HBRSpotlight

The 21st-Centuiy Supply Chain^

Five years ago, salespeople at Whirlpool said thecompany's supply chain staff were "sales disablers"Now, Whirlpool excels at getting the right productto the right place at the right time-while keepinginventory low. What made the difference?by Reuben C Slone

eadinga Supply Chain Turnaround ^ ^

T hings would be very different today-for me, my colleagues,and my company - if the votes of Whirlpool's North Americanleadership team had swung in a different direction on May 3,2001.It was a move I hadn't expected; Mike Todman, our executive vice

president at the time, decided to go around the table and ask each memberof his staff for a thumbs-up or thumbs-down on the investment that PaulDittmann and I had just formally proposed. Did I look worried? I can't imagineI didn't, even though we'd spent hours in individual meetings with each ofthem, getting their ideas and buy-in. We thought we had everyone's support.But the facts remained: Our proposal had a bigger price tag than any supplychain investment in the company's history. We were asking for tens of millionsduring a period of general belt-tightening. Some of it was slated for new hires,even as cutbacks were taking place elsewhere in the company. And Paul and I,the people doing the asking, were coming from the supply chain organization.

Let me be clear: The supply chain organization was the part of the businessthat Whirlpool's salespeople were in the habit of calling the "sales disablers"in 2000. We were perpetually behind the eight ball, tying up too much capital infinished goods inventory - yet failing to provide the product availability ourcustomers needed. Our availability hovered around 87%. Our colleagues grimlyjoked that in surveys on the delivery performance of the four biggest appliancemanufacturers in the U.S., we came in fifth.

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The 2Xst-Century Supply Chain.HBRspotlight

And here, with all the credibility that track record con-ferred on us, we were proposing an ambitious new suiteof IT solutions - something, too, for which the companyhad little appetite. It had been just 20 months sinceWhirlpool North America had flipped the switch on amassive new ERP system, with less than desired effect.Normally, Whirlpool ships close to 70,000 appliances aday to North American customers. The day after we wentlive with SAP, we were able to ship about 2,000. A barrageof bad press followed. Even though the situation was soonrighted (SAP remains a valued partner), the experience ofbeing treated as a sort of poster child for ERP folly hadleft scars.

So imagine our relief when we heard the first voice say"yes." It was the executive who headed up sales to Sears.Paul and I looked anxiously to the next face, and the next.The heads of our KitchenAid, Whirlpool, and valuebrands followed suit-a watershed, given that the fundingwould have to come from their budgets. I could see thatJ.C. Anderson, my boss and senior vice president of oper-ations, was happy, too. He had tried to voice his supportat the beginning of the meeting, but Mike Todman hadasked him to wait. Now that it was his turn to vote, he didit with a fiourish:"I am fully committed,"he said,"to mov-ing our supply chain from a liability to a recognized com-petitive advantage." Only after Todman had heard fromeveryone in the room - brands, sales, finance, human re-sources, and operations-did he cast his vote.

With that last yes, the tension broke, and everyone wassmiling and nodding. Paul and I had a sense of triumph-but also trepidation. Because now, we knew, there couldbe no excuses. We were on the hook to deliver some seri-ous value.

Devising the Strategy

M y responsibility at Whirlpool today is for theperformance of the global supply chain. Butin 2001,1 was focused only on North America,

and I was utterly new to the supply chain organization.(I had come into the company a few years earlier to leadits e-business efforts.) By contrast, Paul Dittmann, the vicepresident of supply chain strategy, was a Whirlpool vet-eran with a tenure spanning a quarter century.

Our lots were cast together in October 2000 by Jeff Fet-tig. Jeff is now Whirlpool's chairman and CEO, but at thetime he was president and COO - and he was good andtired of hearing about spotty service and high logistics

Reuben E. Slone iReuben_E_S\one@Wbirlpool.com) is thevice president of Global Supply Chain at Whirlpool Corpo-ration in Benton Harbor, Michigan.

costs. Sales had risen to record levels in 2000 as ourlaunch of some innovative products coincided with anuptick in housing starts. With the rest of the companychugging on all cylinders, there was only one thing hold-ing us back: our supply chain. Jeff called me into his officeand gave me a two-word order: "Fix it."

