I speak to many equipment manufacturers in my day job, and a recurring theme is how the cost of within-warranty failures is significantly impacting businesses. Original Equipment Manufacturers (OEMs) face increasing financial pressures from rising warranty claims.
If this issue were isolated to one OEM, it might suggest a product-specific problem. However, this trend is widespread, and OEMs across industries are experiencing similar challenges.
Costs are escalating for various reasons, including inflation, rising raw material costs, and wage increases. For example, the price of steel increased by over 50% in Europe and 80% in North America post-COVID. While inflation explains part of the increase, other factors, like supply chain disruptions and more complex manufacturing processes, contribute to surging warranty costs.
Warranty payouts, once considered manageable, have surged due to these pressures. This article explores the causes of this challenge and its implications for OEMs.
Why Are Warranty Claims Increasing?
Supply Chain Disruptions
The global supply chain has faced numerous challenges, including the COVID-19 pandemic, geopolitical tensions, and natural disasters. These disruptions impact OEMs by:
- Delayed Parts Availability: Critical components are delayed, forcing OEMs to extend production schedules or use alternative suppliers. Rushed substitutions often lead to higher failure rates and compounded repair costs.
- Higher Parts Costs: Scarcity of materials like semiconductors drives up costs, increasing the expense of warranty claims.
- Quality Issues: Secondary or tertiary suppliers may not meet high-quality standards, resulting in more frequent defects and failures.
Increased Product Complexity
Modern engineering marvels bring increased risks due to complexity:
- Integrated Systems: Failures in interconnected systems can cascade, amplifying repair costs.
- Software Failures: Bugs can render functional hardware unusable, often requiring time-consuming fixes.
- Complex Repairs: Compact designs make simple part replacements significantly more expensive.
An Example from My Experience
My car, ordered in 2022, took 12 months to build due to parts delays. When a brake servo failed after 16 months, replacing it required dismantling multiple components, leading to a repair cost exceeding £8,000, compared to an estimated £500 in a less complex design. The prolonged repair also included courtesy car costs, amplifying expenses further.
Environmental Compliance vs Longevity
Regulations prioritising sustainability often result in compromises in durability. Eco-friendly materials may degrade faster, leading to more frequent failures and higher warranty claims. For instance, FAME biofuels, designed for sustainability, can cause significant operational issues in machinery, raising costs for OEMs and users alike.
The Hidden Costs of Warranty Claims
Direct Costs
When it comes to direct costs, OEMs are under immense pressure. One of the most significant challenges is parts replacement. The rising costs of raw materials mean that even standard components are becoming prohibitively expensive. For instance, semiconductors and other critical parts have seen price hikes due to scarcity, and this expense is directly passed on during warranty claims. OEMs must bear the burden of ensuring these parts are available, which not only affects their financial stability but also leads to inefficiencies in production and repair schedules.
Additionally, labour costs are a growing concern. Skilled technicians, essential for performing repairs, are in short supply globally. The scarcity has resulted in wage inflation, driving up the overall cost of resolving warranty issues. Repairs that once required a straightforward process now involve intricate diagnostic work, increasing both the time and financial outlay required to address faults.
Indirect Costs
The indirect costs of warranty claims can be equally debilitating. Reputation damage is a critical factor. Frequent warranty claims create dissatisfaction among customers, eroding trust in the brand. For instance, an OEM that develops a reputation for unreliable products risks losing market share as customers turn to competitors with a better track record of reliability. This loss of trust can take years to rebuild and has a cascading impact on revenue streams.
Legal penalties are another substantial risk. Failing to comply with warranty and product safety regulations exposes OEMs to fines and lawsuits. A prominent example is the VW dieselgate scandal of 2015. While the issue revolved around emissions testing, the reputational and financial fallout demonstrated how non-compliance could cripple even the largest manufacturers. Legal costs and mandated recalls can severely undermine profitability and investor confidence.
