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STRATEGIC SOURCING AT WHIRLPOOL CHINA: FINDING THE IDEAL SUPPLIER

THE INTERNATIONAL PROCUREMENT OFFICE IN SHANGHAI

Various factors could turn global sourcing into a tricky process: transportation delays, lack of technology and capacity of foreign resources, cultural and language differences, quality assurance, political and economic stability, and proper inventory management systems, to name just a few. For these reasons, Whirlpool set up an international procurement office in Shanghai to support its own manufacturing operations in Asia and to provide support for any other operation in the world that sourced components from Asia. In 2010, the Asian international procurement office sourced more than US$1 billion in China out of $8 billion global direct spend.

Companies chose to source in China for many reasons, including reducing capital investment, gaining more market share, focusing on core competencies, and increasing the company’s flexibility in production. Although China may have shown a cost advantage when it came to raw materials, inconsistencies existed in the areas of quality and reliability. Other hindrances that companies often faced when operating in China stemmed from the fact that the country lacked capable service providers and suffered from shortcomings in the areas of transportation and IT infrastructure. At times, high rates of damage/loss in transit also caused a problem.

For a supplier to be considered as a Whirlpool supplier, it had to match the following criteria:

• Whirlpool code of conduct and other requirements;
• Minimum quality audit score;
• Best total cost of ownership and manufacturing efficiency;
• Continuous innovation in design and manufacturing for best-in-class quality and technology;
• Structured project tracking, design reviews with management tollgates, utilizing design and process FMEA, fault tree analysis, reverse engineering and other tools where applicable; and
• Access to UL, CSA, VDE and other agency approval.

The following requirements were dependent on the commodity analyzed:

• Laboratory capability for engineering conformance and reliability testing.
• Prototype capabilities.

Whirlpool required a very restricted supply quality system, namely the Whirlpool Supplier Quality System. The Whirlpool Supplier Quality System was developed based on the ISO 9001. The household appliance industry was broader than the ISO 9001 requirements, including process capabilities assessments (see Exhibit 2).

Based on Castelletti’s experience, most suppliers in China, even those who supplied Whirlpool’s competitors, could not reach the minimum required score when audited as potential suppliers during the first round of Whirlpool’s selection of potential suppliers. With the minimum score required being 60/100, the first-round score among good, local suppliers was approximately 50. Elements were weighted separately to bring about the total score of 100. Since 1996, Whirlpool had followed a restricted Six Sigma program, and within the company, more than 1,500 Whirlpool employees possessed Six Sigma training. The training program included teaching the employees to use Lean and Six Sigma techniques. This system was intended to improve the quality and efficiency of Whirlpool’s manufacturing, technology, and business processes and products.

When a supplier showed a distinct advantage on cost structure and could provide clear value, the SQE (Supplier Quality Engineer) and SDE (Supplier Development Engineer) team at Whirlpool’s international procurement office would provide resources to facilitate closing the gap within a certain time frame. The commodity team was also in charge of facilitating the supplier qualification process.

The international procurement office had a special budget for the SQE team for supplier development, covering the travel costs of supplier visits and continuous training. The SQE members often travelled, moving from one supplier to another to conduct gap-closure development by providing training or by coaching the execution of given projects. The suppliers were not charged for the training they received from Whirlpool; however, they were expected to take some initiatives to acquire outside resources for self-improvement if their current situations were judged to be insufficient. For example, those local suppliers that did not have capable people in place would be pushed to hire the right people to enhance their quality process.

FINDING THE RIGHT SUPPLIER

To find a suitable supplier of DC motors for the new energy-efficient refrigerator model, Whirlpool used the Sourcing Strategy Development (SSD) process, which included four steps for sourcing the right suppliers: Step 1 – internal analysis; Step – 2 external analysis; Step 3 – Strategy development; and Step 4

– implementation. Even before Step 1, it was necessary to define the commodity and allocate

responsibilities and resources through co-ordination of global and regional activities. An internal analysis identified and prioritized the process-partner requirements, then evaluated the performance of the existing supply base, and reviewed the existing supply base. The SSD process should also identify the switching costs in Step 1.

When the internal need was clear, then the process moved forward to Step 2, the external analysis, which included analyzing the supplier industry and competitors and evaluating competitor performance and strategies. The evaluation process made use of SWOT (Strength, Weakness, Opportunities, Threat) analysis and Best-in-Class performance analysis. From the results of the internal and external analysis, Step 3 was then used to develop the sourcing strategy. In this stage, Porter’s Five Forces Model was also adopted to analyze the competitiveness. After understanding the existing strategies, strategic options were formulated and their financial impact was analyzed. In developing a sourcing strategy, preliminary negotiations could be carried out, a suitable strategy and suppliers should be selected, and the critical path for implementation should be defined. Step 4 addressed the implementation stage, wherein the planned strategy was put into play, feedback was given to the chosen process partners and suppliers, and final negotiations were nailed down. In the implementation phase, if the goals had not been met, the strategy needed to be revised.

With the complete SSD analysis, the sourcing strategy had put Whirlpool in a position to find suitable suppliers.

THE CHALLENGES

Acting as a supplier for one of the largest home-appliance makers in the world was not an easy job for suppliers. First, the suppliers had to agree to some aggressive payment terms. Whirlpool’s U.S. procurement team privileged the consignment stock process, which meant that any agreed-upon payment terms started when parts were withdrawn from Whirlpool’s components warehouse, located in every Whirlpool factory. The warehousing time and the transportation lead time, including sea and land transportation times, were consequently added to the agreed-upon payment terms but were not predetermined — or even pre-determinable. Many suppliers found it difficult to accept these challenging payment terms.

Second, the suppliers had to endure a long sample-testing process When suppliers were deemed qualified (i.e., after passing the quality system audit) to move ahead for a particular project, Whirlpool still required them to provide samples that passed the sample tests and application tests (see Exhibit 3).

Third, suppliers faced a continuous challenge in terms of cost and quality improvement, year on year, especially since Whirlpool placed a great deal of emphasis on both quality and cost. For the sourcing team, continuous improvement was expected in terms of each year’s sourcing performance. Whirlpool used a technology road map for its own corporate technology evolution; therefore, its suppliers were expected to meet that same requirement each year to ensure continuous progress.

Whirlpool’s strict selection criteria made it difficult to find suppliers in China. To launch new products, Castelletti had to make full use of Whirlpool’s Asia International Procurement Office in Shanghai. Finding the right supplier for DC motors in less than six months was the key challenge in front of Castelletti. With the help of its Global Sourcing Strategy and its selection criteria, Castelletti had to decide how to find the optimal supplier.

QUESTION:

What are the pros and cons of using single sourcing and/or multiple suppliers? How does a company make the decision to choose one or the other?