Question

John Smith, President of Metro Motors, just returned to his office after visiting the companys newly acquired automotive dealership. It was the fourth Metro Motors dealership in a network that served a metropolitan area of 400,000 people. Beyond the metropolitan area, but within a 45- minute drive, were another 500,000 people. Each of the dealerships in the network marketed a different brand of automobile and historically had operated autonomously. What set them apart was the high volume of vehicles it stocked on the lots. With a wide variety of options, they avoided the need to special order from the manufacturer for individual clients. Mr. Smith was particularly excited about this new dealership because it was the first “auto supermarket” in the network. Auto supermarkets differ from traditional auto dealerships in that they sell multiple brands of automobiles at the same location. The new dealership sold a full line of Chevrolets, Nissans, and Volkswagens. Within the metropolitan area, outside of the Metro Group, there were 3 other major auto dealerships, one “auto supermarket” and 7 smaller auto dealers selling only “previously owned” vehicles. 2 of the used car dealers had closed over the past year due to the downturn in economic conditions. Starting 15 years ago with the purchase of a bankrupt Dodge dealership, Metro Motors had grown steadily in size to 3 domestic brand dealerships and had gained a favorable reputation. John Smith attributed this success to three highly interdependent factors. The first was volume. By maintaining a high volume of sales and turning over inventory rapidly, economies of scale could be achieved, which reduced costs and provided customers with a large selection. The second factor was a marketing approach called the “hassle-free buying experience.” Listed on each automobile was the “one price-lowest price.” Customers came in, browsed and compared prices without being approached by pushy salespeople. If they had questions or were ready to buy, a walk to a customer service desk produced a knowledgeable salesperson to assist them. Finally, and Mr. Smith thought perhaps most importantly, was the after-sale service. Metro Motors established a solid reputation for servicing, diagnosing and repairing vehicles correctly the first time. Customer feedback from online surveys indicated that customers appreciated the free, specialty coffee, located in the waiting area while they browsed, as well as the children’s activity room. The “Kid Zone” included a TV with DVD player and a selection of Disney movies, a Wii console with 3 different games and various toys and books. The room was unsupervised, however, it was located between the reception desk, where a Metro Motors employee was stationed at all times, and the customer waiting area. Feedback also indicated that customers valued the 2 work-stations available in the customer waiting area and free wifi access. Customer feedback wasn’t all glowing however; Metro Motors received regular complaints regarding the long waiting times on the sales side to set up insurance after purchase. Metro Motors used a third party mobile insurance agent (Mr. Smith’s niece) who came into the dealership on an as needed basis. When the client had the financing and purchase in place, the salesperson would call in the insurance agent to meet with the client, but if they were busy at another dealership, it could take up to an hour for them to arrive. In the service department, customers complained about waiting on parts, which might delay the service anywhere from 1 hour for non- manufacturer parts that could be obtained from local wholesalers, and up to 2 days for certified manufacturer’s parts if they were not available locally. High-quality service after the sale depended on three essential components. First was the presence of a highly qualified, well-trained staff of service technicians. Second was the use of the latest tools and technologies to support diagnosis and repair activities. Third was the availability of the full range of parts and materials necessary to complete the service and repairs without delay. Mr. Smith invested in training and equipment to ensure that the trained personnel and technology were provided. What he worried about, as Metro Motors grew, was the continued availability of the right parts and materials. This concern caused him to focus on the supplier relationship process and management of the service parts and materials flow in the supply chain. Mr. Smith thought back to the stories in the newspaper’s business pages describing the failure of companies that had not planned appropriately for growth. These companies outgrew their existing policies, procedures and control systems. Lacking a plan to update their systems, the companies experienced myriad problems that led to inefficiencies and an inability to compete effectively. He did not want that to happen to Metro Motors. Because each dealership was considered a separate business within the Metro Group, each of the dealerships had its own ERP system that kept data relating to the individual business processes, including finance, HR, inventory management and a CRM database. Each dealership also purchased and stored its own service parts and materials. Purchases were based on forecasts derived from historical demand data, which accounted for factors such as seasonality. Batteries and alternators had a high failure rate in the winter, and air-conditioner parts were in great demand during the summer. Similarly, coolant was needed in the spring to service air conditioners for the summer months, whereas antifreeze was needed in the fall to winterize automobiles. Forecasts also were adjusted for special vehicle sales and service promotions, which increased the need for materials used to prep new cars and service other cars. One thing that made the purchase of service parts and materials so difficult was the tremendous number of different parts that had to be kept on hand. Some of these parts would be used to service customer automobiles, and others would be sold over the counter. Some had to be purchased from the automobile manufacturers or their certified wholesalers, to support for example, the “guaranteed Volkswagon parts” promotion. Still other parts and materials such as oils, lubricants, and fan belts could be purchased form any number of suppliers. John Smith believed in a tidy work environment and invested in good, sturdy shelving in the storage room. Mr. Smith was known to “blow up” at the nearest employee if he saw boxes of parts piled up on the floor so the staff made sure that all inventory received was placed on a shelf right away. These parts were shelved in no particular location, usually the nearest empty space and technicians often ended up sorting through countless boxes of parts to find the ones required for the service. Because they were frustrated in their lengthy search, they often failed to “check out” the parts they took from inventory. This often led to parts that appeared to be “in stock” in the computer system, not actually being available in the stock room. This inventory discrepancy was a constant frustration for both the purchasing department and the service technicians. Mr. Smith was trying to figure out how to balance having the right inventory at the right time and not having to tie up too much cash in inventory. Given the company’s cash flow problems, he wanted to keep a close eye on the high dollar value inventory items. The purchasing department had to remember that the success of the dealership depended on (1) selling in volume, by lowering costs to support the hassle-free, one price-lowest price concept and (2) providing the right parts at the right time to support fast, reliable after-sale service. Mr. Smith looked out the window of his office and noticed his niece rushing from her car with briefcase in hand to set up a new customer’s insurance. He was proud of her for the successful business she had built in a tough industry and decided that she had inherited the “Smith smarts”. He closed the door to his office to think about what had to be done to be able to survive in this competitive economy. Regarding the purchasing of parts and materials, two things kept going through his mind: the amount of space available for parts storage and the level of financial resources available to invest in parts and materials. The acquisition of the auto supermarket dealership put an increased strain on both finances and space, with the need to support three different automobile lines at the same facility. Investment dollars were becoming scarce, and space was at a premium. Mr. Smith wondered what analysis and supply chain and operational process improvements could be done to address some of these concerns and alleviate some of the pressures.

