Journal of Service Science and Management, 2011, 4, 191-202
doi:10.4236/jssm.2011.42023 Published Online June 2011 (
Copyright © 2011 SciRes. JSSM
On the Risks and Costs Methodologies Applied for
the Improvement of the Warranty Management
Vicente González Díaz1, François Pérès2, Adolfo Crespo Márquez3
1General Dynamics European Land Systems, Seville, Spain; 2Laboratoire Génie de Production, ENIT –INPT Université de Toulouse,
Toulouse, France; 3Department of Industrial Management, School of Engineering, University of Seville, Seville, Spain.
Received March 24th, 2011; revised May 7th, 2011; accepted May 16th, 2011.
This paper deals with the problem of efficiency in warranty management programs, where efficiency is understood as
provisioning an effective prod uct warranty service to the lowest cost. For that purpose, this paper first d efines the con-
cept of warranty and its interaction with other disciplines. It introduces all the necessary stages that should be included
within a framework for warran ty management. This brief introduction will help the reader to plac e the work presented
in this paper within a context of tools and methods already developed in the literature for similar areas management.
Later on, an analysis on risk and cost is presented applying these methodologies to the development of a warranty pro-
gram. We show how generic tools developed for project management can now be adapted, in a very useful way, to or-
ganize and control the technical assistances to customers during the warranty period. Finally, conclusions of the work
are presented, where the main concepts of the paper are summarized and further potential research is suggested.
Keywords: After-Sales, Cost Management, Decision-Making, Earned Value Analysis, Reference Framework, Risk
Management, Warranty Assistance
1. Introduction
Warranty is a written and/or oral manufacturer’s assur-
ance to a buyer that a product or service is or shall be as
presented [1]. Guarantees the integrity of a product and
specifies the warrantor (generally the manufacturer) re-
sponsibility in case of the failure of the product per-
formance. This assurance is applied during a period of
time after a product has been sold. The management of
warranty combines technical, administrative and mana-
gerial actions during the warranty period of an item in
order to maintain or restore the item to a state in which it
can perform the required function, needed to provide a
given service [2]. We can find different types of warran-
ties, each one suited for a different type of product (con-
sumer, commercial and industrial; standard versus cus-
tom-built, etc.) [3,4]. In this paper we will consider a
complex system such as a custom-built product, where
multitude components and conditions must be taken into
account. For this case, our literature review shows im-
portant interactions between warranty and other disci-
plines [2,5] impacting warranty efficiency. Among all of
them, we underline warranty interactions with:
Maintenance: In many cases, during the warranty
period the manufacturer still has a strong control over
its product and its behavior. Additionally, the ex-
pected warranty costs depend normally not only on
warranty requirements, but also on the associated
maintenance schedule of the product [6].
Outsourcing: warranty service or in general, the af-
ter-sales department of a company, is usually one of
the most susceptible to be outsourced due to its low
risk and due also to the fact that, among other features,
outsourcing provides legal insurance for such assis-
tance services [7].
Quality: The improvement of the reliability and qual-
ity of the product has not only an advantageous and
favorable impact in front of the client; it also highly
reduces the expected warranty cost [8].
Costs Analysis: In reference to costs estimations,
there are nowadays methods to estimate accurately
the final cost of a specific acquisition contract as, for
instance, the “Estimate at Completion” (EAC)
method [9], a management technique that can be used
in a project for the control of the costs progress.
The main contribution of this paper is to show how
generic tools developed for project management could be
adapted in an efficient way, to organize and control the
On the Risks and Costs Methodologies Applied for the Improvement of the Warranty Management
Copyright © 2011 SciRes. JSSM
technical assistances to customers during the warranty
period. As already introduced, the literature review on
this research subject is properly illustrated in some ref-
erences as [2] and [3]. The structure of this paper is as
follows: first it is briefly depicted a framework for the
warranty management and, particularly, it is defined the
warranty efficiency. Afterwards, the paper deepens in the
analysis about risk and cost regarding warranty assis-
tances. With this, the paper continues with the project
management definition of earned value, considering the
after sales management point of view. To finish, the con-
clusions will suggest some possible further researches.
2. Warranty Efficiency and Management
Where do warranty efficiency efforts fit within a generic
framework for warranty management? What techniques
can be used to improve warranty management efficiency?
