Note: Attempt all the Question,
All the questions carry equal marks,
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.
VCI/Ellison has also decided to apply its global process to contracts that the sourcing teams determine are regional rather than global (a region is defined as North America or Europe only). A global supplier is one that can competitively supply a product or service to all of VCI/Ellison’s worldwide production and assembly locations. To date a majority of contracts have been classified as regional. This is not surprising given the fact that the major competitors in the heavy equipment industry operate regionally, which the supply community is structured to support.
VCI/Ellison’s Global Sourcing Process With the help of an external consultant VCI/Ellison has created a rigorous and thorough nine-step global strategy development and implementation process. Steps 1-4 of this process involve strategy development, while Steps 5-8 involve strategy implementation. Global sourcing project teams are responsible for the first four steps. Step 0 involves the executive steering committee selecting nine global sourcing projects at a time (called a wave) and identifying the cost savings expected from each project.
Perhaps the most important task associated with Step 1, which is project launch, is the formation of the global sourcing teams. Team members are selected based on their familiarity with the commodity or items under review. Since there is usually only one engineer and buyer for the commodity, these individuals become team members almost by default.
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.
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
The analyst is central to the success of the RFI and RFP process. Analysts compile and send RFI and RFP packages to suppliers, track and report response rates, input RFI and RFP response information into a sourcing software system and database, and follow-up with suppliers who are late with their submission. The business analyst also answers any questions that suppliers have or forwards their inquiries to the appropriate procurement or engineering representative. The analyst also provides feedback to suppliers concerning the competitiveness of their initial quotation or proposal. Finally, analysts have responsibility for forwarding the project database to their counterpart team across the ocean on a regular basis. Team members are relieved of extensive analytic and clerical duties, which allows members to commit time to value-adding activities.
While management views the business analyst position as an ideal way for high-potential individuals to gain exposure to purchasing and sourcing, there are some issues with this part of the process. Managing three projects simultaneously creates an intense work pace that affects morale and promotes turnover. Furthermore, one analyst maintained that too many RFPs are forwarded to suppliers, resulting in an intensive work requirement. Obtaining the necessary drawings from engineering is also a time consuming activity. Finally, the process to coordinate team activities between the U.S. and Europe presents some difficulties. The analyst must fax documents daily, manage reams of paper, and use software that was not compatible between the U.S. and European systems.
Global Sourcing Outcomes A number of themes emerge when managers describe the value of taking an integrated approach to worldwide sourcing. Perhaps most importantly, global sourcing was the first major integrative effort undertaken between VCI and Ellison. This process demonstrated that the two organizations could work jointly to capture the benefits offered by taking a global rather than regional perspective, although the company is somewhat disappointed by the number of opportunities that were determined to be regional rather than global. Second, this process demonstrated that material savings are available from a disciplined approach to worldwide sourcing. Contracts resulting from this process average over 10% in material price savings, which is not as high as the savings that Santek is realizing. Part of this is due to the fact that many of VCI/Ellison’s agreements are regional rather than global.
Global sourcing has also narrowed the differences between Ellison’s and VCI’s sourcing practices. Ellison has historically been more relationship focused with suppliers and viewed negotiation as a means to build upon those relationships. VCI has shown a greater willingness to switch suppliers more frequently and faster due to cost and quality considerations. The global process has enabled the two companies to converge on a consistent sourcing approach that combines the best features of both sourcing philosophies.
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.
The process is not without less positive outcomes or observations. One issue concerns a lack of knowledge between VCI and Ellison personnel about each other’s supply base. As a result, each side during a project has had a natural tendency to favor its own suppliers. When the two project teams work together face-to-face, they have to spend time sorting out who the best suppliers from each side are globally. This “home market bias” has hindered the process to some degree. Global sourcing teams have been forced to learn more about each other’s suppliers, which requires greater effort and an open mind.
As expected, all 27 global project teams to date have not been equally effective. One team leader argues that any differences in performance are due to the quality and effort of the team members and leaders rather than project complexity. This highlights the need for careful member evaluation and selection. Unfortunately, team leaders do not receive special training before they assume that critical position. And, team members are usually selected because they are most familiar with the item or category under study rather than their ability to be effective team members.
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.
Concluding Observations An issue that all companies should address is whether the supply base that supports their industry has global capabilities. Most competitors in the heavy equipment industry operate regionally, which the supply community is structured to support. The issue of a regional versus global industry raises a critical question—is the heavy equipment industry, with its regional perspective and different customer tastes and requirements, a true global industry? How much time should VCI/Ellison spend searching for common interests, including in procurement and design, when perhaps limited opportunities are available?
As VCI/Ellison completes the first major iteration of its global process (three waves of nine projects each that addressed the entire product structure), some managers are openly concerned about losing the discipline associated with this process. When first introduced the global sourcing process was something new that received special attention from executive leadership and suppliers. Some managers have expressed a concern that internal participants and suppliers already perceive the process is “winding down” and that most of the available savings have been captured. Maintaining momentum rather than succumbing to complacency will likely require a group that is committed to driving this process forward. In all likelihood that group must be the executive steering committee that is responsible for directing VCI/Ellison’s global efforts.
Questions:
1. What is global sourcing? Are there different levels of global sourcing?
2. What are some of the differences, including cultural differences, between VCI and Ellison? Can these differences affect the success of the company’s global sourcing projects?
3. Why is this company pursuing integrated global sourcing? Describe the global process that VCI/Ellison has implemented.
4. The assessment of worldwide suppliers creates an extensive workload. Discuss how VCI/Ellison supports the analysis requirements faced by each global sourcing team.
5. Discuss the concept of a “wave.” Why does executive management want each global sourcing project to last six months and move through a lock-step series of steps?
CASE 4
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-à-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.
