTY:

INVOICE: € 100 INVOICE: € 100 INVOICE: € 100
CLAIM: € 70 CLAIM: € 85 CLAIM: € 90
PAID: € 70 PAID: € 75 PAID: € 85
WP: 100% WP: 88% WP: 95.5%
UCW: € 30 UCW: € 15 UCW: € 10
WC: € 30 WC: € 25 WC: € 15
URW: € 0 URW: € 10 URW: € 5

Maurizio Bonacchi Caterpillar 4

Geneva

2
 Warranty Performance
• General formulas:
• Calculation % of: Warranty recovered rate % or Warranty performance %
Warranty cost or residual warranty cost & Warranty hours.:

Warranty recovered Total settlement amount or Total Paid CAT Goal

rate or Warranty = 95% to 85%
performance Total expected amount or Total Claim

Residual Warranty Total settlement amount or Total Paid

cost % = 100% -
Total warranty cost
40% to 50%

Warranty hours Total warranty billable hours 15% to 12%

distribution % =
Total billable hours

Maurizio Bonacchi Caterpillar 5

Geneva

Warranty Performance
• General formulas (cont.):
• Calculation % of: Warranty cost of Prime product or Power system %:

Warranty cost as Total warranty cost

% of sales =
Total Sales of Prime Product

Mix warranty cost

2% to 2.8%

Be careful: Total Sales of Prime Product before discount & Total

warranty cost with any subsidization from service

Maurizio Bonacchi Caterpillar 6

Geneva

3
 Warranty Performance
DEALER WARRANTY COST

Non claimable warranties are generally paid to Service by interdepartmental

Work Orders, or Service receives a % to cover these costs.(*)

It is easy that service invoices their inefficiencies in this account because, the
customer “Warranty Cost” doesn't exist.

Uncontrolled warranties costs with an inefficient service generates distortions

in this account.

(*) Be careful with % that totally wrong calculated & Service abuses

Maurizio Bonacchi Caterpillar 7

Geneva

Warranty Recommendation

Maurizio Bonacchi Caterpillar 8

Geneva

4
 Warranty Recommendation

Warranty analysis by segments

Maurizio Bonacchi Caterpillar 9

Geneva

Warranty Recommendation

Warranty Tips
Labor Rate/h for warranty @ Break even rate (EBIT 0), such as
minimum rate.
Claim Submission days vs. Last labor to close.
Re-submission claims analysis vs. Standard warranty documentation
process.
Warranty performance for each type of warranty.
Monthly analysis of Warranty balance vs. Warranty provision.
Warranty provision base on product family with annual review.
Residual Warranty Cost allocation in each business unit such as
direct expenses.
If service absorbs the residual warranty cost [+ / -] it will be
allocated such as other income or other expenses, and after PADE.

Maurizio Bonacchi Caterpillar 10

Geneva

5
Dealer warranty costs management: practices impact
on warranty cost (inefficiencies , interdepartmental rates, etc).
Warranty Tips

Warranty provision base on product family with annual review.

Residual Warranty Cost allocation in each business unit such as

direct expenses.

Warranty Provision support the real warranty cost of past year

sales.

Goodwill is not an obligation, neither is to help dealers. It is to

return a fair value to the customers.

Consider warranty such as a business that helps to reduce the

dealer's costs.

Maurizio Bonacchi Caterpillar 11

Geneva

Warranty Recommendation

if the dealer has a EPP?

Warranty provision is the same?

Maurizio Bonacchi Caterpillar 12

Geneva

6
 Warranty Recommendation

Service work for internal customer @ one rate/h

bellow total cost: Service subsidy: Prevision >
Actual

Interdepartmental

Maurizio Bonacchi Caterpillar 13

Geneva

Warranty Recommendation

Dealer Bottom line doesn’t change but

with distorted intermediate results
Maurizio Bonacchi Caterpillar 14
Geneva

7
 Warranty Recommendation

if the dealer has a EPP?

Warranty provision is the same?

Maurizio Bonacchi Caterpillar 15

Geneva

Warranty Recommendation

Service work for internal customer @ EBIT 0 rate/h or

total labor cost:Prevision ~ Actual

Interdepartmental

Maurizio Bonacchi Caterpillar 16

Geneva

8
 Warranty Recommendation

Dealer bottom line doesn’t change but

with real intermediate results
Maurizio Bonacchi Caterpillar 17
Geneva

Warranty Recommendation

if the dealer has a EPP, the total and partial profit will be different
because the warranty cost drop as consequence of the
reimbursement by the EPPMaurizio Bonacchi Caterpillar 18
Geneva

9
 Warranty Recommendation
•Warranty balance “Participants”
Based in historical data of warranty
costs by family models

Total amount of Part-Labor &

Misc. invoiced to the warranties
internal accounts.
Total amount claim to Caterpillar
for all warranty type

Total amount paid by Caterpillar

for all warranty type.

Total amount invoiced to the

warranties internal account minus
amount paid by Caterpillar for all
type of segments & warranties
Maurizio Bonacchi Caterpillar 19
Geneva

Warranty Recommendation

(135,652) is the real warranty cost & is allocated in the prime

product direct expenses P&L.

Maurizio Bonacchi Caterpillar 20

Geneva

10
 Warranty Recommendation

+/- 18,842 is the warranty balance result. Is the difference between

the warranty provision and the real warranty cost. If service should
absorb the balance, this amount will be allocated after the service
PADE.(Indirect expenses under other financial cost/income)

Maurizio Bonacchi Caterpillar 21

Geneva

Warranty Recommendation

The warranty
balance sheet
should be
reviewed
monthly and
adjusted if it is
necessary.
Service should
work at break
even rate such as
a minimum
rate/h

Maurizio Bonacchi Caterpillar 22

Geneva

11
 Warranty Recommendation
•Warranty “ Service Sales”
All Warranty
WO orders

Allocation of Parts sales in Allocation of Labor @ total

the Parts P&L labor cost/h or Sales price/h
& Miscellaneous sales in the
(interdepartmental)
Service P&L
(interdepartmental)
Warranty
balance
account To Cat
Allocation From
Cat
In Dealer
P&L
Maurizio Bonacchi Caterpillar 23
Geneva

Warranty Recommendation

Extended warranties.
The costs the extended warranty will be distributed by every year
of duration such as part of the warranty provision or warranty cost.
It is not necessary to calculate a warranty provision or to add.
Consider that there are some additional costs non covered in the
extended warranties.
Warranties provision can drop from 3% to 1% per year vs. total prime
product sales.

Maurizio Bonacchi Caterpillar 24

Geneva

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