Wednesday, February 9, 2011

Negotiation - Thoughts On Negotiating Warranty Redemption

 In negotiating warranty redemption provisions, just as Buyer’s are concerned about the Supplier’s quality checks prior to shipping parts, Suppliers are concerned that Buyers have a similar quality process in managing returns to screen out items that aren’t defective items. Since many Suppliers are concerned about this they may want samples of the defects to be provided so they can verify the defect prior to issuing a return material authorization to return a larger quantity. Supplier’s may also want to negotiate in no-defect found or no-problem found charges for those situations where the Buyer returns good Product to cover their costs of checking inspecting and testing those returns. Suppliers may also want for the parties to split the cost of the returns with the Buyer paying for the return to the Supplier and the Supplier paying for the return back to the Buyer.

For the Buyer, the primary concern in negotiating warranty redemption is the speed in which the repair or replacement will be performed. The speed in providing a repair or replacing an item will impact how long you may not have the product or service available for use.  If you maintain an inventory of items, the time it takes to get a repaired or replaced item impacts the inventory levels that you may need to carry.

Issues like No-Problem found requests can easily be dealt with by offering the Supplier to agree to pay that, if they pay you for all your costs every time they send you a defective product, which is a proposition I’ve never had a Supplier accept.

Supplier requests, such as wanting samples sent where they can verify the defect, create a serial approach where you need to be concerned about the cumulative period. First they want a time to verify the defect, then they want a time to issue an RMA, then they want time to provide a replacement of perform the repair. The total impact can be of substantial. It adds time to the period during which you or your customer may be down, not able to use the product or service. If you maintain spare items, it drives your investment in inventories up. The higher the value of the product, the greater the investment in inventory and the more quickly you need to have the repair or replacement of the product turned around and can’t wait for a serial process to occur. 

To reduce the amount of time I’ve seen “advance swap” programs be implemented where when the Buyer has what they believe a defective item, they contact the Supplier and the Supplier ships out a new or repaired item in parallel with the Buyer returning the item under warranty.  If the product was bad the Supplier repairs or replaces it, if the product was good it goes into their inventory for the next advance swap. While many Suppliers may be reluctant to agreeing to an advance swap program because it adds to their inventory costs, you may want to consider it as a remedy that they are required to implement if you have an excessive number of defects.

Any time the Supplier wants to include a step prior to your return you need to be careful.
For example if they want to verify the defect, that’s equivalent to the having them agree. If they fail to agree you don’t get warranty redemption.  If you need to have a situation where you provide the Supplier with a sample before they issue and RMA, I would require that 1) they agree to act in good faith in performing the verification, and 2) establish the maximum period they have for their verification. What the requirement of good faith does is prevent against them acting in an arbitrary manner. What the firm time period does is to prevent against unreasonable delays on their part in performing the verification.

I would also review the warranty redemption section to determine whether the standard remedies for breach of warranty redemption are going to be effective in terms of driving the Supplier’s behavior. A common remedy is if the Supplier fails to perform the Buyer would have the right to procure it elsewhere and charge the Supplier the difference. That may not be practical as other Suppliers may not be able to repair or replace it.

As to the cost of the shipping as part of warranty redemption, my position has always been that we paid for the Supplier to provide a high quality, high reliability product. We also paid to have that product shipped to us. Since we paid once, we shouldn’t have to pay again.  Paying to return defective products adds to you life cycle cost and it’s a cost you have no control over. If you must agree to it, consider adding a requirement that if the quantity of defective products exceeds a certain amount,  the Supplier assume the costs both ways.  

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