Prepare a situation analysis?

Define and analyze the problems Metro Motors is facing?

What do you recommend Mr. Smith do to address the problems you have identified?

Answer 1

METRO MOTORS AND MR. JOHN SMITH

To understand and to provide solution for the company, we need to primarily understand about the organizational structure as well as the personality of Mr. John Smith

Organizational structure of Metro Motors:

It is quite evident when one reads through that Metro Motors had attained success because of its mode of operation and stringent management policies that Mr. Smith had attained during its period of operation. Started as a small company, the growth happened because of certain strategies adopted by Mr. Smith including, high volume sales, reduction in cost of operation, customer satisfaction, etc. Since the management is generally reporting to Mr. Smith, a change in its structure could be attained very easily as Mr. Smith runs over the day to day activities of the company. He is focussed on his line of business which we understand where he outsources the insurance part to his niece. The business growth is nothing but the result of concentrated approach to sales and allied activities.

Personality of Mr. Smith. If you analyse the character or behaviour of Mr. Smith, we can understand as an aspiring person, who needs to improve Metro motors in terms of business, volume of sales and various options he could give to his customers within the same roof. He also understands the primary fact that a customer demand can be tapped if you have multiple products in the portfolio. For example, if a customer wishes to purchase a BMW, then we are clear of two aspects.

