How Are Warranty Claims Impacting Your Bottom Line?
August 2006, Auto Dealer Today - WebXclusive
In the car business, warranty administration is often one of the more overlooked parts of the business. Frequently little attention and oversight is paid to warranty issues and this can have a detrimental impact on the bottom line.
Warranty is not an avenue that we should use to increase profits in the service and parts department, and, improperly managed, it can be a big drag on profits and you could be losing money owed to you.
Here's a quick checklist to determine the financial health of your warranty administration processes.
Warranty Schedule - The first place to look is the warranty schedule. The warranty schedule will give you a list of closed repair orders that haven't been paid for by the manufacturer yet. While variations in the time frame that a manufacturer pays claims can affect what your warranty schedule looks like, a good rule of thumb is that only a small number of claims should be over 30 days.
If a manufacturer pays claims daily, semi-weekly or weekly, most claims shouldn't go over 15 days. If it's less frequently, then factor that into your expectations. In all cases, it's best to assess a warranty schedule after recent payments have been credited to the schedule.
Open Warranty ROs - The warranty schedule isn't the only place to find unpaid warranty claims. The open RO or work-in-process report will list all warranty ROs (and other pay types) that haven't been closed yet. This report is an often overlooked one and is just as important as the warranty schedule is to finding out what warranty claims haven't been paid. Not all the ROs on the open RO or work-in-process report should be closed; some may still be in process because the vehicle is being worked on.
Warranty Labor Rate - How does your warranty labor rate compare to your customer pay retail rate? If the two aren't the same, your warranty labor rate shouldn't be more than a few dollars less than your retail rate. Without question, your warranty labor rate shouldn't be lower than your effective labor rate. If your warranty labor rate is too low, it's time to ask the manufacturer for an increase.
Warranty Parts Pricing - You'd be surprised at how many dealerships don't have their computer systems set up to properly price parts correctly. Incorrect parts pricing shouldn't adversely impact the price claims are paid at (General Motors being an exception), but it will cause claim payment discrepancies on the warranty schedule and parts sales figures on DOC reports and financial statements to be underreported. Incorrect sales figures and payment discrepancies on the warranty schedule will obscure the total picture you'll have of your financial situation.
Claim Debits - Claim debits can come in the form of many different items but the most common are for parts return debits, audit chargebacks and claim document requests that were never returned. Unless you look at the specific debit and not the total dollar amount, you won't know what the debit was for. If you find any debits, you should speak to your service rep and see what can be done about reversing some of the debits and how to eliminate them in the future.
This quick checklist should be used to make sure your warranty dollars are being managed correctly. However, keep in mind that this list does not take into account whether or not your warranty numbers are in good shape or your documentation is in compliance. Those are two more warranty issues you should take a look at to ensure your warranty claims system is run properly. By taking time now to investigate potential drains on your cash flow, you'll ensure profitability.