Warranty Standards Using XBRL – A New Application

by Kenneth J. Purfey, CFS, CMA, CPA

Reverse Logistics Magazine, March/April 2007

Many companies think of warranties or warranty expense as an afterthought and for some companies warranty expense may indeed be small. However for larger and Fortune 1000 companies warranty expense can and does dramatically impact their bottom lines. For example, General Electric warranty expense in 2005 was over $700 million or 4.3% of Net Income. With warranty claims from just the top 50 US-based warranty providers totaling over $27 billion in 2005 alone, warranty expense is larger than the Gross National Product of some European countries or the annual budgets of many US States! The ability to save even a portion of this amount would be a major coup for many warranty providers.

An “electronic consumer warranty management program” using XBRL (Extensible Business Reporting Language) can provide new applications for these companies to apply, track, monitor, analyze, and reduce warranty expense, and provide multiple benefits to consumers alike. XBRL is a worldwide standard for the publishing, exchange, and analysis of financial reports and data based on XML (Extensible Markup Language). XBRL “tags” financial data much like a bar code on commercial products allowing investors and analysts to search not only forms, but the information within them with speed and consistency. It will permit information to be immediately downloaded into application software.

A typical example of XBRL use is the ability to define and track fact elements such as warranty expense by product, by country, by region, by account, as a percent of sales, as a percent of warranty reserves, in total, or by any other dimension. The ability of XBRL to do this can go far beyond this simple case and the metadata specifications provide an important extension of the ability of XBRL to easily represent the dimensional information that exists in financial reporting.

Some of the current issues and problems faced by manufacturers and warranty providers include:

• There is little standardization of warranty reporting now among US companies and even less among international companies. This makes benchmark comparison among companies and across industries difficult or incompatible. There are no common standards even for the vocabulary or data-sets related to warranty management.
• Warranty programs cost an average of 1.5% to 2% of sales; and sometimes double or triple that amount as a % of Net Income. The process is highly manual and prone to error.
• It is estimated that between 10% and 15% of all warranty claims should not be paid due to warranty fraud or incomplete or incorrect registration data.
• Incomplete or inaccurate data on consumer ownership leads to higher cost of ownership, higher replacement and shipping costs, and consumer dissatisfaction.
• Consumer dissatisfaction blunts and sometimes destroys the original objective of warranty coverage: that of building brand and consumer loyalty.

Some of the current issues and problems faced by consumers include:

• Many consumers consider warranties as an afterthought – tending to misplace product manuals and the warranty coverage language and literally cannot find it when it is needed the most.
• As a result, consumers are not sure if their product is under warranty or not.
• Consequently, consumers cannot easily connect with manufacturers and third-parties for parts, repairs, service, or consumables. Consumers find further difficulty connecting with manufacturers for technical help, training, service, product returns or to provide feedback.
• Additional frustration is encountered when consumers attempt to share their good or bad experiences with other consumers and cannot describe the precise type of item they have because they have lost the registration or warranty paperwork.

Here is a typical scenario. How often does this happen?

A consumer wishes to return something but cannot find the manufacturers phone number or address. After searching for minutes or hours the consumer finds the documentation and calls the manufacturer only to go through a maze of telephone logic alternatives to finally be put on HOLD. While listening to elevator music for what seems like hours, the consumer is interviewed by someone who usually has difficulty determining if you are under warranty. This wastes more time. Assuming the telephone line is not accidentally disconnected during the process; the service person may or may not issue the consumer a Return Material Authorization (RMA). Then the consumer must find a way to ship the product back to the manufacturer, wasting additional time and effort. This is clearly a very frustrating experience for all parties. Once the product is shipped, the receiving dock verifies the RMA and serial number match, then send the returned product to inspection—often with no record for why the return was authorized. Inspectors then do not know what to look for, and incorrectly reject the item – causing further damage to the customer relationship.