In previous contributions we have addressed these issues,
and proposed a reference framework (Figure 1), consist-
ing in a process (steps to follow) and a supporting struc-
ture (techniques and methods to improve decision mak-
ing at each step) to manage warranty [10,11]. This refer-
ence framework consists of four building blocks (BB):
The Warranty Program Effectiveness BB: Here we
suggest applying the Balanced Scorecard (BSC)
model to avoid strategic contradictions between the
warranty program and the overall business strategy.
Then, it is necessary to determine the product critical-
ity, i.e. how crucial is the complaint of a client (due to
a failure) and its consequences to the business. Fi-
nally, the Root Cause Failure Analysis is proposed for
those high impact specific failures showing rare and
high failure frequency.
The Warranty Program Efficiency BB: In order to
attend warranties at the minimum waste or expense it
is necessary to design an adequate plan for the war-
ranty program. An adapted reliability analysis and
maintenance design tools can be extracted from the
maintenance field (for instance RCM). In reference to
costs, the Warranty Policy Risk-Cost-Benefit Analy-
sis will depend on the information available.
The Warranty Program Assessment BB: A RAMS
(Reliability, Availability, Maintainability & Safety)
analysis of every single warranty program is impor-
tant here due to the huge amount of restrictions and
conditions that any complex product warranty ob-
serves. In this 3rd step is also important to include a
Life Cycle Cost Analysis [12].
The Warranty Program Improvement BB: It is con-
sidered the last step. Tools that can be used in this
point are related to the implementation of new tech-
nologies to warranty (here the “E-Warranty” concept
comes to play, including resources, services and the
necessary management to enable proactive decisions).
Also for this step, Customer Relationship Manage-
ment and Six Sigma tools, for instance, can be very
beneficial for the warranty program of the company.
3. Cost-Risk-Benefit Analysis in Warranty
Once described the main lines of the suggested warranty
management framework, an important aspect to fulfill
Step 1.Effectiveness Step 2.Efficiency
Step 4.Improvement Step 3.Assessment
BalanceScore Card
Criticality Analysis
Failure Root CauseAnalysis
Maintenance Design Tools
adapted to Warranty
Warranty Policy RiskCost
Benefit Analysis
Life Cycle Cost Analysis
Relia bility,Availability,
Maintenability and Safety
Six Sigma
Customer Relationship
Step 1.Effectiveness Step 2.Efficiency
Step 4.Improvement Step 3.Assessment
BalanceScore Card
Criticality Analysis
Failure Root CauseAnalysis
Maintenance Design Tools
adapted to Warranty
Warranty Policy RiskCost
Benefit Analysis
Life Cycle Cost Analysis
Relia bility,Availability,
Maintenability and Safety
Six Sigma
Customer Relationship
Figure 1. Proposed Framework for Warranty Management.
On the Risks and Costs Methodologies Applied for the Improvement of the Warranty Management
Copyright © 2011 SciRes. JSSM
the proposed step on warranty efficiency is to analyze
those costs, risks and benefits applied to the development
of a warranty program. Notice that here the term “bene-
fit” refers to a cost which is intended to decrease. The
profit reverted from warranty is considering such a war-
ranty as a competitive one and a marketing tool which
can increase the sale of a robust product, with higher
quality than others competitors in the market.
Concerning warranty costs modeling, there is a huge
range of diverse approaches, analytical and empirical,
related to other fields [1]. In general terms, to carry out a
Warranty Policy on Risk-Cost-Benefit Analysis, such
activity will depend of course on the objective that the
own model builder keeps in mind. In any case (as here
with the management of a warranty program), the prob-
lem is influenced by the information available. In addi-
tion to this, the complexity of the issue is usually high
and considerations must be taken under certain assump-
tions in order, either to simplify the analytical resolution,
or to reduce sometimes the computational needs. This
section will try to present and adapt the main concepts
related to costs, risks and earned value to a warranty
program and for the improvement of its management and
3.1. Warranty Cost Management
A project cost management includes those processes re-
quired to ensure that the project is completed within the
approved budget [13,14]. Regarding warranty tasks, it
will be primarily concerned with the cost of the resources
required to fulfill the complete activities related to the
after-sales service in order to provide to the customers a
proper technical assistance. It is possible to observe from
different points of view the warranty cost management.
On one hand, the general cost management should
consider the effect on the cost of the product of decisions
taken for the whole project. For example: limiting the
number of design reviews may reduce the cost of the
project, but at the expense of an increase in service and
customer’s operating costs. A broader view of warranty
cost management should be referred also to the life-cycle
cost, considering therefore acquisition, operating, and
disposal costs when evaluating with the Balance score-
card the different project strategies. Consequently, a
creative approach applied to optimize life cycle costs
Save time
Increase profits
Improve quality
Expand market share
Use resources more effectively
Solve problems not only for the warranty assistances
but for the whole business.
