The assessment of worldwide suppliers creates an extensive workload. Discuss how VCI Ellison supports the analysis requirements faced by each global sourcing team.
The assessment of worldwide suppliers creates an extensive workload. Discuss how VCI Ellison supports the analysis requirements faced by each global sourcing team.
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Purchase Management
Attempt Any Four Case Study
CASE 1 -The Santek Images Business Unit
Consolidated Products is a $21
billion company headquartered in Atlanta, Georgia. The company’s five business units, which
offer a wide array of products and services, are the result of an aggressive
strategy of mergers and acquisitions starting in the late 1980s. The corporate staff is surprisingly small,
comprised of general management, legal staff, and human resources. Part of the reason for this small staff is
due to the eclectic array of businesses housed within one corporate
entity. A Business Week editor recently commented that “Consolidated Products
could easily be broken up into five separate companies, since at one time it
was five separate companies.” The editor
also said that if the company “ever learned how to leverage its size in the
marketplace, Consolidated Products could be a Wall Street powerhouse!”
While Consolidated Products is a global corporation with facilities around the world, it operates each business unit as a highly independent and decentralized company. The corporate culture is best described as entrepreneurial, with each business unit being headed by an executive vice president who has complete profit and loss accountability. One of the business units, Santek Images, is the focus of this case.
Santek Images
Santek
Images produces instant film and the imaging products that use that film for
industrial applications. Increasingly,
Santek has shifted much of its production requirements to oversees producers. The outsourcing of finished products, also
called contract purchasing, represents a 180-degree shift from the vertically
integrated model that Santek pursued during the 1970s and 80s. A key driver behind the outsourcing of
non-core products was the realization that previous ways of doing business
could not support 10-20 new-product launches a year, which is the target that
Santek’s executive vice president has established.
Many
products at Santek use self-contained instant film, which Santek refers to as
media. Only one other company in the
world has similar technical capabilities.
However, Santek now faces intense competition from digital technology,
forcing the unit to make digital imagery part of its image acquisition core competency.
Most outsourcing at Santek now involves product hardware, such as the
product casing, rather than media.
There
are several reasons why Santek insources media while outsourcing hardware. Most of the innovation valued by customers
occurs within media rather than hardware, making media a primary area to focus
research and development efforts.
Furthermore, the margins for media products are higher than the margins
for hardware products. From an
investment and financial perspective, limited corporate resources are best
allocated to media rather than hardware.
While hardware is necessary, it does not offer the best financial and
innovative opportunities. This does not
mean that hardware is not important.
Santek recently suffered through an embarrassing recall because a
contract manufacturer produced a finished product casing that cracked when
exposed to high temperatures (above 90 degrees).
Asian
suppliers provide virtually all outsourced hardware requirements. While Japan is the epicenter for hardware
manufacturing, other low cost areas in Asia are emerging. Outsourcing to Asia offers two major
benefits—access to technology and low cost.
As with most electronics and their supporting components, U.S. and
European producers are no longer competitive.
Beginning
in 2002, Santek began to actively search for contract or outsource manufacturers,
particularly for camera hardware.
Unfortunately, there was no organization in place to formally support
that effort. While a small OEM group
worked to find contract manufacturers during the 1970s to 1995, Santek did not
endorse or focus on outsourcing as a key corporate strategy. As a result, creating an outsourcing
organization was not a major concern at Santek.
In
2001, Santek formed a contract purchasing organization, which has primary
responsibility for hardware outsourcing.
The contract-purchasing director (also referred to as the outsourcing
director) reports to the vice president of new product delivery. This group has responsibility for procurement
(identifying and qualifying outsource manufacturers), product quality, and
working with contract manufacturers during new product development.
To
date, the contract-purchasing director believes his staff has done a good job
of shifting production from internal to external sources. In addition to managing two international
procurement groups, the contract-purchasing director is responsible for
managing relationships with the outsource providers. After several years of outsourcing, the
director of contract purchasing, Steve Keller, started to notice that the
performance gains from outsourcing were flattening out quickly. When he recently surveyed his contract
manufacturers about their perception of doing business with Santek, he was
surprised by their answers.
Of the
12 contract manufacturers currently used, seven thought of Santek as just
another customer. These suppliers did
not believe there was anything unique or special about the relationship. Three other suppliers expressed serious
concern about doing future business with Santek since they were dedicating
their capacity (through longer-term contracts) to other customers (who were not
competitors of Santek). Two other
suppliers expressed an interest in developing a closer relationship with
Santek. It appeared that these suppliers
were developing new technology and products that aligned well with Santek’s
future product plans. These two also had
the longest working relationship with Santek of the current suppliers. Steve could not help but wonder if his group
could do more to develop or elevate the relationship with these two
suppliers. And, if he could develop the
relationship, could his group achieve greater performance improvements?
