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September 1, 2008

Whirlpool's delicate cycle

After the company announced plans to buy Maytag, Whirlpool's supply chain team faced the daunting challenge of combining the supply chains of two of the world's largest appliance makers while conducting business as usual.

By David Maloney

When Rich Gorbett first learned of his company's plans to buy Maytag, he felt a rush of mixed emotions. Gorbett, the senior manager of supply chain operations at Whirlpool Corp., recalls being both excited and a bit intimidated by the magnitude of the challenges ahead. "I knew it was a once-in-a-career type of event—integrating the supply chains of two of the world's largest appliance manufacturers," he says.

In some ways, Gorbett was understating the challenges that he and his team faced. At the time that Whirlpool announced its intent to purchase Maytag in July 2005, the two companies had a combined total of 18 factories, 16 regional distribution centers, and 155 local distribution points. Each had to be evaluated to see how it would fit into a merged operation. At the same time, it had to be business as usual while all of the work was being completed.

"We had to make sure appliances were delivered each day and take on the major challenges of the merger as a second job," Gorbett recalls.

He and his planning team were not the only ones with concerns about how the merger would play out. Everyone involved in the supply chain, from trading partners and suppliers down to workers in the factories and DCs, wondered how the combination of the two behemoths would affect them. Would duplicate functions cause elimination of some jobs? Exactly how would a combined company function?

Among the first things Whirlpool did once the deal became public was to send its executives out into the field to calm fears and promote confidence among employees and suppliers. They shared their vision of how the newly combined company would operate and described the efficiencies and cost reductions that would result. To keep communications open throughout the acquisition process,Whirlpool also made updated information about the merger available through a special Web site.

From a supply chain perspective, Whirlpool's managers saw the merger as an opportunity to re-think their operations. It was as if they had been given a clean sheet of paper and had the support of management to redefine how an optimal appliance supply chain should look. "Anytime you undertake anything this large, you have the opportunity to evaluate how you do business," says Gorbett.

Jump start
From the outset, the supply chain planning team knew it had to be ready to spring into action as soon as the deal closed.

"We had the period between the announcement and the close of the deal where our network engineering began planning how we would consolidate," recalls Dan Iddings, Whirlpool's senior manager, supply chain program management.

This gave the transition and planning team about an eight-month window for strategic planning. All together, the team's approximately 200 members worked on 128 separate initiatives and identified 4,477 individual milestones to attain, 1,400 of which had a financial impact.

One of the first steps was to determine what inventory was on hand in both operations so that Whirlpool could determine what to do with it. The company acquired ILOG's LogicNet Plus suite of network design and planning software so it would have a tool in place that could import and crunch data once the deal was finalized (regulations did not permit the managers to have access to Maytag-specific data until the acquisition closed).

"When the deal was completed on March 31, 2006, we were in the starting blocks ready to go. We had our tools in place and people in place, and we had our own data. We were then prepared to bring in the Maytag data," says Iddings.

Another early initiative was to provide the real estate department with information about the location and size of each existing facility. This was completed by the end of April and allowed for modeling of an optimized distribution network. The real estate department then began the work of disposing of facilities that were slated to close and acquiring new facilities in areas where it fit the network model. "Their job was to find the most efficient facility that would get us as close as possible to our network optimization," says Iddings.

Big-time savings
The overall goal for any acquisition is to gain competitive advantage. Whirlpool's acquisition of Maytag was no exception. Management's main objective was to create a stronger, leaner company from the two units. There was obvious duplication in nearly every area of the two companies. Not only did they have similar product lines, but they also had the same basic distribution configuration—each had manufacturing operations that shipped from factory distribution centers to regional DCs, then on to local DCs. Streamlining these operations and eliminating redundancy could offer the kind of savings that made the merger very attractive.

Senior management had committed to the investment community the huge goal of $400 million in savings over the first three years, 2006 to 2008.

"That would be achieved from savings in procurement, manufacturing, and logistics," says Gorbett. "We targeted $40 million of savings in freight and warehousing costs alone for each of those years. That aggressive target galvanized everyone into action, as we organized and immediately began to identify where we could achieve those savings."

A huge chunk of the savings would come from shuttering duplicate facilities. At the time of the merger, there were 18 distribution centers connected to manufacturing operations. The plan, which is two-thirds of the way through implementation, calls for this to be reduced to 15 factory DCs. Sixteen regional DCs are also in the process of being consolidated into 10 larger, more efficient buildings. And 155 local DCs, primarily cross-docking facilities serving cities and towns, have been reduced to 106 buildings. Overall, nearly a third of the pre-merger buildings are either being closed or relocated.

In addition to the facility closings, some changes had to be made to equipment operating within each of these buildings. For example, Whirlpool's lift trucks were equipped with appliance clamps, but Maytag did not use clamps. There was also a difference in the way products were "cartoned," so there has been a move to common packaging for both brands.

