UVA-OM-1071

WHIRLPOOL CORPORATION GLOBAL PROCUREMENT

Martha Jones and Scott Trebeck, Booz Allen summer interns from the Darden Graduate
School, were comparing notes in the conference room of the Whirlpool Corporation’s St. Joe
Technical Center. As part of a consulting team conducting a six-week capability assessment of
Whirlpool Corporation’s Global Procurement Organization, they were approaching the crunch
time when data needed to be converted to findings that would support actionable
recommendations.

“Did you get all of the commodity data you needed during your trip to Milan?” Trebeck
asked. “I heard that the head of Purchasing for Europe can be rather intimidating.”

“She’s pretty intense and wicked smart,” Jones replied, “but, she was a very cordial host.
She’s quite supportive of the study and provided all the information we requested. How did it go
for you in Brazil?”

“The South American Procurement group seemed quite laid back and anxious to learn
best practices from anyone,” Trebeck answered. “I got the sense that the region overall operates
more independently from headquarters than the European region. Although their systems are
less developed than North America and Europe, I got all the information we requested as well.
The issue now is what to do with it all!”

“My thoughts exactly,” Jones exclaimed. “I’ve got cost details on four different
injection-molded parts produced by four different suppliers in four different countries—but I’m
not sure what it tells me.”

“Only four part numbers?” Trebeck retorted. “I’ve got data on 45 different compressors
from North America, Europe, and Latin America, but everyone tells me that I can’t compare
them across regions because the designs aren’t the same. Hopefully, we can get some guidance
from Carlos over dinner tonight now that he’s back from India.”

This case was prepared by Assistant Professor Timothy M. Laseter. It was written as a basis for class discussion
rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2003 by the
University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send
an e-mail to sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval
system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,
recording, or otherwise—without the permission of the Darden School Foundation.
 -2- UVA-OM-1071

Whirlpool Corporation: The Global Appliance Leader

As the world’s leading producer and marketer of major home appliances, Whirlpool
Corporation manufactures in 13 countries and markets products in over 170 more. In addition to
its own major brands such as Whirlpool, KitchenAid, Roper, Estate, Bauknecht, Ignis, Laden,
Inglis, Brastemp, and Consul, the company supplies many of the appliances marketed by Sears,
Roebuck and Co. under the Kenmore brand name.

Whirlpool Corporation can trace its roots back to the Upton Motor Machine Company, a
manufacturer of electric motor-driven washing machines, founded in 1911 in St. Joseph,
Michigan. The corporation’s relationship with Sears also goes back, to the years 1916, when
Upton began producing appliances for Sears, and 1925, when it became the sole supplier of
Sears washing machines. After combining with the Nineteen Hundred Washer Company in
1929, the predecessor to the Whirlpool Corporation of today became the world’s largest washing
machine company.

After successfully introducing its first automatic washing machine under the Whirlpool
brand name, the company changed its name to match the brand in 1950. Whirlpool Corporation
expanded to into a full line of major appliances during the 1950s and 1960s—including forays
into central heating and even television. Today, the manufacture of its original laundry products
continues to be its largest area of production, but this is closely followed by refrigerators and
freezers plus a significant level of sales of cooking and other appliances. (See Exhibit 1.)

Whirlpool Corporation began its international expansion with an investment in Multibras

Eletrodomésticos in 1958, but most of its international growth came through joint ventures and
acquisitions in the 1980s and early 1990s. Today North America—including a major presence in
Mexico—accounts for about two-thirds of Whirlpool Corporation’s $11 billion in revenues.

Although today Whirlpool Corporation operates with an executive team accountable for
regional profit and loss, it formed a global Product Development and Procurement Organization
in the mid-1990s to drive efficiency in product design and sourcing across the regions. The
senior management team includes the chairman, president, and five executive vice presidents.
Three of the executive vice presidents cover the three major regions of North America, Europe,
and Latin America. The chief financial officer and the chief technology officer—responsible for
product development and procurement—complete the set of executive vice presidents.