This approach is usually called as value engineering
which is used together with the life cycle cost analysis as
techniques to reduce cost and time, improve quality and
performance, and optimize the decision-making. On the
other hand, the particular cost management does not re-
quire considering all those decisions taken during the
whole product life cycle (for instance, recycling costs or
the number of design reviews). The particular costs for
warranty refer just to those activities needed to resolve a
problem during a specific period of time at the beginning
of the phase of use or product operation. Such activities
will depend just on the product quality (see Figure 2).
Frequently, estimating and analyzing the financial per-
formance of a product launched to the market does not
consider warranty issues. In this case, controllable and
uncontrollable costs should be estimated and budgeted
separately to ensure that the expected benefits will be
obtained from the actual performance of the product. In
order to influence in warranty costs, it will be easier at
the early stages of the project during the pre-launch stage,
due to the fact that a soon definition and identification of
the expected product requirements are critical to reduce
future costs during the warranty period. The process of
determining what resources (people, equipment, materi-
als) and what quantities of each (when needed) should be
used to perform warranty activities is dealt as part of the
product logistic support but supposes of course an im-
portant part to take into account when the budget to these
activities must be established. In addition to this, the
process of developing an approximation of the costs for
the resources needed to perform the warranty tasks
should be preferably done prior to budget request rather
than after budgetary approval is provided, developing an
assessment of the likely quantitative result and how
much will cost to the organization to provide this product
service. The product pricing will be a business decision
where the above mentioned costs should be taken into
account, together with other factors. As inputs for the
warranty cost approach can be included:
Resource requirements
Estimated activities duration
Historical information
Used structure of the organization
Commercial available data on cost estimating, and
risks (either as threats or opportunities)…
All these factors have a significant impact on cost
which the management board should consider to budget
properly the future technical assistance. The Figure 3
illustrates as an example those costs to have into consid-
eration, in connection to the already mentioned para-
graph about that logistic support which should be applied
or taken into account during the management of a war-
ranty program. We suggest using the following methods
On the Risks and Costs Methodologies Applied for the Improvement of the Warranty Management
Copyright © 2011 SciRes. JSSM
Figure 2. Integrated model for total warranty costs
(adapted from [3]).
Training Cost (Operator
and Maintena nce
Acquisition cost
(Research, Design,
Test, Poduction)
Software Cost
(Operation and
Supply and
Support Cost
Product Distribu tion
Cost (Transportation,
Traffic and Material
Operation Cost (Personnel ,
Facilities, Utilities and Energy)
Retirement and
Disposal Cost
Test and
Suppor t
Figure 3. Costs iceberg related to Logistic Support.
for warranty cost estimation:
Analogous estimating: It uses the actual warranty cost
of a previous similar product as the basis for estimat-
ing the cost of the current product [15,16]. It is fre-
quently used when there is a limited amount of de-
tailed information about the product in the early
product phases. Generally less costly than other esti-
mating techniques, but it is also generally less accu-
rate. Most reliable when the previous product is simi-
lar in fact and not just in appearance (that includes a
similar market target), and the staff to prepare such
estimation have the needed expertise (because the ap-
proach will be considered as a form of expert judg-
Parametric modeling: It uses product characteristics
(parameters) in a mathematical model to predict
product failures and consequently the costs of spare
parts, repair time, logistic… as well as staff training,
technical documentation, tools and equipment etc. [15,
16]. Models can be simple or complex, but they are
more reliable when the historical information used to
develop the model is accurate, and the parameters are
Bottom-up estimating: It involves the cost estimation
of individual activities or work packages related for
instance to the product maintenance, adapted and
summarized to warranty tasks [15,16]. Its cost and
accuracy will depend on the size and complexity of
the individual activity or work package taken into
Therefore, the management board must weigh the ac-
curacy against the cost, due to the fact that smaller ac-
tivities or packages increase both cost and accuracy of
the estimating process. There are of course other methods
to estimate warranty costs. All of them should finally
express a quantitative assessment of the likely costs of
the resources required to complete the warranty activities
(labor, materials, supplies, and maybe special categories
such as inflation allowance or cost reserve). The estima-
tion is expressed in currency units to facilitate compari-
sons with other budgets of the whole business or with the
warranty costs of other products. For instance, it is very
useful for large companies with a specific range of prod-
ucts in the market (e.g. the automotive sector); to control
multiple warranties cost baselines to measure different
aspects of the warranty performance or different degrees
in demands or requirements of specific customers’ pro-
files. In any case, the warranty cost estimation must be
refined during the course of the warranty period, adding
new details which can be available during this time,
making all this exercise more accurate. The estimation
report usually includes other supporting details as a de-
scription of the scope of work estimated and how this
estimation has been developed, with justified assump-
tions and an indication of the range of possible results.