But the most significant changes went well beyond equipment: Operations at the distribution centers themselves are being radically changed. Nowhere is this more obvious than at the 10 facilities that will serve as regional distribution centers. These will be significantly bigger than their predecessors and feature advanced concepts to optimize distribution.

Half of these regional DCs are newly constructed and represent a total of 10.23 million square feet of new distribution space. Five are designated as "full mix" DCs that will handle the company's full product line. The first of these, a facility in Perris, Calif., is now open. The others, targeted to come online late this year and next year, are located in Atlanta; Fort Worth, Texas; Columbus, Ohio; and Seattle.

We'll always have Perris
The Perris facility is a good example of how things have changed at Whirlpool. For one thing, the building measures a whopping 1.8 million square feet. Whirlpool's largest DC prior to the merger was less than half that size. Most products are floor stacked in bulk areas, which provides flexibility in handling a range of product lines and sizes.

Perris is also what the company calls a "Hi-Lo" stocking facility—one that handles both high- and low-velocity products. Eventually, each of the fullmix DCs will handle both fast- and slow-movers, while the remaining five DCs will stock only fast-moving stock-keeping units (SKUs). Though it might strike some as unusual, that stocking strategy makes sense for Whirlpool, which experiences high demand for a fraction of its products: A mere 2 percent of its SKUs account for 40 percent of its overall shipments, and just 11 percent of its total SKUs account for 80 percent of its shipments. Orders for highvelocity items can be turned within 24 hours. Slower movers must be transferred from a Hi-Lo facility to the nearest regional DC before shipment. These orders can be turned within 48 hours.

The Perris DC is designed so that fastermoving appliances are placed close to the docks. Many of these SKUs are designated for picking in "full clamp quantities," which means that a lift truck equipped with a large clamp can pick up several of them at a time. Less-than-full-clamp SKUs go to an active zone, where they are picked individually. The design cuts down on travel and allows the fast movers to get out the door quickly.

In addition, the Perris facility uses the "task interleaving" approach to work assignments— a technique that will be adopted in the other new buildings as they come online. In the old facilities, a lift-truck operator would be assigned the task of unloading a trailer. He would work on that one assignment until finished, but that meant that on return trips to the trailer, his fork would be empty, wasting time and effort. Now with interleaving, the driver is dynamically assigned to the highest-priority task, such as performing a pick close to where he made his last putaway. After completing the pick, he may be directed to return to unloading duties, but not necessarily at the same trailer where he started out. Interleaving keeps drivers busy at all times and eliminates travel with empty loads.

All of these new initiatives have been made possible by the installation of new warehouse management systems from Manhattan Associates. The new systems were required to handle the volumes and complexities of the bigger DCs, and have resulted in significant cost savings and productivity gains. The software directs workers in making fewer touches and taking more efficient routes. It is being phased in system-wide to the other regional DCs and the factory DCs so that there will be one process across the entire distribution network. The same team that has managed the merging of the supply chains is also handling the multi-year WMS implementation.

In addition, the company is taking a "green" approach where it can. Over 700 existing propane lift trucks are being replaced with electric vehicles. Energy-efficient lighting systems with sensors to turn them on and off are being installed to save up to 50 percent on energy usage. Skylights in the new buildings also reduce the need for electrical lighting.

On track
The new facilities, software, and process designs have already allowed Whirlpool to achieve a 15- to 20-percent improvement in labor productivity. And because the company is only two-thirds of the way through the implementation process, managers expect to see further productivity gains. "The savings are tracking quite nicely against our estimates, which bodes well for the future," says Gorbett.

The company has also seen improvements in transportation efficiency. The higher volumes have enabled the company to move more of its products in full truckloads. This allows better utilization of its local distribution facilities, which function primarily as cross-docking operations. The greater volumes have also given Whirlpool more leverage in negotiating transportation rates.

"Our buying power has been enhanced with our transportation providers," notes Iddings. "We are now a major player with the volume bringing economy of scale in moving products from one geography to another."

Those gains, along with greater efficiencies in the warehouse operations, have added up quickly. While Whirlpool had targeted $40 million of savings in freight and warehousing costs annually, the team has actually achieved savings of $66 million this year.

It has been an interesting two years at Whirlpool, to say the least. "Just the sheer magnitude of it has been a challenge— going into 1.5 million-square-foot buildings, the change management involved, the need to communicate with our trading partners, and the integration of a new warehouse management system," says Iddings.

"Each of those things alone could be a major initiative," Gorbett adds, "but we have done it all at once. That required our team to work in concert."

In working through a project of this scale, the team has gained valuable experience in understanding exactly what takes place in each building and how to make incremental improvements that can have lasting effects.

"There are process areas we would never have cracked before had it not been for evaluating everything we do. We are more confident in our ability to handle change than we were a couple of years ago," Gorbett concludes. "After we've come through this success, we can handle anything now."

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