Equipment Type

How to Maximize Extended Warranties

Cost-effective coverage takes into account historical equipment data and an analysis of policy details.

May 23, 2014

Reprinted with the permission of Equipment Manager magazine, the magazine of AEMP.

 

An extended warranty on fleet equipment is a safety net. Without it, you run such a risk of free-falling into catastrophic failure that not even the Flying Wallendas would chance it.

Gil Gilbert, CEM, who is fleet manager of the Henkels & McCoy Pipeline Division in Pennsylvania, described extended warranties as a purchase plan that basically is available to any purchaser or fleet professional. These warranties can provide bumper-to-bumper coverage or be whittled down to coverage of specific components. Extended warranties apply to both off-road and on-highway fleet vehicles.

Such warranties are generally offered at the time of equipment purchase or, in some cases, six months before the expiration date of the original warranty.

“Fifteen years ago most components were manual, easy to rebuild and didn’t require a lot of tooling to get the job done,” Gilbert says. “There wasn’t as much electronics involved and it was fairly easy to accumulate money to implement a proactive component-replacement program over the life of the equipment.”

Those days are gone, he says. The new world of electronics and emissions control devices permeates so many equipment components, from engines to particulate filters, that it is no longer cost-effective to have in place the tooling and trained technicians to keep up with the technology.

“A good extended-warranty program—and I emphasize the word ‘good’—gives you the assurance that if you have a component failure outside the warranty guidelines the equipment is covered, parts and labor,” Gilbert says. “If you prefer, you can have the warranty cover only parts or only labor.”

For instance, if Gilbert specifies a machine, he generally checks to make sure the OEM’s extended warranty has a performance guarantee.

“Any OEM worth his salt will provide you with a performance guarantee,” he says. “There’s no one out there who knows the equipment and how it performs better than OEMs. They are going to know basic life cycles. They are going to have a baseline of average component failures. When the OEM says he is going to guarantee that components will operate at this level, at that particular point and time, then you are not going to experience any premature failure that is not covered by the performance guarantee. Of course, the equipment has to be maintained as recommended and taken care of.

“Make no mistake about it,” he says, “every component in a machine is designed to fail at one time or the other. With this being said, OEMs can tell through their historical data how long a component will last.”

In deciding whether or not to purchase an extended warranty, managers must look at what they can expect from component life, have an idea of costs when it comes to rebuilding that component and do their homework, he says. Understanding the parameters of the warranty is vital.

“Most extended coverage talks about OEM defects. What OEMs don’t tell you is they are talking about the casting,” Gilbert says. “If the casting cracks, they will cover it. If the casting rusts through, that’s a maintenance issue and they won’t cover it. Most people not only buy extended coverage without knowing that, but they buy extended coverage without even knowing what’s in the package.”

The more warranty that is purchased, the more it costs. Again, managers must do the homework to evaluate the warranty’s value.

“You have to consider the possibility of raising your life cycle cost to accumulate dollars in anticipating those repairs,” Gilbert says. “You have to determine if it’s cheaper to buy extended coverage up front.”

Many managers look at extended warranties as a way to establish a fixed cost over an extended time, which makes it easier to budget. “You don’t have to use a crystal ball to guess how much money you need available to replace that equipment,” Gilbert says.

Buying an extended warranty is not without its potential pitfalls. “There are all kinds of such warranties out there, and some cover basic consumable (wear) items,” says Gilbert. “It makes absolutely no sense to buy that initial coverage because it is based on an unknown. Being consumable, it gets eaten up over time, depending on the operation, the operating conditions and on the machine operators themselves. A good operator can make a tremendous difference in the life cycle cost of that machine,” he says.

Undercarriage components on tracked equipment are one example of consumables. “The average undercarriage of a dozer [might] cost about $40,000 to $60,000 to rebuild. The rollers, bull gears and sprockets are all wear items—they all wear out as they go. If you know the average cost over a period of time, you can accumulate dollars for that. However, the variable here is where your vehicles operate. If you have a track machine working in a sandy environment and another machine working in clay conditions, the sandy application is going to wear out those components much faster than the clay application. In that scenario, an extended warranty makes sense in the sandy application.”

Another pitfall in extended warranty purchase is not knowing who the underwriter is. If dealing directly with most major OEMs, Gilbert says, chances are the coverage will be better. But, as an example, if the underwriter is an insurance company, there might not be the flexibility to exercise the policy that an OEM warranty has.

“If you don’t know who the underwriter is that’s backing up the coverage, you are dealing with an unknown,” says Gilbert.

Robert Knouse, CEM, maintenance manager for Republic Services, says an extended warranty works like an insurance policy: Coverage applies only to what is named in the extended warranty. If only the powertrain is included and the door hinges on the equipment are bad, the extended warranty won’t cover the hinges.

“Make sure you read and understand the extended warranty you are buying,” he says. “A warranty should provide cost savings if you need it. They cost money, and if you’re not going to use it or don’t use them now you probably don’t want to incur that cost. But if you are aware of a problem that’s showing up after the standard warranty expires, then you may want to look at extended warranties.”

