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CASE STUDY
It was April 10, 2011, when Gianluca Castelletti, head of
Whirlpool's Asia International Procurement Office in Shanghai, was
informed by his colleagues that the company was about to launch a
new refrigerator model in just six months. With the current
worldwide focus on energy saving, and as one of the biggest home
appliances producers, Whirlpool China planned to introduce a new
energy-efficient refrigerator.
Castelletti immediately spotted a challenge in Whirlpool China's
plan to launch a new energy-efficient model within such a short
period of time. Under the current global trend of energy-saving,
consumers were demanding new energy-efficient products, which
obviously would involve new kinds of technology, For the new
refrigerator model, the basic difference was in the motor, since
the current style of AC motor, which offered a low cost, would need
to be replaced with DC motors, which offered much higher energy
efficiency. Castelletti would have to find a suitable supplier of
DC motors, and he had less than six months to do so.
Delayed components would cause delays in the production of a new
refrigerator, and thus, a later launch of new products. Within the
home appliance industry, the fierce level of competition meant that
any delays in launching new products would result in a severe loss
of sales for the stragglers. Castelletti now faced a tough
challenge: How should he go about the process of finding a suitable
supplier for the required DC motor parts? Should he explore the
possibility of developing the company's current supplier, or should
he quickly engage an existing supplier of DC motors?
Sourcing the right components was the first step in launching the
new product. The pressure increased even further when Castelletti
received call from his supervisor, inquiring about his planned
strategy for sourcing the new motor for the energy-efficient
refrigerator. Castelletti had to quickly decide where he could find
the suitable suppliers in order to avoid delays in launching the
new product. The question was "how"? Castelletti called together
his team to develop a plan.
COMPANY BACKGROUND
Whirlpool's History
Whirlpool Corporation was the world's leading manufacturer of major
home appliances. In 2010, the company had more than $18 billion
revenues and net earnings of $619 million (see Exhibit 1). On a
worldwide basis, Whirlpool had 68,000 employees working in 67
manufacturing and technology research centres. It produced all
major categories of home appliances, including stoves, washers and
dryers, dishwashers, refrigerators, garage organizers, and
countertop appliances. Whirlpool produced and marketed Whirlpool,
Maytag, KitchenAid, Jenn-Air, Amana, Gladiator Garage Works,
Inglis, Estate, Brastemp., Bauknecht, Consul, and other major brand
names to consumers in almost every country around the world
Whirlpool's global headquarters were located in Benton Harbor,
Michigan, with manufacturing facilities and sales outlets across
North America, Latin America, Europe and Asia. In total, the
company's products were sold in more than 130 countries.
Ironically, Whirlpool was founded on a business failure. In 1908,
Lou Upton's invested his savings in a venture that manufactured
household equipment, but the business did not succeed. Upton
retained one asset from the business that he hoped would be
valuable: the patents on a hand-operated wringer washing machine
that he thought could be converted to an electric model.
In 1911, Upton joined forces with his uncle and his brother to
launch the Upton Machine Company in St. Joseph, Michigan, which
produced motor-driven wringer washers. After a quick business
expansion, 1929 saw the company merge with the Nineteen Hundred
Washer Company of New York. Twenty years later, the company's name
was changed to Whirlpool Corporation, and it soon earned the title
of industry leader.
After a series of other acquisitions, Whirlpool participated in an
acquisition with the Maytag Corporation on March 31, 2006. This was
a significant step for Whirlpool to become the largest home
appliance maker in the world," a title that had previously been
reserved for Electrolux,
Whirlpool's philosophy focused on customer loyalty. Its products
were built to be reliable with long lifecycles, which meant
substantial emphasis had to be paid to product quality. The
company's focus on quality was rooted at the conceptual stages and
continued throughout the manufacturing process. The results of
these quality efforts, combined with Whirlpool's commitment to
innovation and cost productivity, brought about a strong
competitive advantage.
Stiff competition from competitors such as Electrolux, General
Electric, LG, etc. also created a competitive pricing environment,
and hence, it was essential that Whirlpool concentrated on cost
reduction, productivity initiatives, and innovation in order to
offset high material costs and maintain its position in the market.
Furthermore, lean manufacturing and operational excellence were the
principles on which Whirlpool relied to ensure a continuous
improvement of process and to meet its high standards of
quality.
