A young healthcare manager unexpectedly finds herself responsible for running a family- owned car dealership that is in trouble. She is very concerned about the poor performance of the service department and wonders if a turnaround is possible. Viewed from Wilson Avenue, the dealership presented a festive sight. Strings of trian- gular pennants in red, white and blue flut- tered gaily in the late afternoon breeze Rows of new model cars gleamed and winked in the sunlight. Geraniums graced the flowerbeds outside the showroom en- trance. A huge rotating sign at the corner of Wilson Avenue and Victoria Street sported the Ford logo and identified the business as Sullivan Ford Auto World. Ban- ners below urged, “Let's Make a Deal!” Inside the handsome, high-ceilinged showroom, three of the new model Fords were on display—a dark-green 4x4 sports utility vehicle, a red convertible anda white ‘Taurus. Each vehicle was polished to a high sheen. Two groups of customers were chat- ting with salespeople and a middle-aged man sat in the driver's seat of the convert- ible, studying the controls. Upstairs in the conifortably furnished general manager's office, Carol Sullivan- Diaz finished running another spreadsheet analysis on her laptop. She felt tired and depressed. Her father, Walter Sullivan, had ‘© 2001 by Christopher Lovelock SULLIVAN Forp Auto Wor.p' * Christopher Lovelock * died four weeks earlier at the age of 56, of a sudden heart attack. As executor of his estate, the bank had asked her to tempo. rarily assume the position of general man ager of the dealership. The only visible changes that she had made to her father's office were installing a fax machine and laser printer, but she had been very busy analysing the current position of the busi- ness. Sullivan-Diaz did not like the look of the numbers on the printout. Auto World’s financial situation had been deteriorating for 18 months and had been running in the red for the first half of the current year. New car sales had declined, reflecting a turndown in the regional economy. Margins had been squeezed by promotions and other efforts to move new cars off the lot. Industry forecasts of future sales were dis- couraging and so were her own financial projections for Auto World’s sales depart- ment. Service revenues, which were below average for a dealership of this size, had also declined, although the service depart- ment still made a small surplus. Had she had made a mistake last week, Carol wondered, in turning down Bill Froelich’s offer to buy the business? It was true that the price offered had been substantially below the offer from Froelich that her father had rejected two years ear lier, but the business had been more prof: itable then.The Sullivan Family Walter Sullivan had purchased a small Ford dealership in 1981, renaming it Sullivan Ford and had built it up to become one of the best known in the metropolitan area. Six years ago, he had borrowed heav- ily to purchase the current site at a major suburban highway intersection, in an area of town with many new housing develop- ments. There had been a dealership on the site, but the buildings were 30 years old. Sullivan had retained the service and re- pair bays, but torn down the showroom in front of them and replaced it with an at- tractive modern facility. On moving to the new location, which was substantially larger than the old one, he had renamed his business Sullivan Ford Auto World. Everybody had seemed to know Walt Sullivan. He had been a consummate show- man and entrepreneur, appearing in his own radio and television commercials and was active in community affairs. His ap- proach to car sales had emphasised pro- motions, discounts and deals in order to maintain volume. He was never happier than when making a sale. Carol Sullivan-Diaz, aged 28, was the eldest of Walter and Carmen Sullivan's three daughters. After obtaining a bach- elor’s degree in economics, she had gone on to take an MBA degree and had then embarked on a career in healthcare man- agement. She was married to Dr. Roberto Diaz, a surgeon at St. Luke's Hospital. Her 20-year old twin sisters, Gail and Joanne, who were students at the local university, lived with their mother. Inher own student days, Sullivan-Diaz had worked part-time in her father’s busi- ness on secretarial and bookkeeping tasks and also as a service writer in the service department; so she was quite familiar with the operations of the dealership. At busi- ness school, she had decided on a career in Case 2 « Sullivan Ford Auto World 567 healthcare management. After graduation, she had worked as an executive assistant to the president of St. Luke's, a lange teach- ing hospital. Two years later, she joined Metropolitan Health Plan as assistant di- rector of marketing, a position she had now held for almost three years. Her