Designing long term oriented policies to build strong Manufacturer-Dealers relationships:
a system dynamics approach
Enzo Bivona ‘?, Francesco Ceresia “”)
Abstract
In today’s economy all manufacturers need to pay attention on how to build strong and long-term relationships with
their dealers’ chain. In fact, it has been demonstrated that short term policies aimed to provide dealers immediate
benefits (e.g., price discounts) may prevent the development of long term and fruitful relationships. Also supporting
dealers in promoting manufacturers’ products has been proved as a sustainable strategy in the long run
Another implication of manufacturers bounded policies refers to their inclination to reinvest significant amounts of
their sales revenues in advertising and product portfolio improvement, without taking into account the need to invest in
dealers’ human resources, to make their strategie stainable. Such weaknesses have been proved to be a crucial
cause of failure in high-tech industries, where busi internal and external actors are expected to quicker share the
key-success factors underlying innovative and revolutionary product offer.
Based of the above remarks, this paper aims to demonstrate the usefulness of a system dynamics approach in involving
both manufacturers and dealers in strategic reasoning. Such an approach is likely to overcome communication
boundaries arising from an inclination to maximise short term personal results.
Empirical evidence arising from a research project conducted by the authors with a manufacturer operating in a high-
tech industry, shows that using system dynamics as a methodology to support communication and learning may act as a
significant lever to design successfully long term oriented policies. Such policies ought to increase dealers’ skills and
motivation, and improve potential customers’ awareness of product benefits, at the same time.
es.
Introduction
In today’s economy all manufacturers need to pay attention on how to build strong and long-term
relationships with their dealers’ chain. In fact, it has been demonstrated that short term policies
aimed to provide dealers immediate benefits (e.g., price discounts) may prevent the development of
long term and fruitful relationships (Liker and Choi 2004:3). Also supporting dealers in promoting
manufacturers’ products has been proved as a sustainable strategy in the long run.
These issues have been debated in the field of the Distribution Channel Management (Dwyer et al.
1987; Anderson and Narus 1990; Ganesan 1994; Yilmaz et al. 2004). In particular, researchers
emphasised that manufacturers cannot ignore in designing long term growth-oriented policies,
strategies aimed to increase dealers’ satisfaction. Furthermore, in order to successfully plan business
growth, it has been remarked in literature the central role played by communication. In fact,
researchers underlined that a failure in channel communication is likely to affect the relationship
between organizations and its own dealer structure (Mohr and Nevin 1990; Stem and El-Ansary
1992).
Such remarks suggest that in order to effectively build a long term oriented relationship with an
own dealers’ chain, a manufacturer has to adopt a systemic approach aimed to foster market
consensus on a side, and mutual benefits on the other side.
In particular, in the innovative and revolutionary high-tech industry, manufacturers in order to
achieve the desired sales revenues can not ignore the need to continuously promote activities aimed
to both update dealers employees’ skills and motivation.
This paper is the result of a research project conducted by the authors with a manufacturer operating
in the high-tech industry. It is based on the hypothesis that in order to successfully support dealers,
a manufacturer has to design long term oriented policies aimed to both build up a growing potential
customers’ awareness of company product benefits on a side, and increase dealers employees’ skills
and motivations on the other side.
Assistant Professor in Business Management, University of Palermo (Italy), PhD in Business Management, University of Catania
(Italy), Master Phil in System Dynamics, University of Bergen (Norway), enzobivona@sciepol.unipa.it, Address: Via Maqueda, 324
- 90100 Palermo (Italy)
(assistant Professor in Work and Organisational Psychology, University of Palermo, PhD in Work and Organisational Psychology,
University of Bologna (Italy), Master in Managing business growth through System Dynamics and Accounting Models, University
of Palermo
In the first part of this paper, an analysis of main contributions in the Distribution Channel
Management and Communication fields are outlined. Further, the role of the Strategic Human
Resource Management is also briefly remarked.
In the second part, the case-study, the evolution of the business, problem issues, feedback analysis
of adopted management growth policies, unperceived potential limits to growth of management
policies and policy design to remove limits to growth are discussed. It is worth remarking that
problem issues and feedback analysis of adopted company growth policies are the results of several
meetings with the involvement of the management.
