How Volvo Penta Brought Together the Dealerships That Had a Long-Lasting Conflict-Publication
Volvo Penta (makes part of Volvo Vostok Group) chose to restructure the dealerships’ works throughout Russia. They used to have conflicts, snatch away clients from each other, conceal information, engage in price wars, which exerted an adverse impact on the revenue and service quality. Today, Volvo Penta is trying to foster the cooperation culture by rewarding the dealerships helping each other, says Vsevolod Gavrilov, Director of Volvo Penta in Russia. The project designed to foster a new culture has been implemented over the course of four years. It helps Volvo Penta retain the sales volumes despite the contracting market, he argues. In 2014, revenues equalled RUB 530 mln, and in 2016 — RUB 860 mln. Volvo Penta manufactures diesel engines for yachts, tugs, and fishing boats, as well as industrial generator units.

Recently, the Russian market of ship engines has suffered a major contraction: if in 2013 manufacturers imported 1,157 new engines to Russia (from 10 up to 1000 h/p), in 2015 only 547 engines were imported, Volvo Penta’s data indicate. Due to the crisis, private clients are purchasing fewer yachts and motor boats, Gavrilov explains. The Russian office of Volvo Penta chose to focus on sales to larger b2b-clients. The list of Volvo Penta dealerships’ clients includes Rosmorport, Novorossiysk Commercial Sea Port, Container Terminal Saint-Petersburg, Yugorsk Generating Company, etc. The share of b2b-clients has grown: in 2012 it accounted for 20–30%, in 2017 — for about 50%.

The problem is that individually, dealerships were unable to provide service to major clients due to resource scarcity. Volvo Penta has 26 dealerships in 20 Russian cities. These are small, predominantly family businesses; oftentimes, service stations are accommodated in a garage, as 90% of works are done in the field. All the dealerships combined have 100 mechanics. This prompted the idea to use them collectively, making savings on travel expenses and using each other’s advice.

The primary source of dealerships’ income is the sale of engine parts. There are no stringent requirements to the dealerships’ financial stability, but they must have a stock of spare parts in the warehouse, so that ideally they could service clients on the day of breakdown, says Tatyana Kuzmina, Dealership Network Development Manager, Volvo Penta. But the costs are quite significant: you need to purchase the tools €25,000 worth in order to be able to service all the sterndrives manufactured by Volvo Penta.

Analysing Conflicts

Oftentimes, car dealerships compete with each other, particularly if they are located in the neighbouring regions or in the same city, says Vladimir Mozhenkov, former Vice President of Avtospetstsentr. Just some three years ago, Volvo Penta’s trading partners could have 20 conflicts per year, Gavrilov recalls. For instance, a certain dealership is stroking a client, while the other lures it away at the very last moment by knocking the price down. Another typical case is when a dealership is undermanned, but would not let a mechanic from another company fix its client’s motor boats. The list of Volvo Penta’s clients includes a major shipping company headquartered in Samara that owns 20 tankers. And Volvo Penta had to take three attempts to strike a deal with it by providing service through the effort of a team composed of several dealerships, Gavrilov says.

In 2014, Gavrilov suggested analysing the most serious conflicts at the dealership conferences in order to make them public. Quite recently, a Volgograd-based dealership’s client requested technical support in the Primorye territory. Our Vladivostok partner was willing to help — he offered sending a mechanic (subsequently, it turned out that the company had a shortage of necessary tools), but the parts were supplied by the Volgograd-based company aggrieving the Primorye-based dealership due to the fact that these are the parts that are the primary source of its income. This resulted in a holdup. The conflict was analysed together with the parties involved. It was recommended that dealership from Vladivostok obtain additional tools and upgrade the mechanic’s skills, and that the dealership from Volgograd raise the price (the parts were so inexpensive that the dealership was unable to share the profit).

