Warranty as a Cost Center?
Warranty as a Cost Center?
Guest writer Chris Kohart takes a look at the warranty department in “Warranty as a Cost Center?”
Many equipment dealers view warranties as a goodwill cost center; why don’t we view this highly visible service we provide as not only a goodwill builder but also as a source of revenue or at least a break-even? Our OEMs have set us up to take warranty on the chin, but does it have to be this way? There are plenty of reasons to say no – read on.
A few eons ago, when I became the dealership’s product support manager, one of the first significant financial sinkholes I wanted to solve was curing the dealership’s annual six-figure warranty write-off (loss). The belief within the dealership was that it was a cost of doing business. In addition to staunching this loss, I wanted our dealership to highlight the significant value-add we provided to our customers that was not being positioned in our favor.
- First question: How many customers know the value add your warranty service provides? (at my dealership, the internal management’s consensus was, “It doesn’t matter, they expect it to be fixed for free under warranty”). If you’re not maximizing this extraordinarily costly and valuable benefit you offer your customers, it’s time to rethink your strategy.
- Second question: Do you invoice every warranty repair to the customer at prevailing retail charge out rates showing a warranty discount at the end, bringing their cost to $0.00? That’s an impactful selling tool; once we started sending these no-charge invoices to our customers (I could write another article or three on the gyrations we went through to make our business system support that), we began to get feedback from customers as they had no idea of the additional value our dealership offered.
Here’s an example of an invoice for a minor repair on a leaking hydraulic line:
| DESCRIPTION | QTY | UNIT | EXTENSION |
| Tube, hydraulic feed | 1.00 | $685.98 | $685.98 |
| O Ring | 4.00 | $16.20 | $64.80 |
| Hydraulic oil per gallon | 4.00 | $5.00 | $20.00 |
| Inbound air freight | 1.00 | $218.90 | $218.90 |
| Parts Total | $989.68 | ||
| Field Labor per hour | 3.00 | $180.00 | $540.00 |
| Travel Labor per hour | 5.00 | $180.00 | $900.00 |
| Labor Total | $1,440.00 | ||
| Mileage charge per mile | 50.00 | $1.75 | $87.50 |
| Tolls | 1.00 | $45.00 | $45.00 |
| Supplies & Materials | $115.20 | ||
| Invoice Sub – Total | $2,677.38 | ||
| Less OEM warranty coverage | ($934.11) | ||
| Dealer Courtesy credit | ($1,743.27) | ||
| NET DUE FROM CUSTOMER | $0.00 |
It is pretty interesting when this is presented to a customer. They see a net total of $2,677.38 and owe the dealer $0.00. It’s a powerful selling tool for whole goods and your dealership’s product support operations. So, we’ve shown our good customers that as a dealership, we absorb 66% of this fully covered warranty repair while the OEM only covers 34%. Start reinforcing this huge dealership advantage before your OEMs encroach directly in your trading area as we get deeper into the “no-maintenance” electric construction equipment era (more to come later).
Now, let’s go a little deeper into this work order and review our actual P&L:
| DESCRIPTION | RETAIL
EXTENSION |
Actual Dealer Cost | OEM Allowance | Profit (Loss) | Comments | |
| Tube, hydraulic feed | $685.98 | $583.08 | $437.31 | ($145.77) | Stock order discount is listed less 25% & 15% | |
| O Ring | $64.80 | $41.31 | $41.31 | $0.00 | ||
| Hydraulic oil per gallon | $20.00 | $16.00 | $0.00 | ($16.00) | OEM does not pay for fluids | |
| Inbound air freight | $218.90 | $218.90 | $0.00 | ($218.90) | OEM does not pay for freight | |
| Parts Total | $989.68 | $859.29 | $478.62 | ($380.67) | ||
| Field Labor per hour | $540.00 | $324.00 | $432.00 | $108.00 | OEM reimbursement rate is 80% of charge-out | |
| Travel Labor per hour | $900.00 | $540.00 | $0.00 | ($540.00) | OEM doesn’t pay travel time | |
| Labor Total | $1,440.00 | $864.00 | $432.00 | ($432.00) | ||
| Mileage charge per mile | $87.50 | $87.50 | $0.00 | ($87.50) | ||
| Tolls | $45.00 | $45.00 | $0.00 | ($45.00) | ||
| Supplies & Materials | $115.20 | $115.20 | $0.00 | ($115.20) | ||
| Invoice Sub – Total | $2,677.38 | $1,970.99 | $910.62 | ($1,060.37) |
In our example, this basic, simple warranty repair cost our dealership $1,060.37, and we lost $700 in profit opportunity. Where does your dealership book this cost today? (our dealership booked it as a new “OEM” expense). It’s not hard to see how this balloons over a fiscal year to be a six-figure write-off for many dealers. How do we solve this dilemma? More thoughts to come in a subsequent article.