Finally, an analysis of the main stock and flow structure of the system dynamics model used to
explore alternative scenarios and results from two simulation runs are provided.
1. Distribution Channel Management
Researches in the field of distribution channel management underlined the importance of enhancing
the quality of relationships between manufacturers and dealers (Dwyer et al., 1987; Anderson and
Narus, 1990; Ganesan, 1994). As noted by Anderson and Narus (1984), manufacturers should focus
on strategies aimed to increase dealers’ satisfaction about the adopted distribution channel system
(Brown et al., 2000; Geyskens et al., 1999).
In particular, as remarked by Yilmaz et al. (2004) manufacturer companies may increase the level
of dealers’ satisfaction by acting on four main areas:
e delivery (e.g., how well the manufacturer fulfil dealers’ procurement requirements);
© operation (e.g., manufacturers’ contribution to dealers’ inventory management, store
design);
¢ personnel (e.g., manufacturers’ support about dealers’ personnel competence, courtesy and
responsiveness);
e sales (e.g., manufacturers’ support about dealers’ sales and profits).
By effectively managing the above sub-systems, manufacturers may enhance dealers’ commitment.
In fact, dealers could be more prone to invest in manufacturer’s business and to share its mission.
As consequence, the manufacturer is inclined to foster investments in distribution channel
management.
Such phenomenon is likely to generate a virtuous circle able to build up a long-term relationship
between manufacturer and its dealers’ chain (Fein and Anderson, 1997; Ross et al., 1997).
By analysing the successful relationships between Japanese and North American companies, Liker
and Choi (2004; p. 3) emphasised “that immediate benefits of low wage costs [or aggressive pricing
policy] outweighed the long-term benefits of investing in relationships”. In particular, Liker and
Choi also emphasised that Toyota and Honda built great supplier relationships by implementing a
set of different, but coherent policies aimed to:
- investigate how their suppliers work;
- supervise their vendors;
- develop their suppliers’ technical capabilities;
- share selected information intensively;
- conduct joint improvement activities.
To some extend such set of policies can be also used in managing the relationships between
manufacturer and dealers.
It is also worth remarking that one of the main difficulties in building a strong supplier relationship
is played by the role of channel communication. In fact, it has been also remarked that a failure in
channel communication is likely to affect the relationship between organizations and its own dealer
structure (Mohr and Nevin, 1990; Stem and El-Ansary, 1992).
2. Distribution Channel Communication
By reviewing main contributions in the field of the communication channel theory it is possible to
detect two approaches (Mohr and Sohi, 1995).
The first approach aims to explore the “nature of communication flows” between channel partners.
In particular, it underlies some aspects such as the frequency of interaction (Brown, 1981), the level
of formality or the bidirectionality of communication flows (Anderson et al., 1987).
The second approach focus on the assessment of communication flows quality, in terms of mutual
benefits, satisfaction and effectiveness generated from managing communication flows among
channel partners (Guiltinan, Rejab, and Rodgers, 1980; Bialaszewski and Giallourakis, 1985).
Mohr and Sohi (1995) suggest a model of communication flows between suppliers and dealers.
Figure | reported above shows the cause-and-effect relationships underlying distribution partners’
satisfaction with communication, embodied in Mohr and Sohi model.
Frequency
+or-
Formality
Norms of
Information
Sharing
Satisfaction
with
Communication,
Communication
Quality
Figure 1 - The model of communication flows between manufacturers and dealers
(Adapted from Mohr and Sohi, 1995)
The first variable in the model is “Norms of information sharing”. Such guidelines feed dealers’
expectations towards manufacturer’s behaviours, and vice versa, within the distribution channel.
Such a variable is likely to affect the communication quality through three main drivers: frequency,
bidirectionality and formality.
It has been remarked (Feldman and March, 1981) that a lack of information, due to a low
communication frequency, is likely to generate difficulties in decision making process. However, a
high level of communication frequency may determine a phenomenon of “information overload”
that causes problems in assessing new business alternatives (O’Reilly, 1980; Liker and Choi, 2004;
p. 9).
Similar considerations may be given about the formality variable. In fact, formality may increase
communication quality of distribution channel partners, allowing them to anticipate partner’s
behaviours. However, this formality may represent a real obstacle to a “just in time”
communication.