The conclusion is that the dealerships should be advised to provide for such a margin in the service contracts that they could share the workload and there were economic incentives to cooperate, Gavrilov said. The prices will become higher for the clients, but the rise will not exceed a few percent, Gavrilov claims. He argues that the discussion of such situations works as a preventive tool. Over the past two years, the number of conflicts dropped tenfold: in 2016, just two cases were discussed at the conference.

In times of War, Unexpected Persons Become the Leaders

Starting from 2014, Volvo Penta’s conferences have become more frequent and longer: they now gather the people for two days instead of one. The dealerships used to form groupings: big dealerships used to group with other big dealerships, small dealerships used to group with small dealerships. Starting from 2014, all of them have been seated together around one big desk, which has mixed the established groupings. As recently as in 2014, all the disagreements between the dealerships would be resolved through the interference by Volvo Penta, while now they are calling each other and try to reach agreement, Gavrilov says. He confessed that he distilled a lot of ideas about incentivising dealerships from Dave Logan’s Tribal Leadership.

A Point for Help

Nevertheless, collective discussions were not enough to make the dealerships cooperate, Gavrilov says. In 2016, the bonus system had to be modified. Today, the sales are not the primary indicator determining the discount as it used to be in the past. Now dealerships’ discounts are determined by financial discipline, precision of business processes, mechanics’ qualifications, and willingness to help other dealerships. Points are accrued for securing each individual KPI. Those who come first in the ranking (these may be several dealerships), get a discount of about 30%, those who come second — a 25% discount, and those who come third — a 20% discount. “We’ve allowed dealerships to accrue points to each other, for instance, in case a dealership receives technical advice from another dealership, Gavrilov explains.

Cooperation may help go up from the third place, say, to the second, says Alexander Orlov, General Director of Moscow-based Unisale, Volvo Penta’s major dealership. A dealership from Murmansk servicing coast-guard motor boats, was short of current capital and it has recently shared a commission with Unisale. In the past, dealerships did not use to cooperate so closely, Orlov argues.

Starting from 2016, mechanics are tested online and openly, so that another dealership could see the qualifications of someone else’s mechanic. In the winter of 2017, all the power generators broke down in the settlements Karaul and Nosok in Taimyr. A dealership from Saint Petersburg servicing the local administration did not have enough men to repair them, and a Moscow-based dealership seconded its mechanic to Taimyr. So far cooperation has produced a minor growth in revenue, not exceeding 1–2%, Orlov says. But joint projects help solve an important problem — getting work for the staff during the dead season in winter, Gavrilov adds.

Not to Stifle with Regulations

Dealerships are anyways subject to too many restrictions, including the purchase volume, financial discipline, etc., and therefore, it is crucial not to stifle them with too many regulations, Mozhenkov says. Encouraging cooperation is a noble strategy, but it has its risks, adds Ludmila Shusterova, Strategic Development Director, BDO Unicon Outsourcing. When a company cedes a client to a partner, it obtains no guarantees of financial support in the future, she notes. And it is highly unlikely that cooperation weighs more in terms of securing a discount than the sales volume. But nonetheless, the cooperation points do help manage the clearing system between the dealerships, Shusterova believes.

AvtoVAZ Revises Terms of Engagement for Dealerships

Car manufacturers used to deal with similar problems in the development of the dealership network, says Arturs Smilkstinsh, BCG car practice leader, Russia & CIS. They were able to improve the service quality through an adequate bonus system, for instance, by granting extra bonuses for the accomplishment of long-term plans, investment in business development and staff training, he says. Manufacturers’ dealerships are not as highly organised as in the car sector, Smilkstinsh claims. Higher requirements to financial reliability and part stock should be set for them in order to prevent the situations when a dealership is unable to help a client promptly.

Volvo needs higher sales and this objective can be achieved in two ways: by increasing the number of dealerships or by improving the service quality, Mozhenkov argues. But Volvo Penta, on the contrary, has reduced the number of dealerships by parting with four partners that were unable to comply with the new business standards. The service quality is currently more important than the number of partners, Gavrilov claims.



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