Strategic Alliance Between Whirlpool Corporation And Inland Steel: An Essay.

Whirlpool’s Sourcing Strategy Challenges

CASE on Strategic Alliance Whirlpool Corporation and Inland Steel

 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.

Inland Steel's Customer Relationship Management Approach

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.

The Need for an Alliance between Whirlpool and Inland Steel

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.

Overcoming Obstacles to 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.”

 EXHIBIT 1

Supply Chain Linkages Between Whirlpool Corporation and Inland Steel

STRATEGIC PROCUREMENT MANAGEMENT

Please Note: 

• Do not follow a report structure. Simply answer the questions.

 ONE

Please read the case on Whirlpool Corporation and Inland Steel, and answer the following questions

1.Partnership and Performance

a. Discuss what the following statement means: ‘It can take years for a buyer/seller partnership to begin delivering results.’

b. How can the companies involved in a buyer/seller partnership tell if the partnership is successful? What specific indicators can the companies use to measure progress and performance?

2.Partnership Process: 

a. Discuss the advantages of having point-to-point contact (Exhibit 1) between functional groups at different companies. Are there any disadvantages to this approach?

b.Why is it important to have a strategic fit between the companies involved in a buyer/seller alliance or partnership?

TWO 

2. Is it counter-intuitive to consider the single-sourcing strategy in the leveraging category of the portfolio matrix? Why? Under what conditions might you consider the single-sourcing strategy in the leveraging category? Clearly explain the conditions and your decision.

Whirlpool’s Sourcing Strategy Challenges

Cost Cutting and Supply Chain Precision

Part a:

Buyers and sellers often enter into partnership to enhance their business position which may long a long time to generate the target business outcomes (profits). The buyers here are composed of business firms which acquire materials from specific suppliers of the raw materials, the sellers. The multinational companies like Whirlpool Corporation require to maintain uniformly high quality of the products to ensure continuous customer satisfaction creation and revenue generation. These two business needs namely, customer value creation and revenue generation require these companies to acquire raw materials from a number of suppliers (Kamal and Sundaram 2016). These multinational firms in order to gain higher level of economies of scale and maintain uniform quality of their finished product often restructure their vast supply chains and select a few suppliers with which they partner to develop their products instead of merely purchasing them. The suppliers of raw materials today also in order to ensure more profit and reduce their bad debts, are also opting for supplying raw materials to a limited number of manufacturing companies (Hartmann, Wieland and Vargo 2018). As far as Whirlpool is concerned, the American electronics giants in order to ensure that it acquires uniform high quality steel for its electronics products, decided to partner with Inland Steel. Here, Whirlpool was the buyer while Inland Steel was the seller. The two companies entered into partnership to gain competitive advantage and help each other reduce cost of production yet maintain their product quality. This is where the strategic fit comes into play. The two partners need to match their management and organizational policies to be able to operate profitably. The employees of the two organizations need time to gain familiarity and mutual acceptance of each other’s modes of operations. Thus they take time to reach an optimum level of collaborative productivity. As far as the given case study is concerned, Whirlpool and Inland Steel partner and the two organization establish strategic fit. They collaborate not only in the operational level but at the management level as well. The two companies collaborated to solve issues and avoid conflicts, thus boosting mutual productivity. However, as Burns (2016) points out failed partnerships can lead to loss of productivity in venturing companies ultimately leading to collapse of the partnership. Thus one can summarize that it takes years for collaborating to establish strategic fit and reach high level of productivity.

Inland Steel's Customer Relationship Management Approach

Part b:

The business organisations involved in business partnerships can measure the profitability of the venture by considering several parameters. They can judge both external and internal parameters to judge and measure the success of the venture. As far as the external parameters are concerned, the companies can consider profit generated and market position improvement post partnership. The internal parameters like employee turnover reduction would show the level of success of the partnership (Nielsen and Vilson 2014).

The parameters like profit and employee turnover can be measured to indicate the level of success of the partnership. For example, the increase in profits in the companies post partnership period would indicate the success of the partnership, Again, if the share price of the partnering companies increase post release about the partnership in the market, this would indicate high future capital generation that would indicate high level of success of the partnership. The internal parameters would also indicate the level of success of partnership. If the partnering companies experience high employee turnover, it would indicate that the employees of the companies are not able to accept the organisational policies and culture of the other companies (Kolk, Vock and van Dolen 2016). This high employee turnover would indicate strong probability of the failure of the partnership venture. Low employee turnover would on other hand indicate future success of the partnership. Thus, both internal and external parameters can be used as indicators of measuring strategic fit of partnership.