Bidirectionality is likely to directly increase communication quality. In fact, by providing and
receiving feedbacks about distribution partners’ behaviours and performance, both manufacturer
and dealers are able to share more effectively business strategies and mission.
A high communication quality directly affects partners’ satisfaction with communication and, in
particular, allows dealers to achieve satisfactory performance.
In order to affect communication quality’s drivers it is necessary to focus on dealers’ personnel sub-
system (Yilmaz et al., 2004). This requires that manufacturers identify coherent practices of dealers’
human resources management able, on a side to improve the communication quality with dealers
and on the other to build up dealers’ personnel competencies to effectively promote manufacturers’
mission.
Based on the above remarks, such a perspective suggests to identify a pattern of human resource
management practices, as a strategic lever on which to act to increase dealer’s performance. This
has been identified as the domain of the “strategic human resource management” (Wright and
McMahan 1992).
3. The Strategic Human Resource Management
The “strategic human resource management” (SHRM) approach is defined as a planned set of
practices aiming to develop human resources skills and competences, that allows organizations to
reach its own objectives (Wright and McMahan, 1992).
In particular, in order to understand the SHRM approach, Wright (1998) underlines four main issues
on which organisations have to focus.
The first issue concerns the role of human resources as one of the main levers on which to act in
order to build a sustainable competitive advantage towards competitors.
The second requires the drawing up of a coherent and articulated set of programs, actions and
activities that can facilitate, on a side, personnel to acquire desired skills and competences, on the
other, organizations to create the internal environment able to fully exploit personnel abilities to
gain a sustainable competitive advantage.
The third refers to the necessity to develop systemically human resources management practices. In
particular, such practices have to be coherent among them (horizontal coherence) and with
corporate strategies (vertical coherence).
Finally, the strategic role of Personnel Unit has also to be taken into consideration in order to allow
the organization to reach its own objectives. This issue emphasises the pragmatic dimension of the
SHRM approach.
Jeppy Ltd case study
By the end of the 1980’s, Samantha and Marc few months after their marriage decided to launch a
new venture. The business idea of Jeppy Ltd turned around a simple but a revolutionary concept: to
give to the technology its original rule. In other words, to create a technology able to increase
human capabilities and improve the quality of live.
Such a vision started from an observation of the diffusion of an innumerable electronic products
used for various applications in houses, offices and companies. Even though most of them embody
a common electronic part they can be used to do only one application. This is due because each
producer designs a product as a “closed world”.
For instance, when you buy a washing machine and an air conditioner indeed you bought the same
electronic device twice. As a consequence, you are forced to pay twice the same electronic part.
Furthermore, these two products are not able to communicate at all. This is mainly due because they
have been designed through a “closed word” logic.
In order to overcome such limits, Jeppy Ltd proposed a new unitary and humanized technology
concept based on an unlimited set of bricks that combined among them produce the various
applications that men need for their home and working activities. It's the same philosophy of the
LEGO bricks game where combining the various bricks among them, it is possible to build endless
shapes.
The evolution of the business
At the beginning of the 1990’s, in order to create Jeppy’s bricks by using high quality components
Samantha and Marc signed a partnership with major high-tech producers located in Asia. Such
agreement also allowed them to support a low production cost.
As Samantha and Marc were conscious that the market was not ready to understand and, hence,
“buy” the concept of “Unitary Technology” (UT), they decided to adopt “Trojan horse” products.
Even though such products appeared to end consumers as traditional one (i.e., computers,
4
videorecorder, etc.), they embodied some Jeppy’s bricks. This was the initial commercial strategy
pursued by Jeppy Ltd.
Company products have been sold by high-tech dealers all over the domestic market. As the
products have a high quality/price ratio, due to the use of the latest technology, in few years Jeppy’s
sales revenues reached a satisfactory level.
At the end of the 1990’s, during a management meeting, commercial managers were very happy of
company results as they have been able to reach all commercial targets. However, both founders,
Samantha and Marc, started to make some remarks related to company mission.
In fact, by analysing business figures they perceived that the concept of UT proposed by Jeppy Ltd
was not understood by end consumers. In order words, it seemed that customers bought Jeppy’s
products without any consciousness of the bricks logic behind them.