Although the Global Procurement Organization (GPO) reports to the chief technology
officer, it must manage a tension between functional and regional priorities. Certain critical
commodities are managed across regions on a global basis while simultaneously regional
Procurement vice presidents have dotted-line relationships into the management structures
supporting the regional executive vice presidents. A global strategy and process group works to
ensure collaboration and consistent “best practices” across the globe. The Booz Allen study was
commissioned in support of this objective.
 -3- UVA-OM-1071

Dinner Discussion

As the team settled around the table on the veranda at Schu’s, a restaurant overlooking
Lake Michigan, Carlos Martinez didn’t bother opening his menu. It was a standing joke among
the consulting team that he always ordered a bacon cheeseburger, fries, and a beer if given a
chance. After a long week in India, he was in desperate need of his staple.

Not wasting any time, as usual, Martinez looked at Scott Trebeck and Martha Jones. “So,
how’s the cost/price analysis going? Got it all figured out?”

Trebeck and Jones looked at one another, both hoping the other would take the lead.
Trebeck managed to drop his fork on the ground and bent down to pick it up forcing Jones to
break the silence. “We’ve collected all the data you suggested, but we were hoping to get your
thoughts on how best to proceed with the analysis,” she explained.

“No problem,” Martinez replied as he reached into his brief case and pulled out a sheet of
paper. “Here’s the way I’ve started to think about cost modeling over the past few weeks.”
Placing a tabular chart (reproduced as Exhibit 2) on the table in front of Jones and Trebeck, he
continued, “In the past, when I talked about cost modeling, I thought about bottoms-up models
for a supplier facility and/or an individual part number. But, I now realize that those models
only work with certain types of products. As you can see from the chart, I refer to Metal
Stampings, Injection Molding, and Packaging as ‘Simple Transformation Processes’ where the
bottoms-up approach works well.”

Martinez pointed to the top row of the chart and continued, “But, for raw materials—true
commodities like steel, resin and foam—macro-economic/trend analysis seems more
appropriate. For example, consider memory chips—we can build a bottoms-up cost model, but
Intel and the other chip makers are going to price according to supply and demand and other
industry factors and not simply the current cost.”

“Engineered subsystems, like compressors, motors, and wiring harnesses also need to be
treated differently,” explained Martinez. “Usually, it’s just not practical to build a detailed cost
model for a highly complex product like a motor. But, with an approach like multivariate
regression analysis, it’s possible to quantify the key drivers of cost. With that knowledge, we
can negotiate better prices from suppliers and also convince engineering to specify designs with
the best cost/value tradeoff.”

“That makes sense,” responded Trebeck. “I should use regression analysis on the
compressors to conduct a ‘Parametric Comparison’ across the regions. I’ve got the data,”
Trebeck continued as he pulled out a spreadsheet (reproduced as Exhibit 3), “but what should I
be looking for? My QA professor warned us against simply running the data through the
regression tools without any understanding of the relationships between the variables. I’m not
sure I know enough about compressors to make a judgment.”
 -4- UVA-OM-1071

“I’m not an expert on compressors either, but I think we can hypothesize the key
relationships,” said Martinez. “What’s the main parameter they use to describe a compressor?”

“That’s easy,” Trebeck replied. “They describe the various designs according to the
cooling capacity as measured in BTUs per hour.”

“Can we hypothesize that larger compressors generate more BTUs per hour, and larger
ones cost more to make, because they require bigger, heavier parts?” Martinez asked. “And
even if they don’t require bigger, heavier parts, I would guess they are priced higher because
they are worth more to the consumer.”

“That makes sense to me,” Trebeck replied. “And I think I see where you’re going.
Energy Efficiency should be another important parameter. I’m not sure how it affects cost, but it
certainly makes the compressor more valuable because it requires less energy to operate. They
also track other parameters like weight and RPM, but those are probably correlated with some of
the more important parameters we already discussed.”

“What about annual purchases?” asked Jones.

Trebeck looked perplexed. “What do you mean? I’ve got that information, but the
number of units purchased isn’t a product characteristic.”

“But, higher unit volumes tend to produce lower costs per unit due to economies of
scale,” explained Jones.

“I’m not sure economy of scale is the best way to describe it, but I agree with you that
higher volume products should cost less per unit. Generally, that’s true because you can
amortize one-time costs like product design and batch costs like machine setups over more
units,” explained Martinez. “Economy of scale is related to facility capacity rather than volume
at an individual SKU level.”

