by Loren Nasser, President & CEO
By all indications, we have now experienced the worst of the economic downtown. Once again, companies are beginning to think through their plans for accelerating growth rather than on hunkering down for dire financial times. The darkest storm clouds have now passed and glimmers of blue sky can be seen in the distance.
Those of us with P&L responsibility have a shared understanding for the tough decisions that had to be made last year. As the nervous public began pulling out of market, most publicly traded companies watched their stock price drop by 30% or more. Financial institutions backing companies like yours demanded increased cash reserves. Spending stopped. No doubt your mandate was on cost reduction – anything to preserve cash.
Some of the cost cutting actually needed to be done anyway. During the strong growth years, some unnecessary spending always slips though and it’s in the tough economic times that those costs are forced back out. But the question to contemplate is, “did you really position yourself for operating lean and mean for the long-term or was all your cost cutting simply focused on short term expenditures that will eventually creep back in?”
I’m referring to warranty cost – that write-off to the bottom-line that derives from past products not living up to expectations. Statistics indicate that a whopping $40 billion in warranty costs are expended by US companies annually. The auto sector alone accounts for a large chunk of this. Most companies have a financial wiz team with statistical algorithms for forecasting warranty. But if their witch’s brew of statistics really worked as they say it does then why didn’t the forecast get back to the product team in time for them to do something about it? Or maybe it doesn’t work that well.
Given it may be 2-3 years into the future before today’s product decision making results in the level of warranty expenditure I am referring to, how much effort and cost should you expend today trying to avoid it? That’s the dilemma most P&L decision makers face having to dealing with. And we all know the “fix” isn’t that easily implemented or you would have already done it.
I’m suggesting that this is the perfect time to address this big-picture issue. Think about it from this perspective – you are already lean relative to your company’s short term cost perspective (the economic downturn mandated that), the path to revenue recovery is now in sight and your team is planning for growth acceleration in 2010. My primus is that in setting up an internal tiger team to attack the heretofore most bedeviling issue of warranty now, you will out-flank would be competitive threats to your market position 24 to 36 months down the road. Your margins will be higher without warranty cost detracting from them and your market position will be enhanced though higher customer satisfaction. They’ll all wonder how you did it but let’s make them buy your post-retirement book to find out…
— Loren Nasser, CEO and Co-founder, VEXTEC Corporation