Questions:
1.
Many outsourcing decisions
involve the concept of a core competency.
Define what is meant by this term.
Discuss if film technology is truly a core competency of Santek.
2.
Develop a process that would
guide firms through the insourcing/outsourcing process. Create a process that is robust enough to use
across a variety of product/service applications.
3.
A major challenge with an insourcing/outsourcing
analysis involves gathering reliable data.
Discuss the various groups that should be involved when conducting an
insourcing/outsourcing analysis. What
information can each of these groups provide?
4.
Do you think hardware suppliers are candidates for
alliances or partnerships with Santek?
Why?
5.
Partnerships and alliances are special forms of
supplier-buyer relationships. First,
define the concept of partnerships and alliances. Second, identify when a firm should pursue a
partnership or alliance with selected suppliers. Use the portfolio segmentation tool to assist
with your answer.
6.
Develop a process that firms can use when
identifying and developing supply chain alliances.
CASE 2
Bryan Janz
was just arriving back from lunch when his office phone rang. It was his wife, Nina, calling from
home. Nina told Bryan that FedEx had
just delivered a package addressed to her.
The package contained a beautiful clock now sitting over the
fireplace. In fact, Nina said, “the
clock looks absolutely beautiful on our living room fireplace”. Thinking the clock was from a family member,
Bryan asked who sent the present. She
said she did not recognize the name—the clock was from Mr. James McEnroe. Bryan immediately told Nina that she had to
repack the clock because it was from a supplier who has been trying to win
business from Bryan’s company. They
definitely could not accept the clock.
Nina was very upset, and responded that the clock was perfect for the
room and, besides, the clock came to their home, not to Bryan’s office. Because of Nina’s attachment to the clock,
Bryan was unsure about what to do.
Questions:
1. What should Bryan do about the clock?
2. What does the Institute of Supply Management (formerly the NAPM)
code of ethics say about accepting supplier favors and gifts?
3. Why do you think the supplier sent the clock to Bryan’s home and
addressed it to his wife?
4.
Does the mere act of sending the
clock to Bryan mean that Mr. McEnroe is an unethical Salesperson?
CASE 3
VCI/Ellison,
which represents the consolidation of the heavy transportation equipment units
of two previously separate and regional companies, is facing worldwide pricing
pressures from customers and competitors.
The ability to meet financial targets has presented a major challenge
for this new global company. With
limited ability to raise product prices, the alternatives facing VCI/Ellison
have become managing material costs better or absorbing price increases through
lower profit margins and profitability.
Given that direct materials represent over 70% of the company’s total
costs, it becomes easy to appreciate the impact that improved global sourcing
efforts should have on profitability.
From
the time VCI, a European company, assumed ownership of U.S.-based Ellison both
companies have sought to leverage the commonality between them on a global
basis. The company concluded early on
that procurement offered excellent opportunities for global synergy across the
two continents. Ellison Equipment,
working with VCI, has implemented a multi-step global sourcing process designed
to leverage the volumes available through the newly combined units. This case offers insight into how two
geographically and culturally diverse companies, brought together through
acquisition, are attempting to gain synergy and efficiency through integrated
global sourcing. The challenges facing
this global effort include not only geographic separation, but also cultural,
language, technical, and business practice differences.
Global
Sourcing Process Overview The global process at this
company features two teams, one at Ellison Equipment and one at VCI, working
concurrently on the same global project.
While Ellison had experience using cost reduction teams, VCI had never used
teams within their procurement or engineering areas. As part of this process teams are aligned on
both sides of the ocean working jointly on a commodity category or
project. The teams eventually work
face-to-face as they progress through the process steps.
Each global sourcing project has an expected duration of six months (although the transition to a new supplier can take much longer). After working with an external consultant to segment its primary products into six commodity groups, VCI and Ellison jointly identified 27 project opportunities. This process is designed to support nine projects at a time (each having a six-month duration) with three iterations or waves. Each team pursues three categories of commodities (which may have sub-categories or sub-commodities) simultaneously, so three teams in a wave pursue a total of nine projects.
