SAS^® Solution for Warranty Reserve Forecasting

In the Spotlight Rightsizing Your Accruals: Transforming Lazy Capital into Working Capital Archived Webcast SAS Solution for Warranty Reserve Forecasting Maximize the use of your financial resources by right-sizing your warranty reserves; a CFO's perspective on sound warranty financial management.

According to Warranty Week, 58 of the top 100 US-based manufacturer warranty providers paid out a higher percentage of sales as warranty claims in 2006 than in 2005. These companies reported more than $28 billion in warranty claims paid in 2006, yet held nearly $40 billion in reserve to cover those claims. What portion of that $12 billion difference was really needed to cover future warranty expenses? Without accurate forecasting, it is impossible to know. What could it have meant to these companies if they could have exploited the portion that was reserved but not needed?

Traditionally, determining warranty reserve allocations has been highly manual, cumbersome and error-prone. Inaccurate warranty forecasts put companies at risk of either under- or over-budgeting for warranty payouts – increasing financial risk and diminishing overall company performance.

Improvements in the processes used to forecast warranty reserves can yield tremendous savings. The SAS solution for Warranty Reserve Forecasting extracts data from your present operational systems, applies sophisticated modeling and forecasting techniques to this data, and generates forecasts that are significantly more accurate than what manual methods and spreadsheet programs can achieve.

When you merge a true picture of projected failure rates over time, cost factors for addressing those product failures (both historical and anticipated), and field population under warranty, you gain a highly accurate and adaptable picture of the short- and long-term warranty reserves needed to cover those projected costs. The payback is significant:

• By bringing analytical rigor to the process, an organization can decrease the margin of error from 20 percent to less than 5 percent. An organization that reserves $20 million for warranty accruals could then see $1.2 million coming back into the budget, based on an 8 percent cost of capital.

• Companies expending extra manual effort into decreasing the margin of error can reduce manual labor by 50 percent or more by automating the process. For a typical $100 million company, that could translate into savings of up to 4,000 hours a year – double that for a typical $1 billion company.

For example, one consumer electronics manufacturer found that it took more than 12,000 work-hours a year to generate warranty reserves forecasts – and still the forecasts were off by more than 20 percent. With SAS, the company can collect data and produce accurate forecasts in less than an hour. Refreshing a forecast takes less than a minute.

The SAS Solution for Warranty Reserve Forecasting is a component of SAS® Service Intelligence, an integrated set of solutions for the post-production, after-market service chain that also includes SAS® Warranty Analysis, SAS® Service Parts Optimization and SAS® Service Operations Optimization. You can either add the SAS Solution for Warranty Reserve Forecasting to your existing service platform, or integrate it with the SAS Service Intelligence suite of solutions. Either way, the benefits are substantial – including reduced lazy capital, freeing up of resources from manual forecasting tasks for strategic planning, and reducing risky or embarrassing shortfalls.