“That’s one of the issues I’m struggling with in comparing prices of injection-molded
parts between Europe and North America,” said Jones. Turning to Trebeck, she quickly added,
“Sorry Scott, your turn is over; it’s time to talk about my product category, injection-molded
parts.”

“No problem. The appetizers are here now, and I would rather eat than talk!” retorted
Trebeck.

Turning back to Martinez, Jones discovered him sheepishly cramming a potato skin in his
mouth. “Like I was saying,” she continued, “I’ve got lots of detailed supplier data comparing the
costs for producing six identical parts in Europe and in North America, but I’m not sure how to
analyze it.”
 -5- UVA-OM-1071

Martinez quickly swallowed the potato skin and wiped his mouth before answering. “As
you know, when building cost models, we’re trying to identify and highlight the key drivers of
cost. Drawing from the methods employed in competitive cost modeling, I’ve found it useful to
organize the drivers into four categories: Design, Facility, Geography, and Operations. Design
recognizes that two products may provide the same functionality but employ different design
concepts—for example, reciprocating versus scroll compressors.” He turned to Trebeck, who
was peering out over the lake. “By the way, Scott, this framework obviously applies to your
analysis of compressors as well.”

“I see that,” said Trebeck “but, it also reminds me of a concern raised during my data
gathering efforts. The compressor buyer explained that the regions employed different designs so
the products are not really comparable.”

“That’s an important point,” replied Martinez. “I’m not sure that I agree that different
designs make the task impossible…but his comment reinforces an important principle about
regression analysis. The regression approach only shows whether there is a relationship between
two things: it does not prove cause and effect. For example, if you find lower pricing in Europe,
the cause could be better buying by the European region…but it could also be that the designs
are inherently different. We will use the parametric analysis tool to find if a difference exists. We
will need to investigate the cause by forming hypotheses and talking to the experts.”

“Design won’t be an issue for plastic parts, because the comparisons are between
identical SKUs made to the exact same specifications in both regions,” explained Jones.
“Interestingly, they have compared prices in the past, but each region has its own supplier for
each part.”

“Even without design differences, you can examine the other three categories,” explained
Martinez. “You should isolate the cost drivers like wage rates that relate to the regions in the
Geography category. If material prices for the raw plastic compound are driven by regional
pricing, you would also include them as well. Of course, it might be that material prices are
related to purchasing scale because larger companies can buy in greater volume at lower prices.
You should also consider differences in molding equipment or tooling in the Facility category.
Ultimately, Operations is supposed to capture anything that doesn’t fit in the other three.”

“Since, conceptually at least, the approach adjusts for differences in the design and the
plant and the region, what’s left?” asked Jones.

“The most common issue in the Operations category is a difference in utilization levels,
but it might also include some productivity differences. Imagine that two suppliers are making
identical parts with identical equipment, but one plant is running only one shift, and the other
plant runs two shifts. The costs would be different. And sometimes you simply find that one
supplier can run the machine faster or produce less scrap,” explained Martinez, as he pulled
another bit of paper from his briefcase (reproduced as Exhibit 4). “I think this chart offers a
good summary and guide.”
 -6- UVA-OM-1071

Jones perused the tabular chart as Martinez grabbed another potato skin. “This helps a
lot,” she said, barely glancing up and nodding her head at the sheet of paper. “I think I can start
making some sense out of the data that I have.” (See Exhibits 5, 6 and 7.)

“Great,” replied Martinez. “Remember, we have several objectives in conducting the

analysis. First, we want to demonstrate the power of cost modeling as a tool. We also want to
show that different techniques can apply depending on the product category. Finally, we’re
looking for any evidence that one region does a better job than another, or at least some evidence
that they should be sharing insights and learning from one another.”

“Wait a minute,” implored Trebeck. “I’ve been focused on simply doing the analysis and
trying to compare across regions. I haven’t really stepped back to think how Whirlpool
Corporation can apply the cost models going forward.”

“First, remember that a cost model is simply a tool…but it can be a powerful one,”
explained Martinez. “A cost model can drive a sourcing strategy. For example, the geographic
cost drivers may demonstrate that cost savings of sourcing from a low-factor cost country are
more than offset by the high transportation cost.”