In particular, two phenomena could be pointed out:
- end users did not tend to link Jeppy’s products among them;
- Jeppy’s products that didn’t appear as traditional one showed a dramatically decreasing
pattern over time.
As they recognised that the initial strategy, based on the “Trojan horse” products concept, has
failed, they decided to reshape their commercial strategy.
At the beginning of the third millennium, the management launched an own dealer chain aiming to
explicitly promote the concept of UT. In order to effectively introduce to potential customers such a
revolutionary concept, the company decided to provide dealers’ employees an initial training
course.
Problem issues
In few years, the number of company dealers steadily increased in the domestic market. In fact, at
the end of the 2001, Jeppy Ltd could count on 16 dealers. By the end of the 2004, the number of
dealers was about 166.
Dealers Sales revenues
12000 25.000,000,00
oe am .20,000,000,00
ies ae 25,000.000,00
100.00 20,000,000 00
mye ve €000.000,00
€2.000.000,00
©.000.000,00
20.00
2001 2002 2003 2004 2001 2002 2003 2004
Figure 2 — Dealers and related sales revenues dynamics (2001-2004)
From figure 2, it is possible to note that in the observed period company sales revenues reached
about Euro 30 Millions.
However, by analysing the quantity of products sold over the four-years it is worth remarking that
the so called “Trojan horse” products showed a continuous growing trend. On the contrary, the
company products that explicitly represent the UT concept show a weak growth in a first period and
dramatically fallen down in the last two years (see figures 3 and 4).
# products
120.000
100.000
80.000 + | 2001
60.000 = @ 2002
40.000 | 32003
20.000 + J Al 2004
Pdt1 Pdt2 Pdt3 Pdt4 Pdt5 Pdt6 Pdt 7
Trojan horses Non Trojan horses
Figure 3 — Company products sales quantities (2001-2004)
# products
Non Trojan horses products
14.000
12.000 +
10.000
8.000
2001
6.000 2002
4000 7 2003
2.000 2004
e
ry e
Pdt 6 Pdt 7
Figure 4 — Non Trojan horses products sales quantities (2001-2004)
Figures 3 and 4 depict the negative trend of the “Non Trojan horses” company products sales
quantities. In fact, at the end of the 2004, the latter count for less than 1% of the total company
revenues.
Such figures stimulated the following key questions:
e Why do sales quantities of “non Trojan horses” products show a decreasing pattern?
What are the main causes of such drastic reduction?
Why do sales quantities of “Trojan horses” products show a continuous growing trend?
e What is the real contribution of the company dealer chain to the achievement of the
company mission?
Based on such key issues, the management decided to launch a research project aimed to detect the
causes underlying company strategy failure in achieving its mission.
A feedback analysis of main management policies aimed to foster business growth
The project has been conducted by authors with the active involvement of the management and, in
particular, of the company organising manager. Due to the complexity of the above key issues and
the relevance of delays and non linearity between decisions and effects, the System Dynamics
methodology has been applied (Sterman, 2000).
Once key variables and related behaviours over time have been shared with the management, the
research focused on detecting management mental model of business growth processes. Such
approach aims to explore main feedback loops underlying perceived company growth policies and
disclose unperceived potential limits to growth (Isaac and Senge, 1994).
In particular, the above key issues have been explored by using qualitative diagrams. Such a step
has been done through five meetings with the company management. By using such diagrams
company key variables, policy levers and main cause and effect relationships among them have
been made explicit '.
Perceived
Company “Unitary —"
Product quality/price ratio
"yosae any “Unitar
Tectmoboay Product
‘quality/price
ratio
Company
Ae customers
Marketing Investments
Gap in Sales Effectiveness
wr
erry ror
Figure 5 — Balancing feedback loop leading to company
sales revenues growth through marketing investments
In order to close the gap between the desired and the actual value of company sales revenues, the
management planned to invest in marketing and in dealers’ chain. In particular, the former would
allow the company to spread out in the market product portfolio innovative characteristics. As a
consequence, the management expects an increase in both customers and sales revenues. An
increase in company revenues generates a reduction in the gap between the desired and the actual
value. Once company revenues reach the target the management will make new marketing
investments in order to maintain such level of sales. This policy underlines the balancing feedback
loop portrayed in figure 5.
