Category Archives: Supply Chain Management

How a Quality Initiative Changed -Whirlpool’s Supply Chain

How a Quality Initiative Changed -Whirlpool's Supply Chain

For over 30 years, Stanley Engineering Components (SEC), a division of the Stanley Works, had been manufacturing oven-door-latching mechanisms for the range-appliance industry. (The oven-door-latching mechanism locks an oven door during the self-cleaning cycle in both gas and electric ranges.) Its customers viewed SEC as a low-cost supplier of customer-designed stamped metal assemblies. In this capacity, SEC provided little input with respect to the designing, manufacturing, and marketing of their customers' end products. The largest of SEe's customers was the range-appliance division of the whirlpool Corporation, the world's leading manufacturer and marketer of appliances. SEC has been a supplier of oven-door latches to Whirlpool for more than 20 years. In early 1993, Whirlpool notified its existing and potential suppliers that it was instituting a new quality initiative, based on total quality management (TQM) principles. that directly affected its customer-supplier relationship. It now wanted its suppliers to be business partners, as compared to the existing customer-supplier arrangement in which price was the primary criterion for purchase. Whirlpool now. asked potential suppliers to provide extra value-added services and encouraged them to (a) become partners who were to be. experts in Whirlpool's business, (b) participate in customer-supplier teams. and (c) learn .about the needs of Whirlpool's customers. As business partners, Whirlpool wanted its suppliers to follow its strategy. which was to deliver world-class products that exceeded customer expectations. An important part of this strategy was Whirlpool's commitment to continuous quality improvement. Whirlpool  was able to achieve this strategy by leveraging its suppliers' technical expertise. To accomplish this, its su pliers had to be flexible to change and proactive to the continuous quality improvement of their products. In addition, Whirlpool's suppliers had to be able to produce consistently high-quality products at lo~ cost, while providing additional services, which included free consulting, as well as other initiatives to decrease product cost
and increase product quality. Another of Whirlpool's goals was to decrease its number of suppliers. Therefore. in addition  to the oven-door-Latching mechanism, Whirlpool encouraged SEC to develop a program to manufacture oven-door hinges, as this additional product was viewed as a natural extension to SEe's product line because a hinge is also a stamped metal assembly. If SEC  supplied both of these products, Whirlpool could reduce its number of suppliers. SEC had to make many changes within its organization in order to meet these new requirements. For example, SEC was now expected to initiate cost saving and quality improvement programs that extended far beyond SEC's own products. In addition. SEC had to assume significant risks. Its previous method of doing business. although far from risk-free, was in a stable environment, and SEC knew what was needed to complete successfully: low-cost pro uses. On the other hand, supplying Whirlpool under its TQ\1 meant competing in a highly uncertain environment that presented a significant ri k of failure. If SEC was not able to meet Whirlpool's requirements, then Whirlpool would  not consider it as a potential supplier. Losing Whirlpool's business would result in a 20 percent loss in sal s along with high sunk costs, which could ultimately mean business failure for See. all of its existing and future customers would also have to accept this new way of doing00 business, because SEC was not willing to operate two separate business structures. SEC  consciously chose TQM a a competitive advantage and therefore assumed the risk of losing
those customers who-did  not endorse TQM principles. In this respect, SEC consideredWhirlpool's demands as an opportunity to force itself to change and to adopt TQM practices. SEC also realized that Whirlpool was not going to lead it through the TQM process; SEC would have to develop this on its own. SEC also needed to change its business philosophy from being just a low-cost supplier. to that of being a concerned business partner. To accomplish this, SEC began considering all aspects of the final product, not just those pertaining to the components it supplied. SEC
showed its willingness to change in many ways. Perhaps the most striking example was SEC using its own personnel to co-develop a latch and a hinge with Whirlpool even though there was no guarantee that SEC would get Whirlpool's business. SEC personnel became free internal consultants to Whirlpool in order to demonstrate that they were committed to becoming a business partner. Whirlpool expected its suppliers to provide a sustainable. competitive advantage that was consistent with its strategy, although Whirlpool did not provide any leadership to SEC. It simply imposed its demands. Developing a strategy for achieving Whirlpool's goals rested solely with the supplier. By not providing any detailed plans. Whirlpool left the strategic planning and implementation up to SEe. Whirlpool also wanted SEC to help predict consumer preferences. It therefore sought SEe's opinions, suggestions, and solutions to problems about many aspects of its products, most of which did not relate to SEe's components. Again SEC was expected to play the role of free consultant. even before it established formal agreements with Whirlpool. One of Whirlpool's key strategic thrusts was to "effectively manage the selected technology base that emanates from the suppliers." To meet Whirlpool's objectives, SEC had to communicate Whirlpool's needs to all of SEe's employees and suppliers. Whirlpool demanded high-quality. low-cost, timely products, and SEC had to comply with these demands.
Whirlpool stated that its chosen suppliers would be the best in their class and their goals would be in line with Whirlpools' goals. . In early 1995.the buyers atWhirlpool accepted SEe's design proposals for the latch and hinge assemblies and awarded SEC the contract for these components. SEC started shipping small quantities of latches and hinges early in the spring of 1996. In mid-1996, Whirlpool awarded SEC a contract to supply smoke eliminators and venting tube assemblies. Since SEC first starting shipping components under its new supplier program. Whirlpool has
awarded SEC $S million in additional yearly business. At the same time, others suppliers lost this $S million in busi-iess. 0By adopting TQ\1. SEC became a successful competitor. Between 1993 and 1997  SEC sales toWhirlpool increased 12S percent, and its productivity increased by 76 percent. Over the same period, its sales to other customers (originally non- TQM customers) increased 2S percent. For SEe. implementing TQM, although ri'k~ and painful. was a success. SEC realized that it must solve problems immediately aI1LIprovide the best possible design and quality at a competitive price. As a supplier. SEC needs to constantly initiate new technology idea-. as suppliers to organizations that u-,e TQ\l principles must always be ready to change and be on the alert