1. He has the ability to purchase a premium product and he has made a decision for a purchase
2. Finance will not be a constraint to convert this lead to actual business
3. In the case if his needs does not map to the brand he choose, he can always look for alternatives if available in the same umbrella. Here the advantage is that he can compare and apple to apple within the same premises instead of visiting to other premises.

Mr. Smiths’ decision to open up an automart in the premises is a clear evidence that he has lot of customers who are genuine in their purchase decisions. Any customer that does not bring in business is just because of the fact that he cannot offer them alternatives. In such a case, an automart would effectively cater such customers.

Let us now understand the constraints and current issues

1. The finance would be a constraint if invested judiciously.
2. Space would be a constraint when it operates in a central part of a town
3. Inventory management is also a constraint since the rack space is not used properly.
4. Logistics would be a constraint if the space and inventory is not managed properly.
5. Long waiting ques for customers who come in for a service for their vehicle depending upon the type of service and the type of parts (either from a local whole seller or an authorized manufacturer)required (even though, they have a good waiting area with kids space)
6. Poor inventory management when new stock of spare parts come in. The technicians has to literally search for the spare parts since it is already shown on the computers about its availability

Understanding the three aspects above, let us now closely look into the situation of Metro motors. Metro motors has an effective manager or an owner or investor who is ready to invest any amount of money to improve its operations. Understands the competitions and thinks his level best to tide over it. Mr Smith exactly knows that with the available resources he will be able to operate the auto mart in the same premises of his existing business.

Metro Motors should have certain objectives to improve their business. Once these objectives are attained then infusing a new line of business will not be an issue. These objectives include designing of new processes at certain areas and refining existing business processes.

Some of the objectives that needs to be attained are as follows.

1. Customer satisfaction is the primary importance any automobile industry should offer when there is a competition that exists in the market. Why should a customer go to Metro motors and not to XYZ for their choice of vehicles, should be the primary question that Metro should answer. Existing glitch is that there are longer queues of customer waiting at any point in Metro motors be it rainy season, winter season or spring. Certain steps that could be implemented are as follows.
   1. With the available data of customers who come in for repairs from the inception of the company, Metro should have an inventory management software which can show the spare parts with regard to their different brands of vehicles that moves more. For example, Oil, oil filters, brake pads, axle accessories, Air condition spare parts and all the gases (compressor gasses) can be considered as fast moving spare parts. The principal inventory area should stock these items and their inventory should be maintained with actual reorder quantity based on demand. Reorder quantity should also include the lead time of getting the actual spare parts to warehouse from the time it is ordered with the local whole seller or authorised manufacturer. Also there should be a proper rack management method that needs to be devised. The spare parts can be large, medium and small in size based on their OEM packs. If the racks can be classified in alphabetical order (separately for large medium and small size spare parts) finding out a spare part will be easier. There again the issue would be as follows which Smith is already facing. Let us consider the example of a brake assembly for one of the Brand of cars let’s say Brand -A. Brake assembly consists of brake shoes, brake pads and Brake liner (example purpose only). In the computer, Brand – A, brake assembly would be in stock. Let’s say a customer comes with Brand  - A vehicle for repair. The issue would be only with the brake pads and the other brake assembly does not require any change. Here what happens usually is that a technician checks with the inventory manger and understands that the item is there in stock. He goes and finds the entire assembly and just pulls out the brake pads for change and the other two remain in the shelf. So according to the inventory, one brake assembly is used however, only the brake pads are actually consumed and the other parts remain in the rack. So when the inventory is reordered, there would be items like this (in short part of a standard assembly) that would remain in shelves without movement which is a toll on profits. Suppose if another vehicle with the same Brand -A comes for a brake liner change, the inventory manager would say that it is not there in stock even though we know from the above scenario that the brake liner and brake shoes are still existing in the rack. This is what that needs to be eliminated first. The only way to do this is by changing the method of defining inventory within the software. Instead of defining each item as a single inventory item, collective grouping of inventory should be attained. In the above example. If you type brake assembly brand -A then the display should be “Available” Brake and should look something like this
      1. Brake Assembly – 1 Nos (Available)
         1. Brake Pad 1
         2. Brake Liner 1
         3. Brake Shoe 1

