<img height="1" width="1" style="display:none;" alt="" src="https://dc.ads.linkedin.com/collect/?pid=296796&amp;fmt=gif">
Calculate Expected Warranty Costs

How To Calculate Expected Warranty Costs [Calculator]

Do You Manage or Design Your Company's Warranty Policy? 

Product Warranties are a key element that your customers evaluate when making a purchase decision about your product.  Let's face it, in an era where perfection is both the expectation and the norm, the better your warranty, the better chance you have of winning your consumers' heart and mind.

Warranty Cost Calculator

We're Operating At Six Sigma

That Means My Product Is Perfect - Right?

Well, if you have achieved 6 Sigma at every level of your production process, perhaps it is close to perfect.  But the reality is, nobody is perfect.  That's why automobile manufacturers provide a warranty and offer extended service contracts as part of their auto warranties, rather than providing a booklet with the actual measurements of each and every product, process and service process plotted on Statistical Process Control (SPC) charts.  Most consumers would not understand what it means but some would, like me. 

Failure Mode and Effects Analysis (FMEA)

Before you can truly design a warranty that is both economically viable for you, the producer and attractive to your customers, you need to have produced and sold quite a bit of product.  You also need to have determined what fails, how it fails, and what effect it has on the operation of your product when it fails.  This process has many names, but one common name and approach is to conduct FMEA (Failure Mode and Effects Analysis) studies.  This is part of the on-going process you need to execute to predict future warranty claims.  It's also why you need the advanced capabilities of SAP warranty management software.

We Just Use a Percent of Sales as Our Expected Warranty Cost

Isn't that 'Good Enough'?

Though there is nothing wrong with this approach to warranty expense valuation planning, and indeed, that's how most industry players do it, it doesn't really allow you to fine-tune your warranty to match up with the predicted failure rates you can get by doing a little bit of analysis.  When you're first starting out, you may not have a choice other than to use this approach.  If you use SAP, you should routinely do a deep dive analysis on actual claims payout and adjust the amount you're putting aside to cover expected warranty product costs.

When Do I Need to Record Expected Warranty Cost

Under GAAP rules for warranty reserve accounting and warranty revenue recognition, you need to record your expected future warranty cost during the same time period as the item was produced.  Under this warranty accounting rule, it is also when you should set aside the money required to cover product warranty cost, using realistic warranty estimates, to cover your claim in your Warranty Liability Account.  This is then covers the provision of warranty expenses.  Keep in mind this may impact your inventory account numbers.

When Do I Need to Consume The Money I Set Aside For Warranty Cost

Again, under current GAAP rules, you should consume your Warranty Liability Dollars in the time period during which the warranty claim was made.  By following these two rules, you ensure revenues and expenses are properly aligned and recorded properly.

Where Do I Need To Track This Warranty Liability Set-Aside

Not unsurprisingly, your CFO will need to have established a contingent liability account within your financial management system for this.   There may be a need to track your financial exposure at the equipment item level, and though this is possible in the standard SAP system, it does require specific configuration steps to set up.   

Usage Based Warranties

If you offer a usage based warranty, meaning it is based on something like hours ran, then you and your customers will need to have a collaboration system in place to automate this.  There are many scenarios where this is already happening today, for instance, many city buses have sensors that continuously provide status updates back to the manufacturer.  This allows all parties to keep the buses running, while ensuring that warranted items are fixed and charges settled properly as well as helping to facilitate maintenance and repairs on non-warranted items and settling charges.

What Happens If I Don't Consume All of My Warranty Liability Set-Aside Dollars

If you have set up your SAP Financial Management system correctly, and as well, have SAP Warranty Management properly configured, then you should have a very accurate picture of what you sold when, which items have consumed warranty dollars and which items will soon be out of warranty coverage.  These items, once they are out of their warranty coverage, essentially release the corresponding amount of warranty dollars back into the business for further use.

What Happens If I Have Greater Warranty Claims Than Expected

How Can I Prevent This Problem in the First Place?

As you might expect, you will need to adjust the amount of money you have set aside to cover these unexpected cost.  If you have a robust SAP Warranty Management Solution implemented, including a data-warehouse, you should start doing a methodical deep dive into the performance of all of your business processes.  With proper business process instrumentation, meaning you have sensors and other technologies in place to monitor and improve your business processes, you should be able to find and prevent these problems in advance.  

What Role Do Insurance Companies Play in this Process?

Do They Care About My Quality?

As you might imagine, most companies want to minimize their risk, and there is always some risk involved in offering a warranty.  Given a known failure rate and with a normally distributed data pattern, the insurance company's actuaries can predict the expected loss of any given warranty or set of warranties.  This means they can price the risk.  Pricing the risk and trading a risk premium to offset the risk being taken by the producer to offer his product or service in the market, while offering a warranty, is a multi-sided business model many insurance players are happy to participate in.

Of course, insurance companies routinely employ and offer 'help' to clients to reduce risk.  This can include everything from workplace safety audits to help with quality improvement efforts.  They also ensure the warranty policy is not only legally compliant, but offers limits to the actual risk all parties are actually taking.  This is why they are somewhat complicated to read.

Can You Help Me Estimate My Expected Warranty Cost?

Performing a warranty cost calculation can be complicated. That's why we produced the Warranty Cost Calculator, which is at the beginning of this article.  It's really a highly simplified tool we offer to our prospects and clients.  We offer SAP Warranty Implementation services with a focus on positive ROI to clients in a variety of industries.  We understand how important warranties are to both producers and consumers and can help you design yours to maximize revenues and customer satisfaction.  To get started, just use our online booking system to book your free initial consultation.


Book a Meeting To Discuss  Your Warranty Requirements


Soren Detering

My name is Soren. I am the founder of Detering Consulting. I began the company in 2003 because I wanted to provide more value for SAP customers. I knew that many of them were missing out on all the great benefits that could be obtained from the software. Before establishing Detering Consulting, I completed my education by obtaining a Master’s in Computer Science. After that, I worked at SAP in Germany and SAP Labs in North America for 10 years. My extensive background in solution management, project planning and -management, implementation services and leadership includes experience in: Automotive, A&D, High Tech, Medical Equipment, and Manufacturing Industries.
Me and my teams have successfully assisted many customers with their SAP ERP software, completed several full life cycle implementation projects, and carried out over 30 projects in SAP ECC and S/4 Hana. My experience has given me the unique ability to scope out ERP solutions in a very short amount of time. I have a knack for finding untapped money-making opportunities and discovering areas where customers could be saving money. I currently live and work in Palo Alto, CA just 10 minutes away from the SAP office. I dedicate myself to helping our clients with our SAP consulting services. In my spare time, I enjoy sailing, kickboxing, and spending time with my family and our two Taiwanese Mountain dogs.

View All Articles by Soren Detering
Have a Comment or a Question? Please Use The Form Below to Tell Us What You Think About This Blog Post

Detering Consulting Blog

Subscribe to our blog and receive updates about SAP Consulting, Warranty Management, Service Contract Management, Analytics and SAP Consulting Best Practices and ideas delivered right to your email.