If that constitutes a mandate, we had one. But it was upto us to figure out what fixing the supply chain wouldentail. At the top level, of course, it's a simple formulation:getting the right product to the right place at the righttime - all the time. That gets complicated very quickly,however, when you consider the scale of the challenge.Whirlpool makes a diverse line of washers, dryers, refrig-erators, dishwashers, and ovens, with manufacturingfacilities in 13 countries. We sell those appliances in lOOcountries, through retailers big and small and to the con-struction companies and developers that build newhomes. In the United States alone, our logistics networkconsists of eight factory distribution centers, ten regionaldistribution centers, 60 local distribution centers, andnearly 20,000 retail and contract customers.

We needed to formulate a battle plan that would includenew information technology, processes, roles, and talents.But before we could begin to imagine those, we neededto define our strategy. Looking to the future, what would itmean to be world-class in supply chain performance?

The decision we made at this very early point in theprocess was, 1 think, a pivotal one. We decided that wecould answer that question only by focusing on customerrequirements first. Our approach to developing our sup-ply chain strategy would be to start with the last link-theconsumer-and proceed backward.

It's an obvious thought, isn't it? Fxcept that it wasn't.The overwhelming tendency in a manufacturing organi-zation is to think about the supply chain as somethingthat originates with the supply base and moves forward.It's understandable; This is the part of the chain overwhich the company has control. But the unfortunateeffect is that supply chain initiatives typically run out ofsteam before they get to their end point-and real point.Whether or not they make customers' lives easier be-comes an afterthought.

Understanding Customers' Needs. If you start with thecustomer, the customer can't be an afterthought. The wayI expressed this to my colleagues was to say,"Strategic rel-evance is all from the consumer back." And conveniently,we had new research to consult on the subject of con-sumer needs. Whirlpool and Sears had recently engagedBoston Consulting Group to study consumers' desireswith regard to appliance delivery. The top-line findingwas that people value what I call "delivery with integrity."That is, your ability to get it there fast is important, but

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Leading a Supply Chain Tux*naround

not as important as your ability to getit there when you said you would."Give a date, hit a date" is whatthey're asking for. This sounded fa-miliar to me, coming from the auto-motive industry. In my previous po-sition at General Motors, I'd beeninvolved in several studies that em-phasized the psychology of deliverydate commitments.

Identifying Trade Partners' Priori-ties. Moving upstream, we needed tounderstand the desires of our directcustomers better. We conducted ourown interviews to define require-ments by segment. As well as lookingat smaller retailers versus largerones, we focused individually onSears, Lowes, and Best Buy, our threebiggest customers. And within thecontract-builder market, we studiedmany subdivisions, from contractdistributors and apartment develop-ers to single-family-home builders.We asked about their overall avail-ability requirements, their prefer-ences in communicating with us, andwhat they would like to see along thelines of e-business. We asked aboutinventory management and how theymight want Whirlpool to assist in it. In all, we discovered27 different dimensions along which our performancewas being judged, each varying in importance accordingto the customer.

Benchmarking the Competition. Naturally, our custom-ers' expectations and perceptions were shaped in largepart by what others in our industry were doing. So webenchmarked our competitors-primarily GE, which wasour biggest rival. We obtained cross-industry informationand competitive intelligence from AMR, Gartner, andForrester Research to make sure we had a broad and ob-jective assessment of supply chain capabilities. Then wemapped out what would be considered world-class (ver-sus sufficient or transitional) performance for each of the27 capabilities and how much it would cost us to reachthat top level. It turned out that to prevail on every frontwould require a total investment of more than $85 mil-lion, which we knew wasn't feasible. It was time to getserious about priorities.