Each global sourcing project has an expected duration of six months (although the transition to a new supplier can take much longer). After working with an external consultant to segment its primary products into six commodity groups, VCI and Ellison jointly identified 27 project opportunities. This process is designed to support nine projects at a time (each having a six-month duration) with three iterations or waves. Each team pursues three categories of commodities (which may have sub-categories or sub-commodities) simultaneously, so three teams in a wave pursue a total of nine projects.
The
team leader works with the team to develop time schedules, a list of
deliverables, and expected milestones within the six-month project window. During this part of the process the teams
begin to quantify what they are studying by collecting and validating
data. Across each category there may be
four or five segments or sub-categories that require separate analysis. While each team decides on the segmentation
of a category, both teams assigned to the project must agree on the
segmentation.
Even
thought each project technically has two teams assigned (one at each company
working simultaneously), they are really one team looking at the same
project. Teams can proceed to the next
process step without the explicit approval of the executive steering committee. However, teams are required to publish
progress updates weekly. A major
responsibility of the business analyst (discussed later) is to compile and
provide performance updates to the executive steering committee.
Some
managers consider Step 2, sourcing strategy development, to be the most
interesting and critical part of the global process. During this step the project teams identify
potential worldwide suppliers. One of the
realizations when beginning this process was that supplier switching, including
switching from long-established suppliers, was likely to occur. This realization was based partly on the
external consultant’s global sourcing experience. Supplier switching can be time-consuming and
difficult as new supply chain relationships are established.
From
the list of potential suppliers, the teams send Requests for Information
(RFIs), which they can modify to meet the specific needs of their category or
segment. The RFI is a generic supplier
questionnaire that introduces the global process and requests data about sales,
production capacity, quality certification (such as ISO 9000), familiarity with
the equipment industry, and major customers.
It is not unusual to send 400-500 RFIs during a project, depending on
the complexity of the category and segments the team is working.
The RFI
is a first filter in the supplier selection process. During this step it is critical that
suppliers return a high percentage of the RFIs, which are separated and
reported by region of the world. Of the
400-500 RFIs forwarded to suppliers, a team may receive and analyze several
hundred completed RFIs. The teams also
conduct a detailed supply market analysis to develop a thorough understanding
of the economics and dynamics of a particular market.
Step 2
is usually the first time that the two teams working on a global sourcing
project meet face to face. The European
and U.S. teams meet physically to conduct face to face analysis of the RFIs
returned by suppliers. It is each team’s
responsibility to establish the criteria for determining which suppliers will
receive Requests for Proposals (RFPs). A
key decision during Step 2 is whether a procurement opportunity appears to be
regional versus global. A lack of
globally capable suppliers can make a project a regional opportunity.
Step 2
requires a major effort on the part of engineering. Engineers on both sides will examine drawings
in an effort to commonize part specifications between locations. While a project team may conclude that a
global supply source does not exist, there may be opportunities to commonize or
standardize specifications across the two locations.
Step 3, requests for proposals, features the development,
sending, and analysis of formal proposals to the most promising suppliers
identified in Step 2. The average number
of proposals forwarded to suppliers per project is 20-30. Suppliers typically require six weeks to
analyze and return the RFPs. The teams
strive for a high percentage of returned proposals, similar to the RFIs. Team leaders, representing the project teams,
report RFP progress to the executive steering committee at a weekly meeting.
Teams
are responsible for analyzing the returned supplier proposals. Like the RFIs, teams can set their own
evaluation criteria and weights, but members must reach consensus in their
choices. The proposal allows suppliers
to provide design suggestions.
The
teams usually meet via video or audio conferencing to review the
proposals. Engineers again take a lead
role in evaluating technical merits. Complex
purchase requirements may require teams to meet face-to-face for a second
time. Using standardized spreadsheet
tools that are available to all teams, each team analyzes its proposals and
decides, based on the analysis, which suppliers will be invited to
negotiations.
A
negotiation workshop takes place at VCI’s European learning center during this
step. This session has several
objectives—team members receive training in negotiation, the project teams
develop their negotiating strategy, and the teams select a negotiation
leader. If a team determined that a
sourcing opportunity was regional, negotiation will occur separately by
region. Teams select regional
negotiation leaders if the project is a regional opportunity or a single
negotiator if the project is global. The
decision of who should be the negotiating leader is based on discussion and
consensus rather than voting. Of the
first 27 projects, fully one-third of the negotiating leaders were selected
from outside the project teams.
Step
4 involves recommending a strategy and negotiating with selected
suppliers. Project teams make a
recommendation to an executive committee, specifically the vice presidents of
purchasing and engineering from VCI and Ellison. The executive committee may ask questions but
to date has not overturned any team recommendations. Team recommendations include the selected
supplier(s) with expected savings and timings identified. The teams also identify whether the suppliers
are regional or global but do not recommend contract length.
