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If you want to minimize warranty expenses in order to maintain anything resembling profit, then you need to engineer you product so that the average useful life

by abtinf 11y ago

If you want to minimize warranty expenses in order to maintain anything resembling profit, then you need to engineer you product so that the average useful life is well beyond your warranty period. The math is brutal: An solid net profit margin for a typical manufacturer is around 5-7%. Even warranty rate of 5% would send you deep into losses. So the average durability of your product needs to be 2 standard deviations above your warranty period. Of course, not everyone takes advantage of warranties, so you might discount durability to account for that. Also, with regard to the gp specific point about the discussion being in regard to a gaming console: they want the product to last as long as possible. Each additional function unit in existence counts toward their installed base and increases the attractiveness for third party developers.

jsprogrammer 11y ago
You are assuming a normal distribution of failures. A sufficiently evil company would design their failure curves to be as flat as possible until the warranty period expires and then rapidly increase to 100%. The practice still makes no real long-term sense though. What do you do after `warranty_period` expires and no one wants to buy your products anymore?
- mhb 11y ago
  Presumably, ceteris paribus, companies do attempt to design their failure curves to be as flat as possible. Otherwise they are wasting money on components which will survive longer than the whole product. (There is no One-Hoss Shay (http://holyjoe.org/poetry/holmes1.htm) http://holyjoe.org/poetry/holmes1.htm))
a3n 11y ago
> If you want to minimize warranty expenses in order to maintain anything resembling profit, then you need to engineer you product so that the average useful life is well beyond your warranty period. Or the flip side, if you want to go that way. Higher reliability allows you to offer a longer warranty, attracting either higher prices or more customers. This is part of how Japan made themselves mainstream car sellers in the US. They calculated that the cars had to be more reliable, because in the early days without a lot of infrastructure, recalls would be very expensive. So they made the cars reliable. Allowing them to offer longer warranties. I just bought a two year old Toyota, after driving a Honda that I bought new for 25 years.
brianwawok 11y ago
Well it depends.. even if an Xbox1 has a -10% profit margin and a 10% failure rate.. Microsoft can still make back their money on game licensing and xbox live fees. For something like a car or a Microwave this is not the case, but this is why the profit margin on a Microwave is closer to 50% than 5%
- abtinf 11y ago
  Be careful not to confuse gross profit with net profit. Gross profit is how much money you make less the raw cost of materials. Net profit is your final profit after accounting for labor, marketing, support, overhead, taxes, and so forth. For example, take a look at the financials [1] for Black & Decker, a manufacturer of tools. For the quarter ending 4/4/2015, they had gross revenue of 2.6 billion. Less cost of goods sold, they have a gross profit of almost 1 billion, or about 61% gross margin. But then observe all of the numerous expenses and taxes they have, which causes their final Net Income (aka net profit) to drop to 162 million, or a net margin of about 9%. 9% can be considered an outstanding rate of return in this industry. If you could come up with a way to build a manufacturing company with such a return, you could have your own IPO. [1] https://www.google.com/finance?q=NYSE%3ASWK&fstype=ii&ei=-AmgVcm1EO32iQLLwICICA https://www.google.com/finance?q=NYSE%3ASWK&fstype=ii&ei=-Am...

by abtinf 11y ago

jsprogrammer 11y ago

You are assuming a normal distribution of failures. A sufficiently evil company would design their failure curves to be as flat as possible until the warranty period expires and then rapidly increase to 100%. The practice still makes no real long-term sense though. What do you do after `warranty_period` expires and no one wants to buy your products anymore?

mhb 11y ago
Presumably, ceteris paribus, companies do attempt to design their failure curves to be as flat as possible. Otherwise they are wasting money on components which will survive longer than the whole product. (There is no One-Hoss Shay (http://holyjoe.org/poetry/holmes1.htm) http://holyjoe.org/poetry/holmes1.htm))

a3n 11y ago

> If you want to minimize warranty expenses in order to maintain anything resembling profit, then you need to engineer you product so that the average useful life is well beyond your warranty period. Or the flip side, if you want to go that way. Higher reliability allows you to offer a longer warranty, attracting either higher prices or more customers. This is part of how Japan made themselves mainstream car sellers in the US. They calculated that the cars had to be more reliable, because in the early days without a lot of infrastructure, recalls would be very expensive. So they made the cars reliable. Allowing them to offer longer warranties. I just bought a two year old Toyota, after driving a Honda that I bought new for 25 years.

brianwawok 11y ago

Well it depends.. even if an Xbox1 has a -10% profit margin and a 10% failure rate.. Microsoft can still make back their money on game licensing and xbox live fees. For something like a car or a Microwave this is not the case, but this is why the profit margin on a Microwave is closer to 50% than 5%

abtinf 11y ago
Be careful not to confuse gross profit with net profit. Gross profit is how much money you make less the raw cost of materials. Net profit is your final profit after accounting for labor, marketing, support, overhead, taxes, and so forth. For example, take a look at the financials [1] for Black & Decker, a manufacturer of tools. For the quarter ending 4/4/2015, they had gross revenue of 2.6 billion. Less cost of goods sold, they have a gross profit of almost 1 billion, or about 61% gross margin. But then observe all of the numerous expenses and taxes they have, which causes their final Net Income (aka net profit) to drop to 162 million, or a net margin of about 9%. 9% can be considered an outstanding rate of return in this industry. If you could come up with a way to build a manufacturing company with such a return, you could have your own IPO. [1] https://www.google.com/finance?q=NYSE%3ASWK&fstype=ii&ei=-AmgVcm1EO32iQLLwICICA https://www.google.com/finance?q=NYSE%3ASWK&fstype=ii&ei=-Am...