For instance, a manager might include truck frames in an extended warranty, says Knouse. If three or four vehicles have frame problems, then include that in your warranty clause. But if only one frame problem has occurred in the past 10 years, that clause probably isn’t needed. Most extended warranties only cover the powertrain unless you ask for additional coverage.

“It’s amazing that most people don’t even use the parts warranties they already have,” Knouse says. “They won’t do the little stuff, like LED lights that are warranted for three years. On standard parts warranties, you should recover anywhere from 9 to 10 percent of your total parts spend for the year, but most people don’t even do that. They don’t want to track it. If they buy the same product from six suppliers, they must track how many they purchased from each vendor or the vendor may balk if you bought three but returned 15 items for warranty. The question with any warranty becomes: Is it worth it? The cost can vary greatly with warranties, so you want to do your procurement homework so that you make sure you’re getting the best warranty for your money.”

Knouse stresses the importance of making sure maintenance is “absolutely world-class.”

“That will affect the price of the warranty,” he says. “If OEMs or dealers know you run equipment into the ground, they will take your money, but it will be easier for them to deny your claim. And the warranty will cost you more up front.”

Evaluating the value of a warranty is based on “how much you need right now,” he says.

“Experience, dealers and communications within your industry can provide valuable information on current problems fleet professionals are seeing,” he says. One natural gas engine manufacturer experienced so many problems, he says, that the company actually put questionable components that had a manufacturing defect in an extended warranty. “The cost of recalling all of the engines would have been huge compared with the price of giving an extended warranty and performing the corrections on an as-needed basis,” Knouse says. “Right now that coverage is free, but that runs out after four years.”

Telematics and warranties

There is little doubt that telematics has had an impact on extended warranties, Knouse says. “It helps you look at the use—and abuse—of your equipment. Almost every company now has good factory-installed telematics on its equipment. For instance, if telematics shows that an operator turned off the regen of a DPF and caused an engine failure, it could result in denial of the warranty claim. But by using telematics, you can catch these problems and change the behavior of the operator before it becomes an expensive issue.”

Many fleet managers—at least in the beginning—want the technology to give them everything, says Knouse. “And they wind up getting so much information they can’t possibly process it all. They might say, ‘Send me the engine diagnostics twice a day.’ But if they have 1,000 pieces of equipment, then suddenly they are going to get hundreds of e-mails and then realize they cannot process it all.

It can get ugly really fast if you’re not careful.”

At Henkels & McCoy, Gilbert says telematics “absolutely” has an impact on extended warranties.

“Extended warranties have the same parameters that standard warranties have,” he says. “If you buy a machine, you are going to get the OEM’s basic program: location, utilization and on-off events. What they are very reluctant to let you see is major component condition and status reports. They utilize that information.”

Gilbert says if he had 1,000 hours on a fleet machine when it had a major failure, “I’m going to tell the OEM that my guys did this and that. The OEM can actually go in via telematics, look at the ECM of the engine and know exactly what was going on at the time. At that point, they have every right in the world to deny the claim—saying, for example, the machine overheated and your operator kept running it anyway.”

If the piece of equipment is something Gilbert absolutely needs, he installs his own aftermarket telematics. That way he knows if the operator is operating the machine in the proper fashion, not idling too much or overloading, he says.

“Although aftermarket telematics gives you the same information, it’s much easier for the OEM to give you full access to the data you need,” he says.

Robert Burnett, project manager, marketing service for John Deere Construction & Forestry, says telematics is revolutionizing the industry and will continue to change it.

“The real value of telematics data to the OEM is that it offers a tremendous opportunity to prevent and reduce warranty claims before failure,” Burnett says. Where the OEMs get their money’s worth is in allowing manufacturers to gather trends and data that help them build better machines, improve customer experience and avoid failures before they occur, he says.

“If a failure does happen, John Deere’s diagnostic and programming technology significantly reduces the amount of downtime and expenses incurred by downtime.”

Cost of extended warranties, he says, will vary depending on the coverage, length of the agreement and type of equipment. Deere has various types of extended warranties, says Burnett, ranging from engine-only to powertrain, powertrain plus hydraulics and full-machine extended warranties. “Also, a customer can customize the coverage type that best meets his individual needs.”

In buying extended coverage, a customer should consider not only the terms in months and years, but also the length of the agreement. Other considerations, Burnett says, are transferability and who is responsible for honoring the warranty and performing repairs.

“Most OEMs sponsor their own extended warranty programs, but third-party programs are also available,” he says. “Among the key questions an end user should ask are: Can the warranty be transferred to the next owner of the machine? Does the manufacturer back the warranty, and are repairs performed by authorized dealers with trained technicians?”

With equipment operators playing such an important role in standard and extended warranty claims, Burnett says monitoring by fleet managers can be “a very simple thing (such as) idle time. JDLink customers are often shocked at the amount of time machines spend idling. Not only is idling time wasting fuel, it is also ticking away valuable warranty hours,” Burnett says. “With all the data provided by telematics, customers can see in incredible detail, for instance, time in gear, engine load levels, tire pressure and filter soot levels. We can even track productivity by operator on some machines,” he says.

As Knouse advises, “Make sure you know what you’re getting in an extended warranty, make sure you analyze your cost and make sure it is actual value,” he says. “The definition of value is will the customer pay for it?”

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