In this
step the negotiating team probes and discusses in-depth the proposals submitted
by suppliers. Suppliers can be
disqualified if engineering determines the supplier cannot satisfy technical
requirements, or the team is not satisfied with the commercial issues
All
negotiation in Step 4 is conducted face to face with suppliers at VCI/Ellison
sites. Half the negotiations so far have
occurred in the U.S. and half in Europe.
Before suppliers arrive they receive feedback concerning the competitiveness
of their proposal, which they are allowed to revise before negotiations
commence. Suppliers may be excused if
they are informed that they are not competitive and choose not to revise their
proposal. Once the lead negotiator takes
over, the team leader’s role begins to diminish (unless the team leader is also
the lead negotiator). The team leader
usually remains as part of the negotiating team.
Step 5,
called supplier certification, features purchasing and engineering groups
receiving the team’s recommendation and preliminary terms of the negotiated
agreement. At this time functional
directors will begin to budget expected savings from the proposed contract into
their financial projections. Supplier
site visits can occur during this step by representatives of the functional
groups. For example, engineering,
procurement, and quality assurance may want to validate a number of topics
during this step. The time frame for
this step varies from one month to over a year.
Step 6, finalizing the contract, involves crafting the
final contract based on the outcome of the negotiations. The negotiation leader remains with the
process until the contract is complete.
While the legal department is also involved, a buyer writes the contract
using an agreement template. Contracts
are typically three years in duration.
Both sides of the ocean are involved in formalizing the contract if the
agreement is global rather than regional.
Global
agreements differ from traditional contracts.
They include productivity improvement requirements to offset material
increases. The agreements also encourage
technical advancements by the supplier to further reduce material costs or
enhance product performance. This
process also includes a formal process to manage improvements, whereas the
process for previous or non-global agreements has been informal. And, in a somewhat significant departure from
previous contracting practices, incentives such as 50/50 improvement sharing
are starting to appear.
Step 7,
sample testing and approval, assesses the samples provided by the selected
supplier. Production facilities go
through a production readiness stage, initial sample inspection reports are
developed, parts are checked off of production tooling, and the negotiation
leader develops a production rollout plan with help from his or her counterpart
on the other side of the ocean.
Step 8,
the concluding step of a global project, is the production readiness
stage. The selected supplier may send a
day or weeks worth of supply to be used in actual production. Logistics becomes part of the implementation
team if there is a switch from one supplier to another.
Organizational
Enablers VCI/Ellison has put in place certain enablers
that support global sourcing. This
includes the formation of an executive steering committee, the use of global
teams, formally selected team leaders, and the creation of a business analyst’s
position to support the operational and analytical needs of the teams.
An
executive steering committee at each unit reviews and prioritizes projects for
study. A sourcing director at VCI and a
counterpart at Ellison drive the process at both organizations. Working jointly, these executives recommend
projects for study, solicit input from functional areas in terms of cost
savings and quality improvement opportunities, develop a plan to pursue the
project (including assembling a cross-functional team), track the status of
each project through weekly progress updates, and manage the global process to
ensure its continued success. The
executive steering committee members conduct a video conferencing meeting each
week for two hours. This meeting also
involves team leaders for projects that are in process.
Cross-functional
teams are an integral part of this process.
Two teams, one from VCI and one from Ellison, work simultaneously on the
same sourcing opportunity, each with a formal team leader, two functional
members (usually from engineering and purchasing), and a business analyst that
supports both teams. Each project consists
of seven combined positions across two teams.
The team leader and business analyst are full-time assignments while the
buyer and engineer provide a part-time commitment.
Teams
are responsible only for the first four steps of the global sourcing process. The two teams usually come together
physically two or three times over a project’s duration. Both sides agree, however, that face to face
interaction is time consuming. At the
conclusion of each project the teams are required to write a “white book”
documenting the lessons learned from their experience.
With
any team-based approach the role of the team leader is critical to
success. Project leaders are responsible
for planning team meetings, which are held once or twice a week depending on
the phase of the project, and reporting project status to the executive
steering committee. Planning includes
setting the meeting agenda, ensuring the global process steps are followed, and
working with team members to meet time lines and achieve project goals. The leader also communicates with each
member’s management when necessary to ensure commitment. Agreement is widespread that the team leader
is a critical part of the process, particularly when the leader must work with
members to balance their priorities while still challenging the team to achieve
demanding performance improvement targets.