“Can you also use them in negotiations?” asked Jones.

“It’s a good place to start,” answered Martinez. “But, simply knowing the cost doesn’t
guarantee results. Issues like industry structure and competitive tension will also influence the
negotiation. Tomorrow we can all meet after lunch, and you can each show me your progress in
analyzing the compressor data and the injection-molded parts data. At that time we can also talk
further about how to apply the model results.”

Trebeck looked at his watch and replied, “No problem. Lunch tomorrow is nearly 16
hours from now. We’ve got plenty of time.”

“Speak for yourself,” Jones countered as she glared at him.

“We’ll let Scott meet with me first to give you more time. Besides, Martha’s analysis of
the injected molded parts will probably take more creativity and time than the regression of the
compressor data,” added Martinez to break the tension. “But for now, let’s enjoy our meal and
the sunset over Lake Michigan because here comes my bacon cheeseburger!”
 -7- UVA-OM-1071

Exhibit 1

WHIRLPOOL CORPORATION GLOBAL PROCUREMENT

2002 Sales

Product Mix $millions % of total

Home refrigerators & freezers 3,272 30
Home laundry appliances 3,381 31
Home cooking appliances 1,672 15
Other 2,691 24

Total 11,016 100

Regional Mix $millions % of total

North America 7,306 66
Europe 2,199 20
Latin America 1,266 11
Asia 391 4
Other/adjustments (146) (1)

Total 11,016 100

Source: Hoover’s Online

 -8- UVA-OM-1071

Exhibit 2

WHIRLPOOL CORPORATION GLOBAL PROCUREMENT

Cost/Price Modeling Approaches

APPLICABLE MODELING
GROUP PRODUCTS EXAMPLE DRIVERS LEVERS APPROACH
Steel • Supply and Demand • Standardization
Raw Macro-Economic/
Resin • Currency Rates • Delivery Mode Trend Analysis
Materials
Foam • Product Mix • Source
Metal Stamping • Regional Wage Rates • Supplier Productivity
Simple Bottoms-Up
Injection Molding • Process Technology • Supplier Margin Part Number
Transformation
Processes/ Packaging • Lean Manufacturing • Capacity Utilization Cost Model
Components
Compressors • Functionality • Design Spec
Engineered
Motors • Volume • Modularity Parametric
Subsystems
Wiring Harnesses • Quality • Scale Comparison