Finally, administrative overhead associated with managing warranty claims adds another layer of complexity. The sheer volume of claims necessitates robust systems to track, evaluate, and process each case. This operational burden diverts resources from innovation and customer service, further compounding the challenges OEMs face.
Strategies to Mitigate Warranty Claim Costs
There are three critical ways to reduce warranty costs:
- Reduce the number of failures in the warranty period.
- Reduce the cost of each failure.
- Reduce the number of invalid warranty claims.
Oil analysis is a cornerstone technology that can address all three aspects effectively.
Reducing the Number of Failures
Oil analysis significantly reduces failures by enabling early detection of issues before they escalate into full-scale failures. Through condition monitoring, OEMs can analyse the lubricants and hydraulic fluids used in machinery to detect wear particles, contamination, and degradation. For example, an increase in metal particles in the oil could indicate that a component is wearing down. Identifying this early allows OEMs to intervene before the issue causes catastrophic failure, saving both downtime and repair costs.
Condition monitoring is a continuous health check for machinery. By collecting and analysing data over time, OEMs can predict when components are likely to fail and schedule maintenance accordingly. This proactive approach improves reliability, extends equipment lifespans, and dramatically reduces the number of unexpected failures.
Reducing the Cost of Each Failure
Oil analysis also helps to reduce the cost of failures by identifying problems earlier in their lifecycle, when they are less expensive to fix. Detecting wear or contamination early often means that minor repairs or adjustments can be made, preventing more extensive damage. While it might seem counterintuitive that identifying more issues earlier could lead to increased in warranty claims, this is ultimately a decision for the OEM when close to the end of the warranty period. The OEM retains full control over how these findings are handled, whether by extending goodwill warranties or using the data to optimise future designs.
Moreover, smaller, manageable repairs are far less costly than addressing catastrophic failures. For example, a detected issue with an oil filter clogging can be resolved with a simple replacement, avoiding the need for a complete system overhaul. Oil analysis’s early detection empowers OEMs to make cost-effective decisions that protect their bottom line.
With LubeWear rapid acid digestion, detection can be even earlier and potentially large issues can be detected extremely early, so that repairs can be performed very early increasing end customer confidence and avoiding low costs. For instance, a fault with intercoolers that cost 43,000 euros in engine repairs was brought down to 324 euros by detecting early. Even if you did detect more of these earlier just avoiding one of these repairs you can cover the cost of doing 132 smaller repairs.
Reducing Invalid Warranty Claims
Invalid warranty claims drain OEM resources substantially. Oil analysis is an invaluable tool for addressing this issue by providing clear, scientific evidence about the condition of machinery and fluids. For instance, analysis can reveal whether incorrect oils were used, whether misfuelling occurred, or whether the operator neglected maintenance. These insights enable OEMs to reject claims that are not the result of manufacturing defects.
“A UK OEM Saved £21.4 million in invalid warranty claims in 2024 using Oil Analysis Laboratories.“
In one notable example, a UK distributor for an OEM in 2024 saved £21.4 million in warranty claims by leveraging oil analysis with my lab. In a recent review meeting, the distributor was kind enough to share these details and confirmed I could quote the figure. The analysis identified cases where operator error or poor maintenance practices, such as using the wrong oil, caused machinery failures. Without this data, these claims might have been incorrectly approved, leading to significant financial losses.
Oil analysis also provides transparency and builds trust between OEMs and their customers. By presenting detailed diagnostic reports, OEMs can justify warranty decisions and demonstrate their commitment to quality and fairness. This not only reduces disputes but also strengthens customer relationships.
Conclusion
Managing warranty claims requires OEMs to address supply chain weaknesses, invest in quality assurance, and leverage technologies like oil analysis. By reducing failures, minimising repair costs, and preventing unfounded claims, oil analysis provides a comprehensive solution to the growing challenges of warranty management. These actions not only protect profitability but also build trust with customers. In an increasingly complex and competitive market, a proactive approach to warranty management ensures long-term success and strengthens OEMs’ reputations in the eyes of their customers.
If you are interested in finding out about oil analysis and how that can help you, please do get in touch and click contact us.