2.Part a.

There are several advantages of having point-to-point contact between the employees of partnering companies. The case study mentions that the two companies namely, Whirlpool Corporation and Inland Steel collaborate on point to point partnership basis. Like the manufacturing departments of both the companies would directly contact each other. The following are the strengths of such contact pattern:

More business aligned communication:

The point-to-point communication process ensures that the two companies collaborate and communicate on a deeper scale. The communication regarding crucial business processes are not necessarily routed through the complex hierarchical pyramid of the two companies and the personnel involved in similar functions can communicate directly. For example, the manufacturing personnel of Whirlpool could directly communicate with the counterparts in Inland Steel. This would facilitate faster decision making and the communication can be aligned to the business needs to a greater extent (Kotula et al. 2015).

Risk management:

The point-to-point communication enables higher level of risk management among the companies involved in the partnership. One can point out that the collaboration to boost business productivity is more prevalent in multinational companies which invest high amount of funds into production of goods. The manufacturing activities in these companies are complex and attract amount of risks like financial risks and technological risks. When departments involved in similar manufacturing processes in Whirlpool and Inland Steel communicate on one-to-one basis, they are able to handle risks involved in manufacturing more efficiently. Thus, point-to-point communication help in more prompt risk management (Rim, Yang and Lee 2016.).

The Need for an Alliance between Whirlpool and Inland Steel

Point-to-point communication between two partnering companies have certain disadvantages as well. The management of the two companies often give more autonomy to employees involved in the partnership processes. This give the employees of one company opportunities to poach the employee of the other. The second disadvantage of point-to-point communication is that it gives employees to pass sensitive data which might harm one or all the partnering companies, thus ultimately leading to the collapse of the partnership.

Part b:

It is important to have strategic fit between partnering companies due to various reasons. Strategic fit refers to the degree to which organisation seeking to enter into partnership or acquisition and merger relationship match their resources and capabilities. Considering this factor, it is important for partnering decide the level of strategic fit. Firstly, high level of strategic fit means that the companies are able to match and share their resources like human resources, technological resources, material resources and financial resources. For example, Whirlpool and Inland Steel partner in the given case study. Their successful collaboration clearly indicate their high level of strategic fit. Thus, high level strategic fit ensures high level of collaboration of resources and profitability.

The second reason for which strategic fit is significant is that it results in more profitable business partnership. Considering the high profitability of Whirlpool and Inland Steel partnership, one can infer that they share high level of strategic fit. One can point, that if the two companies enter into partnership lack strategic fit and there happens to be vast difference in their resources strength, the partnership would fail.

Two:

It is not prudent to consider single sourcing strategy to develop the strengths of the product portfolios. The case study mentions that Whirlpool and Inland Steel enter into single sourcing partnership and are successful. However, one should point that such successful partnership based on single-sourcing is risky and less profitable in most of the cases. This is because, when two companies enter into single sourcing contract, they are bound to purchase and sell products among themselves. The companies often have to cede their supply chains with suppliers and limit their supply chains to each other. If, the company supplying raw materials become bankrupt or fail the meet the demand of the purchasing, the production of finished goods in the purchasing suffers. This in turn affects the revenue generation in the manufacturing companies. Similarly, if among the partnering companies, the company purchasing raw materials fails to make timely payments to the supplier company, the revenue generation of the latter suffers. This extreme dependence of the single partnering companies on each other ultimately leads to business failures for both the companies.

Single-sourcing partnership lead to lack of variety of products the manufacturing companies. When companies limit their supply chains to the limited one or two suppliers, they are not able of to acquire variety of raw materials and in turn are forced to limit their product portfolio. This entering into partnerships with a small number of producers ultimately impedes the customer value creation power of companies owing to the limited variety products which in turn leads to reduction in revenue generation.

Single sourcing of raw materials strategy would leverage the operations of companies which produce fixed assets or heavy goods. The construction and mining industries often use single supplier strategy to ensure that the provider of materials and the equipment are equipped financially, technologically and human resources to provide the former with continuous operation support. Similar strategy is prevalent in the automobile and heavy engineering industries. This ensures the manufacturers of automobiles and machinery are able to obtain high quality parts from the selected supplier base to ensure production of high quality automobile and machine pieces respectively.