Each
set of teams that works on three projects simultaneously has a business analyst
assigned to support the effort. The time
required for managing requests for information (RFIs) and requests for
proposals (RFPs) across two continents is extensive. VCI/Ellison created a full-time business
analyst position to manage the required tasks when pursuing global
agreement. Exhibit 1 outlines the key
features of this position.
 |
| The assessment of worldwide suppliers creates an extensive workload. Discuss how VCI Ellison supports the analysis requirements faced by each global sourcing team. |
Exhibit 1
Positive and Negative Features Related to
the Business Analyst Position
|
Positive Features
|
Negative Features
|
|
Experience
from the position builds expertise about the global sourcing process
|
Managing
three projects simultaneously creates an intense work pace
|
|
Full-time
commitment to the process helps the business analyst avoid other job
distractions
|
Process
has some inefficiencies (faxing, handling reams of paper, some software
inefficiencies), creating additional and perhaps unnecessary work burden
|
|
Team
leader and business analyst are key “point people” to management and
suppliers
|
Long
and stressful days can affect morale and promote turnover
|
|
Given
the work required to manage RFIs, RFPs, and negotiations, the global sourcing
process would not succeed without the analyst position and a strong analyst
|
Too
many RFI suppliers pass to RFP stage, creating intensive work requirements
for the analyst
|
|
Business
analyst position prepares individuals for future sourcing careers
|
Obtaining
drawings for RFPs from engineers is a time consuming process
|
A
repeated sentiment among managers is that this nine-step process introduced a
discipline to sourcing at VCI/Ellison.
Each sourcing project moves lock-step over a six-month period with
weekly reporting to an executive steering committee. Global sourcing teams must meet deadlines and
milestones, make sure information gets to suppliers, and thoroughly research
the supply base before negotiating and awarding contracts. The process has made everything “official”
with suppliers, who have taken VCI/Ellison’s global efforts seriously.
While
external consultants played a critical and highly visible role in developing
and using VCI/Ellison’s global process, managers point out that the use of
consultants caused some concern. For
example, consultants assumed the role of team leader with several early teams,
raising questions concerning who should lead the teams and their
qualifications. The consultants often
dictated what the RFPs should contain, which created some disagreement within
project teams. The consulting group also
insisted on top management presence at weekly meetings. While this demonstration of executive
commitment was valuable for the first few months, later meetings became too
detailed to warrant executive attendance.
Finally, too much time was spent educating consultants about the heavy
equipment industry. There was some surprise
initially at the lack of experience of the consultants sent to work with
VCI/Ellison on a day-to-day basis.
Faced with
intense competition, increasing expectations from customers, reduced product
life cycles, and localized geographic markets, Whirlpool Corporation (a Fortune
500 manufacturer of appliances) realized that the need to achieve a competitive
advantage from its sourcing and material efforts was greater than ever. Part of the strategy to achieve this
advantage involved pursuing an alliance with a key steel supplier. Steel is a major component used across all of
the company’s finished products (such as washing machines, dishwashers,
refrigerators, and others). The
purchasing managers at Whirlpool faced a number of questions with regard to
their purchasing strategy:
• What do we need to do to be competitive?
• Who is best suited to be the primary steel supplier?
• What do we need to know, and how do we get the information
required to answer this question, especially with regard to our organizational
culture, technological roadmap, and where both organizations are moving in the
long term?
• How do we implement a strategic alliance?
• How do we establish a strategic alliance in terms of
confidentiality agreements, termination agreements, and negotiation strategies?
• How do we provide the supplier with evaluations to ensure that
this alliance continues, with regard to continuous performance, goal
achievement, and commitment?
• What do we do if we do not meet our objectives—change the
situation or simply terminate the agreement?
Whirlpool realized it needed to reduce the number of steel
suppliers it used and locate a supplier with a common desire to enter into a
longer-term alliance. Whirlpool’s
organizational goals were to leverage the selected supplier’s technical
capabilities through early supplier involvement, day-to-day redesign support,
and process improvement. At the same
time, top executives realized that in order to obtain these benefits, it was
important that the supplier partner perceive value in the relationship.
While all of
this was occurring in 1984 at Whirlpool, the management team at Inland Steel
was considering a different set of questions.
