Volume 8, Issue 3 - March 2007

Trend Tracker

Uncovering a Secret 
Certifications Could Lead to Fewer Warranty Expenses
by Michael Collins

In the time since we initiated our research into the coming wave of competition from companies in China and elsewhere, we have had numerous conversations with door and window manufacturers and distributors regarding that topic. The conversations with distributors have probably been the most interesting that we have had so far. Door and window manufacturers have every reason in the world to undertake steps to compete with foreign manufacturers more effectively. Our article in January DWM (see page 34 of that issue) covers these steps.

Curious About China
Distributors, we are finding, often have very a different reason than manufacturers for learning about Chinese manufacturers. Distributors are curious as to the quality of Chinese products and the steps needed to source goods overseas. 

Overseas manufacturers will not have to push their way into the U.S. market. It appears that U.S.-based distributors will pull them into this market, and a number have already done so. Additionally, we have talked to a number of manufacturers who are gathering information to decide whether to begin sourcing whole products or components in China. We polled several hundred door and window manufacturers recently regarding their plans to attend trade shows in 2007. In addition to the International Builders Show (IBS), the Association of Millwork Distributors (AMD) show, GlassBuild America and other events, a handful of them intend to attend one or more of the several trade shows in Asia regarding doors and windows. Following the webinar hosted by our company in November, during which we discussed the competition coming from China, several companies requested our list of Chinese door and window manufacturers so they could begin conducting due diligence on importing products from those companies.

Alibaba.com, one of the websites we have utilized in our China research, exhibited this year at IBS in Orlando. The site helps companies find overseas sources for hundreds of different products. Its decision to exhibit at the show is another indication that companies in the building products industry are interested in sourcing production of goods in China and other international locales. It is possible that the manufacture of products at the greatest risk from overseas competition–high-volume, low customization products–will move overseas more quickly than many suspect. 

Commonality: Warranties and Certification
On another (but related) note, the results of the recently completed Window and Door Industry Benchmark Survey for mid-year 2006 include an analysis of the warranty expenses of the companies that responded. Our results showed that, overall, the companies that responded accumulated warranty expenses that averaged roughly 1 percent of revenues. Interestingly, there were no discernible differences between the warranty expense ratio when we examined large companies versus small or companies from various product groups (windows, entry doors, interior doors, overhead doors). One pattern that did emerge was a connection between warranty expenses and certifications earned by reporting companies. The most common certifications earned by the companies participating in the survey were the Energy Star® rating, followed by certifications through NFRC, ASTM, ANSI, FMA, AAMA and others. 

To determine the relationship between warranty expenses and certifications, we first arranged the reporting companies in order of their warranty expenses as a percentage of revenues. We then examined the distribution of companies with various certifications between the top half of the list (those with the highest warranty expenses) and the bottom half (those with the lowest warranty expenses). 

If there was no relationship between certifications and warranty expenses, we would expect there to be a roughly equal number of certified companies in the top and bottom half of the list. However, that is not the case. In fact, the majority of companies with certifications fell into the bottom half of the list, among the companies with the lowest warranty expense ratios. 

It is important to assign causality to this relationship correctly. The credit for the lower warranty expenses most likely belongs to the process that companies undergo in order to achieve the various certifications. In ensuring that products will meet the stringent standards of the various certifying bodies, it appears that companies improve their product quality and enjoy the tangential benefit of lower warranty expenses.

Achieving certifications is a good way to differentiate oneself from foreign and domestic competitors. Now, however, it appears that the process of achieving certifications brings the added benefit of reducing warranty expenses. If a company with $20 million in revenue can reduce its warranty expenses by even one-half of one percent, an additional $100,000 will drop straight to the bottom line. An annuity like that, when combined with enhanced protection from foreign competition, can go a long way toward compensating a company for the additional expense and effort of the certification process. 

Michael Collins is with Jordan, Knauff & Company, an investment banking firm that specializes in the door and window industry. He may be reached at mcollins@jordanknauff.com.


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