"The methodology used to facilitate managers’ mental model explicitation is based on the group model building
approach. Vennix J. 1996, Group Model Building, Wiley.
Potential Customer
Consciousness of “Unitary
+ Technology” benefits
N
Effectiveness in communicating
“Unitary Technology” benefits Perceived
Company “Unitary Technology”
+ Product quality/price ratio 7
Company “unitary
Tec! Product
quality/price
Dealers employees’ skill and i+ Tata
motivation levels ° =
ompany
¢ se customers
Company
Sales
Revenues
Dealers chain Investments (*)
as ‘Gi
a Marketing Investments
Gap in Sales Effectiveness
me
Desired 7.
Sales Revenues
(*) Investments in Dealers chain are based on: eed
Sean Investments
- product cost discount.
Figure 6 — Company dealers’ chain investment policy aimed
to reach the desired level of sales revenues
The other policy adopted by the company to meet the desired sales revenues is based on
investments aimed to open new dealers’ store and at the same time to provide dealers personnel
training programmes and product cost discount. Such investments in dealers’ chain would allow the
company to increase UT products sales. In fact, in order to effectively communicate to potential
customers the concept and related benefits of UT products, the management perceives as
fundamental the increase of the levels of skill and motivation of dealers’ employees. According to
management mental models, such goal can be achieved through two different policies:
- a basic training course of dealers’ employees on the UT concept and related benefits and
- a high product cost discount compared to other resellers.
In fact, as such levels of skill and motivation of dealers’ employees grows up it is likely that
potential dealers’ visitors became more aware of the benefits of UT products. As company product
quality/price ratio is very high, an increase in the potential customer consciousness will contribute
to boost the number of individuals that become more prone to buy company UT products. Such
phenomenon generates an increase in the company sales revenues up to the desired target. Once
such a target has been achieved, the management may decide to invest new resources in the
development of the dealers’ chain to keep such market position (see balancing loop B2 reported in
figure 6).
Unperceived potential limits to growth of management policies
Feedback loops carried out in figures 5 and 6 disclose management mental models underlying main
business growth processes and related policies aimed to foster UT products sales. According to the
effects generated by such balancing feedback loops management expected a growth pattern of UT
products sales up to the desired target (see figure 7).
It is worth remarking that the management also implicitly recognised two other positive phenomena
that may contribute to foster a company growth over time. In particular, the new resources derived
from higher revenues will contribute to increase the budget to be allocated in both marketing and
dealers’ chain investments and as a consequence to move up the desired value of sales quantities.
“Unitary technology” products
Sales
Quantities Expected
behaviour
Actual
behaviour
2001 2002 2003 2004
Figure 7 - Comparison between expected and actual behaviours of
“Unitary Technology” product sales quantities
By comparing expected and actual UT products sales quantities, it emerges a noteworthy gap that
underlines the limits of management mental models in explaining the outcomes of business growth
policies.
What are the main causes underlying such a gap?
What are the main limits to growth unperceived by the management?
In order to investigate main causes of discrepancies between desired and actual company product
sales quantities, it has been decided to interview some key actors of the company dealers’ network.
People
cultural attitude towards Potential Customer
“Unitary Technology” Consciousness of “Unitary
Eobbede t Technology” benefits
Ny +
p> Effectiveness in communicating
“unitary Technology” benefits Perceived
Company “unitary Technology”
x 7 Product quality/ price ratio
—— Dealers employees’ skill and Company “unitary
peaciom motivation levels Technology” Product
Turnover + quality/price
+ ratio
Company
= dealers chain Investments Customers Ft
+ Effectiveness copay
sales
+ Revenues
Dealers employees —_ Dealers chain Investments (*
cultural attitude towards f
“ at ett ‘Gi
EE ean ees + z Marketing Investments
Gap in Sales Effectiveness
Revenues
7
Sales Revenues ceere
Investments,
(*) Investments in Dealers chain are based on:
= training;
~ product cost discount.
Figure 8 — Main unperceived variables preventing company investments effects
By interviewing personnel working in a sample of Jeppy’s Dealers, we detected three main key
aspects that act on dealers’ chain investments effectiveness (see figure 8).
