NEWS FROM YOUR I.R.C.
The Industry Relations Committee
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Here for IRC Committee Members and Addresses
March Update:
The IRC has created a document entitled, "The State Of Warranty
Service" which appears below. The purpose of this
document is an attempt to give the industry a clear and concise
description as to how we view the current conditions under which most of
us do warranty service. It is our intention to distribute this
document as far and as wide as possible. To that end it was
distributed to all attendees of ISM 2001 and will be published in a
future edition of Appliance Service News.
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PREFACE
The state of our industry has never been more
fragile. Never before has
warranty service had such a negative impact on our business.
It is clearly evident that those companies that do little or no
warranty service are in a better state of financial health.
Our industry is not attractive to young people, and certainly not
attractive to the young entrepreneur.
The complexity of the product continues to increase, with a
decreasing ability to provide competent, well-trained technicians to
service it. With longer
warranties and more reliable product, the COD part of our industry
continues to shrink. This
would point to an increased demand for competent warranty service.
So, why are many businesses saying “No” to warranty service?
First and foremost, it
is not profitable. In
addition, it is much more costly than non-warranty service.
Those servicers performing warranty work, and still
in business, have mastered the ability to subsidize the losses warranty
work generates. This has
been mentioned before to the Original Equipment Manufacturers (OEM’s),
but they have apparently not understood.
Then, when the ability to subsidize is diminished, the
willingness to perform that service will diminish.
Today, there are fewer service companies in any particular market
that are in a position to support warranty service.
This trend will continue to grow as more servicers continue to
face the diminishing returns of warranty work.
The need to subsidize is then what forces the
servicer to limit the warranty work for a particular brand. The biggest impact here is the zero margin on warranty parts,
as well as warranty labor rates that may be at or near cost.
Typically, this will require the servicer to limit his warranty
work to about 30% or less, of service within that brand.
This is probably something that few OEMs understand or would
agree with. But, this is
the reality of warranty service, and this is the mechanism that is
driving good service companies away from warranty work.
As fewer companies are available for warranty work, the demand on
those remaining will only increase.
Therefore, the warranty percentage begins to increase.
As the warranty percentage increases, the servicer must increase
his COD margins to continue the subsidy, which makes him less
competitive in that arena.
The huge impact of zero margin warranty parts has
only come to light recently. The
cost to handle a particular brand will be around 30% to possibly as high
as 40% of the cost of the parts. To
date, the warranty servicer has fully subsidized this expense.
At a warranty level of 30%, most all of the COD parts profit is
consumed by subsidizing the operating expense for the warranty parts.
As the warranty percentage continues to rise, the COD profits
will no longer meet the need, and now the profits from COD labor will be
needed to subsidize the zero-margin warranty parts expense.
If the warranty percentage climbs too high, then the COD part of
the particular brand’s service cannot meet the subsidy demand, and now
the successes within another brand is needed.
It is at this point that the informed or knowledgeable servicer
will say no more and discontinue service for the OEM.
Many OEM’s will complain that our technicians are
poorly trained, and they feel that more training will improve the
quality of our repairs. Certainly
there is value and benefit to technical training, but a company’s
expertise to repair a particular brand comes first and foremost from the
volume of service that it performs.
Many OEM’s do not understand this concept.
Yet the paradox here is that what makes us good at servicing a
particular brand, we must then limit to stay in business.
When the volume of service becomes high enough to develop a
servicers expertise and makes him a valuable asset to the OEM, the
servicer must then limit this volume to remain profitable.
The OEM will then seek other service in the area to fill the gap,
only to find they don’t come close to the quality of service required.
This has a huge impact within warranty service.
That which makes us valuable to an OEM we must limit
because of the OEM’s warranty program.
In addition to the vanishing profits in warranty
service, the expenses are rising. The
OEM continues to implement procedures, checks and balances, and other
hurdles to prevent fraud. Admitting
there most likely is some fraudulent activity, it may be that most of it
is due to the diminishing abilities of the servicer to subsidize
warranty work and now he is doing all that he can to survive.
This has placed a huge burden on the service operation and the
overhead expense needed to support the warranty billing process. When you compare what is required to schedule and perform a
COD service call versus the time required to schedule, perform the
proper product verifications, complete the repair, then bill for your
service for the warranty service call, there is a huge difference.
The indirect costs to perform warranty service is much more than
the COD service. At times,
the servicer will work harder to get paid for a job than what was
required for the actual repairs.
The arguments for supporting these discounts to do
warranty service are just not valid any more.
The burden of subsidizing warranty work is pricing the servicer
out of the COD business. The
COD customer referral is no longer a strong enough incentive to perform
warranty service. The
training and literature support is also not enough and most servicers
must even pay for literature support.
The
trend is definitely away from warranty service.
It is time for careful evaluation on the OEM’s part.
Continuing on this path will result in fewer and fewer servicers
participating in warranty service.
Those that do continue probably are doing so because they do not
fully understand the impact and they will be endangered because of the
increased demands upon them by the OEMs.
A reversal of this trend will require a reduction in cost and a
return of profitability in warranty service.
There will be no other way.
IN SUMMARY
A detailed
analysis of ten of the most important issues concerning the warranty
servicer follows. This
listing is not prioritized because the impact of each item varies with
the manufacturer involved. In
many ways each item rates a #1 priority.
1.
Zero Margin Parts –The cost to the service
provider has only recently been clearly understood.
Historically the service provider receives no compensation for
handling a warranty part yet the cost of handling that part is actually more
then the cost of handling a COD part.
In many cases, once the warranty parts “sales” and the COD
sales have been combined, an otherwise reasonable margin in the range of
50% can plummet to 10 – 25%. More
often then not this is less then the actual cost of handling the part
which typically runs in the range of 30 – 40%.
