Reduce Warranty Costs

Even a few isolated product failures can damage an organization in the form of reputation, sales, stock price, warranty claims, legal costs and credit rating. Product integrity is emerging as a potential problem at a time when the cost of delivering a faulty product to customers has never been higher. The American Society for Quality estimates that each product recall costs an average $8 million-plus in direct costs alone. Fines of up to $15 million can result for failing to report potential product safety violations or defects. U.S. companies spend a combined total of over $2 billion a year defending product liability lawsuits according to the Public Services Research Institute. This number does not include actual settlements or jury awards, which average about $700,000 each. But the greatest cost of all may be the effect on a company’s reputation if consumers believe that its products are not safe.

Consider the case of Pierburg, a leading German automotive supplier. It quantified the negative impact (on product quality) of reducing cost and time to market and determined that it would result in progressively increasing warranty costs due to lowered product integrity. The company, which was already using engineering simulation, instead boosted its investment in virtual analysis to improve quality and reduce warranty costs while meeting time and cost targets. The effects were not immediately apparent, as warranty costs climbed while products not subjected to engineering simulation were released in the marketplace. But in time, the warranty cost curve clearly indicated a systematic decrease: It more than halved the initial warranty costs, which largely exceeded the increase in total engineering simulation cost.

The difference between decreased warranty cost and increased engineering simulation investment is a direct indication of return on investment. Though decreased warranty cost may not be exclusively due to the large adoption of engineering simulation, the biggest, intangible impact of this new approach lies in the improved product quality and positive impact on the brand.