Leading Supply Chain Turn Around

Five eld ago, salespeople at Whirlpool state the companys tot twine stave were sales disablers Now, Whirlpool excels at limit the right product to the right institutionalize at the right time-while retentiveness in showory low. What made the difference? by Reuben C Slone a make out train Turnaround eading T hings would be very different today-for me, my colleagues, and my company if the votes of Whirlpools North the Statesn leadership team had swung in a different direction on May 3,2001.It was a move I hadnt expected Mike Todman, our executive vice president at the time, firm to go around the table and ask each member of his module for a thumbs-up or thumbs-down on the investment that Paul Dittmann and I had just offici bothy proposed. Did I look worried? I shadowert imagine I didnt, even though wed spent hours in individual meetings with each of them, postureting their ideas and buy-in. We thought we had everyones support. just now the facts remained Our proposal had a bigger price tag than any release kitchen stove investment in the companys history. We were asking for tens of millions during a period of general belt-tightening.Some of it was slated for recent hires, even as cutbacks were taking place elsewhere in the company. And Paul and I, the people doing the asking, were coming from the put up chain organization. Let me be clear The supply chain organization was the part of the business that Whirlpools salespeople were in the habit of calling the sales disablers in 2000. We were perpetually behind the octad testicle, tying up in bid manner much capital in finished goods inventory yet failing to provide the product availability our customers needed. Our availability hovered around 87%. Our colleagues grimly joked that in surveys on the de be intimatery performance f the four biggest appliance manufacturers in the U. S. , we came in fifth. 114 HARVARD BUSINESS REVIEW OCTOBER 200 U HBR The 2Xst-Century Supply Chain. spotlight An d here, with all the credibility that track record conferred on us, we were proposing an ambitious new suite of IT solutions intimately-nighthing, too, for which the company had little appetite. It had been just 20 months since Whirlpool North America had flipped the electric switch on a massive new ERP system, with less than desired effect. Normally, Whirlpool ships close to 70,000 appliances a day to North American customers.The day after we went live with SAP, we were able to ship about 2,000. A barrage of bad press followed. Even though the situation was soon righted (SAP remains a valued first mate), the consume of being treated as a sort of poster child for ERP folly had left scars. So imagine our relief when we perceive the first component part 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 value brands followed suit-a watershed, entrustn that the fun ding would view as to come from their budgets.I could see that J. C. Anderson, my political boss and senior vice president of operations, was happy, too. He had tried to voice his support at the beginning of the meeting, still Mike Todman had asked him to wait. Now that it was his turn to vote, he did it with a fiourishI am fully committed,he say,to moving our supply chain from a liability to a recognized competitive advantage. Only after Todman had heard from everyone in the room brands, sales, finance, human resources, and operations-did he cast his vote. cost. Sales had risen to record takes in 2000 as our launch of well-nigh nnovative products coincided with an uptick in housing starts. With the stay put of the company chugging on all cylinders, there was only one thing holding us back our supply chain. Jeff called me into his office and gave me a two-word order heap it. If that constitutes a mandate, we had one. just it was up to us to figure out what fixing the sup ply chain would entail. At the legislate level, of course, its a fair formulation getting the right product to the right place at the right time all the time. That gets complicated very quickly, however, when you consider the scale of the challenge.Whirlpool makes a diverse pass of washers, dryers, refrigerators, dishwashers, and ovens, with manufacturing facilities in 13 countries. We sell those appliances in lOO countries, through retailers big and small and to the construction companies and developers that build new homes. In the United States alone, our logistics network consists of eight factory distri providedion centers, ten regional distribution centers, 60 local distribution centers, and nearly 20,000 retail and contract customers. M We needed to formulate a battle innovation that would include new information technology, processes, roles, and talents. however before we could begin to imagine those, we needed to define our st cropgy. Looking to the future, what would i t mean to be world-class in supply chain performance? The decision we made at this very early point in the process was, 1 think, a pivotal one. We mulish that we could answer that question only by focusing on customer With that last yes, the tension broke, and everyone was requirements first. Our approach to developing our supsmiling and nodding. Paul and I had a good sense of triumphply chain strategy would be to start with the last link-the but withal trepidation.Because now, we knew, there could consumer-and proceed backward. be no excuses. We were on the hook to deliver few serious value. Its an obvious thought, isnt it? Fxcept that it wasnt. The overwhelming tendency in a manufacturing organization is to think about the supply chain as something Devising the Strategy that originates with the supply base and moves precedent. Its understandable This is the part of the chain over y responsibility at Whirlpool today is