The Impact of Technology

The Impact of Technology

State-or-the-art software has had a significant impact on the overall management of the supply chain. These software packages. in combination with network linkage- proxy indeed by the Internet; allow each of the organizations within a supply chain to share information on a real-rime basis. Knowing the actual demand a-, it occurs allows each of the firms in the' chain to operate leaner with less inventory while <simultaneously providing them with the ability to respond fa term to change in the market Exhibit 13.5 shows some of the major SC[ software package, that are caused companies to establish long-term relationships with a smaller number of suppliers than was previously the case. Increased competition also has forced companies to look to the four comers of the globe for suppliers that can meet their needs. As a result, the logistics and associated costs of transporting goods over great distances have become major factors in vendor selection. However, while the use of international vendors has caused the supply chain to become longer in many cases, there is a trend toward disintermediation, which eliminates many of the intermediate stages in the overall supply chain.


2.What are the advantages and disadvantages to a firm having a small number of suppliers?
Supply chain management as presented in this chapter pertains primarily to goods.
What would be the different steps or elements in a supply chain for a service? Give an .
How has technology impacted a firm's supply chain and the trend toward disintermediation?
What are the main differences between having a vendor's employees working in your
manufacturing operation and you hiring your own employees to do the same work?
Identify all of the steps in the supply chain for a hamburger that you buy at McDonald's.
How might this supply chain differ for a Mclronald's located in a developing country



It seems warehouses have grown wheels  Called "rolling inventories, n trucks have become the place of choice for just-in-time stockpiles. Eighteen wheelers  pull-up to factory loading docks to deliver parts go almost immediately onto production lines, bypassing  the warehouses ",'Companies now precisely plan their need of inventory so that [intermediate] warehouses aren't needed," says Don Schneider, president of trucking concern Schneider National Inc. and a member of the Chicaqo  Federal Reserve Bank. . o be sure, just-in-time inventory methods aren't new. But as more companies come around to this approach, trucks and railcars have begun to function as warehouses for nany producers-adding yet another anomaly to the   economic recovery.The construction of warehouse square footage tumbled  nearly 18 percent in 1992 and 9 percent in 1993, evenas the economy gained momentum and space in stores and shopping centers grew 6 percent and 12 p~rcent,respectively. For trucking companies, the trend means new business. but also more demanding customers. Many trucking  ornoanies say that in recent years, they've come under
increasing pressure to deliver parts within a small window of time. "There are sometimes less than 10-minute lag times," says Larry Mulkey, president of Ryder Dedicated Logistics Inc., a Miami unit of transportation-service
company Ryder Systems Inc.  Such use of trucks enables businesses to cut space costs, freeing up capital for investments such as equipment or new employees. "The back room decreases in size because you don't need it to store stockpiles and that means you have more floor space for selling," Mr. Mulkey says. But a heavy reliance Oil trucks to keep Inventories low  isn't without its risks. The General Motors Corp., ToyotaMotor Co. joint venture in Fremont, California, once had to shut down its production line because a just-in-time delivery truck broke down on the highway.  Ken Simonson, chief economist of the American Trucking Associations, says trucking for just-in-time orders  generally works better in uncongested regions of the country. But trucking companies have come a long way in eliminating delivery glitches. Mr. Schneider of Schneider boasts that not one load was late because of the
icy, wintry weather that hit much of the nation recently. Technology enables trucking companies and their clients to track a load's progress from minute to minute. If a problem comes up, another truck can be dispatched immediately to pick up the load. Trucks also have become more reliable mechanically. Source: Lucinda Harper, "Trucks Keep Inventories Rolling Past  to Production Lines." The Viall Street Joe. February:y 7, 1994, Copyright © 199~ Dow Jones & Co., Inc. Reproduced with permission of Dow Jones & Co .. Inc. via Copyright Clearance Center .