responsi- bilities included attracting new members, complaint handling, market research and member retention programmes. Carol’s employer had given her a six- week leave-of-absence to put her father’s affairs in order. She doubted that she could extend that leave much beyond the two weeks still remaining. Neither she nor other family members were interested in making a career out of running the dealer- ship. However, she was prepared to take time out from her healthcare career to work on a turnaround if that seemed.a viable proposition. She had been successful in her current job and believed it would not be difficult to find another health manage- ment position in the future. The Dealership Like other car dealerships, Sullivan Ford ‘Auto World operated both sales and serv- ice departments, often referred to in the trade as “front end” and “back end”, respec- tively. Both new and used vehicles were sold, since a high proportion of new car and van purchases involved trading in the pur- chaser’s existing vehicle. Auto World would also buy well-maintained used cars at auc- tions for resale. Purchasers who decided that they could not afford a new car would often buy a “preowned” vehicle instead, while shoppers who came in looking for a used car could sometimes be persuaded to buy a new one. Before being put on sale, used vehicles were carefully serviced, with parts being replaced as needed. They were then thoroughly cleaned by a detailer whose services were hired as needed. Dents ep368 Case 2 « Sullivan Ford Auto World and other blemishes were removed at a nearby bodyshop and occasionally the ve- hicle’s paintwork was resprayed, too. ‘The front end of the dealership em- ployed a sales manager, seven salespeople, an office manager and a secretary. One of the salespeople had given notice and would be leaving at the end of the following week. ‘The service department, when fully staffed, comprised of a service manager, a parts supervisor, nine mechanics and two serv- ice writers. The Sullivan twins often worked part-time as service writers, fill- ing in at busy periods, when one of the other writers was sick or on vacation, or when—as currently—there was an unfilled vacancy. The job entailed scheduling appointments for repairs and maintenance, writing up each work order, calling custom- ers with repair estimates and assisting customers when they returned to pick up the cars and pay for the work that had been done. Sullivan-Diaz knew from her own experience as a service writer that it could be a stressful job. Few people liked to be without their car, even for a day. When a car broke down or was having problems, the owner was often nervous about how long it would take to get it fixed and, if the warranty had expired, how much the la- bour and parts would cost. Customers were quite unforgiving if'a problem was not fixed on the first attempt and they had to re- turn their vehicle for further work. Major mechanical failures were not usually difficult to repair, although parts replacement could be expensive. It was of- ten the “little” things like water leaks and wiring problems that were the hardest to diagnose and correct and could make it necessary for the customer to return twice or thrice before they were resolved. In these situations, parts and materials costs were relatively low, but labour costs mounted up quickly, at about $45 an hour. Customers could sometimes be quite abusive, yelling at service writers over the telephone or ar- guing with service writers, mechanies and the service manager in person. ‘Turnover in the service writer job was high, which was one reason why Carol— and more recently her sisters—had often been pressed into service by their father to “hold the fort” as he described it. More than once, she had seen an exasperated service writer respond sharply to a com- plaining customer or hang up on one who was being abusive over the telephone. Gail and Joanne were currently taking turns to cover the vacant position, but there were times when both of them had classes and the dealership had only one service writer on duty. * By national standards, Sullivan’s Auto World was a medium-sized dealership, sell- ing around 1,100 cars a year, equally di- vided between new and used vehicles. In the most recent year, its revenues totalled $26.6 million from new and used car sales and $2.9 million from service and parts— down from $30.5 million and $3.6 million, respectively, the previous year. Although the unit value of car sales was high, the margins were quite low, with margins for new cars being substantially lower than for used ones. The reverse was true for serv- ice. Industry guidelines suggested that the contribution margin (known as the depart- mental selling gross) from car sales should be about 5.5 per cent of sales revenues and from service, around 25 