for the which the company has control. But the unfortunate performance of the globular supply chain.But effect is that supply chain initiatives typically run out of in 2001,1 was focused only on North America, steam before they get to their end point-and real point. and I was utterly new to the supply chain organization. Whether or not they make customers lives easier be(I had come into the company a few years earlier to lead comes an afterthought. its e-business efforts. ) By contrast, Paul Dittmann, the vice president of supply chain strategy, was a Whirlpool vetUnderstanding Customers Needs. If you start with the eran with a tenure spanning a can century. ustomer, the customer cant be an afterthought. The way I expressed this to my colleagues was to say,Strategic relOur buss were cast unitedly in October 2000 by Jeff Fetevance is all from the consumer back. And conveniently, tig. Jeff is now Whirlpools chairman and CEO, but at the we had new research to consult on the subject of contime he was president and COO and he was good and sumer needs. Whirlpool and Sears had recently engaged threadbare of hearing about spotty service and high logistics Boston Consulting Group to study consumers desires Reuben E.Slone emailprotected com) is the with regard to appliance delivery. The top-line finding vice president of Global Supply Chain at Whirlpool Corpo- was that people value what I call delivery with integrity. That is, your ability to get it there fast is important, but ration in Benton Harbor, Michigan. 116 HARVARD BUSINESS REVIEW Leading a Supply Chain Tux*naround not as important as your ability to get it there when you said you would. Give a date, hit a date is what theyre asking for. This sounded familiar to me, coming from the automotive industry.In my previous position at General Motors, Id been involved in several studies that emphasized the psychology of delivery date commitments. Identifying Trade Partners Priorities. Moving upstream, we needed to understand the desires of our direct customers split. We conducted our own interviews to define requirements by segment. As well as looking at smaller retailers versus larger ones, we focused individually on Sears, Lowes, and Best Buy, our three biggest customers. And within the contract-builder market, we studied many subdivisions, from contract distributors and flatcar developers to ingle-family-home builders. We asked about their overall availability requirements, their preferences in communicating with us, and what they would like to see along the lines of e-business. We asked about inventory management and how they might want Whirlpool to answer in it. In all, we discovered 27 different proportions along which our performance was being judged, each varying in importance according to the customer. Benchmarking the Competition. Naturally, our customers expectations and perceptions were shaped in large part by what others in our industry were doing.So we benchmarked our competitors-primarily GE, which was our biggest rival. We ob tained cross-industry information and competitive intelligence from AMR, Gartner, and Forrester Research to make sure we had a broad and objective sagacity of supply chain capabilities. Then we mapped out what would be considered world-class (versus sufficient or transitional) performance for each of the 27 capabilities and how much it would cost us to delve that top level. It turned out that to prevail on every front would require a nitty-gritty investment of much than $85 million, which we knew wasnt feasible.It was time to get serious about priorities. Now that we had established the cost of world-beating performance, we asked ourselves For each capability, what improvement could we accomplish at a low investOCTOBER 2004 ment level, and at a medium level? We quickly staked out the areas where a relatively small investment would yield supremacy, usually due to an active strength. A few areas we simply decided to cede. Our plan was to meet or beat the competition in most areas , at minimum cost. Building for the Future. Strategy, of course, does not simply address the needs of the moment.It anticipates the challenges of the future. A final component of our supply chain strategy was identifying the probable range of future operating scenarios based on industry, economic, and technological trends. The point was to assure ourselves that our proposal was fat enough to withstand these various scenarios. To date, the planning has worked. Having set a course, weve been able to deal with situations we hadnt conceived of and to continue evolving in the alike(p) basic direction. Selling the Revolution I ts always a difficult decision-when to involve your internal customers in the planning of a major capital investment.Their time is scarce, and they typically 117 HBR T h e Spotlight Chain. dont want to be embroiled in the details of what you, after all, are getting paid to do. You must have your act together and have a solid plan to which they can respond. On the other hand, you cant be so far along in the process that youve become inflexible. You need to nurture a careful balance between seeking their guidance and selling your vision. Paul and 1 liked to think we had that mandate from Jeff Fettig to get the supply chain fixed. But it wasnt the frame of mandate that comes with a blank check.Like most well-managed companies, Whirlpool will not undertake a capital investment without a have business case. As a cost center in the company, we had to justify our project wholly on expense reductions and working capital improvements. Even if we viewd that better product availability would boost sales, we couldnt count those chickens in the business case. We spent an enormous amount of time talking with the brand general managers