So brake assembly instead of remaining as 1 inventory item should be a group of three individual items. Hence it’s the ability of the inventory manger or despatch section of spare parts to assemble spare parts inside the software if an entire assembly is requested by the technical team for replacement. By following this simple method, inventory redundancy can be overcome to a certain extend.

1. The Insurance for new vehicles: Mr. Smith, as he is now starting an automart should stop having sentiments for his niece for insurance business and should set up a set of inhouse staff to manage vehicle insurance for new and reconditioned vehicles. This will become important when once, refurbished vehicles would start to sell in the automart or even when a vehicle exchange happens. (Brand – A sold for a price at Metro and Brand – B is purchased for an additional cost over the cost of Brand – A). Most of the customers who purchase a vehicle will have his time spent on pre-purchase studies where he knows or almost understand facts about the buying process and the related costs.
2. Mr. Smith should have his own ERP structure in place. Spending on a Good ERP will always pay back in time when it comes to purchase of redundant inventories. If his multiple stores across different locations has different demand for spare parts, then a centralised ERP would help him to move these spare parts across his show rooms much before the actual demand comes up.
3. Mr. Smith should have a separate team for automart and should not allow same staff dealing the two types of business. This is because, the employ focus will be shifted which would also affect their targets of sales. Also, an employ selling a brand needs to know about that particular brand only whereas an employ selling a vehicle in auto mart should know what the competition does. So the person selected should be a well aware of the market.
4. Point of receiving the inventory should be improved. Every item received should be batched and bar coded for easy identification. The practical situation that may arise would be for example in the above situation, Brake assembly of Brand – A might come in a single piece which can be easily dismantled by a technician but may not be done by a person receiving the inventory. So what can be done here is that he can have three labels on the same product that can be stuck during receiving phase from the supplier (OEM manufacturer or whole seller), if an individual part is removed then the technician should be trained to remove one of the label from the main assembly and stick it on the part he removes and then bill it before it moves to the work space.
5. Mr. Smith should think of a central warehouse remotely but easily accessed by all his showrooms to stock high value inventory and inventory that is not commonly used. For example, Fuel injection kit for let’s say Mercedes E200 (this is just used as an example and does not relate to actual spare parts) does not fail usually in a life time of the car. Such spare parts should be stored in central warehouse. Here if a costly spare parts is in procurement, then Mr. Smith can increase the most frequently moved spare part price negligibly to absorb the cost incurred over a period of time.
6. The reception staff siting at the front office of Metro Motors should have a sound technical knowledge as to explain the customer when they come in with their request. For example, a new customer for a new brand purchase should be properly directed to the right team. Another customer who comes for a repair should be connected to an advisor who should check the availability of the stock of spare parts and keep the customer well informed in advance. So if a person accepts the delay in his mind, there will not be any complaints and they will use the break out area or waiting lounge with the sound expectation of delay. Wrong information given at the time of welcoming a customer can cause serious issues as they would exact a faster service but ends up a delayed check out.

A customer can easily be managed if the front office staff understand clearly the requirement and the body language. A regular office goer for example, will be in a hurry to drop his vehicle and go to his office. For him, he will not wait until the vehicle is repaired but if the right information on the time involved and the cost of spare parts are given, he will not create any issues during the entire process. A proper communication plays a major role in any business that gives importance to customer satisfaction. AS the old saying goes, customer is always the king, respect him and you will have a successful business ahead.