Once the cost estimation is done, it must be described
how such costs will be managed during the warranty pe-
riod. This description is usually expressed in a warranty
cost management plan, which will be an element of the
overall product plan. In order to simplify the use of the
On the Risks and Costs Methodologies Applied for the Improvement of the Warranty Management
Copyright © 2011 SciRes. JSSM
mentioned methods there are many software applications,
simulation or statistical tools widely used to assist with
cost estimating and failure modeling [15,16].
3.2. Warranty Risk Management
The warranty risk management is the systematic process
of identifying, analyzing, and responding to risk likely
appearing during a program of warranty assistances. It
includes maximizing the probability and consequences of
positive events and minimizing the probability and con-
sequences of adverse events to warranty objectives. Sev-
eral contributions deals with issues regarding risk and
spare parts estimation, or risk and maintenance decisions
[17,18] can now perfectly be applied to warranty man-
agement. Warranty risk is understood as an uncertain
event or condition that, if occurs, has a negative effect on
the program objective. Nevertheless, it brings the oppor-
tunity to improve the product quality. Any risk has a
cause and, if it occurs, a consequence. Therefore, known
risks are those that have been identified and analyzed and
may be possible to plan for their occurrence and mitiga-
tion. On the other hand, unknown risks cannot be man-
aged or their probability of occurrence cannot be as-
sessed. Nevertheless, executive managers may address
them by applying a general contingency based on past
experience with similar programs, in our case, related to
the after-sales service. Those known risks that are threats
to the warranty program may be accepted if they are
balanced with the reward that may be gained by taking
the risk. Likewise, risks that are opportunities may be
pursued to benefit the program’s objectives. Conse-
quently, organizations (particularly the after-sales de-
partment or the management board) must be committed
to addressing risk management throughout the whole
warranty program. One measure of an organization’s
commitment is its dedication to gathering high-quality
data on warranty and product risks and the characteristics
of these risks.
In Figure 4 we illustrate the risk management process
[obtained from 19-21], divided into different steps. In the
next paragraphs we will apply this process to the war-
ranty management case.
Step 1: Risk Management Planning.
In order to approach the risk management activities to
a warranty program, a planning for such processes can
help to ensure that the level, type and visibility of this
management are proportional with both the risk and im-
portance of the warranty assistance to the whole organi-
zation. Tools to prepare the mentioned planning are for
instance program charts; business policies which prede-
fine an approach to risk analysis on the warranty assis-
tance; defined roles, responsibilities as well as authority
levels for decision-making; risk flexibility; etc. In order
to identify risks, the plan must analyze them qualitative
and quantitative, including a monitoring and control
structured and performed during the product life cycle,
and being addressed to general risks of the after-sales
service. We suggest that main parts to include in a risk
management plan [22], but particularized for a warranty
program, are:
Methodology: This part defines the approaches, tools,
and data sources used to perform the risk manage-
ment on the warranty program. Different types of as-
sessments can be appropriate, depending on the pro-
gram stage (product pre-launch, launch or post-launch
stage), the amount of available data, and the tolerance
admitted in the risk management.
Roles and responsibilities: The plan must define the
lead, support, and risk management team membership
for each type of action. The risk management team
may be able to perform independent and impartial
analyses of the warranty program.
Risk Management
Risk Analysis
Ris k
Ris k
I d enti ficati o n
Ri sk
Analy sis
3Quantitati ve
Ri sk
Analy sis
Acce ptabl e
Ri sk?
Ris k
5Cal culate
Ris k
Ris k
& Con t rol
1, Deci de how
2. F i nd t hem
3. Filter
4. Measure
5. Deci de ac ti ons
6. Act and m eas ure
Figure 4. Risk management workflow.
On the Risks and Costs Methodologies Applied for the Improvement of the Warranty Management
Copyright © 2011 SciRes. JSSM
Budgeting and Timing: It establishes a budget for risk
management of the warranty assistances program.
Due to the fact that the risk management process is a
continuous process based on the observation of the
environment which can evolve all the time, it is
therefore necessary that decisions should be reviewed
periodically during the warranty program execution.