Source: Whirlpool Corporation, Booz Allen Hamilton Capability Assessment Report

 -9- UVA-OM-1071

Exhibit 3
WHIRLPOOL CORPORATION GLOBAL PROCUREMENT
Compressor Data
Part Price/ Capacity Weight Unit
Number Unit Type Region BTU/Hr in lbs. EER* Volume
110-1574 $ 34.49 Reciprocating North America 510 5.68 3.26 81,000
111-0810 $ 39.48 Scroll Europe 920 10.51 4.90 137,000
116-7080 $ 32.08 Reciprocating North America 720 8.16 4.28 47,000
116-7532 $ 29.47 Reciprocating Europe 285 3.31 5.03 82,000
122-7151 $ 26.56 Reciprocating Europe 260 2.97 4.16 66,000
126-1065 $ 37.71 Scroll Europe 780 8.72 4.64 39,000
128-9814 $ 31.22 Reciprocating Europe 420 4.97 3.83 77,000
131-4060 $ 31.81 Reciprocating North America 430 4.74 4.30 350,000
135-5677 $ 41.31 Reciprocating Latin America 240 2.66 5.01 87,000
139-2202 $ 31.97 Reciprocating North America 630 6.93 4.39 41,000
142-4903 $ 37.83 Reciprocating Latin America 345 4.01 5.33 165,000
143-1644 $ 34.41 Reciprocating Europe 600 6.74 4.22 34,000
147-4990 $ 28.23 Scroll North America 825 9.61 3.09 750,000
156-7534 $ 33.45 Reciprocating North America 290 3.44 3.73 55,000
157-4140 $ 33.88 Reciprocating Latin America 350 3.85 4.49 23,000
162-5296 $ 29.30 Reciprocating Europe 435 4.76 4.37 293,000
165-4522 $ 36.77 Reciprocating Latin America 440 4.87 5.26 47,000
173-9008 $ 37.07 Reciprocating Latin America 580 6.49 5.17 117,000
182-7808 $ 39.33 Reciprocating Latin America 625 6.84 4.34 31,000
184-5143 $ 30.01 Reciprocating Europe 230 2.54 5.03 52,000
186-4136 $ 39.15 Scroll North America 895 10.58 3.30 44,000
192-1143 $ 40.73 Reciprocating Latin America 725 8.30 5.29 26,000
201-9244 $ 43.78 Reciprocating Latin America 785 9.03 5.10 98,000
209-4727 $ 26.68 Reciprocating Europe 120 1.36 4.37 71,000
223-0730 $ 38.44 Reciprocating Latin America 330 3.90 4.93 42,000
234-4640 $ 37.92 Reciprocating Latin America 405 4.80 4.49 34,000
235-5951 $ 30.56 Reciprocating North America 1030 11.96 3.45 220,000
237-8072 $ 37.07 Reciprocating Europe 870 9.56 5.02 46,000
258-4726 $ 30.85 Reciprocating North America 275 2.98 3.91 450,000
269-9744 $ 32.95 Reciprocating Europe 700 8.30 4.04 358,000
297-7521 $ 32.46 Scroll North America 1090 12.77 3.80 65,000
306-4927 $ 33.34 Reciprocating Europe 550 5.96 4.49 52,000
347-9507 $ 34.39 Reciprocating Europe 385 4.44 4.47 47,000
376-3080 $ 32.71 Reciprocating North America 280 3.18 4.40 49,000
395-0165 $ 28.14 Reciprocating Europe 245 2.91 4.68 230,000
448-4487 $ 33.46 Reciprocating Europe 230 2.65 4.66 39,000
475-5893 $ 32.33 Reciprocating North America 355 3.91 4.06 55,000
509-1084 $ 39.89 Scroll North America 930 10.48 3.02 47,000
577-9733 $ 36.44 Scroll North America 850 9.73 3.70 69,000
601-0639 $ 33.02 Reciprocating North America 405 4.42 3.86 45,000
656-1533 $ 31.98 Scroll North America 770 8.35 3.19 72,000
744-9083 $ 31.66 Reciprocating North America 725 8.17 4.40 41,000
759-6425 $ 35.36 Reciprocating North America 465 5.02 4.14 75,000
845-6688 $ 30.72 Reciprocating North America 650 7.46 3.67 125,000
960-0588 $ 32.98 Reciprocating North America 560 6.13 3.18 62,000
* Energy Efficiency Rating
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Exhibit 4

WHIRLPOOL CORPORATION GLOBAL PROCUREMENT

Cost Driver Framework

CATEGORY DESCRIPTION EXAMPLES

Design Costs attributable to product • Material specifications

design tradeoffs
Facility Costs related to the size of the
facility, equipment, and process
technology employed
Geography Costs associated with the location
of the facility relative to the
customer
Operations Costs that differentiate a well-run
facility from a poorly run facility
• Product line complexity
• Facility scale
• Degree of vertical integration
• Use of automation
• Location-related wage rate difference
• Transportation cost to customer
• Duties and import/export taxes
• Labor productivity
• Facility utilization
• Rejection rates

Source: Balanced Sourcing: Cooperation and Competition in Supplier Relationships

 -11- UVA-OM-1071

Exhibit 5

WHIRLPOOL CORPORATION GLOBAL PROCUREMENT

Plastic Injection Molding Supplier Data

Albertos Burgendorf Christiansen Del Rio

(Italy) (Germany) (USA) (Mexico)
Size Metrics
Annual Sales (millions) $ 12.5 $ 137.4 $ 72.3 $ 14.2
Hourly Employment 56 313 221 117
Salaried Employees 9 47 29 33
Total Employment 65 360 250 150
Shifts 2 3 3 2

Cost Drivers
Average Hourly Wage Rate $ 10.36 $ 15.23 $ 14.65 $ 2.65
Resin Cost/Pound $ 0.351 $ 0.332 $ 0.343 $ 0.362
Indirect to Direct Labor Ratio 1.2 1.6 1.3 2.0