The first limit to growth to UT company products sales perceived by dealers’ employees refers to
people cultural attitude towards UT concept. The main difficulty in understanding such concept
results from the common habit to perceive technological products as “closed worlds”. On the
9
contrary, UT concept is based on the revolutionary idea that is possible to create endless
applications that are able to communicate among them through a common technology.
The second limit can be related to a low dealers’ employees cultural attitude toward UT concept. In
fact, by discussing with front-office employees, it was possible to note their difficulties in
effectively communicate to potential customers the benefits of UT products. This is mainly due a
lack of effective and continuous focused training activities provided by Jeppy.
Moreover, such a difficulty in promoting UT products is also amplified by the high turnover
recorded in dealers’ personnel. This can be considered another limit preventing dealers’ chain
investments effectiveness on Dealers employees’ skill and motivation levels.
Policy design to remove limits to growth
Based on the causal loop analysis showed in the previous pages, we suggested the management to
act on the above commented limits to growth (people cultural attitude towards UT concept; dealers
employees’ cultural attitude towards UT concept; dealers employees turnover) by introducing
customised dealers personnel recruitment, advanced training and goal setting policies, and new
investments in developing people's awareness of UT concept.
People
cultural attitude towards
+
by “Unitary Technology” a
concept Potential Customer
of yy Consciousness of “Unitary
YO Technology” benefits N
ef
Investments in
developing people's Effectiveness in communicating .
aS ae eness f “Unit “Unitary Technology” benefits Perceived
Company “Unitary Technology”
+f Product quality/price ratio
Dealers employees’ skill and
‘motivation levels
Dealers + quality/price
employees — +f ratio
Turnover
- + Company
Dealers chain Investments a Custo +
Effectiveness somes
Company
ey Sales
A Revenues
Dealers employees init
cultural attitude towards Policy \ @y
“unitary Technology” concept ( p, Marketing Investments
+ Gap in Sales Effectiveness
=) Sea pas
Recruitment
" Policy
Goal Setti
: +
iota
Psion
(*) Dealers chain investments are based on:
= training;
- recruitment.
~ goal setting.
Figure 9 — Suggested policies to overcome company limits to growth
To achieve company mission and the desired level of sales of “Non Trojan horses” products, we
suggested the management to act on the “dealers’ chain investment effectiveness” through a set of
policies that have not to be conceived as alternative, but complementary. In fact, we demonstrated
them through an insight system dynamics model that decisions aimed to implement a goal setting
policy without proper personnel recruitment, advanced training activities are likely to fail in
reaching company desired goals.
10
First, we suggested the management to design new training programmes aimed to foster dealers’
personnel capabilities related not only to sales communication effectiveness, but also to UT benefits
in using such innovative products. Training programmes include workshops, demonstrations
sessions of the use of UT products, team work and on-the-job-training period.
Second, we proposed the management to introduce more selective dealers’ personnel recruitment
policies aimed to verify human resources potentiality and their initial level of skills and
competences to effectively promote UT products. In fact, an improvement in the recruitment
activities will provide employees with a higher cultural attitude towards UT products.
Third, it has been also recommended to adopt a goal setting policy. Such policy has two main goals:
on a side, it aims to increase dealers’ personnel motivation and to provide employees well defined
and stimulating targets. On the other side, it reduces dealers’ personnel turnover and as consequence
it allows dealers to maintain personnel with a higher level of competences.
Finally, in order to diffuse the concept and related benefits of UT products among people and to
increase potential customer consciousness about UT products, it is necessary that such investments
have to be supported periodically by public events, conferences and targeted news through monthly
reviews.
All these policies are able to foster both the “Effectiveness in communicating
Unitary Technology benefits” and “Dealers’ chain investments effectiveness”. As a consequence,
dealers’ personnel will be able to get more potential customers inclined to buy UT products. This
will increase the quality/price ratio of UT products perceived by potential customers, the number of
company customers that will buy such products and sales revenues. This will in turn decrease the
gap between the desired and the actual level of company sales revenues.
Such phenomena are portrayed in figure 9 (see, in particular, feedback loops B3, B4, BS, B6, B7). It
is work remarking that all suggested policies bring back to balancing loops that aim to push the
actual value of company sales revenues towards the desired one.
