How Whirlpool buys steel
Long-term contracts are key since a limited number of producers are capable of supplying appliance-grade steel.
By Tom Stundza -- Purchasing, 8/9/2001 2:00:00 AM
"Steel is a critical commodity" at Whirlpool Corp., says Douglas F. Egerton, the appliance giant's chief metals buyer. "There are many plants putting out large quantities of major appliance units every day, and it all starts with steel." For example, a typical Whirlpool washing machine made for the U.S. market weighs about 165 pounds, about two-thirds of which is steel.
Officially, Egerton is the global director of commodity management for metals, motors and pumps. He oversees the company's biggest buy—more than $550 million annually for some 1.1 million net tons of cold-rolled, galvanized, enameling, prepainted and stainless sheet steels. He also supervises purchasing of the company's second-biggest buy—almost $420 million for the many motors and pumps required to make major appliances work. But it is steel that occupies much of his attention.
"First off, there are a limited number of producers worldwide capable of supplying the appliance-grade steel we need," he says. "And that's because of our very specific requirements on the critical characteristics of gauge, width, surface finish, formability and consistency." Egerton tells PURCHASING in an interview that "appliance-grade steels, like their automotive-grade cousins, need to be 100% usable when they arrive at Whirlpool" so "the only way to manage supply is to limit sourcing to the best producers capable of producing and delivering in an error-free environment.
"A lot of what we buy is driven by the fact that we run our materials through our processing and assembly equipment at high volumes, so the steel has to have consistency, formability and excellent surface finishes," Egerton says. "Therefore, we have to manage our steel supply relationships as efficiently as possible so we can guarantee the key material needed to keep our plants operating at efficient and profitable levels." Another key factor is just-in-time delivery since Whirlpool's far-flung steel-processing and appliance-manufacturing plants operate with virtually no inventory.
That's why the company buys 75-80% of its tonnage from just five domestic and foreign mills under long-term contracts—two American, two European and one South American. There is some limited service center involvement, where the steel mill suppliers job out some processing. The remainder of Whirlpool's steel supply comes from smaller regional mill suppliers in parts of the world, such as Asia, where delivery from the major suppliers isn't practical.
Egerton says the local steel mills must meet the same specifications and delivery requirements as the major suppliers. "They are good mills," he says, "just not as sophisticated and global in scope as the five key suppliers." He notes that "at one time we used almost everybody that could supply steel to us, mills scattered all over and a tremendous number of service centers. We don't anymore because our supply management system now is both cost effective and delivery sensitive," Egerton adds.
"Confederacy of buyers" involved
In effect, steel buying at Whirlpool is "a confederacy of buyers," he says. The purchasing staff in St. Joseph, Mich., has global sourcing responsibility while the supply contracts are implemented regionally in North America, South America, Europe and Asia. "We have to provide a centralized global overview," he says, "but we recognize that regional use of the contracts can be limited by steel company capabilities and local political and economic considerations."
Contracts with steel suppliers vary slightly by region. The basic carbon steel grades are purchased in North America under long-term supply arrangements while some specialty grades are bought under one-year pacts. In Europe, almost all of the steel is bought under one-year contracts "although we are looking to move closer to the North American methodology," Egerton says. The Whirlpool plants elsewhere—Asia and South America—get their steel under six-month to one-year supply arrangements.
"Sometimes we can leverage global buying and sometimes we can't, depending on regional needs and supply base capabilities," he says. "But, whatever we do, we try to develop alliances that are cost-effective for us and profitable for the mills we buy from."
Price hikes are anathema
Still, "there are no quarterly price reopeners in any of the long-term contracts," Egerton says. "Price increases aren't an acceptable part of the Whirlpool vocabulary." He also insists that "relationships with the steel suppliers go way beyond price." He says there are ongoing discussions with suppliers about productivity, quality, continuous improvement, service and technology issues—but not price. "The long-term agreements have purchasing commitments that are reflected in the agreed-upon price," which often is above spot-market averages because of the complexity of the steel grades purchased and Whirlpool's delivery and technical service requirements.
"Part of our steel-buying philosophy is to provide value both to Whirlpool and to its chosen suppliers," he explains.
That's why discussions with the mills often occur less with supply managers and more often with multiprocess improvement and design teams, and center on such steel-supply issues as 100% usability, technical support, quality improvement and cost reduction.
Whirlpool insists on cost-reduction by its steel suppliers, although Egerton declines to specify the corporate percentage goals. "It doesn't matter whether we are asking for 3% or 20% annual reductions," he says. "Given the significance of the steel purchase, it's sufficient to say that they tie in with our corporate annual expenditure reduction goals." However, Egerton does admit that no matter what the cost-reduction goals are, nor how justified they are in today's tough business environment, they are perceived as difficult by the company's steel mill suppliers.
Whirlpool's steel-buying managers tend to meet with key suppliers every two to six months to discuss what's happening in the appliance marketplace, what's happening with Whirlpool, and what the firm needs from its suppliers to support the business, he says. Whirlpool's purchasing management "expects suppliers to help keep the company competitive in a tough global marketplace." He points out that development of new thin sheet steels—to .019-in thickness and below—came about "through engineering, purchasing and supplier efforts to develop highly formable reduced-gauge sheet that would optimize our automated factory systems without sacrificing quality." In other words, the steel could be stamped and roll-formed into shape with no cracks or other imperfections on the surface.
Egerton held management positions in production control, material and purchasing in the mining equipment industry before he joined Whirlpool in 1984. For fourteen years, he has held plant material control and purchasing posts in the U.S., Italy and Germany, and corporate global purchasing positions in various manufacturing groups (refrigeration, laundry products and cooking products). Egerton became global commodity director of metals and motors in 1999.
Exploring the future
Lately, he's been spending time with suppliers to determine future steel supply for expected changing needs. "As the product development organization designs innovative appliances, it's hard to predict what customers will want," he says, "but some trends are already emerging." Stainless and prepainted, for example, are expected to grow from 20-25% of the supply mix in the near future.
"Stainless is being driven by customers who want more appliances made from this long-lasting and easy-maintenance material," he says. "Prepaint is being driven by the need for manufacturing flexibility and environmental concerns." Sheet coils already painted by the mills eliminate the need for costly and potentially troublesome in-house paint lines.
In another supplier relations area, Egerton's team is working on a pilot program for what he calls "e-enabled transactions," which go through a proprietary Whirlpool electronic purchasing and payment system based on its existing advanced electronic data interchange (EDI) system.
"When you're talking about any kind of e-procurement system, you have to be careful not to limit yourself to the use of auction sites, which we have not found to be effective in an environment of long-term supply contracts with a limited number of suppliers," he says. "We continute to monitor what's happening with e-procurement for other commodities to determine if it can provide greater leverage than we already have."
Whirlpool's biggest buy is steel
(top annual purchases, $ millions)
| 1 | Sheet steel | $563-$576 |
| 2 | Plastic resins and parts | $475-$495 |
| 3 | Motors and pumps | $415-$422 |
| 4 | Steel components | $280-$290 |
| 5 | Electrical components | $175-$185 |
Whirlpool aims to cut costs 5% annually
08/08/2001
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