In deciding which is the most economical mode of transportation to use. a analyzer needs to take into consideration two cost elements: the actual costs of transportation ;nd the in- transit inventory carrying costs of product while in transit. These carrying costs consist primarily of the cost of the capital tied up when items are purchased at the vendor', plant. but are not available for use until they arrive at the firm's plant. (For a more detailed definition of the CC1stof capital, see Charter 16.) T) typically. the slower the mode of transportation. the lower the transportation costs. the longer the shipment time. and thus the higher the in-transit carrying cost. The trade-off between these two costs   s shown in Exhibit 13"+. he total annual costs associated with transporting products from a vendor's plant are

Total costs = Transportation costs + In-transit inventory carrying costs + Purchase cost
TC = DM + (X/365liDC nc


Based on this analysis  the more economical mode of transportation i by truck, even though the actual transportation cost per unit is twice that of sending the items by ship. Note that when evaluating alternative modes of transportation from the same vendor, the purchase cost remains the same and, for simplicity, is not included in the analysis.

The Role of Logistics in the Supply Chain

The Role of Logistics in the Supply Chain

The continued emphasis on globalization with respect to both suppliers and customers ha caused the supply chain to become longer in terms of time and distance, As a consequence, the logistics associated with both the delivery of raw material and component to the company and the delivery of finished goods to its customers have taken on added importance.  However, the lengthening of the supply chain runs counter to the firm's need for flexibility to provide customers with a wide variety of products that can be delivered quickly. Companies have therefore adopted various strategies to compensate for the longer supply chain. For example, companies are locating distribution center co er to customer markets so they can better serve thee markets


Another approach to addressing the is ue of a growing supply charm involves the establish hint of a strategic alliance or partner hip with a firm that specialize in transportation or log: tics. For example. L.L. Bean, a well-known mail-order firm specializing in outdoor equipment and clothes, has established such a partnership with FedEx. As a result. FedEx employees, who are physically located on a full-time basis at the L.L. Bean distribution facility in Freeport, Maine, handle all of the outbound shipments to L.L. Bean's customers (including the shipment of some packages by UPS). An alternative approach to using a logistics partner is for 3 firm to store finished goods at the logistics partners hub or distribution center, Establish-hang an inv memory at the point in the distribution channel will significantly reduce the delivery time of critical products. As an illustration, some companies that produce medi .al products for implants may maintain a supply of their products at FedEx's hub in Memphis. Tennes-ee Requests for these products, in many cases, can be delivered the same day or. at most, the next morning, to any location in the United States. Laura Ashley, a chain of high-fashion boutiques, similarly maintains an inventory of high-usage items :.H Fedfixs distribution center in Memphis. Such an arrangement allows retail operations ro re rock the follow ing day with items that have sold out. (See OM in Practice box for an .thcr role for a logi-ric partner.)

In- Transit Inventory Costs

The stretching of the supply chain to all comer of the globe ha 'cd manager-0 closer look at the various costs associated with the delivery of referred to as in-transit inventory costs and are usually  material and components that are inbound to the plant. These are sold FOB at the vendor's plant. (FOB stands for free-on-b which is the point .u which ownership and title to the goods are transferred from the supplier to the customer.



In November 1996, Volkswagen began operations at its new truck and bus assembly plant in Re•sende, Brazil. Unlike any other automotive assembly plant in the world,  this facility has suppliers' personnel working side by side with VW's workers. This latest advancement in supply chain management is the concept of Jose Ignacio Lopez de Arriortua, who is in charge of purchasing for View. As a result, only 200 out of a total workforce of 1 ,GOO are VW

employees. The remaining workers are employed by the major subcontractors such as MWM-Cummins, which produces the engines and transmissions, and Rochelle, which produces the suspension systems. With this revolutionary approach to automotive asset bly, VW hopes to increase both productivity and quality. At the same time, VW is sharing the risk of this new'venture with its major suppliers, who have to shoulder a large percentage of the fixed operating costs of the plant. In exchange for this risk, these subcontractors hope to develop and maintain a long and profitable relationship with View. Sources: Edvalclo Pereira Lima, "VW's Revolutionary Idea." Industry Week, March 17, 1997, and OianaJ. Schema. "ls VW's New Plant Lean, or Just Mean?" New York Times,_November 19, 1996.

VW's Canning Co-op
Like Tom Sawyer and his fence-painting project, Jose  L6pez de Arriortua designed Volkswagen's new truck plant in Resende, Brazil, around work done for Volkswagen's benefit by others. Major suppliers are assigned space in the plant and supply their own workers to add components to trucks rolling down the assembly line. Volkswagen's employees, a minority in the plant, supervise the work and : finished trucks; only when they pass are the suppliers paid.


Individual Strengths of Organizations

If a firm enters into a long-term relationship with a vendor. then it i in that firm's be. t Internet t that the vendor remain in business for a long period of time. Thu a good customer will  work with a vendor to ensure that it is profitable and that it remains financially strong. The selection of proper vendors is also important. Thu . in addition to financial  strengths, each vendor should have some unique operational or engineering strengths with respect t  the products it makes and delivers. This permits the firm to incorporate these strengths into its own products, which then provides an added advantage in the marketplace.