Early profit warning: TREAD Act exposes value of automated tracking systems   

Automotive manufacturers could see valuable side benefits by adhering to a key provision of the Transportation Recall, Enhancement, Accountability and Documentation (TREAD) Act.

By Sidney Hill, Jr., executive editor November 5, 2007

The U.S. Congress passed the Transportation Recall, Enhancement, Accountability and Documentation (TREAD) Act

But automotive manufacturers could see valuable side benefits by adhering to a key provision of the act. Specifically, industry analysts say, manufacturers that comply with the TREAD Act’s requirement for establishing an early-warning reporting system should see the following benefits:

At least one technology vendor—data warehousing and business intelligence specialist Teradata —claims to be working on solutions that will make it easier for manufacturers to create and manage early-warning systems.
Joe Barkai, a practice director who follows the auto industry for Framingham, Mass.-based IDC , says U.S. automakers should be particularly interested in these solutions

“When you look at initial quality—which is measured over the first 90 days—U.S. and Asian cars are basically the same,” Barkai said in a recent interview. “But as you get near the end of the warranty period, the Asian products are proving to be superior.”

This translates to real money, Barkai said, noting that Asian car companies like Toyota and Honda pay roughly 1.5 percent of sales annually on repairs covered under warranty, while U.S.-based companies are expending 2 percent to 3 percent of annual sales on warranty costs.

The nature of automotive supply chains—in which as many as 70 percent of the components that make up a vehicle can be built by suppliers—makes it difficult to isolate the cause of a product defect. But Barkai says that only

“Car companies always had early-warning systems,” says Kamau Njenga, a program director for global industry solutions with Teradata. “The problem has been that because of the sheer amount of data involved, they could only implement targeted early-warning programs. In most cases, those programs were limited to looking at components that they expected to fail.”

Njenga says Teradata is working with seven automotive manufacturers—five in Europe and two in the U.S.—on automated early-warning solutions.

“We have frameworks of solutions that play to our strengths, which are dealing with large sets of data and integrating data from many parts of the organization,” Njenga says. “We can organize this data and do complex calculations that [enable the] manufacturer to predict which components may be likely to fail.”

The Teradata early-warning solutions typically include a Terdata data warehouse, and its data-mining tools. With these tools in place, Njenga says, “You can track every component in a car.”

In its current engagements, Teradata is using information on warranty claims to help manufacturers address quality issues with specific components before more cars containing those components come off the line.
“We are working with both original equipment manufacturers [OEM] and suppliers,” Njenga says. “They have the same issues, but the OEMs are paying out for more claims.”

Barkai, the IDC analyst, says OEMs spend more on warranty claims partly because their tracking systems don’t easily determine where problems originate—i.e., with the OEM or a particular supplier. OEMs that successfully adopt defect-tracking systems will be able to make those determinations, and ultimately hold suppliers responsible for those costs, he says.

Even if they choose not to allocate warranty costs to suppliers, there are other good reasons for automakers to adopt these tracking solutions.

“It’s not unusual for a problem to linger for 200 days before it’s resolved—and this is after the OEM becomes aware of the problem,” Barkai says. “Typically car companies have looked at paying warranty claims as a cost of doing business, but they are starting to understand that this also erodes brand value, which can have long-term financial consequences. The TREAD Act is pushing companies to look at early-warning systems because they are required to report on any issues that could lead to safety problems, but they are starting to see broader value.”