Now that we had established the cost of world-beatingperformance, we asked ourselves: For each capability,what improvement could we accomplish at a low invest-

ment level, and at a medium level? We quickly staked outthe areas where a relatively small investment would yieldsupremacy, usually due to an existing strength. A fewareas we simply decided to cede. Our plan was to meet orbeat the competition in most areas, at minimum cost.

Building for the Future. Strategy, of course, does notsimply address the needs of the moment. It anticipatesthe challenges of the future. A final component of oursupply chain strategy was identifying the probable rangeof future operating scenarios based on industry, eco-nomic, and technological trends. The point was to assureourselves that our proposal was robust enough to with-stand these various scenarios. To date, the planning hasworked. Having set a course, we've been able to deal withsituations we hadn't conceived of and to continue evolv-ing in the same basic direction.

Selling the Revolution

I t's always a difficult decision-when to involve yourinternal customers in the planning of a major capitalinvestment. Their time is scarce, and they typically

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don't want to be embroiled in the details of what you,after all, are getting paid to do. You must have your acttogether and have a solid plan to which they can respond.On the other hand, you can't be so far along in the processthat you've become inflexible. You need to maintain a care-ful balance between seeking their guidance and sellingyour vision.

Paul and 1 liked to think we had that mandate from JeffFettig to get the supply chain fixed. But it wasn't the kindof mandate that comes with a blank check. Like mostwell-managed companies, Whirlpool will not undertakea capital investment without a compelling business case.As a cost center in the company, we had to justify ourproject wholly on expense reductions and working capitalimprovements. Even if we believed that better productavailability would boost sales, we couldn't count thosechickens in the business case.

We spent an enormous amount of time talking withthe brand general managers and others who would be

needed. They said they had nothing more to add. But wepersisted. I remember telling Paul, "If they won't let usin the door, we'll go through the window. And if they lockthe window, there's always the air vent...."

Along the way, we'd been particularly concerned aboutcherry-picking. We knew that, in a company of smart busi-nesspeople, the first reaction to a multimillion-dollarprice tag would be, "OK, what can I get for 80% of thattotal?" And indeed, from a project management stand-point, we knew it was important to break out each com-ponent of the plan into a stand-alone initiative, justifiedby its own business case. Yet we knew the whole thingcame together as a sort of basket weave, with each partsupporting and relying on multiple other parts.

What helped here was our competitive analysis, inwhich we had plotted our capability levels against oth-ers'. We charted our current position against our numberone competitor on each dimension valued by customers,then extrapolated to show how, depending on the level

We staked out the areas where a relatively smallinvestment would yield supremacy, usually due toan existing strength.

affected by the changes we were proposing. The Japanesecall this kind of consensus-building nemawashi (literally,it means "root binding"), and it is impossible to overstateits importance. Yet it is often neglected in the midst of acomplex project. Note that, at the same time we neededto be meeting with key decision makers, we were also inthe thick of the analysis and design of the solution. Inthose early months, the project needed leadership in twodirections - the kind of work people typically refer to asneeding a "Mr. Inside" and "Mr. Outside." I made sure wehad sufficient consulting resources for the inside workwhile Paul and I devoted 50% of our time to the outsidework - interfacing with the trade, outside experts, andinternal stakeholders.

In our initial meetings with these key people, we'dessentially say, "Here's what we're doing. What do youthink?"Typically,the executive would half pay attention,half blow us off. But we'd get some input. In a secondmeeting, we'd show how our work had evolved to incor-porate their ideas and others'. Usually, we'd see moreengagement at this point. By the time we were asking fora third meeting, reactions were mixed. People were moreor less on board, but some felt another meeting wasn't

of investment, we could overtake that company or allowthe gap to widen. Sure enough, the competitive instinctsof our colleagues kicked in. No one wanted to fall behind.

Getting Focused

One of the earliest successes in the turnaround ofWhirlpool's supply chain was the rollout of a newsales and operations planning (S&OP) process.