Four vice presidents of marketing at Inland Steel, an integrated steel
producer located in the same geographic region as Whirlpool, were reviewing
their market strategies and the recent changes that had occurred in their
strategic alliances. They had made the
decision to reduce their customer base, and were forming a new management
plan. This was part of Inland’s Customer
Relationship Management strategy, which entailed reducing their customer base
in order to serve only their preferred customers that would yield the highest
long-term profitability for the company.
This strategy was a direct result of Inland Steel’s total quality
management program, which dictates that to delight the customer one must
identify key markets and focus on those markets.
A major
component of this market strategy was to approach key customers with the idea
of entering into long-term agreements.
In doing so, Inland Steel realized that the best opportunity for
reducing costs was to become involved early in new product design with key
customers. However, to achieve this
objective, the vice presidents realized that significant capital investment
would be required to update Inland Steel’s facilities with state-of-the-art
steel processing technology to align technologies with key customers. In some cases, this involved some degree to
risk, as aligning capital investments with specific key customers could “shut
out” new business with other potential customers. However, the management team reached a
consensus that the only way to succeed in the current market structure was to
reduce costs through early involvement in customer new product designs, and to
back this up with capital investments in design capabilities and new
facilities.
Meanwhile,
Whirlpool executives were mulling over whether Inland Steel was the right
supplier to form an alliance with.
Whirlpool Corporation had used Inland Steel as a supplier for several
years, but had used many different steel suppliers during this period. The strategy of forming a formal buyer-supplier
partnership was a relatively new one. As
these two companies explored the idea, it became obvious that a complementary
common strategic vision existed between the two companies, which could make
such a partnership a reality. This
common vision was based on the fact that the Whirlpool Corporation needed to
sustain a competitive advantage and support its direct customer relationships,
while Inland needed to manage the transition inherent in a customer-focused
market strategy. Thus, Whirlpool Corporation
sought to work with Inland Steel to realize reduced costs vis-Ã -vis the
competition, and Inland sought to obtain a major share of Whirlpool’s steel
contract. While this initial concept
seemed straightforward, it required almost seven years to make it a reality.
The vision
was made a reality by first understanding that reducing cost did not simply
mean lowering the price paid per ton of steel, but rather to take cost out of
the business processes, which takes
much more time. Linkages throughout every
step of the value chain, not just between purchasing and sales, had to be
established (See Exhibit 1). The end
goal became to maximize profitability at both companies, while not relying on
explicit formulas and equations formalized in contract form. Along the way, the companies encountered a
number of obstacles. However, as the
vice president of purchasing at Whirlpool Corporation described the process,
“Neither of us let these problems get in the way of cost reduction efforts,
which in the long run far exceeded the changes in market steel prices.”
Overcoming
the obstacles in the relationship required a seamless organization and the
elimination of levels of bureaucracy.
Functional personnel in each firm had to be able to communicate directly
with their counterparts in the other firm, all the way to the chief executive
office. The underlying foundation of the
relationship was challenged many times during the early years. “The reason why this relationship works,”
says the vice president of marketing at Inland Steel, “is that Whirlpool
Corporation created an environment that allowed questions to be laid out on the
table every time a new issue came up.”
A Roadmap to Trust
The
following is a timeline of the development of the strategic relationship between
Whirlpool Corporation and Inland Steel.
In 1984, Inland Steel began to share its market strategy and management
vision with Whirlpool. The sharing was
unique because the supplier (Inland Steel) actually took the initiative when
pursuing the strategic alliance. By
1986, Whirlpool had reduced its supply-base from eleven steel suppliers to
seven, and Inland had invested over $1 billion in new capital investment. This investment was specifically designed for
Whirlpool’s steel requirements in the appliance industry, which could not be
used in their other major market, the automobile industry. Inland Steel needed to be granted access to
Whirlpool’s engineering personnel to identify the different ways that Whirlpool
Corporation was using steel and convert these into process specifications. At this point, Inland was given assurances
that it would receive a larger volume of Whirlpool’s orders. One of the most important of Whirlpool’s
later actions was that the company actually did place the orders it said it
would.
In 1988 and
1989, the alliance was reevaluated by Whirlpool Corporation, and Inland’s
orders from Whirlpool increased by 30%.
Simultaneously, Inland began the first of their joint cost-reduction
projects, which sought to eliminate cost from the business processes. By 1990, Whirlpool had reduced its number of
steel suppliers to four. The companies
held a joint leadership meeting to bring discussion of the alliance to top
management’s attention and to formally develop a supplier council. The companies also developed a long-range
vision, which was deemed critical to the success of the partnership.