Scoring and Interpretation: The scoring and interpre-
tation methods must be determined in advance to en-
sure the consistency of the plan, being them appropri-
ate for the type and timing of the qualitative and
quantitative risk analysis
Thresholds: The “boundaries” that identify which
risks will be acted upon, by whom, and in what man-
ner. The product owner, customer, or user can have a
different risk threshold. The acceptable threshold will
constitute the objective which the management board
(or risk team) will measure.
Reporting formats: It describes the content and format
of the risk response plan, including also how the re-
sults will be documented, analyzed, and communi-
cated to other parts of the company.
Tracking: The plan has to take into account how risk
activities will be recorded for the benefit of the cur-
rent warranty program, future needs, and lessons
learned. In addition to this, this part can also inform
whether these risk activities will be audited and how.
Step 2: Risk Identification.
Once the planning is done, the risk identification can
be carried out through various steps [23]. This is the
process of determining which risks can affect the war-
ranty program and to document the characteristics of
each one. This identification supposes an iterative proc-
ess according to the risk management plan. Methods to
use for the identification of risks in warranty programs
are for instance:
Documentation reviews (as warranty assumptions,
hypotheses or considered scenarios, as well as other
data sources).
Techniques to compile information (as brainstorming;
expert and technicians interviewing; strengths, weak-
nesses, opportunities, and threats -SWOT- analysis).
Checklist (based for instance in historical data or pre-
vious warranty programs of similar products).
Diagramming techniques (as cause-effect diagrams;
process flow chart; etc.).
Step 3: Qualitative Risk Analysis.
Afterwards, a qualitative analysis of risks [24] must be
performed which is the process of assessing the impact of
the identified risks in the warranty assistances. It priori-
tizes risks according to their potential effect on the pro-
gram objectives, determining the importance of address-
ing specific risks and guiding risk responses. This analy-
sis requires that the probability and consequences of the
risks be evaluated using established qualitative-analysis
methods and tools. The importance of a risk can be mag-
nified due to time-criticality of risk-related actions.
Therefore, trends in the results when qualitative analysis
is repeated can indicate the need for more or less
risk-management action. In general terms, the use of
these tools can be helpful to correct trends that are fre-
quently present in the warranty program. Consequently,
this analysis should be reviewed during the product’s life
cycle in order to be warned to any change during the
warranty program.
Step 4: Quantitative Risk Analysis.
After the qualitative analysis, a quantitative analysis
[25] of the possible risks during the application of the
warranty assistance is also important. This is a process
which measures the probability and consequences of
risks, estimating their implications for program objec-
tives. It helps to analyze numerically the probability of
each risk and its consequence during the warranty service.
There are techniques for that purpose [26] as well as
other decision analysis which help, for instance and
among others issues, to identify risks which require more
attention by quantifying their relative contribution to
warranty risk, as well as to determine realistic and
achievable cost, schedule, or scope targets for the war-
ranty program. The quantitative and qualitative risk
analysis processes can be used separately or together.
Anyway, when there are repeated results in the quantita-
tive analysis which mark a trend, it is an index about the
need for more or less risk management action. Methods
to quantify risks during a warranty program are for in-
Decision tree analysis (in order to consider different
alternatives and their implications).
Simulation (using for instance the Monte Carlo tech-
nique on a specific model [26]).
Afterwards, a sensitivity analysis should be applied,
which is not really a method of quantifying risks such as
decision trees or simulation. The sensitivity analysis al-
lows detecting how variances in warranty elements affect
the achievement of the whole program objectives.
Step 5: Risk Response Planning.
The following step on the risk management of a war-
ranty program is the response planning, which is the
process of developing options and determining actions to
enhance opportunities, reducing threats to the program’s
objectives. It includes the identification and assignment
of individuals or parties to take responsibility for each
agreed risk response. This planning ensures that identi-
fied risks are properly addressed and the effectiveness of
response will directly determine whether risk increases or
decreases during the development of the warranty pro-
On the Risks and Costs Methodologies Applied for the Improvement of the Warranty Management
Copyright © 2011 SciRes. JSSM
gram. The risk response planning must be appropriate for
our case of warranty assistance. In addition to this, it has
to take into account, for warranty programs, among other
The severity of the risk
The cost to meet challenges
The time to be successful
The context of the warranty program
The influences on every involved part
The response planning must be under the responsibil-
ity of a person, who must be able to determine and select
the best response from the available options to the identi-
fied risks for the warranty program.
Step 6: Risk Monitoring and Control.