and others who would be needed. They said they had nothing more to add. But we persisted. I cogitate telling Paul, If they wont let us in the door, well go through the window.And if they lock the window, theres always the air vent. Along the way, wed been particularly concerned about cherry-picking. We knew that, in a company of smart businesspeople, the first reaction to a multimillion-dollar price tag would be, OK, what can I get for 80% of that score? And indeed, from a project management standpoint, we knew it was important to break out each component of the plan into a stand-alone initiative, reassert by its own business case. Yet we knew the whole thing came together as a sort of basket weave, with each part supporting and relying on multiple other parts.What helped here was our competitive analysis, in which we had plotted our capability levels against others. We charted our current position against our number one competitor on each dimension valued by customers, then extrapolated to show how, depending on the level We staked out the areas where a relatively small investment would yield supremacy, usually due to an existing strength. affected by the changes we were proposing. The Japan ese call this kind of consensus-building nemawashi (literally, it means root binding), and it is im thinkable to overstate its importance.Yet it is often neglected in the midst of a complex project. Note that, at the same time we needed to be meeting with key decision makers, we were also in the thick of the analysis and soma of the solution. In those early months, the project needed leadership in two directions the kind of work people typically refer to as needing a Mr. at bottom and Mr. Outside. I made sure we had sufficient consulting resources for the inside work while Paul and I devoted 50% of our time to the out-of-door work interfacing with the trade, outside experts, and internal stakeholders.In our initial meetings with these key people, wed essentially say, Heres what were doing. What do you think? Typically,the executive would half pay attention, half blow us off. But wed get some input. In a second meeting, wed show how our work had evolved to incorporate their ide as and others. Usually, wed see more engagement at this point. By the time we were asking for a three meeting, reactions were mixed. People were more or less on board, but some felt another meeting wasnt 118 of investment, we could overtake that company or allow the hoo-hah to widen.Sure enough, the competitive instincts of our colleagues kicked in. No one wanted to fall behind. Getting Focused O ne of the earliest successes in the retroversion of Whirlpools supply chain was the rollout of a new sales and operations planning (S&OP) process. Our previous planning environment had been inadequate. What passed for planning tools didnt go far beyond Excel spreadsheets. Now, we had the ability to pull together the long-term and short-term perspectives of marketing, sales, finance, and manufacturing and produce forecasts that all the participants could base their game plans on.We soon pushed our forecasting capability further by launching a CPFR pilot. The acronym stands for collaborati ve planning, forecasting, and replenishment, with the coaction happening across different companies within a supply chain. The idea is straightforward. Traditionally, we forecast how many appliances we will sell through a trade partner (Sears, for example) to a given HARVARD BUSINESS REVIEW Leading a Supply Chain TumarouiuL market And at the same time, that trade partner develops its own forecast.Each of us has some information that the other lacks. With CPFR, we use a Web-based tool to share our forecasts (without sharing the sensitive data behind them), and we collaborate on the exceptions. As simple as it sounds, it isnt easy to pull off. But we have, and its been a real home run. Within 30 days of launch, our forecast accuracy error was cut in half. Where we had close to 100% error (which isnt hard, given the small quantities involved in forecasting individual SKUs for specific warehouse locations), today were at about 44% or 45%.To put this in perspective, a one-point improve ment in forecast accuracy across the board reduces our total finished goods position by several million dollars. These were just two of many initiatives we launched in rapid succession after May 2001. A couple things were absolutely critical to keeping them all on track a highly disciplined project management office and stringent performance metrics. The key was to think big but focus relentlessly on near-term deadlines. We organized the change effort into 30-day chunks, with three new capabilities, or business releases, rolling out monthly-some on the supply side, some on the demand side.The job of the project management office was to ensure the completion of projects on time, on budget, and on benefit. Paul oversaw this for me. Also keeping us honest were new metrics and the man 1 brought in to enforce them. My colleague bottom Kerr, now general manager of quality for the North America division, was then in charge of Whirlpools Six Sigma program. Hes a real black belt when it co mes to performance management. It took some persuading, aimed at both John and the North American leadership team, before he was freed up and allowed to dedicate himself to the supply chain turnaround.But we absolutely needed his data-driven perspective. When one of my team would say, We need to take this action tofixthis issue, John would always counter with,Please show me the data that allowed you to draw that conclusion. Were these demands sometimes a source of irritation? Id be lying if 1 said they werent. 