Case study: Purchasing and Inventory at Silvaro Motors
Helen Silvaro, CEO of Silvaro Motors, has just returned to her office after visiting the company’s newly acquired automotive dealership. The new dealership was the fourth Silvaro Motors dealership in a network that served a metropolitan area of over two million people. Beyond the metropolitan area, but within a 45-minute drive, was another half a million people. Each of the dealerships in the network marketed a different make of car and historically had operated autonomously.
Silvaro was particularly excited about this new dealership because it was the first “auto supermarket” in the network. Auto supermarkets differ from traditional car dealerships in that they sell multiple makes of cars at the same location. The new dealership sold a line of Daewoos from Korea, Mahindras from India and Cherys from China. This brought the total number of brands sold by the group to six.
Since the purchase of a bankrupt Mitsubishi dealership 15 years ago, Silvaro Motors had grown steadily. As the city was relatively small, it was difficult to expand within a single brand, so eventually Silvaro purchased a rundown Mazda dealership, and shortly afterwards, a small Hyundai dealership as well. Under her direction, all three dealerships saw rapidly improving sales figures and the Silvaro Motors network grew in strength and reputation.
Silvaro attributed this success to three highly interdependent factors. The first was volume. By maintaining a high volume of vehicle 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 sales person to assist them. Finally, and Silvaro thought perhaps the most important, was the after sales service. Silvaro Motors had established a solid reputation for servicing, diagnosing, and repairing vehicles correctly and in a timely manner—the service division’s motto was “do it once, do it right”.
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. And third was the availability of the full range of parts and materials necessary to complete the service and repairs without delay. Silvaro invested in training and equipment to ensure that the fully trained personnel and the latest technology were available at all sites. What she worried about, as Silvaro Motors grew, was the continued availability of the right parts and materials. She knew there was a fine line between too much and too little stock. With the new dealership, the complexity of inventory control had increased dramatically. This concern caused her to focus on the purchasing function and management of service parts, accessories and materials flows at both a supply chain level, and as an internal function.
Silvaro thought back on 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. She did not want that to happen to Silvaro Motors.
Each of the four dealerships purchased its own service parts and materials. Each location had its own purchasing officer and parts manager. 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 autumn to winterise cars. Forecasts were also adjusted for special vehicle sales and service promotions, which increased the need for materials used to prepare new cars and to service other vehicles.
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 vehicles, others would be sold over the counter to retail customers, whilst others (particularly genuine replacement parts) were on-sold to wholesale trade customers. Some had to be purchased from the car manufacturers (genuine replacement parts and accessories), to support, for example, the “guaranteed genuine parts” promotion or because that was the only source of supply. Non-genuine replacement parts and accessories were purchased from a variety of suppliers and other parts and materials such as oils, lubricants, fan belts and other generic service parts and materials, could be purchased from any number of suppliers. The purchasing department had to remember that the success of the dealership depended on (1) 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-sales service.
As Silvaro thought about the purchasing of parts and materials, two things kept going through her 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 car lines at the same facility. Investment dollars were becoming scarce, and space across all the locations was at a premium. Silvaro wanted a ‘whole of organisation’ approach, and wondered what could be done in the purchasing, supply chain, and inventory areas to address some of these concerns and alleviate some of the pressures.
As a newly appointed Purchasing Manager at Silvaro Motors you are required to prepare a report for Ms Silvaro that addresses the following questions:
1. How might purchasing and inventory management policies and procedures differ because of the different types of service parts and materials purchased by the dealerships (e.g. lubricants, non-genuine parts versus genuine parts) from different types of suppliers?
2. What appear to be the main weaknesses of current purchasing and inventory management practices at Silvaro Motors, and how could these weaknesses be affected by the new acquisition?
3. How can supply-chain and inventory management concepts help Silvaro Motors reduce investment and space requirements whilst maintaining adequate service levels?
4. What recommendations would you make to Ms Silvaro with respect to restructuring the purchasing and inventory functions for the Silvaro Motors dealership network?
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