per cent of rev- enues. In a typical dealership, 60 per cent of the selling gross traditionally came from sales and 40 per cent from service, but the balance was shifting from sales to service. ‘The selling gross was then applied to fixed expenses, such as administrative salaries, rent or mortgage payments and utilities. For the most recent 12 months at Auto World, Sullivan-Diaz had determined that the selling gross figures were 4.6 per cent and 24 per cent, respectively, both of them lower than in the previous year and insuf- i —_ —.ficient to cover the dealership’s fixed ex- penses. Her father had made no mention of financial difficulties and she had been shocked to learn from the bank after his death that Auto World had been two months behind in mortgage payments on the property. Further analysis also showed that accounts payable had also risen sharply in the previous six months. Fortu- nately, the dealership held a large insur- ance policy on Sullivan's life and the pro- ceeds from this had been more than suffi- cient to bring mortgage payments up to date, pay down all overdue accounts and leave some funds for future contingencies. The opportunities for expanding new car sales did not appear promising, given rising interest rates and recent layoffs at a local factory that was expected to hurt the local economy. However, recent promo- tional incentives had reduced the inven- tory to manageable levels. From discus- sions with Larry Winters, Auto World’s sales manager, Sullivan-Diaz concluded that costs could be reduced by not replac- ing the departing sales representative, maintaining inventory at somewhat lower levels and making more efficient use of advertising and promotion. Although Win- ters did not have Walter’s exuberant per- sonality, he had been Auto World's leading sales representative before being promoted and had shown strong managerial capa- bilities in his current position. As she reviewed the figures for the service department, Sullivan-Diaz won- dered what potential might exist for im- proving its sales volume and selling gross. Her father had never been very interested in the parts arid service business, seeing it simply as a necessary adjunct of the deal- ership. “Customers always seem to be mis- erable back there,” he had once remarked to her. “But here in the front end, every- body’s happy when someone buys a new car.” The service facility was not easily vis- ible from the main highway, being hidden rs | ase 2 » Sullivan Ford Auto World 569 behind the showroom. Although the build- ing looked old and greasy, the equipment itself was modern and well maintained. There was sufficient capacity to handle more repair work, but a higher volume would require hiring one or more new me- chanics. Customers were required to bring cars in for servicing before 8:30 am. After park- ing their cars, customers entered the serv- ice building by a side door and waited their turn to see the service writers, who occu- pied a cramped room with peeling paint and an interior window overlooking the service bays. Customers stood while work orders for their cars were prepared. Ring- ing telephones frequently interrupted the process. Filing cabinets containing cus- tomer records and other documents lined the far wall of the room. If the work were of a routine nature, such as an oil change or tune up, the cus- tomer was given an estimate immediately. For more complex jobs, they would be called with an estimate later in the morning once the car had been examined. Customers were required to pick up their cars by 6 pm on the day the work was completed. On several occasions, Carol had urged her fa- ther to computerise the service work-order process, but he had never acted on her sug- gestions, so all orders continued to be hand- written on large yellow sheets, with car- bon copies below. ‘The service manager, Rick Obert, who was in his late forties, had held the posi- tion since Auto World opened at its current location. The Sullivan family considered him to be technically skilled and he man- aged the mechanics effectively. However, his manner with customers could be gruff and argumentative. Customer Survey Results Another set of data that Sullivan-Diaz had studied carefully were the results of the {ail570 Case 2 * Sullivan Ford Auto World customer satisfaction surveys that were mailed to the dealership monthly by a re- search firm retained by the Ford Motor Company. Purchasers of all new Ford cars were sent a questionnaire by mail within 30 days of making the purchase and asked to use a five-point scale to rate their satisfaction with the dealership sales department, ve- hicle preparation and the characteristics of the vehicle itself. The questionnaire asked how likely the purchaser would be to recommend the dealership, the salesper- son and the manufacturer to someone