Transforming a Contractual Recall Obligation Into a Profit CenterResearch Paper

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Transforming a Contractual Recall Obligation Into a Profit Center

The field of operations management is primarily focused on transforming various types of inputs into outputs through the use of physical resources in order to produce the desired outcomes for purchase by customers while still satisfying the other organizational objectives of enterprises such as efficiency, effectiveness, and flexibility (Kumar and Suresh 14). The purpose of this paper was to identify and apply OM (Operations Management) concepts and tools that were used to solve a real-world operational problem and improve operational performance for the country's largest automotive retailer, AutoNation. The problem of interest was the level of recalled vehicles being experienced at AutoNation which exacted a heavy toll on service departments from customers who want recall work only performed. The overarching goal of this paper is to demonstrate how this issue was resolved through the recommendation of a multipoint inspection and up-selling additional maintenance services and repairs.

This paper reviews the peer-reviewed, scholarly and organizational literature to provide relevant background information concerning the corporation of interest, a description of the above-described problem that was the focus of the OM initiative, a discussion concerning the various OM concepts and tools that could be applied to the situation and the rationale in support of their use, and a description concerning how these concepts and tools can be applied to solve the problem of concern. Finally, an analysis of the results that are expected from the implementation of this initiative is followed by a summary of the research and important findings concerning this OM initiative in the conclusion.

2. Background information

As noted above, the company of interest is AutoNation (hereinafter alternatively "the company") which is the largest retailer of new and used vehicles in the United States today (Shuldiner 38) and the author's employer. The company markets its vehicle through traditional brick-and-mortar dealerships as well as online (Shuldiner 38). Headquartered in Fort Lauderdale, Florida (Corporate profile 2), the company currently operates nearly 350 dealerships and more than 370 new vehicle dealerships in 18 states with 35 vehicle brands (Shuldiner 38). The company has enjoyed sustained financial success, and has become the largest public company competing in Florida with annual revenues of nearly $20 billion (Shuldiner 38). At present, the company's new vehicle sales account for a majority (about 61%) of its revenues, while almost a quarter (23%) are derived from the sale of used vehicles, another 13% for the sale of service and parts and the remainder the sale of various insurance and finance services (Shuldiner 38). According to the company's profile, "AutoNation has sold over 10 million vehicles, the only auto retailer to achieve this milestone. AutoNation seeks to be the best-run, most profitable automotive retailer in the nation" (Corporate Profile 2).

To its credit, the company has launched a number of initiatives in recent years to achieve this goal, including implementing a sophisticated customer relationship management application that tracts the effectiveness of its sales for each category of consumer that makes an inquiry at one of its retail locations or online (Shuldiner 38). In this regard, Shuldiner advises that, "Every customer call or store visit is recorded in AutoNation's computer system, so each dealer can scan a customer's sales history" (38). Approximately one-quarter of the company's profits from new vehicle sales are generated by the premium luxury segment such as BMW, Mercedes-Benz, Audi and Porsche (AutoNation annual report 4), with the majority of the remainder of its profits being provided by sales of various domestic (e.g., General Motors, Ford and Chevrolet) and foreign (e.g., Nissan, Honda, Toyota brands (Shuldiner 38).

3. Problem Description

Today, automobile recalls in the United States are covered by the National Traffic and Motor Vehicle Safety Act ("the Act") which authorizes the U.S. Department of Transportation's National Highway Traffic Safety Administration to issue vehicle safety standards as well as to require the recall of vehicles that have been identified as failing to meet federal safety standards of which have safety-related defects (Motor Vehicle Defects and Safety Recalls 2). Since the passage of the Act, nearly 400 million automobiles, trucks, buses, recreational vehicles, motorcycles, and mopeds together 66 million pieces of motor vehicle equipment, 46 million tires 42 million child safety seats have been recalled in order to correct identified safety defects (Motor Vehicle Defects and Safety Recalls 3). Vehicle manufacturers are obligated to pay the minimum costs for the correction of the identified defect or defects at no cost to the vehicle owners (Motor Vehicle Defects and Safety Recalls 4).

