Reference no: EM133279601

Case 7.1 Handy Andy, Inc.

Handy Andy, Inc., produced residential trash compactors at a factory in St. Louis, Missouri, and sold them throughout the United States. Over 90% of Handy Andy's sales were in large urban areas where trash-collection costs were high.

The standard model compactor was about 3 feet high, 2 feet deep, and 1 1/3 feet wide. The deluxe model had the same dimensions but had better features, such as greater capacity and greater horsepower. Because most of the compactors would be placed in home kitchens, a wide variety of colors and trims were manufactured, providing exteriors that would match many kitchen decors. The standard model was available in five colors with three different trims, for a total of 15 different combinations, while the deluxe model was available in eight colors and four different trims, for a total of 32 different combinations. Retail prices were set by the dealer, with prices for the standard model ranging between $600 and $725 and for the deluxe model between $950 and $1,100. Sales in an area were usually slow until trash collectors, faced with rising landfill costs, raised their rates per can of refuse picked up.

There was one authorized Handy Andy factory distributor in each large urban area. The distributor was responsible for filling orders from licensed Handy Andy retailers. The factory distributors were also allowed to sell compactors to the final consumer. Each factory distributor maintained a complete stock of all styles and trims of the Handy Andy compactors. These distributors were required to stock at least five units each of the 47 different styles available.

Because of the sporadic sales patterns and the large number of colors and trims available, the licensed retailers usually stocked only a display unit or two. Each retailer carried a "design your dream compactor" software package that allowed prospective buyers to choose the model, color, and trim they wanted. When the retailer completed the sale, the order would be transmitted to the nearest Handy Andy factory distributor.

The general agreement between the factory distributors and Handy Andy was that the distributors would deliver and install the compactor within 5 days after receiving an order from a licensed retailer. For the delivery and installation, the factory distributor received 9 percent of the unit's wholesale price, half paid by the licensed retailer that had made the sale and half paid by Handy Andy.

José Ortega worked in Handy Andy's distribution department in the St. Louis headquarters. He was working on a project to determine whether the compactor's warranty should be extended from one year to two years. The units were well built, and there had been almost no warranty work requested in the first year of each model's life. Because Handy Andy would have no records of repair work performed after the one-year period had expired, Ortega was randomly contacting buyers via their mobile phones to learn about their experience to date. Handy Andy's buyer database, which included customer names and mobile phone numbers, was generated when buyers activated their product warranty online (see Exhibit 7-A).

Exhibit 7.A Warranty Activation Form

Ortega was in the process of contacting 500 purchasers who had owned the compactors for between one year and four years (when they had first been introduced) to determine whether the compactors had required repairs and, if so, the extent and cost of the repairs. In talking to purchasers, Ortega was impressed by the fact that there were remarkably few complaints involving the durability of the compactors.

Another type of complaint did arise, however, one that Ortega had difficulty understanding until he heard many buyers, usually from the same few cities, tell an almost identical story. It appeared that in these cities the factory distributor would contact individuals who had purchased a standard model compactor from licensed retailers. The factory distributor would tell these buyers that the model originally requested was out of stock but that they could purchase a deluxe model for only $100 more than they originally paid for the standard model. The factory distributors also indicated that buyers would receive better after-sale service because higher-priced purchases would receive priority over lower-priced purchases if something malfunctioned. In addition, the factory distributors in these few cities indicated that they, not Handy Andy, Inc., stood behind the one-year warranty.

Ortega realized that he was uncovering a much larger-and more serious-problem than he had been assigned to explore. He chatted briefly with his supervisor, Sheryl Booher, who told Ortega to revise the format of his interview to include several questions concerning the installation. Booher also told Ortega to begin calling individuals who had owned compactors for less than a year. Ortega did this, and he discovered marked differences in the installation process based upon whether the customer purchased from a factory distributor or from a licensed retailer.

As a general rule, compactors purchased from factory distributors exhibited fast delivery in terms of elapsed time since sale. Importantly, over 90% of the deliveries occurred within the two-hour delivery windows that buyers were promised. Moreover, the installation personnel carefully explained how the compactor worked, and follow-up contacts were made to the customer 3 days and 10 days after installation to make certain that the customer had no additional questions concerning the compactor's operation.

On the other hand, Ortega learned of troubling inconsistencies in the delivery times of compactors purchased from licensed retailers. More specifically, fewer than 20% of the deliveries occurred within the two-hour delivery windows that buyers were promised. Even more disturbing was that in some cases the compactor was left in the middle of the kitchen floor in its shipping container-i.e., uninstalled! Customers of the licensed retailers also indicated that installation personnel would not explain how the compactor worked and that some installers were rude and disrespectful. As an example, in response to one customer's question an installer stated, "Assuming you can read, the answer can be found in the owner's manual."

Ortega had another meeting scheduled with his supervisor. As Ortega entered Booher's office, he was surprised to see Handy Andy's vice president of marketing, Bob Bixby, also sitting in the office. Booher asked Ortega to tell Bixby the results of his interviews. After listening to Ortega, Bixby asked, "Do you think this pattern exists in all markets?"

"No," was Ortega's reply. "I'd say it is a problem in Jacksonville, Baltimore, Cleveland, Louisville, Denver, and San Diego. It may be a problem in Dallas and New Orleans. My sample wasn't very well structured in a metropolitan market sense; you will recall that it was a nationwide sample that was trying to look at repairs."

Question 1: Is this a customer service problem? Why or why not?

Question 2: It appears that the factory distributors are exploiting the licensed retailers. Yet from what we can tell, Handy Andy in St. Louis has heard no complaints from the licensed retailers. Why wouldn't they complain?

Question 3: What should Handy Andy's marketing vice president do? Why?

Question 4: In the case is the statement, "The factory distributors in these few cities indicated that they, not Handy Andy, Inc., stood behind the one-year warranty." Is this a problem for Handy Andy? Why or why not?

Question 5: Bixby, Booher, and Ortega recognize that Handy Andy needs a better way to learn about the buyer's installation experience. One alternative is to add an open-ended question, dealing with the installation experience, to the warranty activation form. Another alternative is to email a brief survey about the installation experience within three to 5 days of receiving a warranty activation form. Which of these alternatives should Handy Andy choose? Why?

Question 6: Discuss the pros and cons of allowing Handy Andy trash compactors to be sold only through licensed retailers (i.e., factory distributors would no longer be able to sell to consumers).

Question 7: Is it too late for Handy Andy to attempt service recovery with customers who reported a less-than-satisfactory installation experience? Why or why not?