Every business thrives on sales growth. As an extended warranty provider grows in market share and issues more service contracts, the organization creates the opportunity to generate greater profits for shareholders. While sales growth creates a short-term cash infusion, the warranty provider must be rational in adjudicating customer claims to fully realize the benefits.
Beyond the adjuster’s time and a possible rental car, the primary components of mechanical claims are labor and parts. While labor time can be determined using estimation guides and market labor rates, choosing the correct part can be more challenging. This challenge is particularly acute with high-dollar drivetrain components, such as engines, transmissions, transfer cases and differentials.
Weighing the Factors
A number of economic considerations must be taken into account when an adjuster chooses between OEM new, used and remanufactured. Choosing the correct category of part can save thousands of dollars in settling a repair claim. However, the adjuster must take into consideration a number of factors to make the best decision in each scenario. These considerations include vehicle age, vehicle mileage, part price, warranty terms and part vendor service level.
Vehicle age is important for several reasons. For newer vehicles (1–2 years old) that experience drivetrain failure, there are often fewer choices for alternative components because used parts have not yet hit the secondary supply chain. In these instances, the adjuster may need to pay the premium for an OEM new part. Conversely, for older vehicles (over 5 years), there are often many options in the secondary market. While remanufactured parts are appealing in these instances, tested used parts often come at a significant discount.
Vehicle mileage becomes particularly relevant for used vehicle contracts that have higher miles (50,000-plus). When mechanical parts fail at high miles, the TPA often has the opportunity to save thousands by installing a used part compared with OEM new or even reman. For example, an adjuster can install a 70,000-mile engine into a vehicle that failed at 110,000, which benefits the customer and the TPA’s bottom line.
While part price can’t be the sole parameter for decision making, it can be a decisive factor for determining the replacement part that makes the most sense. If the adjuster has made the decision to forego OEM new, there is the opportunity to realize a significant cost savings by choosing used or reman. In some cases, reman is not an option (such as many CVT transmissions) and used is the only way to go. In other instances (such as GM truck transmissions), there are many reasonably priced reman options. In this scenario, the adjuster must compare the reman with the quality of a used unit. If the used unit is sufficiently low-mileage and run-tested, then it is worth going used to save several hundred dollars. If prices and warranty terms are equal, then the reman is generally preferred.
Warranties and Reliability
Buying an engine or transmission is about much more than the complex 300-pound contraption strapped to a shipping pallet. Indeed, what you don’t see on the pallet is just as valuable and important as the part itself. If a new, used or reman replacement engine fails after 30 days and it not under a comprehensive warranty, the cost of the claim will double and the customer will be furious.
To fully protect a TPA, a warranty must cover both parts and labor, and should span six months at a minimum, preferably 12. A tested used part with a 12-month parts and labor warranty is a safer bet than a remanufactured part with a three-month warranty. While both parts have a small probability of failure (usually between 4% and 8%), the additional warranty coverage protects the TPA against future expenses that can add up to thousands.
Finally, the reliability of the vendor must be taken into account when sourcing replacement drivetrain components. Vendor quality is particularly important with used and reman parts. The primary criteria to evaluate used and reman vendors are (1) testing/failure rate (2) logistics capability (3) price transparency and (4) after-sale service. A shrewd TPA should carefully track and evaluate each vendor based on percentage of components that fail, adherence to promised delivery deadlines, incidence of price inflation through hidden fees (pallet fees, surprise core fees), and willingness to honor agreed-upon warranty arrangements.
In an imperfect world, no amount of testing can ensure that a component will never fail, and even the best freight carrier will experience delays due to weather and road conditions. The goal is to identify partners that make a deliberate effort to be consistent, reliable and honest.