Finally, the last step is to monitor and control risks
[22], which is the process of keeping track of the identi-
fied risks, monitoring residual risks and identifying new
risks, ensuring the execution of risk plans, and evaluating
their effectiveness in reducing risks. The records risk
metrics are usually associated with the implementation of
contingency plans, providing information that assists
with effective decision making in advance of the risk
occurrence. Therefore, the risk monitoring is in few
words an ongoing process for the product life cycle
which helps to determine if:
Responses have been implemented as planned.
Response actions are effective as expected.
New responses should be developed.
Warranty assumptions are still valid.
Risks have changed (trends analysis).
Proper policies and procedures are followed.
Occurred risks were not previously identified.
Anyway, risk control should involve the choice of al-
ternative strategies, the implementation of contingency
plans, the application of corrective actions, or replan the
whole warranty program in order to mitigate risks. In the
following chart (see Table 1) are included those inputs
and outputs of the already commented steps for the
Table 1. Inputs/Output summary . Risk manage ment in a warranty program.
Warranty risks management Warranty risks
management Input Output
Risk Management Plan-
Warranty program chart.
Company’s risk management policies and plan templates.
Defined roles and responsibilities.
Risk tolerances in the warranty program.
Work breakdown structure for warranty assistances.
Risk plan for the warranty management
Risk Identification
Risk plan for the warranty management
Scope and objective of the warranty program
Risk categories:
-Technical or quality risks
-Warranty management risks
-Organizational risks
-External risks
-Historical information
List of identified risks
Risks symptoms or warning signs
Insufficient detail in the inputs of other steps
Qualitative Risk Analysis
Risk plan for the warranty management
List of identified risks
Status of the warranty program
Product type
Data precision
Probability and impact scales
Warranty assumptions
Risks ranking for the whole warranty pro-
List of prioritized risks
Trends in the results of the qualitative analy-
Quantitative Risk Analysis
Risk plan for the warranty management
List of identified risks
List of prioritized risks
Historical information
Expert technicians judgment
Prioritized list of quantified risks
Probabilistic analysis of the warranty pro-
gram (for achieving expected costs and
Trends in the results of the quantitative
Risk Response Planning
Risk plan for the warranty management
Risks ranking for the whole warranty program
List of prioritized risks
Prioritized list of quantified risks
Probabilistic analysis of the warranty program
List of potential responses
Common risk causes in warranty assistances
Trends in the results of the qualitative and quantitative analysis
Response plan for warranty risks
Residual risks
Secondary risks
Contractual agreements
Contingency reserves
Alternative strategies
Revision to the warranty risk plan
Risk Monitoring and
Risk plan for the warranty management
Response plan for warranty risks
Program data and records
Additional risk identification and analysis
Scope changes
Work plans (for emerging risks)
Corrective actions
Changes request on the warranty program
Update to the risk response plan
Risk database for the warranty assistances
On the Risks and Costs Methodologies Applied for the Improvement of the Warranty Management
Copyright © 2011 SciRes. JSSM
management of warranty risks. Further researches on this
field can be oriented to deepen in the methods and tools
to develop and execute each commented step in the risk
management for a warranty program.
4. Earned Value Management Applied to
Once described the influence of factors like cost, risk and
time in the warranty management, we melt all these fea-
tures in a technique which allow us the economical fol-
low-up of the warranty service [1,27]. An accounting
system developed for general projects management, ap-
plied and well-balanced to warranty management, is now
presented. This system implies the monitoring of cost
performance to detect and understand variances from
warranty plan, ensuring that all appropriate changes are
recorded accurately in the cost baseline, in order to pre-
vent incorrect or inappropriate changes (out of acceptable
limits) which can affect negatively to the business goal.
The inputs required for this control are, for instance,
warranty cost baseline, performance reports (regarding
budget issues), change requests, and cost management
plan etc. It may also alert the management board to war-
ranty issues that may cause problems in the future and
should be integrated in the general budgetary control
system [28-31].
We first compile the meanings of all those acronyms
(internationally accepted) that are used in this section in
Table 2. It is important here to underline, that the best
warranty service is the one that is not needed to be ap-
plied. Nevertheless (and unfortunately), it does not sys-
tematically happen, so the company must be prepared for
any eventuality that may occur. The following account
ability system referred to warranty management is for the
Table 2. Acronyms meanings.