China's Household Electrical Appliance Market
Aided by the rapid development of the Chinese economy and a rising
GDP per capita, China's household electrical appliances industry
grew quickly in response to the government's policy of stimulus in
domestic demand. According to China's Household Electrical
Appliances Industry Report, China had become the largest household
electrical market in Asia Pacific area in recent years. According
to the data from China Household Electrical Appliances Association,
more than one-third of the household electrical appliances in the
world were produced in China in 2007. Approximately 50 per cent of
the world's televisions were manufactured in China, along with 70
per cent of air conditioners and almost 100 per cent of the world's
microwave ovens. China stood out as one of the largest household
appliance makers in the world, also boasting a large market
share.
Establishing a foothold in China had been a long and tedious
process for Whirlpool since its entry into the market in 1995. At
that time, Chinese regulations required foreign companies to work
with local partners. The company's chief executive officer (CEO) at
that time announced a joint venture agreement after its investments
of more than $100 million with local house appliances producers.
The joint venture agreements gave Whirlpool a chance to produce the
top four household appliance categories: washing machines,
microwave ovens, refrigerators and air conditioners. Three short
years, later Whirlpool was forced to pull out of two of the five
joint ventures due to its unfamiliarity with and unclear
positioning in the Chinese market.
In 2001, China joined the World Trade Organization, and the
resulting freer access to China's market greatly improved
conditions for Whirlpool. Furthermore, relocation of the company's
Asian headquarters to Shanghai changes in the Chinese consumer
mindset (i.e., Whirlpool's offerings began to be accepted as a
high-quality products) and incorporating learning from other
multinationals all helped Whirlpool to compete more successfully in
the Chinese market. By 2011, China accounted for approximately 3
per cent of the company's global sales, including sales to other
manufacturers. Whirlpool employed more than 2,500 people in China,
and its microwave factory in Shunde produced more than two million
units per year, most of which were shipped to North America and
Europe. Washers and refrigerators were produced in factories that
had been newly established in a joint venture with Hisense, one of
the largest appliance producers in China.
THE INTERNATIONAL PROCUREMENT OFFICE IN SHANGHAI
Various factors could turn global sourcing into a tricky process:
transportation delays, lack of technology and capacity of foreign
resources, cultural and language differences, quality assurance,
political and economic stability, and proper inventory management
systems, to name just a few. For these reasons, Whirlpool set up an
international procurement office in Shanghai to support its own
manufacturing operations in Asia and to provide support for any
other operation in the world that sourced components from Asia. In
2010, the Asian international procurement office sourced more than
US$1 billion in China out of $8 billion global direct spend.
Companies chose to source in China for many reasons, including
reducing capital investment, gaining more market share, focusing on
core competencies, and increasing the company's flexibility in
production. Although China may have shown a cost advantage when it
came to raw materials, inconsistencies existed in the areas of
quality and reliability. Other hindrances that companies often
faced when operating in China stemmed from the fact that the
country lacked capable service providers and suffered from
shortcomings in the areas of transportation and IT infrastructure.
At times, high rates of damage/loss in transit also caused a
problem.
For a supplier to be considered as a Whirlpool supplier, it had to
match the following criteria:
Whirlpool code of conduct and other requirements; Minimum quality
audit score; Best total cost of ownership and manufacturing
efficiency; Continuous innovation in design and manufacturing for
best-in-class quality and technology: Structured project tracking,
design reviews with management tollgates, utilizing design and
process
FMEA, fault tree analysis, reverse engineering and other tools
where applicable; and • Access to UL, CSA, VDE and other agency
approval.
The following requirements were dependent on the commodity
analyzed:
• •
Laboratory capability for engineering conformance and reliability
testing. Prototype capabilities.
Whirlpool required a very restricted supply quality system, namely
the Whirlpool Supplier Quality System. The Whirlpool Supplier
Quality System was developed based on the ISO 9001. The household
appliance industry was broader than the ISO 9001 requirements,
including process capabilities assessments (see Exhibit 2).
Based on Castelletti's experience, most suppliers in China, even
those who supplied Whirlpool's competitors, could not reach the
minimum required score when audited as potential suppliers during
the first round of Whirlpool's selection of potential suppliers.