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 lot to stabilize product availability and reduce overall supply chain costs.And, after a challenging fourth quarter, we took a huge step forward by implementing a suite of software products from i2, which specializes in supply chain integration tools. That was in January 2002. Six months later. Whirlpool had historic low inventorie s and a bear on high service level. Before the year was out, we were delivering very near our design of 93% availability across ail brands and products. (Momentum has since carried us OCTOBER 2004 well into the mid-nineties. ) We delivered slightly more than promised by reducing finished goods working capital by 10% and improving total cost productivity by 5. 1%.Our customers were voicing their approval. By May 2002, a blind Internet survey given to our trade partners showed us to be most improved,easiest to do business with, and most progressive. I remember that after these results came out, our VP of sales said, Youre good nowbut more important, youre consistently good. It was a turning point in the trades perception of Whirlpool. Engaging Talent I ve touched on the state-of-the-art technologies weve employed in our turnaround-the Web-based collaboration tools, the planning software, i2s rocket-science optimization-but let me correct any impression that this is a tory about te chnology. More than anything. Whirlpools supply chain turnaround is a talent renaissance. Its sometimes hard for us to remember how demoralized this 3,000-person organization had become. In 2000, many people in supply chain roles had been with the company for years and had watched in frustration as competitors outspent and outperformed us. Part of the problem was the massive effort required by the ERP implementation. As an early adopter of enterprise systems in our industry (SAP and other vendors got their start with process-manufacturing concerns like industrial chemicals).Whirlpool had bitten off a lot. With limited attention and resources to spare, it put other projects on hold. We took our eye off the ball in supply chain innovation and fell behind. As a newcomer, I tried to inject some fresh energy into the organization and give people a reason to be confident Paul Dittmann told me this project gave him a second race wind. Hes a brilliant guy, with a PhD in operations researc h and industrial engineering, and suddenly, he had the opportunity to innovate in ways he had only dreamed of in his first 20 years at the company.Other people benefited from changes to how we develop, assess, and reward talent. With help from Michigan State University and the American Production and Inventory Control Society (APICS), we developed a supply chain aptitude model. This is essentially an outline of the skills required in a top-tier organization, the roles in which they should reside, and how they need to be developed over time. And we created a new banding system, which expanded the allowance levels in the organization. Now people can be rewarded for increasing their expertise even if they are not being promoted into supervisory roles. 19 The 21st-century Supply Chain We also put a heavy emphasis on developing peoples project management skills. Here, we relied on a model developed by the intercommunicate Management Institute (PMI), a sort of standard for assessing a nd enhancing an organizations project management capabilities. I wanted as many supply chain professionals as possible to become PMI-certified, and not just because of the glut of projects we were facing at the moment. My view is that project managements disciplined planning and execution is just as vital to on-going operations management.After all, the only real difference between running an operation and running a project is the due date of the deliverable. Over time, my operating staff stopped dismissing project management as a lot of overhead from a former management consultant and car guy. Now theyre the ones insisting on things like project charters and weekly project reviews. Meanwhile, we hired at least(prenominal) 13 new people on the business side and at least as many more on the information systems side, and I made sure that every one of them was top-notch.To fill out our project management ranks, we recruited little people from companies with strong supply chains and from premier operations-oriented MBA programs like Michigan State and the University of Tennessee. Perhaps we were lucky that our talent drive coincided with a downturn in the consulting industry. On the other hand, it might have been the excitement of a turnaround situation that drew the best and brightest to Whirlpool. Finally, I wasnt so arrogant as to believe that my senior team and 1 didnt need development ourselves. We assembled a supply chain advisory board and chartered its members to keep challenging us.The group includes academics forefather Bowersox of Michigan State and Tom Mentzer of the University of Tennessee, and practitioners Ralph Drayer (the Procter & Gamble executive who pioneered Efficient Consumer Response) and Larry Sur (who mastered transportation and warehouse management in a long career at Schneider National and GENCO). Get a group like this together, and you can count on creative sparks flying. These experts keep us on our toes in a way no consulting firm could. Sustaining Momentum refrigerators, washing machines, and other products that appeal to a broad range of consumers.They are the equivalent of a supermarkets milk and nut running out of them has a disproportionately negative impact on customers perceptions. Were now formulating a supply chain strategy that allows us to identify these SKUs across all of our trade partners in all of our channels and to ensure that the replenishment system for our regional warehouses keeps them in stock. That constitutes the