Adding to that loss is the fact that the service company must
dispose of used parts. In cases that involve landfills with restrictions this is
becoming a larger and larger expense.
It is often necessary to pay someone to dispose of compressors
properly or risk serious fines. Large
items like doors and oven liners can be very difficult to dispose of.
Service companies must be compensated for warranty parts and
the cost of handling them
2.
Insufficient warranty labor reimbursements
–Forty years ago appliances were primarily sold with a one year
parts and labor warranty. Extended
warranties and concessions were less common then they are today.
The service provider could count on a reasonable amount of COD work
to follow that first year warranty. Manufacturers
asked for and received discounted warranty labor rates based on the
“free” business the service company received after the warranty was
over. Today things are
different. Appliances are
more reliable and warranties are much longer.
By the time the first potential COD repair comes along it is often
cheaper to replace the appliance. Manufacturers
load so much cost into their replacement parts that often the cost of the
parts make repair unfeasible. The
balance of warranty to COD repair is upside down.
For many brands and many servicers there is as much or more
warranty then COD. As already noted warranty work generates no parts revenue.
The manufacturer pays a seriously reduced labor rate.
Warranty service has become a losing proposition and as a result
many service companies who now realize this are exiting the warranty
service business. This increases the pressure on those who remain to do even
more warranty. If they
do, they will soon be in crisis. Warranty
labor rates must be significantly improved in relation to COD labor rates.
3.
Multiple methods for processing warranty claims
–For companies that do warranty service there are few if any
standards except the traditional “NARDA” form.
For those who do warranty work for more then one manufacturer there
are frequently different policies and procedures.
A company that works for five manufacturers may have five different
ways to processing a warranty claim – not to mention different parts
handling policies. Industry standards for the processing of warranty
claims must be established.
4.
Various levels of electronic processing –The
industry is years behind in making use of electronic processing.
Often claims that start out as electronic claims (paperless) are
turned back into paper somewhere in the processing cycle.
There is no standard file format for filing a warranty claim making
it difficult to impossible for software vendors to build electronic filing
into their systems. This
makes it necessary for the service company to re-key all the information
for each electronic claim. The
cost of doing this increases the cost of providing warranty service –
which is already being paid at a discounted rate as noted above.
Industry standards for electronic filing must be established.
5.
Overly complex warranty parts handling procedures –The
amount of time and effort required on the part of the service provider to
submit warranty parts for payment and keep track of when credits have been
issued creates a significant bottleneck between the OEM, the parts
distributor and the servicer. When
a part has not been credited it is often almost impossible for the
servicer to determine why and where the hang-up exists.
The need to provide invoice numbers to parts distributors is labor
intensive and therefore costly. At all levels this problem adds significant expense to the
warranty process. Warranty
parts processing must be streamlined.
6.
The cost effect on service companies for OEM concessions
–The cost of concessions from OEM to OEM varies, as does the
frequency. In general, when a
concession is made on an appliance that should be out of warranty the
servicer pays a heavy penalty. Once
again the work must be done with no parts margin and discounted labor
rates. While we respect the
OEM’s right to take care of their customers using concessions we do not
feel that the service provider should bear the brunt of the expense.
The OEM appears to be the “hero” to the customer. In fact the
servicer and the parts distributor bear a significant amount of the cost
to provide concessions. OEM’s
should fund concessions out of their sales revenues and pay service
providers and parts distributors for their efforts.
7.
Cost, availability and quality of parts and service
literature Service literature support varies with the
OEM. Many now have
information available on CDROM. There
is also the added expense to the service provider in many cases of having
to PAY the OEM for the literature they need to do warranty service
correctly. Often the
literature is not available before the product finds its way into the
marketplace. Service training often comes along after the service provider
has already spent time trying to figure it out for themselves because
there has been no training. In
addition to more frequent service training OEM’s should provide
literature, in whatever form, to the warranty service provider at no
charge.
8.
Length of time to receive warranty labor payments –When
a service company performs COD service not only do they receive their COD
rate and a reasonable margin on parts, they are usually paid for the work
on completion of the call. When the work must be billed to a manufacturer or third party
it is two weeks minimum and often up to 60 days before payment is
received. At the same time
the servicer is waiting for payment the parts distributor is asking to be
paid for parts purchased. With
today’s electronic processing and the ability to transmit funds via
“ACH” there is no reason that payment could not be made in seven days
or less. The time
period needed to receive payments and parts credits must be greatly
improved.
9.
Lack of new technicians coming into the industry –Industry
wide there is a serious shortage of appliance technicians.
The typical technician is frequently a baby boomer thinking about
retirement. The few technical
colleges around the country with major appliance technology programs are
unable to find enough students to fill their classes.
The public image of an appliance technician is crude and
unprofessional. By contrast
the automotive industry has a much better supply of technicians coming up
through the ranks and has created the “Mr. Goodwrench” type of public
image. Efforts must be
made to elevate the image of the appliance repair technician and the
industry in general.
10.
There is little “New Management
Blood” coming into the industry –The number of
service companies in the US and Canada is dwindling.
No wonder. It is not a
profitable business. People
who might otherwise be smart business people – good for the industry –
do not enter it because it offers little potential for financial reward.
As the owners of larger, older service companies age and leave they
are often simply liquidating their business because there is no one
interested in taking over. When
these business disappear there is no one to pick up the load.
Parts distributors are losing their customers and OEM’s have a
shrinking pool of healthy, well run, professional service companies to
represent them and service their customers.
This trend must be stopped.
This must become an attractive and respected vocation once again.
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