While the Act can be regarded as a positive effort to protect consumers from defective vehicles, the costs that are related to recalls can be enormous. For instance, according to one automotive industry analyst, "The most direct costs to consider are the financial costs of a recall to the automaker. The most obvious one is the cost of the fix" (Elmerraji 3). The "cost of the fix" for recalls for automotive manufacturers, however, do not include the conventional mark-up that is applied to parts for other repairs which represent a significant profit center for automobile dealerships with service centers. In this regard, Elmerraji emphasizes that, "Obviously, repair costs for a car manufacturer are significantly lower than they would be for consumers given the lower part costs and labor expenses that the automakers enjoy. That usually makes a recall's cost per vehicle relatively low" (4).

This paper considers the problem of determining the optimal approach to developing and implementing a value-added strategy in response to the growing amount of contractual work the company is performing on recalled vehicles by the company's service departments. In many cases, consumers with recalled vehicles only want the minimum amount of work performed on their vehicles to resolve the recall issue rather than using the opportunity to have their vehicles inspected for any additional mechanical work that may be needed at the time, a tendency that limits the company's ability to generate additional profits from the provision of these contractual services. This newly implemented policy affects fully 16% of AutoNation's current inventory of vehicles (Griffith 4).

4. OM concepts/tools that can be applied

There are a number of concepts and tools that are subsumed under the OM category that can be applied in various situations, including some that would be most appropriate for the purposes of addressing the problem of interest in this study. The two tools that are best suited for this purpose are decision-support systems (Kumar and Suresh 35) and the Six Sigma methodology (Grant 10). In sum, decision support systems (DSSs) are computer-based applications that facilitate decision-making based at any phase of the process by providing decision-makers with the information they need to formulate an informed response (Kumar and Suresh 35). Decision support systems achieve this objective by providing analysts with the ability to model a wide array of "what-if" scenarios to identify the most desirable alternative (Gunderson and Sermo 22). These attributes make DSSs an especially valuable OM tool that can help practitioners identify viable solutions to seemingly intractable problems. For instance, according to Kumar and Suresh, "[Decision support systems] are a logical extension of the managerial decision processes. This helps the managers to learn better, how to apply data processing and modeling capabilities of computers to the analysis of ill-structured and value-based decisions" (35).

In contrast to DSSs, the Six Sigma methodology is comprised of more than 400 process improvement and analytical tools that have been applied to a wide range of problem areas in an increasingly wide array of business sectors over the past 50 years (Aghili 12). The Six Sigma methodology uses the define, measure, analyze, improve and control (DMAIC) framework that consists of defining a problem area, measuring relevant metrics to establish benchmarks, the performance of appropriate analyses to evaluate the effectiveness of implemented solutions, the identification of initiatives that are intended to improve the situation and a means of controlling the process (Aghili 13). According to Aghili, "The main strength of Six Sigma is that it is data driven" (13). An application of this Six Sigma tool to the problem of interest herein is provided below.

5. Application of OM concepts/tools

This paper considers the problem of identifying strategies to add value to process of providing automotive repair services for vehicle recall orders issued by manufacturers pursuant to the requirements of the National Traffic and Motor Vehicle Safety Act. In response to the above-described problem, an application of the Six Sigma DMAIC framework to AutoNation's situation is provided in Table 1 below.

Table 1

Application of DMAIC to AutoNation's Vehicle Recall Servicing

Step

Application to AutoNation's Problem

Define

Most customers who visit the company's service centers for recall-related work tend to restrict their purchases to these services only, thereby limiting the company's profitability and ability to provide more profitable services for other customers while these repairs are being made.

Measure

Although precise figures are unavailable, what is known for certain at this time is that the burden of providing minimally profitable recall-related services has forced… [END OF PREVIEW]

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