plan to sell part of the program. At the same time, for our smallest-volume SKUs, we are taking out all the inventory and operating on a pure pull basis, with a new, more flexible build-toorder process. The inventory avings on the small-volume SKUs helps offset the costs of stocking up on the highvolume SKUs. Were also working on the capability to set service levels by SKU. That is, instead of having one availability target for all our products, we are recognizing that some products are of greater strategic importance than others. Some of them, for instance, are more profitable. Some hold a unique place in our brand strategy. Again, its easy to grasp the value of being able to vary service levels accordingly. But in a sprawling business like ours, shipping thousands of different SKUs daily, its a very difficult thing to accomplish.We continue to develop new Web-based tools. Recently, weve been focused on system-to-system transactions, in which our system talks immediately to a customers system for purposes of transmitting orders, exchanging sales data, and even submitting and paying invoices. Weve rolled out this capability with a number of trade partners over the past i8 months. At the same time, we keep enhancing our Partner Store, which allows customers to check availability and place orders via the Internet. The site allows them to find near equivalents of models, for those times when a SKU is out of stock or retired. They can even find deals on o bsolete inventory.By the time this article appears in print, well also have implemented event-management technology, which will allow us to be more on top of the movement of goods through the supply chain. An event manager provides an alert whenever an action in the process has taken place-for example, when a washer is prankish into a container in Schomdorf, when that container full of washers is loaded onto a ship in Rotterdam, when the ship departs, when the ship arrives, when the container is drop off from the ship in Norfolk, when the container leaves the port via truck, and, finally, when the washer is unloaded at the Findlay, Ohio, warehouse.The result is that peoples attention is directed to what needs to be done. Well also be further along in our application of HARVARD BUSINESS REVIEW T 120 hree years into the project now, we continue to assign ourselves and deliver three new capabilities per month. This doesnt get simpler over time, either. As I write this, for example, w ere focused on something we call Plan to Sell/Build to Order. Here, the notion is that certain high-volume SKUs should never be out of stock. These are the heart-ofthe-line dishwashers. .lading a Supply Chain Turnaround ean techniques (usually associated with manufacturing operations) to our total supply chain. This involves using pull concepts and kanbanlike triggers to speed up processes, reduce inventory, and enhance customer service. On the Hoz4zon W hirlpool has much to show for its supply chain efforts. By the end of 2003, our product availability had reached over 93%, up from 88. 3% in 2001. (Today its more than 95%. ) That allowed us to attain an order fill rate for key trade partners of over 96%. The number of days worth of finished goods we were holding in inventory had dropped from 32. 8 to just 26.We drove freight and storage total cost productivity from 4% to 7. 2%. From 2002 to 2003, we lowered working capital by almost $100 million and supply chain costs by almost $ 20 million. Does all this add up to value in excess of the expense our leadership team approved? Absolutely. In fact, total payback on that original investment occurred within the first two years. Still, our work is far from finished. In October 2001, just months after we kicked off our turnaround, we were fortunate in that the new executive vice president brought in to run Whirlpools North America region had deep supply chain knowledge.Dave Swift, who came to us from Kodak, believes strongly in the strategic importance of the supply chain both for building brands and for creating sustainable competitive advantage. Immediately after joining us, he elevated our sales and operations planning process by personally chairing monthly executive S&OP meetings. These meetings have become the model for the company and the basis for much of our just-started global supply chain efforts. In the future, well face greater demands for end-toend accountability. Were already responsible for the resal e of any returns. Soon well be accountable for the disassembly of products in Europe.Its only a upshot of time before similar laws are enacted in the United States. And well be taking an even closer look at the design of the products themselves. If we can design a productOCTOBER 2004 make it in a smaller plant, make it with smaller parts, ship it in smaller pieces we can dramatically affect supply chain economics. Its great to improve forecasts, optimize transportation, and speed up our processes with existing SKUs. But what if we could push the end stages of production closer to the consumer and get higher leverage from those SKUs? Thats the kind of thing that can change the rules of the game.Its a wonderful thing about our business We have fierce competition all over the world, and on top of that we have very smart trade partners who deal with numerous other suppliers. We may be a white goods, big box supplier, but because our customers also buy electronics and apparel and so o n, were constantly being challenged by the benchmarks of other, more nimble industries. Technologies continue to evolve, channel power continues to shift, and the bar is constantly being raised. But Im confident that the talent in Whirlpools supply chain organization will be equal to it all. Reprint RO4IOG To order, see page 159. 121