BUSI 474 Week 2 Fixed Revenue Stream Assessment 1 Example

Fixed Revenue Stream Assessment 1: The Service Department at Summit Motors

The Store and Its Service Department

Summit Motors is a composite single-point franchised dealership in a mid-sized metro area, selling about 110 new and 80 used vehicles a month. Its service department has 14 technicians paid on a flat-rate basis, five service advisors and a service manager who reports to the fixed operations director. The shop writes about 1,620 repair orders a month and is open six days a week. The department's role in the store is large: service and parts together supply most of the gross profit that covers the dealership's overhead, so the service department's performance shapes the whole store's results.

Key Measures

The following measures are for a typical month. Technicians are available about 8 hours a day for 21 working days.

Strengths

The shop's technicians are productive. Proficiency of 108 percent means they complete jobs in less time than the labor guide allows, which reflects skilled technicians and a workflow that keeps them supplied with work. Lazear (2000) found that when Safelite stopped paying its windshield installers by the hour and began paying for each completed installation, productivity rose by about 44 percent, through both greater effort and the attraction of faster workers. Summit's flat-rate pay plan works on the same principle, and its results show it. The department's warranty work is also well managed, with claims submitted promptly and few rejected by the manufacturer. Internal work on used vehicles is another strength: the 540 hours a month spent reconditioning trade-ins let the used car department put vehicles on the lot within four days of acquisition, which reduces the holding costs that erode used car profit.

Weaknesses

Three weaknesses stand out. The first is price realization. The posted door rate is $165 an hour, but the department collects an effective $142 on customer-pay work, about 86 percent. Discounts given at the service counter, coupons stacked on top of one another and work written below the labor guide explain most of the gap. On 1,350 customer-pay hours a month, each dollar of effective rate is worth $16,200 a year.

The second is shallow repair orders. Customer-pay repair orders average 1.29 hours, which suggests that many customers come in for an oil change and leave without the inspection results or recommendations that would let them decide on other needed work. Shallow orders mean lost revenue, but they can also mean safety needs that go unaddressed, such as worn brakes or tires that the customer never hears about. Advisors at Summit are busy at peak hours and often skip the conversation about inspection findings, so the problem lies in the process more than in the people.

The third, and most serious, is retention. Only 38 percent of the vehicles Summit sold four to five years ago still come to its service department. Devaraj et al. (2001) found that the quality of dealer service, as well as product quality, influenced customer loyalty in the automotive industry, and Zeithaml et al. (1996) showed that customers' perceptions of service quality were linked to their intentions to stay with a company, recommend it and pay more, and that poor service led to switching. Customers who stop servicing their cars at Summit are also unlikely to buy their next car there. Lost service customers today become lost sales customers in a few years.

How Service Connects to the Rest of the Store

The service department does not operate alone. Every repair order draws on the parts department, so parts availability affects how quickly cars are returned and how many hours technicians can produce. The used car department depends on service to recondition trade-ins quickly. The sales department depends on service for the long relationship that leads to the next purchase, since a customer who returns every few months for maintenance is in regular contact with the store. A service advisor who notices that a customer's vehicle needs expensive repairs can, with the customer's permission, introduce a salesperson who can show what a trade-in would look like. At Summit, those connections are informal. Making them deliberate, through a weekly meeting of the service, parts and used car managers and a simple process for passing trade-in opportunities to sales, would let each department's work support the others.

Recommendations

• Protect the labor rate: require manager approval for discounts beyond a set amount, and stop stacking coupons. Target an effective rate of $150 within six months.
• Deepen repair orders honestly: perform a documented multipoint inspection on every vehicle, with photos or short videos of worn parts sent to the customer's phone, so customers can see recommended work for themselves. Target 1.5 hours per customer-pay order.
• Win back sold customers: contact every owner of a vehicle sold in the past five years who has not visited in a year, offering a complimentary inspection. Target 45 percent retention within a year.
• Add capacity: hire two apprentice technicians paired with senior technicians, since current appointment waits of five days push customers to quick-lube shops. An express lane for maintenance under one hour would free the main shop for diagnostic and repair work.

Gaiardelli et al. (2007) argue that after-sales performance should be measured across financial, process and customer dimensions together, so the department will report all four targets monthly.

A Biblical Perspective

The service drive is a place of trust, because most customers cannot judge for themselves whether a repair is needed. Proverbs 11:1 contrasts dishonest scales, which the Lord detests, with accurate weights, in which he delights (English Standard Version Bible, 2001/2016). Recommending only the work a vehicle needs, and showing customers the evidence, is the service department's version of an accurate weight. It is also the best route to the retention Summit needs.

References

Devaraj, S., Matta, K. F., & Conlon, E. (2001). Product and service quality: The antecedents of customer loyalty in the automotive industry. Production and Operations Management, 10(4), 424-439. https://doi.org/10.1111/j.1937-5956.2001.tb00085.x

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Gaiardelli, P., Saccani, N., & Songini, L. (2007). Performance measurement of the after-sales service network: Evidence from the automotive industry. Computers in Industry, 58(7), 698-708. https://doi.org/10.1016/j.compind.2007.05.008

Lazear, E. P. (2000). Performance pay and productivity. American Economic Review, 90(5), 1346-1361. https://doi.org/10.1257/aer.90.5.1346

Zeithaml, V. A., Berry, L. L., & Parasuraman, A. (1996). The behavioral consequences of service quality. Journal of Marketing, 60(2), 31-46. https://doi.org/10.1177/002224299606000203