With the minimum score required being 60/100, the first-round score
among good, local suppliers was approximately 50. Elements were
weighted separately to bring about the total score of 100. Since
1996, Whirlpool had followed a restricted Six Sigma program, and
within the company, more than 1,500 Whirlpool employees possessed
Six Sigma training. The training program included teaching the
employees to use Lean and Six Sigma techniques. This system was
intended to improve the quality and efficiency of Whirlpool's
manufacturing, technology, and business processes and
products.
When a supplier showed a distinct advantage on cost structure and
could provide clear value, the SQE (Supplier Quality Engineer) and
SDE (Supplier Development Engineer) team at Whirlpool's
international procurement office would provide resources to
facilitate closing the gap within a certain time frame. The
commodity team was also in charge of facilitating the supplier
qualification process.
The international procurement office had a special budget for the
SQE team for supplier development, covering the travel costs of
supplier visits and continuous training. The SQE members often
travelled, moving from one supplier to another to conduct
gap-closure development by providing training or by coaching the
execution of given projects. The suppliers were not charged for the
training they received from Whirlpool; however, they were expected
to take some initiatives to acquire outside resources for
self-improvement if their current situations were judged to be
insufficient. For example, those local suppliers that did not have
capable people in place would be pushed to hire the right people to
enhance their quality process.
FINDING THE RIGHT SUPPLIER
To find a suitable supplier of DC motors for the new
energy-efficient refrigerator model, Whirlpool used the Sourcing
Strategy Development (SSD) process, which included four steps for
sourcing the right suppliers: Step 1 - internal analysis: Step - 2
external analysis: Step 3 - Strategy development, and Step 4 -
implementation. Even before Step 1. it was necessary to define the
commodity and allocate responsibilities and resources through
co-ordination of global and regional activities. An internal
analysis identified and prioritized the process-partner
requirements, then evaluated the performance of the existing supply
base, and reviewed the existing supply base. The SSD process should
also identify the switching costs in Step 1.
When the internal need was clear, then the process moved forward to
Step 2, the external analysis, which included analyzing the
supplier industry and competitors and evaluating competitor
performance and strategies. The evaluation process made use of SWOT
(Strength, Weakness, Opportunities. Threat) analysis and
Best-in-Class performance analysis. From the results of the
internal and external analysis, Step 3 was then used to develop the
sourcing strategy. In this stage, Porter's Five Forces Model was
also adopted to analyze the competitiveness. After understanding
the existing strategies, strategic options were formulated and
their financial impact was analyzed. In developing a sourcing
strategy, preliminary negotiations could be carried out, a suitable
strategy and suppliers should be selected, and the critical path
for implementation should be defined. Step 4 addressed the
implementation stage, wherein the planned strategy was put into
play, feedback was given to the chosen process partners and
suppliers, and final negotiations were nailed down. In the
implementation phase, if the goals had not been met, the strategy
needed to be revised.
With the complete SSD analysis, the sourcing strategy had put
Whirlpool in a position to find suitable suppliers.
THE CHALLENGES
Acting as a supplier for one of the largest home appliance makers
in the world was not an easy job for suppliers. First, the
suppliers had to agree to some aggressive payment terms.
Whirlpool's U.S. procurement team privileged the consignment stock
process, which meant that any agreed-upon payment terms started
when parts were withdrawn from Whirlpool's components warehouse,
located in every Whirlpool factory. The warehousing time and the
transportation lead time, including sea and land transportation
times, were consequently added to the agreed-upon payment terms but
were not predetermined - or even pre-determinable. Many suppliers
found it difficult to accept these challenging payment terms.
Second, the suppliers had to endure a long sample-testing process
When suppliers were deemed qualified (i.e., after passing the
quality system audit) to move ahead for a particular project,
Whirlpool still required them to provide samples that passed the
sample tests and application tests (see Exhibit 3).
For the following cases, present a supply chain strategy that addresses the issues presented. I expect the following: Assume the role of a Supply Chain Manager at Whirlpool. You have been presented with the situations described in the case. Your responsibility is to present to your Director of supply Chain what your professional recommendations are to address the issue. You are encouraged to be creative. You do not need to present the same recommendations presented in the case. What if you source the motors from a different country, for example in Mexico?