An analysis of the main stock and flow structure of the system dynamics model
Based on the above commented feedback structure, the authors built an insight System Dynamics
model. Such model has been used to both capture company key-variables past behaviours (in
particular, “Non Trojan horses” products sales quantities) and explore the effectiveness over time of
the suggested strategy (dealers employees’ recruitment, advanced training and goal setting policies,
and investments in developing potential customers’ awareness of UT concept). The system
dynamics model investigates three main business areas:
e Company Customers’ sub-system related to “Trojan horses” and “Non Trojan horses”
products sales;
¢ Company Dealers sub-system;
e Dealers Employees’ skill and motivation sub-system.
Due to the peculiarity of the third sub-system stock and flow structure, it will be discussed in the
next pages”.
The stock and flow structure depicted in figure 10 has been adapted on the basis of the Skill
Inventory Model suggested by Winch (2001). In particular, it is possible to observe a “physical”
structure related to “dealers employees” and two main co-flows structures associated with dealers
employees’ skill level and dealers employees’ motivation level.
In particular, dealers employees’ level results from the total number of company dealers and the
number of employees per dealer. Dealer employees’ turnover is likely to affect the recruitment
dealer policy aimed to restore the desired number of employees.
Dealer employees’ skill level may decrease due to both a normal employees obsolescence and a
leaving rate. Such a stock may increase not only through new recruits associated with a higher skill
? Model equations are available from authors.
11
level (due to a selective recruitment policy), but also by continuous training programmes provided
to employees.
Figure 10 also captures the main relationships affecting dealer employees’ motivation level. In
particular, it may decrease due to both a normal employees motivation outflow and a leaving rate.
Dealer employees’ motivation level may grows up through customised recruitment and goal setting
policies. It is worth remarking that the goal setting policy is also likely to decrease employees
turnover.
Dealers employees
initial Skill level
‘ Skill Obsolescence
Sy Skill from training ——-_
Training policy
Dealers Training effectiveness
policy Multiplier
~~
( }
Skill level of new
recruits
rate ‘
Normal Skill
Obsolescence rate
Skill with new recruits Skill loss with leavers a
O
Avg Skill level
Dealers employeeS
Skill level
Normal Leaving rate
New recruits, Dealers employees
Initial Skill level in the
Market place
Leavers
Leaving rate
Time to recruit new
Employees
en
Employees per
Dealer / @
Goal setting policy
effectiveness on
Dealers Employees
turnover
Desired Employees
Recruitment policy per Dealer
effectiveness
=
@
Dealers Recruitment
policy Multiplier
Avg Motivation level
Initial Motivation level
in the Market place
Motivation loss with
leavers
~O
Dealers employees
initial motivation level >
_
O Motivation increasing Motivation
rate decreasing rate
Motivation with new
recruits
Motivation level of
new recruits
Paefll
Goal setting policy pee stead
effectiveness on
Dealers Employees
Motivation
Figure 10 —Stock and flow structure related to Dealers employees’ skill and motivation levels
Scenario Analysis
In order to support the management of Jeppy Ltd to explore the effectiveness of our suggested
policies to overcome the limits of business growth, the System Dynamics simulation model has
been used to analyse different scenarios.
In particular, dealers employees recruitment, advanced training and goal setting polices and
investments in developing potential customers’ awareness of UT concept have been hypothesised
according to three possible options: low, medium and high.
12
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3 06
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Desired Invs in People culture attitude , | ) Desired Dealers Recruitment policy | ) Desired Goal setting policy | ) Desired Dealers Training policy
& Low © Low ® Low © Low
© Medium © Medium © Medium © Medium
© High © High © High © High
Figure 11 — Main business variables dynamics (base run)
Figure 11 shows company key-variables behaviours related to the actual policies undertaken by the
management. The simulation run covers 10 years. It starts from 2001 and ends in 2010.
As it is possible to observe from the above figure, such decisions may lead to a decreasing pattern
in dealers employees skill and motivation levels, which affects the effectiveness in communicating
UT benefits to potential dealers visitors. As a consequence, UT customers and company sales will
dramatically collapse. Such phenomenon is also due to a lack of investments aimed to foster people
culture attitude towards UT concept that causes a fall down of people consciousness of potential UT
benefits.
