Home is Where the Warranty Is:

D.R. Horton Inc. is a company founded in Dallas in 1978 by Donald R. Horton. Today its operations extend nationwide into 20 states from Hawaii to Maryland, with a major presence in Arizona, California, Texas, and Washington.

The company spend $5,197,000 to satisfy warranty claims during the first quarter. With $1,777,829,000 in reported home sales during the period, its ratio of claims to sales came in at an industry-leading 0.3%. Obviously, the big question is what D.R. Horton is doing that makes its warranty claims costs so much lower than is the case with its competitors.

A person in the legal department unlucky enough to answer the phone while the boss was out of town told Warranty Week that the way Horton is set up, each division takes care of warranty individually. Instead of having a national warranty manager, there are people in each division managing warranty. What works in Atlanta doesn't necessarily work in Hawaii. So when routine matters arise, they don't have to come back all the way up to the top. Decisions can be made quickly, even at the local level within a specific community development. Major decisions are made during periodic gatherings of the division presidents, of which one took place last week. This reduces overhead and improves responsiveness, she said. Internally, they call this decentralization process "Hortonizing."

Louis Warren, D.R. Horton's project manager and business analyst for the warranty and customer survey systems within the MIS department, said the company is maintaining its 0.3% ratio even into the current quarter, and has been even lower than that within individual months. He agreed that one of the primary reasons for the company's below-average warranty cost is its decentralization, though he declined to use the term "Hortonize."

"The divisions are the masters of their domains, more or less," Warren said. "They are able to control their own destiny as far as the expenditures go. The divisions pretty much are bonused on their budgets, so they're real apt to take care of their homeowners." Right now, growth through referrals is a corporate priority, so each division is aiming for the best word of mouth that's possible, he added.

Warren said D.R. Horton remains the primary point of contact for the homeowner, but each subcontractor is responsible for the work they've done. "We hold our original vendors on a job accountable for their work," he said. "If we have a warranty call on a particular vendor, we ask that vendor to take care of that call. If for some reason that vendor isn't with us any more, or if we need to get a new vendor to that site, we hold some money in reserve to put against that cost."

Avoiding Warranty Cost Before the Closing

Larry Seay, chief financial officer at Meritage Corp., said his company runs basically the same warranty system in each of its major markets, with some degree of localization. "California may be implemented a tad bit differently than, say, Texas. There also are different laws in different states," Seay noted, as well as slightly different lengths of coverage for labor and structural warranties within each market. Some terms follow statutory requirements while others are responses to competitive conditions in each local market. But more or less it's the same warranty system in each state.

The major reason he cites for Meritage's below-average warranty cost is the way it detects and fixes problems before they become warranty issues. "During the construction period, we have a very rigorous quality control review with our superintendents," he said. "And we have a buyer walk-through, to make sure that when that house is delivered to the home buyer, anything that might have been done a little bit wrong during the construction process is noticed by the buyer or by the warranty people who conduct that walk-through. We take that buyer walk-through very seriously."

Another way Meritage keeps warranty cost down is by responding to claims as quickly as possible, he said. This produces the soft-cost benefit of a happier customer, but also produces a very real hard-cost benefit in terms of a reduced need for lawyers and lawsuits. In addition, Meritage passes on the cost of warranty service to the subcontractor whenever possible. Seay explained that what's listed as warranty cost on the company's financial statements is actually a combination of two items: the cost of overhead incurred while being the central point of contact, and the cost of situations that arise where Meritage can't bill back to a specific subcontractor, either because the source of the problem is hard to pin down, or because the subcontractor has gone under. So in effect, what's left is the net warranty cost of the program after bill-backs.

"When you're dealing with consumers, they don't want to have to call 20 people," he said. "So we act as the coordinator for a warranty problem. They call us, but to the extent that we have leverage on the subcontractor that performed the defective work, we will call them and have them go out and fix the problem. If we've stopped using a particular subcontractor, then we lose our leverage to get things done quickly. But we still have a legal obligation to go fix the problem. Ultimately, it's our warranty."

Driving Home a House

The chart below includes figures for the Big Three of RV sales: Fleetwood Enterprises Inc., Thor Industries Inc., and Monaco Coach Corp., who together hold around 64% of the market share in this industry segment on the basis of first quarter revenue. This segment also includes Winnebago Industries, whose name has become synonymous with RVs, as well as four smaller players: Coachmen Industries, Spartan Motors, Featherlite Inc., and Skyline Corp..