The alliance
solidified in 1993. By this time, Inland
Steel had established resources at its technical center dedicated to the needs
of Whirlpool. In 1994, Whirlpool
increased its orders to Inland Steel by another 15%, bringing the total to
approximately 80% of Inland’s total steel requirements. At this point, the two companies were sharing
joint strategies, and Whirlpool’s organizational restructuring was developed
around the Inland Steel relationship.
Purchasing management was actively involved in top-level strategic
planning. To date, the strategic
relationship between Whirlpool and Inland Steel is in place and producing
benefits that a traditional relationship could not have produced.
Issues and Concerns
In the
process of developing greater trust between the two organizations, the
companies had to address a number of issues directly. First, different employee practices between
the two companies often led to conflict.
This conflict was reduced in part by promoting greater cross-cultural
interaction, such as having a purchasing manager work at the supplier’s plant,
which helped to smooth over any differences in corporate culture that
existed. The sharing of cost data was
also problematic, but this happened in segments so as to target specific cost
drivers in different areas of the business process. In the long run, by focusing on quality
improvements and reject-rate reduction, hourly labor costs became almost a
non-issue. Even though Whirlpool had
several CEOs during this period, the relationship between the companies
remained intact because of the level of trust that had developed over time. The relationship was no longer between people
but rather between organizations.
Inland Steel
was also concerned that a single-sourcing policy might cause it to lose touch
with the market, and was concerned with confidentiality of information. At the same time, Whirlpool was concerned
about the technological risks of relying on only one supplier. However, these concerns were ultimately
dwarfed by the belief that both companies would be low-cost producers in the
long-term because of the relationship
Mechanisms to Support the Relationship
Executive
management at both companies recommend that organizations considering pursuing
partnerships need to think early on how they will deal with issues such as
those just mentioned. Although no single
right answers exist, there are different approaches to these issues that must
be tailored to the specific situation.
For example, significant organizational realignment was needed so that
people could work specifically with their counterparts in the other firm.
The creation
of a supplier council was also instrumental to the relationship. This approach permitted the sharing of
strategies and tactics so that each party became aware of each other’s
activities. Senior management
discussion, both structured periodic meetings and informal spontaneous
telephone conversations, also helped promote greater trust. Quarterly performance reviews by Whirlpool
were helpful to Inland for understanding how well they were meeting performance
expectations. Engineers from Inland were
also co-located at Whirlpool’s product development center, which created many
other informal avenues for communication.
Whirlpool
has begun to apply the same “customer service” principles used by Inland to
their own customer based. Whirlpool’s
CEO has redefined his company’s mission as a fabric-care of a food-preservation
enterprise rather than as a washing-machine or refrigerator maker. Whirlpool sales executives recognize that
certain distribution channels make up the majority of their sales volumes – in
this case, what they call the “Power Retailers”, such as Circuit City, Sears,
and Electric Avenue. These retailers
demand 100% availability, and Whirlpool’s logistics managers meet this
expectation. A second set of customers,
building contractors and government agents, purchase in smaller volumes, but also
require higher levels of customer service.
Thus, they promise close to 95% availability for this group. Finally, the “Discount Outlets” and “Mom and
Pop” operations require 85% availability, as they purchase infrequently and in
smaller volumes. In effect, a different
customer service standard is set for different customers, depending on their
importance.
The
underlying outcome for both parties in this agreement is that the relationship
became viewed as a covenant, which implies a greater commitment than a
contract. In the words of one Inland
Steel executive, “A covenant implies a promise that is enduring and provides a
way to manage expectations. The single
most important tenet of the relationship is the need to satisfy the end
consumer who purchases the finished appliance.
By focusing on this covenant, the relationship should survive and
prosper over the long term.”
Questions:
1. Discuss what the following statement means: ‘It can take years for
a buyer/seller partnership to begin delivering results.’
2. Discuss the advantages of having point-to-point contact (Exhibit
1) between functional groups at different companies. Are there any disadvantages to this approach?
3. What role does trust play in the relationship between Whirlpool
Corporation and Inland Steel? Provide
examples from the case that illustrate trust within this relationship.
4. Why is it important to have a strategic fit between the companies
involved in a buyer/seller alliance or partnership?
5. When formulating its purchasing strategy, what other strategy
alternatives besides an alliance with another company could Whirlpool
Corporation have pursued?