else. Other questions asked if the customers had been introduced to the dealer's service de- partment and been given explanations on what to do if their cars needed service. Fi- nally, there were some classification ques- tions relating to customer demographics. ‘A second survey was sent to new car purchasers nine months after they had bought their cars. This questionnaire be- gan by asking about satisfaction with the vehicle and then asked customers if they had taken their vehicles to the selling dealer for service of any kind. Ifso, respond- ents were then asked to rate the service department on 14 different attributes— ranging from the attitude of service per- sonnel to the quality of the work per- formed—and then to rate their overall sat- isfaction with service from the dealer. Customers were also asked about where they would go in the future for main- tenance service, minor mechanical and electrical repairs, major repairs in those same categories and bodywork. The options listed for service were selling dealer, an- other Ford dealer, “some other place”, or “do-it-yourself”. Finally, there were ques- tions about overall satisfaction with the dealers’ sales department and the dealer- ship in general, as well as the likelihood of their purchasing another Ford Motor Com- pany product and buying it from the same dealership. Dealers received monthly reports summarising customer ratings of their dealership for the most recent month and for several previous months. To provide a comparison with how other Ford dealerships performed, the reports also included regional and national rating av- erages. After analysis, completed question- naires were returned to the dealership; since these included each customer's name, a dealer could see which customers were satisfied and which were not. In the 30-day survey of new purchas- ers, Auto World achieved better than aver- age ratings on most dimensions. One find- ing which puzzled Carol was that almost 90 per cent of respondents answered “yes” when asked if someone from Auto World had explained what to do if they needed service, but less than a third said that they had been introduced to someone in the service department. She resolved to ask Larry Winters about this discrepancy. ‘The nine-month survey findings dis- turbed her. Although vehicle ratings were in line with national averages, the overall level of satisfaction with service at Auto World was consistently low, placing it in the bottom 25 per cent of all Ford dealerships. ‘The worst ratings for service concerned promptness of writing up orders, conven- ience of scheduling the work, convenience of service hours and appearance of the serv- ice department. On length of time to com- plete the work, availability of needed parts, and quality of work done (“was it fixed right?”), Auto World’s rating was close to the average. For interpersonal variables such as attitude of service department per- sonnel, politeness, understanding of cus- tomer problems and explanation of work performed, its ratings were relatively poor. When Sullivan-Diaz reviewed the individual questionnaires, she found that there was a wide degree of variation be- tween customers’ responses on these inter-Case 2 Sullivan Ford Auto World 571 personal variables, ranging all the way across a five-point scale from “completely satisfied” to “very dissatisfied”. Curious, she had gone to the service files and exam- ined the records for several dozen cus- tomers who had recently completed the nine-month surveys. At least part of the ratings could be explained by which serv- ice writers the customer had dealt with. Those who had been served two or more times by her sisters, for instance, gave much better ratings than those who had dealt primarily with Jim Fiskell, the serv- ice writer who had recently quit. Perhaps the most worrying responses were those relating to customers’ likely use of Auto World’s service department in the. future. More than half indicated that they would use another Ford dealer or “some other place” for maintenance service (such as oil change, lubrication, or tune-up) or for minor mechanical and electrical repairs. ‘About 30 per cent said they would use an- other source for major repairs. The rating for overall satisfaction with the selling dealer after nine months was below aver- age and the customer's likelihood of pur- chasing from the same dealership again was a full point below that of buying an- other Ford product. Sullivan-Diaz pushed aside the spread- sheets she had printed out and shut down. her laptop. It was time to go home for din- ner. She saw the options for the dealership as basically twofold: either prepare the busi- ness for an early sale at what would amount to a distress price, or take a year or two to try to turn it around financially. In the lat- ter instance, if the turnaround