Our previous planning environment had been inade-quate. What passed for planning tools didn't go far be-yond Excel spreadsheets. Now, we had the ability to pulltogether the long-term and short-term perspectives ofmarketing, sales, finance, and manufacturing and produceforecasts that all the participants could base their gameplans on.

We soon pushed our forecasting capability further bylaunching a CPFR pilot. The acronym stands for collabo-rative planning, forecasting, and replenishment, with thecollaboration happening across different companieswithin a supply chain. The idea is straightforward. Tradi-tionally, we forecast how many appliances we will sellthrough a trade partner (Sears, for example) to a given

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Leading a Supply Chain TumarouiuL

market And at the same time, that trade partner developsits own forecast. Each of us has some information that theother lacks. With CPFR, we use a Web-based tool to shareour forecasts (without sharing the sensitive data behindthem), and we collaborate on the exceptions. As simple asit sounds, it isn't easy to pull off. But we have, and it's beena real home run. Within 30 days of launch, our forecastaccuracy error was cut in half. Where we had close to100% error (which isn't hard, given the small quantitiesinvolved in forecasting individual SKUs for specific ware-house locations), today we're at about 44% or 45%. To putthis in perspective, a one-point improvement in forecastaccuracy across the board reduces our total finished goodsposition by several million dollars.

These were just two of many initiatives we launched inrapid succession after May 2001. A couple things were ab-solutely critical to keeping them all on track: a highly dis-ciplined project management office and stringent per-formance metrics. The key was to think big but focusrelentlessly on near-term deadlines. We organized thechange effort into 30-day chunks, with three new capa-bilities, or business releases, rolling out monthly-some onthe supply side, some on the demand side.

The job of the project management office was to en-sure the completion of projects on time, on budget, andon benefit. Paul oversaw this for me. Also keeping us hon-est were new metrics - and the man 1 brought in to en-force them. My colleague John Kerr, now general man-ager of quality for the North America division, was thenin charge of Whirlpool's Six Sigma program. He's a realblack belt when it comes to performance management. Ittook some persuading, aimed at both John and the NorthAmerican leadership team, before he was freed up andallowed to dedicate himself to the supply chain turn-around. But we absolutely needed his data-driven per-spective. When one of my team would say, "We need totake this action to fix this issue," John would alwayscounter with,"Please show me the data that allowed youto draw that conclusion." Were these demands sometimesa source of irritation? I'd be lying if 1 said they weren't.But they forced all of us to rebuild the metric "fact base"and hone our problem-solving skills.

By the third quarter of 2001, we had already done a lotto stabilize product availability and reduce overall supplychain costs. And, after a challenging fourth quarter, wetook a huge step forward by implementing a suite of soft-ware products from i2, which specializes in supply chainintegration tools. That was in January 2002. Six monthslater. Whirlpool had historic low inventories and a sus-tained high service level. Before the year was out, we weredelivering very near our target of 93% availability acrossail brands and products. (Momentum has since carried us

well into the mid-nineties.) We delivered slightly morethan promised by reducing finished goods working capi-tal by 10% and improving total cost productivity by 5.1%.

Our customers were voicing their approval. By May2002, a blind Internet survey given to our trade partnersshowed us to be "most improved,""easiest to do businesswith," and "most progressive." I remember that after theseresults came out, our VP of sales said, "You're good now-but more important, you're consistently good." It was aturning point in the trade's perception of Whirlpool.

Engaging Talent

I 've touched on the state-of-the-art technologieswe've employed in our turnaround-the Web-basedcollaboration tools, the planning software, i2's

rocket-science optimization-but let me correct any im-pression that this is a story about technology. More thananything. Whirlpool's supply chain turnaround is a talentrenaissance.

It's sometimes hard for us to remember how demoral-ized this 3,000-person organization had become. In 2000,many people in supply chain roles had been with thecompany for years and had watched in frustration as com-petitors outspent and outperformed us. Part of the prob-lem was the massive effort required by the ERP imple-mentation. As an early adopter of enterprise systems inour industry (SAP and other vendors got their start withprocess-manufacturing concerns like industrial chemi-cals). Whirlpool had bitten off a lot. With limited atten-tion and resources to spare, it put other projects on hold.We took our eye off the ball in supply chain innovationand fell behind.