It is worth remarking that management policies adopted from 2001 to 2004 also aimed to strongly
increase the number of dealers. As figure 11 shows, at the end of 2004, the company could count on
166 dealers. Such a growth is the main driver of company UT sales. In fact, as the number of
dealers remains unchanged, from 2005 it is possible to remark an acceleration in the decreasing rate
of company UT sales. Such phenomenon can be also observed in the dynamics of the UT customers
variable.
The analysis of company key-variables dynamics portrayed in the base run provided a satisfactory
fit with company past results. As a consequence, the SD model has been used to assess the
effectiveness of two alternative scenarios. In both scenarios, the suggested policies have been
implemented from January 2005.
The first (reference run) is based on high investments aimed to foster people culture attitude
towards UT concept and unchanged policies on dealers’ human resource management.
The second (current run) is based not only on decision oriented to increase people culture attitude
towards UT concept, but also on high investments in customised dealers employees recruitment,
training and goal setting policies.
13
Figure 12 shows both reference and current runs. In particular, it is worth remarking that company
decisions aimed to only foster people culture attitude towards UT concept is not sufficient to boost
UT customers and sales revenues. This phenomenon is strongly related to the low level of dealers
employees effectiveness in communicating UT benefits. In fact, such a key-variables is affected by
dealers employees skill and motivation levels, that in this first scenario is not properly taken into
consideration.
On the contrary, current run is likely to generate desired effects on both external and internal
company systems. In fact, such decisions contribute to increase, on a side people culture attitude
towards UT benefits and on the other side dealers employees skill and motivation levels. The higher
employees skill and motivation level is, the greater dealers employees effectiveness in
communicating UT benefits will be. This is likely to foster a further increase in the potential
customers’ consciousness of UT benefits, which will affects perceived company UT product
quality/price ratio. As a consequence, potential customers are more prone to buy UT products
leading to an increase in Company UT customers and sales revenues. An increase in UT sales
revenues will allow the company to meet the desired level of revenues.
dealers euRiye euRivr
2 150 4
e $B 40.000.000 3B ccoonoon
a 3 s
A 0.000.000 .
5 Soren | 2 Searee | B «000.000 Soren
a
E fm eterna || 20,00.000 Priewne|| B fm reternce
s 5
E90 o E 2.000.000
5 10.000.000 E
6 2 &
°. °. of
‘1 02 03 04 05 06 07 0809 10, 0110203 o4 05 060708 0910 (0102 03 0405 06.07 08 09 10
2 customers
H bois .
Zk os 5 i 20.
ge 3 8
g8 i, z *
06
Beo Samer ]| 2 carent || = current
5 = reference jm Reterence 40 f= Reference
33 a2 H
BE oo. OG %
as BE os 8 20.
es b3 5
as =
02 of
(01 02 03 04 05 06 07 08 09 10 101 02.03 04 05 06 07 08 09 10 01 02 03 04 05 06 07 08 09 10
= 15.000.
3 os.
H a
3 5 us
= 07 £5 4
g re 0.000
g 06 35 5
3 SGuiret || 2 + Curent ]]| 2 = current
Bos = reference] | $5 jm reterence|| 3 = Reference
ge 5.000:
% 04. 2 E os. 5
= Eo
= ie
& 03
o.
01 02 03 04 05 06 07 08°09 10 01 02 03 4 05 06 07°08 09 10 ‘01 02 03 0405 06 07 08 09°10
Figure 12 — Current and reference scenarios
Conclusions and further analysis
In order to successfully design long term policies aimed to foster manufacturers-dealers
relationships, it has been demonstrated that manufacturers must give up decisions exclusively
oriented to generate immediate benefits (Liker and Choi 2004:3). In fact, such policies may disclose
future company failure.
This paper tries to demonstrate the effectiveness of the system dynamics methodology in supporting
manufacturers in designing long term policies based on human resource management practices
(recruitment, training and goal setting policies) and external efforts aimed to increase potential
customers awareness of company product benefits.
14
Results from scenario analysis session conducted with the management of the manufacturer show
that using system dynamics simulation models is likely to effectively support communication and
learning in designing successfully policies to build strong Manufacturer-Dealers relationships.
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