Cost Center Rates*

200 Ton Press $ 28.66 N/A N/A $ 23.00
300 Ton Press $ 30.21 N/A $ 31.50 $ 25.00
400 Ton Press $ 33.54 $ 36.28 $ 35.00 $ 27.00
500 Ton Press $ 40.16 $ 42.87 $ 41.50 $ 29.00
600 Ton Press N/A N/A $ 48.50 $ 33.00
750 Ton Press $ 48.37 $ 52.65 N/A N/A

* Includes Profit Margin for Supplier

 -12- UVA-OM-1071

Exhibit 6

WHIRLPOOL CORPORATION GLOBAL PROCUREMENT

Plastic Injection Molding Part Data for Price Quotes

Part Number 783-9488 823-6516 925-1677 346-0217

Part Description Plinth Snack Pan Knob Bottle Holder

North American Requirements 250,000 150,000 1,100,000 100,000

European Requirements 150,000 100,000 700,000 200,000
Annual Global Requirements 400,000 250,000 1,800,000 300,000

Part Weight (ounces) 12 56 4 9.5

Plastic Resin PPE PPE PPE PPE
Production Batch Size 5,000 4,000 15,000 5,000

European Supplier Alberto’s Alberto’s Alberto’s Alberto’s

European Price $ .471 $2.51 $ .192 $ .638

North American Supplier Christiansen Christiansen Christiansen Christiansen

North American Price $ .468 $2.51 $ .192 $ .882
 -13- UVA-OM-1071

Exhibit 7
WHIRLPOOL CORPORATION GLOBAL PROCUREMENT
Plastic Injection Molding Part Data Price Quotes for Global Volumes

783-9488 Albertos Burgendorf Christiansen Del Rio

Material Cost/Unit $ 0.303 $ 0.269 $ 0.283 $ 0.326
Labor Cost/Unit $ 0.056 $ 0.041 $ 0.045 $ 0.022
Production Cost/Unit $ 0.075 $ 0.041 $ 0.045 $ 0.064
Total Cost/Unit $ 0.434 $ 0.351 $ 0.373 $ 0.411

Press Size (tonnage) 200 400 300 200

Tooling Cost $ 13,500 $ 33,900 $ 25,500 $ 14,250
Parts Per Mold 4 8 6 4

823-6516 Albertos Burgendorf Christiansen Del Rio

Material Cost/Unit $ 1.376 $ 1.278 $ 1.369 $ 1.482
Labor Cost/Unit $ 0.303 $ 0.537 $ 0.432 $ 0.128
Production Cost/Unit $ 0.706 $ 0.752 $ 0.643 $ 0.547
Total Cost/Unit $ 2.384 $ 2.567 $ 2.443 $ 2.158

Press Size (tonnage) 750 750 600 600

Tooling Cost $ 28,000 $ 37,450 $ 34,500 $ 31,540
Parts Per Mold 1 1 1 1

925-1677 Albertos Burgendorf Christiansen Del Rio

Material Cost/Unit $ 0.095 $ 0.088 $ 0.092 $ 0.103
Labor Cost/Unit $ 0.032 $ 0.049 $ 0.030 $ 0.024
Production Cost/Unit $ 0.054 $ 0.050 $ 0.047 $ 0.079
Total Cost/Unit $ 0.181 $ 0.187 $ 0.168 $ 0.206

Press Size (tonnage) 400 400 600 300

Tooling Cost $ 27,500 $ 31,450 $ 43,500 $ 30,100
Parts Per Mold 8 8 12 4

346-0217 Albertos Burgendorf Christiansen Del Rio

Material Cost/Unit $ 0.229 $ 0.213 $ 0.212 $ 0.241
Labor Cost/Unit $ 0.127 $ 0.234 $ 0.276 $ 0.091
Production Cost/Unit $ 0.251 $ 0.231 $ 0.293 $ 0.307
Total Cost/Unit $ 0.608 $ 0.678 $ 0.781 $ 0.638

Press Size (tonnage) 500 400 300 300

Tooling Cost $ 19,500 $ 21,450 $ 17,500 $ 16,000
Parts Per Mold 2 2 1 1
Note: Labor Cost/Unit includes both Direct and Indirect Labor