As a newcomer, I tried to inject some fresh energy intothe organization and give people a reason to be confidentPaul Dittmann told me this project gave him a "secondcareer wind." He's a brilliant guy, with a PhD in operationsresearch and industrial engineering, and suddenly, he hadthe opportunity to innovate in ways he had only dreamedof in his first 20 years at the company.

Other people benefited from changes to how we de-velop, assess, and reward talent. With help from MichiganState University and the American Production and In-ventory Control Society (APICS), we developed a supplychain "competency model." This is essentially an outlineof the skills required in a top-tier organization, the rolesin which they should reside, and how they need to be de-veloped over time. And we created a new banding system,which expanded the compensation levels in the organi-zation. Now people can be rewarded for increasing theirexpertise even if they are not being promoted into super-visory roles.

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The 21st-century Supply Chain̂

We also put a heavy emphasis on developing people'sproject management skills. Here, we relied on a modeldeveloped by the Project Management Institute (PMI),a sort of standard for assessing and enhancing an organi-zation's project management capabilities. I wanted asmany supply chain professionals as possible to becomePMI-certified, and not just because of the glut of projectswe were facing at the moment. My view is that projectmanagement's disciplined planning and execution is justas vital to ongoing operations management. After all, theonly real difference between running an operation andrunning a project is the due date of the deliverable. Overtime, my operating staff stopped dismissing project man-agement as a lot of "overhead" from a former manage-ment consultant and car guy. Now they're the ones insist-ing on things like project charters and weekly projectreviews.

Meanwhile, we hired at least 13 new people on the busi-ness side and at least as many more on the informationsystems side, and I made sure that every one of them wastop-notch. To fill out our project management ranks, werecruited young people from companies with strong sup-ply chains and from premier operations-oriented MBAprograms like Michigan State and the University of Ten-nessee. Perhaps we were lucky that our talent drive coin-cided with a downturn in the consulting industry. On theother hand, it might have been the excitement of a turn-around situation that drew the best and brightest toWhirlpool.

Finally, I wasn't so arrogant as to believe that my seniorteam and 1 didn't need development ourselves. We as-sembled a supply chain advisory board and chartered itsmembers to keep challenging us. The group includes ac-ademics Don Bowersox of Michigan State and TomMentzer of the University of Tennessee, and practitionersRalph Drayer (the Procter & Gamble executive who pio-neered Efficient Consumer Response) and Larry Sur (whomastered transportation and warehouse management ina long career at Schneider National and GENCO). Get agroup like this together, and you can count on creativesparks flying. These experts keep us on our toes in a wayno consulting firm could.

Sustaining Momentum

Three years into the project now, we continue toassign ourselves and deliver three new capabil-ities per month. This doesn't get simpler over

time, either. As I write this, for example, we're focused onsomething we call "Plan to Sell/Build to Order." Here, thenotion is that certain high-volume SKUs should never beout of stock. These are the heart-ofthe-line dishwashers.

refrigerators, washing machines, and other products thatappeal to a broad range of consumers. They are the equiv-alent of a supermarket's milk and eggs; running out ofthem has a disproportionately negative impact on cus-tomers' perceptions.

We're now formulating a supply chain strategy thatallows us to identify these SKUs across all of our tradepartners in all of our channels and to ensure that the re-plenishment system for our regional warehouses keepsthem in stock. That constitutes the "plan to sell" part ofthe program. At the same time, for our smallest-volumeSKUs, we are taking out all the inventory and operatingon a pure pull basis, with a new, more flexible build-to-order process. The inventory savings on the small-volumeSKUs helps offset the costs of stocking up on the high-volume SKUs.