Acronym Meaning
EVMS Earned Value Management System
EVA Earned Value Analysis
EV Earned Value
ITD Incurred To Date
ETD Estimate To Complete
EAC Estimate At Completion
BAC Budget At Completion
BCWS Budgeted Cost of Work Scheduled
BCWP Budgeted Cost of Work Performed
ACWP Actual Cost of Work Performed
Cv Cost Variance
Sv Schedule Variance
CPI Cost Performance Index
SPI Schedule Performance Index
case when failures in the sold product are foreseen and
they must be handled under warranty. As commented
before, the concept of “benefit” or “earned value” etc.
must be understood in the case of warranty management
as a lower cost in the incurred value applied in the tech-
nical assistance, keeping high levels of service quality.
Earned Value Management System (EVMS) or Earned
Value Analysis (EVA) is an integrated management sys-
tem that allows the progress monitoring, combining (for
our specific case) the technical assistance planning with
the warranty cost. The traditional practice of project
management (Figure 5) tends to compare incurred costs
(actual costs) with planned costs (planned expenditure)
The level of incurred cost in warranty issues is not
necessarily a good measure of progress of the technical
assistances tasks. Therefore, EVA applied to after-sales
provides a third reference point which represents an ob-
jective overview of the status of the warranty contract:
the value of work completed to date and earned value.
This earned value is difficult to understand in warranty
terms, since the warranty application does not imply any
direct income. On the contrary, it is usually considered as
an expenditure centre. Consequently, the philosophy here
is to consider as earned value all this benefit obtaining by
saving resources but applying at the same time a proper
service to the customer. This proper service means fast,
effective and without any additional eventuality to the
customer which supposes a decrease of the confidence in
the company. In the case of Figure 5, one can ask if
there is an excess in the incurred warranty cost, if the
product is behaving in an unexpected (and negative) way,
or if the product launch is advanced in comparison to the
scheduled product positioning in the market. In this fig-
ure, the abscissa axis refers to the percentage of the
whole program time. This program time refers to the
warranty period since a new product is launched to the
market, till the warranty expiration of the last sold unit.
What is here suggested is that the level of incurred cost is
probably not the right choice to determine the progress of
Figure 5. Traditional practice: ITD vs. planned costs.
On the Risks and Costs Methodologies Applied for the Improvement of the Warranty Management
Copyright © 2011 SciRes. JSSM
the warranty program or the reliability of the product
The concept is to compare the budgeted cost and plan-
ning with the actual planning at any time of the program,
integrating the program’s operational progress (earned
value). The basis of the Earned Value Management Sys-
tem applied to after-sales service is the structured de-
composition of the warranty program in work packages.
A value must be assigned to each work package linked to
the completion of activities such as milestones, deliver-
ables related to the warranty schedule. That is in formu-
las as follows:
EV = Earned Value = [Completed% of the Warranty
Schedule] × [Budget for the Warranty Program]
EV = Σ ([Completed% of the Work Package] ×
[Budget for the Work Package])
There are other concepts to have in mind during the
benefit analysis of a warranty program. Such concepts
are for instance the following ones, regarding of course
the work of the warranty program taken into considera-
BCWS: Budgeted Cost of the Work Scheduled
BCWP: Budgeted Cost of the Work Performed
ACWP: Actual Cost of the Work Performed
The graphic (Figure 6) illustrates the meaning of the
above mentioned concept. As we can see comparing the
two above figures, the Actual Cost of the Work (ACWP)
performed corresponds to the Incurred to Date (ITD), and
the Budgeted Cost of the Work Scheduled (BCWS) cor-
responds to the Budget Scheduled at the beginning of the
warranty program.
The Budgeted Cost of the Work Performed (BCWP)
which corresponds to the already defined Earned Value
(EV). In order to implement all this, the warranty pro-
gram must have a defined work breakdown structure. It
does not require being an exhaustive list of tasks; how
ever this is a tool which helps to organize the total work
scope of the warranty program by the subdivision in dis-
crete work elements or tasks of the warranty program.
Consequently, by combining the following information it
Figure 6. Budgeted costs vs. actual costs.
is possible to calculate the earned value, making an early
diagnosis of the warranty program evolution:
Budget for packages of the warranty program
Incurred cost by packages
Warranty program planning
Degree of the operative program advance
Comparing the obtained curves (Figure 7), it is possi-
ble to control the reserves and to determine risks along
the warranty program. Here, the EAC (Estimate At
Completion) corresponds to the Incurred To Date (ITD)
plus the Estimate To Complete, and the BAC (Budget At
Completion) corresponds to the originally planned value
of the complete warranty program. The commented work
packages in terms of warranty are related to that techni-
cal assistance which must be given to the corresponding
amount of product units that are foreseen to be sold ac-
cording to a determined schedule.