succeeded, the business could subsequently be sold at a higher price than it currently commanded, or the family could install a general man- ager to run the dealership for them, Bill Froelich, owner of another nearby dealership and three others in nearby cit- ies, had offered to buy Auto World for a price that represented a fair valuation of the net assets, according to Auto World’s accountants, plus $150,000 in goodwill. However, the rule of thumb when the auto industry was enjoying good times was that goodwill should be valued at $1,000 per vehicle sold each year. Carol knew that Froelich was eager to develop a network of dealerships in order to reap economies of scale. His prices on new cars were very competitive and his nearest dealership clustered several franchises—Ford, Lin- coln-Mercury and Jaguar—on a single large property. Carol knew that Froelich subscribed to an Internet-based car-buying service that allowed consumers to specify their exact requirements for a particular model of car and then submit a purchase request for their choice. In return for a sign-up fee and monthly subscription, Froelich’s Ford deal- ership had been given exclusive rights toa geographic area that included the suburb where Auto World was located. When a con- sumer from this area submitted a purchase request, the dealer was obligated to call the individual within 24 hours and offer a low, competitive, no-haggle, no-hassle price. The customer (who paid no fee for the service) was under no obligation to buy. If the quote led to a purchase, the dealer would coordi- nate financing, if needed and arrange de- livery. In many cases, the customer never even set foot in the dealership. Carol recognised that the procedure represented a radical change in car sell- ing. Although it led to lower prices, it also reduced selling expenses. She had received a call only that morning from a competing Internet company that offered separate services for new and used cars. To become a franchisee of the latter service, dealers had to agree to submit each car to a 135- point certification programme, agreeing to a 72-hour, 100 per cent money-back return policy and a three-month limited warranty.BEET 5/2 Case 2 + Sullivan Ford Auto World An Unwelcome Disturbance ‘As Carol left her office, she spotted the sales manager coming up the stairs lead- ing from the showroom floor. “Larry,” she said, “I've got a question for you.” “Fire away!” replied the sales manager. “T've been looking at the customer sat isfaction surveys. Why aren't our sales reps introducing new customers to the folks in the Service Department? It's supposedly part of our sales protocol, but it only seems to be happening about one-third of the time!” Larry Winters shuffled his feet. “Well, Carol, basically I leave it to their discre- tion. We tell them about service, of course, but some of the guys on the floor feel a bit. uncomfortable taking folks over to the serv- ice bays after they’ve been in here. It's quite a contrast, if you know what I mean.” Suddenly, the sound of shouting arose from the floor below. A man of about 40, wearing a windbreaker and jeans, was standing in the doorway yelling at one of the salespeople. The two managers could catch snatches of what he was saying, in between various obscenities: “.., three visits ... still not fixed right ... service stinks ... who's in charge here?” Everybody else in the showroom had stopped what they were doing and had turned to look at the newcomer. Winters looked at his young employer and rolled his eyes. “Ifthere was something your dad couldn't stand, it was guys like that, yelling and screaming in the show- room and asking for the boss. Walt would go hide out in his office! Don’t worry, Tom’ take care of that fellow and get him out of here. What a jerk!” “No,” said Sullivan-Diaz, “I'l deal with him! One thing I learned when I worked at St. Luke’s was that you don't let people yell about their problems in front of every body else. You take them off somewhere calm them down and find out what's bug: ging them.” She stepped quickly down the stairs, wondering to herself, “What else have learned in healthcare that I can apply to this business?” Study Questions 1. How does marketing cars differ from marketing service for those same ve- hicles? 2. Compare and contrast the sales and service departments at Auto World 3. Prepare a flowchart of the servicing of acar that comes in for repair or main- tenance. 4, How should Sullivan-Diaz handle the angry customer in the showroom? What useful parallels do you see be- tween running an automobile sales and service dealership and running health care services? 6. What advice would you give to Carol about: a. improving service quality? b. marketing the service department and the dealership? c. selling Auto World now versus at- tempting a turnaround?