MODULE 1: WARRANTY – AN INTRODUCTION Professor D.N.P. Murthy The University of Queensland Brisbane, Australia

WARRANTY CONCEPT  Contractual agreement  Established on sale of product  Establishes  Buyer responsibility  Limitations  Seller liability

ROLE AND USES OF WARRANTY 1. Protection for Seller  Specifies Buyer responsibilities  Limits liability  Limits cost

ROLE AND USES OF WARRANTY 2. Marketing tool  Signal of quality  Competitive terms 3. Protection for buyer  Remedy on failure of item  Assurance of performance

PRODUCTS COVERED BY WARRANTY  Consumer Non-durables  Consumer Durables  Software  Services  Commercial and Industrial Products  Defense Acquisition

PRODUCT CATEGORIES 1. Consumer Products  Free replacement (FRW)  Pro-rata (PRW)  Rebate  Combination

PRODUCT CATEGORIES 2. Commercial and Industrial  Above plus:  Cumulative warranty  Fleet warranty 3. Defense  Above  Reliability Improvement

COMMON CONSUMER WARRANTIES NOTATION W = Warranty Period X = Lifetime of item (random variable) C = Sale price of item

NON-RENEWING FREE REPLACEMENT POLICY The manufacturer agrees to repair or provide replacements for failed items free of charge up to a time W from the time of the initial purchase. The warranty expires at time W after purchase. (Denoted as FRW Policy.)

NONRENEWING FRW Applications  Consumer products  Appliances, electronics, auto parts  Industrial  Tools, motors, heavy equipment

PRO-RATA REBATE POLICY The manufacturer agrees to refund a fraction of the purchase price should the item fail before time W from the time of the initial purchase. The buyer is not constrained to buy a replacement item. (Denoted as PRW Policy.)

RENEWING PRW Under this policy the manufacturer agrees to provide a replacement item, at pro-rated cost, for any item (including the item originally purchased and any replacements made under warranty) which fails to achieve a lifetime of at least W.

RENEWING PRW Applications  Nonrepairable items  Batteries, tires, plastics  Alternative to FRW to reduce costs  Less reliable products

COMBINATION FRW/PRW The manufacturer agrees to provide a replacement or repair free of charge up to time W 1 from the initial purchase; any failure in the interval W 1 to W (where W 1 < W) results in a pro-rated refund. The warranty does not renew.

TWO-DIMENSIONAL WARRANTIES In the case of two-dimensional warranties, a warranty is characterized by a region in a two-dimensional plane with one axis representing time or age and the other representing item usage. Notation: Age (W) and Usage (U)

(a) (b) (c) (d)

TWO-DIMENSIONAL FRW The manufacturer agrees to repair or provide a replacement for failed items free of charge up to a time W or up to a usage U, which ever occurs first, from the time of the initial purchase. W is called the warranty period and U the usage limit. The warranty region is the rectangle shown in Figure 2 (a).

RELIABILITY IMPROVEMENT WARRANTIES The basic idea of a Reliability Improvement Warranty (RIW) is to extend the notion of a basic consumer warranty (usually the FRW) to include guarantees on the reliability of the item and not just on its immediate or short-term performance. This is particularly appropriate in the purchase of complex, repairable equipment that is intended for relatively long use.

RELIABILITY IMPROVEMENT WARRANTIES The intent of reliability improvement warranties is to negotiate warranty terms that will motivate a manufacturer to continue improvements in reliability after a product is delivered. The contractor's fee is based on his ability to meet the warranty reliability requirements (e.g., mean time between failures).

RIW POLICY Under this policy, the manufacturer agrees to repair or provide replacements free of charge for any failed parts or units until time W after purchase. In addition, the manufacturer guarantees the MTBF of the purchased equipment to be at least M. [Cont.]

RIW POLICY If the computed MTBF is less than M, the manufacturer will provide, at no cost to the buyer, (1) engineering analysis to determine the cause of failure to meet the guaranteed MTBF requirement, (2) Engineering Change Proposals, (3) modification of all existing units in accordance with approved engineering changes, and (4) consignment spares for buyer use until such time as it is shown that the MTBF is at least M.

OTHER WARRANTIES  Many other –Combination Warranties –Cumulative Warranties –Reliability Improvement Warranties  Extended Warranties  Multi-dimensional Warranties  Multi-attribute Warranties

THREE PERSPECTIVES ON WARRANTY  1. Seller  Manufacturer  Retailer  Third party (insurer, credit card)  2. Buyer  Consumer  Commercial/government

THREE PERSPECTIVES ON WARRANTY 3. Society  Community  Public policy  Legislation  Court actions

PROBLEMS OF INTEREST TO MANUFACTURER  What is the cost of offering a specific warranty policy?  How does this compare with other warranty policies?  How does the warranty cost change with the parameters (for example, duration, form of warranty payoff) of the policy?

PROBLEMS OF INTEREST TO MANUFACTURER  How does one optimize the choice of warranty when multiple business objectives are involved?  What is the optimal strategy for servicing warranty? (This would involve, for example establishing a policy with regard to repair/replace decisions in the case of repairable items.)

PROBLEMS OF INTEREST TO MANUFACTURER  What kinds of data (laboratory, field etc) are needed and how should the data be analysed?  What are the optimal decisions with regard to product design and manufacture given that the product must be sold with a specific type of warranty policy dictated by the market place?

WARRANTY STUDIES -- DIFFERENT VIEWPOINTS  Historical  Legal  Legislative  Economic  Behavioral  Consumerist

WARRANTY STUDIES -- DIFFERENT VIEWPOINTS  Statistical  Engineering  Operations Research  Accounting  Management  Society

ENGINEERING ASPECTS  Design  Reliability choice  Reliability allocation  Reliability improvement  Manufacturing  Conformance  Quality control

ENGINEERING ASPECTS  Pre-sale testing  Cost analysis  Optimization

FURTHER READING Blischke, W. R., and D. N. P. Murthy (1994), Warranty Cost Analysis, Marcel Dekker, Inc., New York ________________, (Eds.) (1996), Product Warranty Handbook, Marcel Dekker, Inc., New York