CASE SUPERAUTO SPARE PARTS SERVICES

Peng Zhang is a project manager with SuperAuto Ltd., a large automobile manufacturer based in Shanghai, China. Three years ago, he led a project to outsource spare parts management to DailyFreight Ltd., a third party logistics provider. Outsourcing is the practice of transferring specific processes from in-house to a third party. It involves a change of process ownership. In Peng Zhang's project, the outsourced processes included spare parts inventory management, receiving spare parts

orders from dealers, and dispatching orders to dealers. Yun Li, the vice president of customer services, recently asked Zhang to assess the impact of the outsourcing arrangement on customer service quality. In the service level agreements (SLAs), DailyFreight needs to meet an availability rate of 95% of spare parts orders. DailyFreight marks up 10% on SuperAuto's sales prices to cover the inventory financing, transportation, and administrative costs.

The demand for spare parts is sporadic and urgent. Before the outsourcing, all the authorized 3S (sales, services, and spare parts) dealers of SuperAuto ordered spare parts directly from SuperAuto, which dispatched available spare parts from its national warehouse in Shanghai the next day using a courier service. The courier has a delivery lead time of one day to major cities and two days to the

rest of China. SuperAuto has over 100 authorized dealers across the country. It was a huge administrative burden for SuperAuto to manage the small quantity of spare parts orders,

which were highly unpredictable. Dealers complained that the courier service sometimes cost more than the spare parts shipped.

In the outsourcing arrangement, DailyFreight orders spare parts in bulk from SuperAuto and owns spare parts at its seven regional warehouses at strategic locations in China. Dealers order spare parts from DailyFreight and expect a next-day delivery from DailyFreight's regional warehouse. Immediately after the implementation of outsourcing, many dealers praised the service model as they got spare parts faster and paid a lower freight rate due to a reduced transportation distance. SuperAuto's logistics department was also very happy with the ease of processing bulk purchase orders in the outsourcing arrangement. Because of the overwhelmingly positive feedback, SuperAuto decided to discontinue its annual dealers' refresher training on spare parts services, given that it was no longer directly supplying spare parts to dealers.

When Peng Zhang accepted the task from Yun Li, he thought it would be simpleapparently all parties involved in the outsourcing arrangement were better off. He followed the routine procedure of conducting a random survey among all the stakeholders involved by phone.

However, he was shocked as he spoke to some vehicle owners: they were very angry about their dealer experiences. They complained that their local authorized dealer had asked them to replace expensive components that were still in a good condition, just to make more profit. When asked how they had discovered the dishonesty of a dealer, some vehicle owners said that their view was based on their experience and knowledge. A few vehicle owners had taken their SuperAuto cars to an independent inspection agency, where the dishonesty was proved. These angry vehicle owners said that they would never visit a SuperAuto authorized dealer again, nor would they consider buying

another SuperAuto vehicle. This was very troubling for Peng Zhang, although the problem that surfaced did not fall within the scope of the task assigned to him by Yun Li.

When Zhang started to ring dealers, he got a mixed response. For the frequently used spare parts, all dealers acknowledged the benefits of faster delivery and reduced freight cost. However, dealers complained that DailyFreight often ran out of stock of some slow-moving items. Consequently, the dealers had to wait many more days, which delayed the fixing of vehicles. Also, some dealers complained that DailyFreight was not professional in handling deliveries. Sometimes a DailyFreight driver might throw a parcel on a working desk in a rush, without even speaking to or informing anybody at a dealer's premises. Zhang tried to probe into the possibility of deceitful diagnosis by the

dealers for unnecessary replacement of expensive components.

However, all the surveyed dealers denied this. Lastly, Zhang called the account manager at DailyFreight who oversaw the services to SuperAuto and its dealers. He did not give a direct answer when asked whether DailyFreight was not keeping a sufficient stock of slow-moving

spare parts. He was confident that DailyFreight met the 95% SLA. He promised to email the statistics of orders and delivery lead times. Somehow, totally unexpected by Zhang, he complained about the cost of financing spare parts inventories and proposed that the price mark-up be increased from 10% to 20%. Zhang reported his findings to Li. A day later, Li called him to join a meeting with Fei Wang, the dealer relationship manager, and Yu Chen, the logistics manager.

Fei Wang looked very upset. He asked Zhang, "Could you provide me with a list of dishonest dealers? I am going to be very tough with them!"

"Sorry, I cannot give you a list," replied Zhang. "I can only give you the names of the few dealers said to be dishonest by the vehicle owners I surveyed. My telephone survey was not meant to investigate into the integrity of dealers. I randomly rang just 30 vehicle owners. We have over 300,000 customers!" "It is not enough to be just tough with themwe need to fire them! How can we still trust these people? They have caused a huge damage to our reputation. I wish I had the time to take them to court!" said a furious Yun Li. "Fei Wang, why did you have no idea about such a serious problem?"

I'm terribly sorry, sir," said Fei Wang, turning his eyes away from Li. "Nobody has ever told us. . .. Perhaps we shouldn't have stopped our annual dealers' refresher training. We used to emphasize our zero tolerance of dishonesty in the training."

"No excuses, please," said Li, proceeding to give instructions: "You three, please find out which dealers are dishonest. You also need to come up with an effective procedure to continuously monitor and manage other dealers to ensure that they act with integrity in serving vehicle owners. Furthermore, please review the SLAs with Daily- Freight to see if any revisions are necessary."

After Li left the meeting room, Wang, Zhang, and Chen discussed how to conduct a large-scale survey of vehicle owners to identify possible dishonest dealers.

Chen showed the others an old spare parts services survey form. The form had been used ten years ago for a mail survey.

QUESTIONS (20 marks- 4 marks each)

1. Does Super Auto have a customer service problem? Why or why not?

2. Based on the reports of some vehicle owners, it is apparent that some dealers have an integrity issue. Why has Super- Auto not been aware of the issue?

3. Does the spare parts outsourcing arrangement have any negative implications for the quality of spare parts services offered to vehicle owners? If yes, why?

4. Is it too late for Super Auto to attempt service recovery with vehicle owners who were cheated by dishonest dealers? Why or why not?

5. What lessons can we learn from the Super Auto case for managing customer service quality in outsourcing?