"Heading Off Premature Failure," Feature Article, August 2006

FEATURE FOCUS: Engineering Management

heading off
premature failure

New software can help you unearth design and
manufacturing issues before they snowball into big warranty problems.

by Alan S. Brown, Associate Editor

hewlett-Packard Co. didn't know it had a problem. Instead, it had 40,000 power supplies for a new model laptop sitting in its warehouse. The vendor said it had individually bench tested each unit.

HP had shipped only 40 laptops when its warranty analysis software indicated a problem. Several users had brought in laptops with power supply problems. HP technicians rechecked their inventory. The most charitable view of their findings suggested that the vendor had failed to test the units properly.

HP quickly substituted another power supply before shipping any more new laptops. Its quick response saved about $4 million in warranty service costs, according to Brian Walker, director of strategy and business development for HP's automotive manufacturing and distribution systems in the Americas.

Hidden Costs

While HP's ability to find a problem after shipping only a few products is unusual, its quality problems were not unique. Small flaws in everything, from design and parts specification to manufacturing, assembly, and packaging, can lead to premature failure. When parts fail, warranty expenses cause margins to evaporate like rain in the desert. The value of the replacement part is often dwarfed by the cost of customer service, shipping, and the highly paid technicians who are needed to make the fix.

Some companies charge those costs back to their vendors, according to Bob Potts, vice president of sales for Houston-based warranty software developer PolyVista Inc. "We're working with a company that makes equipment for heavy-duty trucks. They have a problem with a $5 circuit board in the transmission, but it costs $2,500 to replace it. Suppliers can't continue to bear those costs when OEMs are constantly asking them to reduce prices. Something in the system is going to break," he said.

Meanwhile, warranty costs keep climbing. In 2005, the top 50 warranty providers spent $22.2 billion servicing claims, according to a Warranty Week survey of data filed by public companies. That's up from $20.4 billion in 2004 and $19.2 billion in 2003.

Over the same period, though, HP kept warranty costs roughly level at about $2.4 billion. As a percentage of product sales, they declined to 3.4 percent in 2005 from 4 percent in 2003. Compared with other consumer electronics companies, HP's warranty costs rank on par with IBM Corp. (3.4 percent of sales) and ahead of Dell Corp. (3.8 percent) and Lexmark International Inc. (9.6 percent). Only Apple Computer Inc. (1.6 percent) is notably better.

HP claims that it saved hundreds of millions of dollars between 2001 and 2003 by using software to detect problems faster—sometimes within 24 hours instead of the 90 to 120 days it took in the past—and to streamline its warranty process.

In fact, HP has begun selling its solution, a combination of four different software systems, to help other companies rein in warranty costs. Its goal: to deliver a closed loop solution that spans manufacturing and parts traceability to warranty claims and customer satisfaction.

The heart of the system is PolyVista's analytics software, which searches for patterns in warranty claims. "It's like Google, except you don't have to type in what you're looking for," Potts said.

He claimed that PolyVista provides a step change from conventional analytics. The latter, he explained, does a good job applying computer muscle to the analysis of massive amounts of data—as long as the data has been structured first.

An appliance manufacturer, for example, might measure the number of warranty repairs attributed to failure of specific parts. It might even categorize each type of failure and use the information to find root causes.

Such systems work best when companies already know the parts and failure modes for which they are looking. But what happens when a problem is so new—as in the case of HP's power supply—that no one knows there is an issue? What if the link between warranty repairs and part failure is less than obvious? What if problems have only begun to show up in text records of customer service phone calls and field reports rather than in numerical data?

"Most companies know how to do numeric analysis, but text is more challenging. There's more nuance there and most companies have trouble dealing with it," Potts explained. He said he knew of one company that has a schedule in which different managers take home hundreds of pages of reports to review on weekends.

PolyVista simplifies the process. While its software knows how to correlate known parts and problems, it can also search both data and text for unknown patterns.

Nuggets of Information

"We've created an adaptive analytic environment, and we can tell it to go look for something we don't know," Potts said. "It delivers what we call nuggets of information. They can either be chicken nuggets, something we already know, or they can be gold nuggets."

Potts helped HP find one gold nugget even before he sold HP on the software. "HP asked us to do a proof of concept," he recalled. "So they provided us with information on nine million laptops—everything from serial numbers and warranty part shipments to bills of materials that showed which suppliers provided which parts in each laptop.

"The software identified something interesting about modems and keyboards on a new laptop. About 80 percent of the time, when someone brought in a laptop with a modem problem, HP also replaced the keyboard. But only 30 percent of the people who reported a keyboard problem also needed a modem replacement," Potts said.

Intrigued, HP investigated the problem. It found that engineers had redesigned the clips holding the keyboard to the chassis. To access the modem, service technicians had to remove the keyboard. The new clips broke easily, and the technicians had to replace the entire keyboard when that happened.

"We would never have tied those two problems together," said Walker. PolyVista software discovered the problem when HP had sold only 1,500 units. By finding it so early, the company saved an estimated $2.1 million in warranty costs.

Closed Loop

PolyVista was only part of a larger effort to reduce warranty costs, improve HP's total experience for its customer, and preserve its brand image, Walker explained. To achieve this goal in the age of outsourcing takes software that ties together HP's entire supply chain. "We want to close the loop with our supply chain, so we get problems resolved the first time, every time, and we never build in the same problem again," he said.

In addition to PolyVista, HP's closed-loop warranty solution has three other components. Microsoft Corp.'s .Net platform provides the collaboration infrastructure, while iWarranty software from 4C Solutions Inc. automates the flow of warranty information through electronic record keeping.

The manufacturing execution system from iTAC Software AG enables HP to trace parts through every phase of production.
"We can capture information on every part from every batch," Walker explained. "If we find a bad part, we can trace it back to its batch, dig into that process, and find the root cause of the problem. Then, instead of recalling the 250,000 products made that day, we only need to recall the 2,500 products that used parts from the bad batch. That's a huge savings in warranty costs."

To truly close the loop, HP shares its warranty data with vendors. "In the old days, we'd have problems with modems and they'd say, 'It's not my modem,' " Walker recalled. "Now we can show them the data. It's a real culture change."

Not surprisingly, changes in how HP manages vendors made those cultural changes stick. The company now uses warranty feedback to rank its top vendors, and it encourages its buyers to purchase parts from them. "If suppliers want to see why they're no longer getting orders from HP, they can go into the system and dig into the product details," Walker said.

The solution has worked well enough for HP to package it in an effort to sell to other discrete manufacturers. While it's not cheap—what software ever is?—Walker claims that implementation takes only weeks rather than months or years. A large company with millions of dollars in warranty costs can quickly recoup its investment. With U.S. warranty costs at $27 billion and rising, this promises to be an attractive proposition for many corporations.