The product delivery schedule can be transformed in
terms of warranty costs which are expected to be spent
for a specific amount of units in a specific moment. In
other words, if we know the units delivery schedule and
the foreseen average of warranty costs per unit sold, it is
direct to know the expected warranty cost for the whole
program. Reader can find case studies [36-38] describing
a context very useful to illustrate and facilitate the com-
prehension of these concepts related to warranty terms.
Additional concepts related to this benefit analysis are:
Cost variance (Cv) is the difference between the
Earned Value and the Actual Cost of the warranty
program at any specific time:
Cv = BCWP – PTCA = Earned – Actual
Schedule variance (Sv) is the difference between
the Actual and the Planned Earned Value of the
warranty program at any specific time:
Sv = BCWP – BCWS = Earned – Budget.
Cost Performance Index (CPI) is the rate about
how much costs to generate each of Earned
Schedule Performance Index (SPI) is the rate about
how fast supposes to generate real value in com-
Figure 7. Comparison between EAC and BAC.
On the Risks and Costs Methodologies Applied for the Improvement of the Warranty Management
Copyright © 2011 SciRes. JSSM
parison to the budgeted one:
The meaning of such indexes is as shown in the fol-
lowing chart (Table 3).
These commented indexes are “backward looking”.
However, one of the main advantages of this benefit
analysis is the ability to use these indexes to foresee the
future direction of the warranty program. This is due to
the fact that the calculation of the Estimate to Complete
(ETC) is adjusted to the performance level achieved to
that date:
EAC = ITD + ETC = ITD + (BAC – ITD)/(SPI ×
With these results we can observe that:
If the past performance is good:
CPI & SPI > 1, ETC and EAC < BAC
If the scheduled activities are not been achieving:
CPI & SPI < 1, ETC and EAC > BAC
If CPI & SPI = 1, EAC = BAC
Summarizing, the Earned Value Management provides
integrated data about cost, operations and planning re-
garding (in our case) a warranty program. It is also useful
for an early detection of deviations as well as a provision
of objective information on the status of the warranty
contract. It has the ability to objectively determine the
EAC and the warranty program planning, integrating risk
management and the improvement of cost prediction.
5. Conclusions and Further Research
Throughout this document we have seen various aspects
of the efficiency related to the improvement of the war-
ranty management. Once defined the usual concept of
warranty and briefly proposed a framework for its man-
agement, it has been analyzed risk and benefit as crucial
parts in the warranty efficiency. Nowadays, concepts and
methods for project management are being applied in
many different areas. The intention here has been to
summarize and focus them to the case of a warranty pro-
gram, considering such program as a project with a spe-
cific budget and milestones. Therefore, for such a con-
sideration, a deep knowledge in the product is of course
essential. These tools, in general terms, enable to control
evolution of the warranty program, to foresee possible
new expenses and, summarizing, to take proactive deci-
sions which improve, in last term, the satisfaction of the
Table 3. Chart about CPI and SPI meaning.
>1 (good) <1 (bad)
CPI Under budget Over budget
SPI Ahead schedule Behind schedule
client with the company and with the product provided.
About these financial aspects on warranty management,
further research can be focused to improve the budgetary
control as for instance through the implementation of the
concept of e-warranty in order to foresee the possible
necessity of spare parts, or future complaints from the
user. E-warranty can be therefore defined as the support
to a warranty program which includes those resources,
services and management needed to enable proactive
decision-making. This support not only includes the
e-technologies but also typical activities from warranty,
as monitoring, diagnosis, prognosis, etc. In other words,
these further researches can be oriented to the costs as-
sessment by applying advanced mathematical methods
with the support of electronic technologies, such as re-
mote surveillance and monitoring, and e-diagnosis, etc.
in order to develop more elaborate models. Though the
application of new technologies, the perception of quality
by the customer will not be only related to the internal
production. The external company behaviour is also to be
taken into account, once the product has been launched
to the market. At the same time, it is important to influ-
ence the internal personnel into the search of a continu-
ous improvement. For that intention, the evolution of the
warranty program has to be quantified, making easy the
decision process as budget distribution, marketing ac-
tions, personnel motivation, etc. Warranty has been here
considered as an activity valued in terms of cost and over
the amount of used resources. Therefore, we have tried to
condense the warranty contribution in an indicator re-
lated to consensual criteria according to the company
strategy, taking into account the internal affections, af-
fections in the market and in the customer. In this paper
we have related the quality service to a failure, in order
to improve the decision making in warranty and the
company strategy.
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