EXHIBIT 1
Supply Chain
Linkages Between Whirlpool Corporation and Inland Steel
Supplier Buyer
Manufacturing <——————————> Manufacturing
Human resources <——————————> Human resources
Accounting <——————————> Accounting
Engineering <——————————> Engineering
Sales/Marketing <——————————> Purchasing
CASE 5
Consolidated Products is a $21 billion company headquartered in Atlanta, Georgia. The company’s five business units, which offer a wide array of products and services, are the result of an aggressive strategy of mergers and acquisitions starting in the late 1980s. Exhibit 1 provides an overview of Consolidated Products and its five primary business units. The corporate staff is surprisingly small, comprised of general management, legal staff, and human resources. Part of the reason for this small staff is due to the eclectic array of businesses housed within one corporate entity. A Business Week editor recently commented that “Consolidated Products could easily be broken up into five separate companies, since at one time it was five separate companies.” The editor also said that if the company “ever learned how to leverage its size in the marketplace, Consolidated Products could be a Wall Street powerhouse!”
While
Consolidated Products is a global corporation with facilities around the world,
it operates each business unit as a highly independent and decentralized
company. The corporate culture is best
described as entrepreneurial, with each business unit being headed by an
executive vice president who has complete profit and loss accountability. This case focuses on the Engineered Materials
business unit.
ENGINEERED MATERIALS
The
Engineered Materials business unit, acquired in 1999, is the newest and
smallest addition to Consolidated Products portfolio of companies. Part of this business unit’s efforts over the
last year have centered on becoming more integrated across the various
functional groups that make up the business unit. Unfortunately, this unit was previously part
of Andreas Manufacturing, an old-line company with a strict hierarchical
culture. Executive managers at
Consolidated Products knew this purchase would present some interesting
challenges regarding how this unit would fit in with the entrepreneurial
culture that Consolidated Products has tried to create. Unfortunately, Engineered Materials is
struggling. In fact, internal problems
created by the efforts to change the culture helped push 2003 sales down 8
percent as the rest of the industry increased by 5 percent.
Executive
management believes that the use of cross-functional teams is a primary way to
change the unit’s culture while achieving major performance improvement
savings. One of the teams that
management expects to deliver major cost savings is the composite materials
team. This team, chartered in November
2002, had initial savings targets of 15 percent cost and productivity savings,
which translated to $3 million in annual savings. The team, which has been meeting on a regular
basis for 12 months, has struggled to develop a purchasing strategy for composite
materials. Unfortunately, this team is
not working well together or making much progress, which has frustrated
executive management and has affected the financial projections for 2004 and
2005. The team has fallen far short of
its expectations. While no one has
formally identified the exact reason(s) for the less than optimal performance,
an internal consultant has interviewed several team members. Examples from comments made by these team
members include—
§ Some of
the team’s members are not that committed to the assignment. One even commented that his regular job
responsibilities come first. After all,
that’s where his manager really holds him accountable. And, he continued, what is really the risk of
not supporting the team? The way this
member sees it, the real risk comes from putting in too much time on the team
and neglecting “the real work.”
§ Some of
the team members maintain they do not really understand the team’s goals. The goals that the team developed are vague,
or simply address team behavior. For
example, one goal is for the team to “meet once a week.”
§ While
the team has a formally designated leader, he spends too much time talking and
not enough time listening. He also gets
angry when team members don’t agree with his position on an issue. Several members commented how rude he can be
to team members.
§ Some
members perceive that management is not forthcoming with the necessary
resources. In the opinion of one
member,” Team members spend too much time requesting the necessary resources
rather than working together on team assignments.”
§ One
member asked what qualified him to be on a team. He said he was never on a cross-functional
team in his 20 years with the company.
How is he supposed to know what it takes to be part of a “higher
performance work unit?” This member further
questioned whether the Engineered Materials unit, given its history and
culture, is ready for team-based management.
Although the methodology was not rigorous,
the internal consultant quickly determined that the use of teams at this
business unit was in serious need of help.
Questions
1. Gaining
team member commitment is critical to team success. Discuss how this unit can use its employee
performance evaluation and reward system can encourage members to support
cross-functional project teams. Be sure to
provide examples of the kinds of rewards available to team members.
2.
Goal setting is also important to team
success. Discuss how organizations and
teams should establish goals, and why having team goals is important.
3. Research
has demonstrated a strong link between effective team leadership and
cross-functional team success. Describe
the characteristics of an effective team leader. Next, describe the responsibilities and requirements
of cross-functional team leaders.
4. Identify
the kinds of resources, in general, that cross-functional sourcing teams should
be provided to be successful. (Note: A
specific team could differ in its needs compared to other teams)
5. Identify
the types of training that team members at Engineered Materials will likely
require before they can effectively support team interaction and activities.
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