We're also working on the capability to set service lev-els by SKU. That is, instead of having one availability tar-get for all our products, we are recognizing that someproducts are of greater strategic importance than others.Some of them, for instance, are more profitable. Somehold a unique place in our brand strategy. Again, it's easyto grasp the value of being able to vary service levels ac-cordingly. But in a sprawling business like ours, shippingthousands of different SKUs daily, it's a very difficult thingto accomplish.

We continue to develop new Web-based tools. Recently,we've been focused on system-to-system transactions, inwhich our system talks directly to a customer's system forpurposes of transmitting orders, exchanging sales data,and even submitting and paying invoices. We've rolledout this capability with a number of trade partners overthe past i8 months. At the same time, we keep enhancingour Partner Store, which allows customers to check avail-ability and place orders via the Internet. The site allowsthem to find near equivalents of models, for those timeswhen a SKU is out of stock or retired. They can even finddeals on obsolete inventory.

By the time this article appears in print, we'll also haveimplemented event-management technology, which willallow us to be more on top of the movement of goodsthrough the supply chain. An event manager providesan alert whenever an action in the process has takenplace-for example, when a washer is loaded into a con-tainer in Schomdorf, when that container full of washersis loaded onto a ship in Rotterdam, when the ship de-parts, when the ship arrives, when the container is un-loaded from the ship in Norfolk, when the containerleaves the port via truck, and, finally, when the washeris unloaded at the Findlay, Ohio, warehouse. The result isthat people's attention is directed to what needs to bedone. We'll also be further along in our application of

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lean techniques (usually associatedwith manufacturing operations) toour total supply chain. This involvesusing pull concepts and kanbanliketriggers to speed up processes, re-duce inventory, and enhance cus-tomer service.

On the Hoz4zon

Whirlpool has much toshow for its supply chainefforts. By the end of

2003, our product availability hadreached over 93%, up from 88.3%in 2001. (Today it's more than 95%.)That allowed us to attain an orderfill rate for key trade partners ofover 96%. The number of days'worth of finished goods we wereholding in inventory had droppedfrom 32.8 to just 26. We drovefreight and warehousing total costproductivity from 4% to 7.2%. From2002 to 2003, we lowered workingcapital by almost $100 million andsupply chain costs by almost $20million. Does all this add up to valuein excess of the expense our leader-ship team approved? Absolutely. Infact, total payback on that original investment occurredwithin the first two years.

Still, our work is far from finished. In October 2001,just months after we kicked off our turnaround, we werefortunate in that the new executive vice presidentbrought in to run Whirlpool's North America region haddeep supply chain knowledge. Dave Swift, who came tous from Kodak, believes strongly in the strategic impor-tance of the supply chain both for building brands and forcreating sustainable competitive advantage. Immediatelyafter joining us, he elevated our sales and operations plan-ning process by personally chairing monthly executiveS&OP meetings. These meetings have become the modelfor the company and the basis for much of our just-startedglobal supply chain efforts.

In the future, we'll face greater demands for end-to-end accountability. We're already responsible for the re-sale of any returns. Soon we'll be accountable for the dis-assembly of products in Europe. It's only a matter of timebefore similar laws are enacted in the United States.

And we'll be taking an even closer look at the designof the products themselves. If we can redesign a product-

.l^ading a Supply Chain Turnaround

make it in a smaller plant, make it with smaller parts, shipit in smaller pieces - we can dramatically affect supplychain economics. It's great to improve forecasts, optimizetransportation, and speed up our processes with existingSKUs. But what if we could push the end stages of pro-duction closer to the consumer and get higher leveragefrom those SKUs? That's the kind of thing that can changethe rules of the game.

It's a wonderful thing about our business: We havefierce competition all over the world, and on top of thatwe have very smart trade partners who deal with numer-ous other suppliers. We may be a white goods, big boxsupplier, but because our customers also buy electronicsand apparel and so on, we're constantly being challengedby the benchmarks of other, more nimble industries.Technologies continue to evolve, channel power contin-ues to shift, and the bar is constantly being raised. But I'mconfident that the talent in Whirlpool's supply chainorganization will be equal to it all. ^

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