Here is perhaps a better solution: The manufacturer includes a CD ROM containing the documentation in electronic format. The CD also includes a warranty registration application that automatically connects the user to the appropriate web site setup by the manufacturer. This application includes a simple record into which the manufacturer has pre-loaded certain data such as the serial number and the UPC code. We are calling this record a “token” since it is passed back and forth as a record of the registration event. The user adds their consumer data to this token and it is automatically sent to the manufacturer as the warranty registration. At the time of purchase this single click warranty registration leaves a copy of the token on the consumer’s computer together with a hot-link to an RMA portal. When a return is necessary, the consumer simply clicks the link and is immediately sent to the appropriate manufacturer’s URL together with the product warranty token. A simple questionnaire is attached for explanations. The manufacturer is able to automatically verify the validity of the RMA request by comparing the returned token with their database. An automated process generates the RMA and returns it to the consumer along with instructions. A second click and the consumer’s information together with the RMA are sent to a mail service provider for pickup. A UPS shipping form can be printed right from the consumer’s computer. This entire process can be completed in a matter of minutes and usually at no cost to the consumer. No human intervention is required. This is a much more satisfactory experience for the consumer.

Many of these issues could be addressed if a standard warranty format existed that could be read by any of a variety of applications. Such a standard should be “Open Source” and based upon the XBRL standards. It should be created by all of the various stakeholders in the warranty process. The XBRL standards body is dominated by accounting concerns. The development of a warranty standard would appropriately have as much input from the Logistics Departments, Quality Assurance, Customer Support, and Marketing. The content of such a standard would be an acceptable definition of warranty data fields and descriptions.

It would be most appropriate for manufacture’s to support an application like this for many reasons:

• Reduces service phone calls as it makes product information readily accessible
• Reduces human error inputs of warranty information
• Reduces manual labor costs
• Creates a marketing segue for update information and after-market communications for things like extended warranties
• Increases customer satisfaction and brand loyalty
• Easily enables real-time tracking and monitoring of warranty expense via the XBRL interface and allows auditors and accountants to better manage warranty reserves. Management of warranty reserves has been a sore area with many auditors, and better tracking also allows improved compliance with Sarbanes-Oxley internal control requirements.
• Supports multiple products from multiple sources enabling the electronic bookcase to be perceived as a valuable tool by consumers.

Thus manufacturer’s would be able to significantly reduce manual labor costs, service costs, and warranty costs through reduced fraud and errors, better manage an audit trail and reduce accounting costs, while improving customer satisfaction and loyalty.

A helpful milestone in creating such a successful environment for manufacturers would entail the creation and development of standardized warranty data. Standardized warranty data would allow for commonality of warranty information reporting, analysis, and accounting.

Unfortunately there are no current warranty reporting forms, data, or reporting among US or foreign manufacturers, but the use of both XML and XBRL would clearly ease the marriage process among these tools and warranty applications.

Such a standardized reporting process i.e. “warranty reporting standards” could be developed similar to the example set by the Insurance industry over twenty years ago in their development of common forms, formats, and reporting (“ACORD” forms and software). Further, it is suggested that warranty reporting standards could best be developed using an open-source format whereby the input of all concerned groups such as the accounting profession, manufacturers (logistics, sales, customer service, etc), and freight / delivery transporters requirements would be considered and continuously improved. In this way, a fully integrated framework crossing several industries can be developed in the future that would significantly reduce costs for all concerned parties and improve the consumer experience at the same time.

Perhaps the time is right to develop standards for this type of cost-effective application. While the XBRL standards body is focused on financial issues, other industry groups focus on other stakeholders in this process. The Reverse Logistics Association is one such body. We have over 200 member companies and about 50,000 subscribers to our magazine. This year, over 1000 people attended the RLA annual trade association event in Las Vegas. We have organized a special interest group within the association in order to address this issue. However, the RLA membership does not generally include the financial or IT inputs that are necessary to make this concept into a reality. In fact, a joint standard created by resources from the XBRL perspective as well as Reverse Logistics resources are necessary to achieve this goal. We are organizing such a joint standard convention and hope that readers will agree with us regarding the value of such a task and would like to help with the leadership of this project. We are especially soliciting participation from both the IT and Financial perspectives.

Reverse Logistics Magazine, March/April 2007