Case Study:

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? 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 objectiveschange 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. 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--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. 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."

QUESTION 2 (20 Marks)

In the context of the above case study and with reference to relevant literature, critically examine the most important requirement for an effective retailer-supplier partnership.