DETROIT – Excessive warranty costs affect everyone’s bottom line, and IBM has developed a business model to stop the hemorrhaging of millions.

Warranty costs are up to $700 a vehicle annually in the U.S., says Linda Ban, global industrial sector lead-IBM Institute for Business Value, at a press conference at Convergence 2004 here.

And 50% of the $23 billion spent annually on warranty costs in all industries in the U.S. are automotive.

To address this serious problem, all of IBM divisions worked together to develop a component business model and set of tools to help clients look at their business differently. So far, it is being applied to a few industries: automotive, retail and banking.

IBM has applied for a patent, which is pending, for the model.

It is not a one-size-fits-all solution, says Ban. But the business model helps a company prioritize based on its goals, strategies and issues. It allows executives to see how one change affects the rest of the business, and it takes away organizational, geographic and technology barriers.

A warranty is a good thing in that it is a commitment from a manufacturer of quality, says Larry D. Stolle of IBM Global Services Industrial Sector Automotive Industry Practice.

Warranty numbers are an indicator of quality and can impact the value of a brand. Stolle says he has seen companies suffer a 20% sales decline due to quality issues, for a $1.2 billion loss. “Excess is an issue,” he says.

Warranty numbers can act as a scorecard on what a product is doing, an untapped gold mine of information and potential savings, he says.

One of the biggest problems is latency. Research shows the time between the reporting of a problem and having a solution to implement is 160-220 days, says Ban. “Every day can take out $8 million to $10 million (in expenses),” she says. Conversely, reducing warranty costs can mean $10 million in savings per day.

It translates into greater returns to the shareholders and is money that can be reinvested, Stolle says.

In a typical auto maker’s production run of 200,000 vehicles, at $700 a vehicle in warranty expenses in North America or Europe (less in Asia/Pacific), a 10% reduction in warranty costs translates into savings of $14 million.

apriddle@primediabusiness.com