The reserve, sometimes called provision under the International Accounting rules, is not cash set aside in a separate account, but rather is a liability on the books until the end of the year when the books are closed. The percentage is a function of anticipated cost for repair, return, or replacement. It could be 2% if the company has such a track record based upon actual field returns and associated cost. As such, the warranty reserve does not affect production cost, but is tallied under Cost of Goods Sold on the chart of accounts based upon the company's accounting choices and practices. Out of every dollar the company spends, there are percentage allocations for inventory, direct and indirect labor, and overhead costs. At the end of the fiscal year, if $100,000.00 was set in reserve and only $20,000.00 was used, then the company can convert the remaining reserve of $80,000.00 from a liability to a positive credit. Production cost are usually a function of inventory, (Materials, both direct and indirect) and labor, (direct and indirect). Sometimes Payroll gets thrown in the mix instead of considering it as overhead. Every company has basic rules of accounting, but every company also has it's own practices and sometimes the accounting methods can change mid year. I would really like to see an accountant weigh in on this topic as I only have two years of experience with QuickBooks in a start-up operation. Also, it is really advisable for every company to graphically represent there spending dollar with partitions indicating where each percentage of the dollar is spent. Inventory can be a major chunk, but there are burdened cost associated with the costs of carrying that inventory. I have seen figures like 10% for burdened cost. If anyone can speak to this, we would all benefit from hearing from you.
Douglas Alexander : In your comment, you mentioned that company always reserve 1% for repair and replacement but if a component is 3F qualified as indicated, Would the company reserve 1% of every batch for the repair and replacement? How would that reserve affect the production cost?
Douglas, even I am not so expert in the sector (not so much for writing an editorial about), in my opinion your are outlining a very fascinating topic to address. I agree also with the fact usually buyers attitude is to avoid warranty analysis, including additional spares, despite recent drammatical events, for example at the time of strong hearthquake in Japan, could be demonstrate people have considered that analysis, held a very wise approach.
Very interesting responsed, although I don't quite agree with the ranking given by Prabhakar. I think that it should be: (1) CE, (2) CE, (3) Purchasing, (4) Purchasing & CE, (5) Purchasing & CE, (6) CE, (7) Purchasing, (8) CE, DE, Purchasing, Mfgng, (9) CE, (10) CE/Purchasing, (11) Purchasing, (12) Purchasing/CE, (13) CE, (14) CE, (15) CE.
Anna, Bolaji Ojo is the engin behind this EBN blogsite. If you write to him, he will be most receptive to any comments regarding the format you may suggest. As far as references go, please refer to the library section on www.componentsengineering.com. These are books from my personal library and so if you have any questions from any of these sources, I would be happy to help you with anything I can.
If you go to www.componentsengineering.com and look under core disciplines, you will see many free documents and guidelines that will assist you in your day-to-day work efforts. Thank you for the kind words. I am discovering that by reading all the comments connected to any blog, a wealth of additional knowledge. This community is with it. I enjoy interacting with those who comment so I hope you find many helpful comments from everyone contributing. Thanks again for the encouraging feedback.
Douglas, I read the article and then I read your bio and was impressed. It seems to me you probably have more of these type of practical information of importance to supply chain folks. Have you thought of packaging this in a searchable data for EBN readers? What other topics are you planning to work on for the site and could you add references to other reading materials in future blogs?
Good point mfbertozzi. If a product is under warranty, sometimes a company will set aside 1% of the COGS to be drawn upon to support repair and return operations. But, rarely do we see Purchasing buying part quantities with warranty support in mind. One reason is the MRP is set up for J.I.T. And the EOQ may include anticipated scrap materials from shop floor budgets, but warranty part replacements are usually taken from inventory locations not specifically allocated to R&R. So, Operations experiences unanticipated shortages as the inventory raids are for the most part unplanned events. Does anyone want to do an article on the cure?
Good receiving clarifications Douglas, really appreciated. I've taken a look at sections you mentioned, I understood them in terms of physical perspective instead of market perspective and it was the sense of my previous post. Sorry in case I made mistakes.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.