Home
Global Supplier Directory
APPLIANCE Engineer
Supplier Solutions
APPLIANCE Line
Whitepaper Library
Calendar of Events
Association Locator
Contents Pages
Market Research
Subscription Center


 
   
issue: October 2004 APPLIANCE Magazine

Purchasing Roundtable
Target Procurement


 Printable format
 Email this Article
 Search

by D. Douglas Graham, contributing editor

For U.S. manufacturing, the World Wide Web and globalization are two sides of a double-edged sword. The Web has enhanced many business functions, slicing through old inefficiencies by providing real-time data and instantaneous communication. Globalization has proven both a boon and a bust to American industry, opening the door to opportunities unavailable in past decades, fiercely increasing competition in the bargain.

These two forces of change have left no area of doing business untouched, especially procurement. While the work of purchasing agents has been eased by the efficiency-enhancements of e-commerce, the effects of globalization have been mixed. China, for example, has become a primary source of low-cost goods. Yet it has also evolved into a major consumer of raw materials, fostering shortages and price hikes currently challenging the entire industry.

Today’s purchasing agents spend their days working around the problems created by the burgeoning global marketplace and cashing in the dividends it pays. We asked procurement professionals in the appliance industry to describe the trends and cutting-edge developments currently at work in their world.

Participants


David Barna

Purchasing Manager
U-Line Corporation
Milwaukee, WI, U.S.

Tiffany Carter
Cooking Products Materials Manager
Viking Range Corporation
Greenwood, MS, U.S.

John Mahony
Vice President, Purchasing & Materials Management
W.C. Wood Company, Ltd.
Guelph, Ontario, CANADA

Don Market
Vice President, Purchasing
Electrolux Home Products
North America
Augusta, GA, U.S.

Atul Vir
President
Equator Corporation
Houston, TX, U.S.

 

What do you consider the single most important trend currently affecting purchasing in the appliance industry?

David Barna: “Global sourcing has become critically important today. In the past, companies in our business would dabble overseas, but now you close your eyes to overseas suppliers at your own risk, and I’m talking about suppliers of everything from control components to cosmetic accessories like knobs and handles. It’s a matter of money, bottom line. While a handle may cost you $10 in the U.S., you can get virtually the same thing in China for next to nothing. You can’t argue with the math, so you go for it.

“You have to be more discriminating when it comes to system items. While the quality of components coming out of East Asia is much better than it used to be, you still need full engineering involvement. It’s not just the possibility that the components will fail. There are subtleties to consider that fall under the purview of the engineers.”

Atul Vir: “As I see it, the prime directive these days is to obtain quality product that performs well and is priced right according to the positioning of that product in the marketplace. China plays a big role in this now because the quality of the products built in that country has improved significantly. In the past, the common wisdom was that China made ‘down and dirty stuff’ that was ‘ugly and cheap.’ It was exactly the same for the goods produced in Japan in 1950s and 1960s. That argument fell apart as post-war Japanese manufacturing fell together, and today ‘made in Japan’ has become another way of saying, ‘Here is a quality item.’ This is also becoming true of Chinese products, and the goods of other East Asian countries like South Korea.”

Don Market: “The biggest issue? How quickly can you evolve from a purchasing organization to a manager of an organization that controls and manages a supply chain? In today’s global marketplace, we have to manage opportunities around the world nearly every day. To profit fully from that situation, you must transition from the old purchasing mindset to that of supply chain manager.

“The customer base we serve has a thirst for new appliances that can make their lives more leisurely. They vote on our products in the marketplace daily, and thus establish the demand for them. The challenge, therefore, is to deliver the products that customers want in a timely manner—and at a price they are willing to pay. That requires a focus not just on price, but on creating a reliable, integrated supply chain based on demand flow. In the old model of purchasing, you bought a ton of merchandise in order to drive the price down, with little attention to the inventory you had on hand. In the long run, that practice wound up costing more money. As a supply chain manager, you drive value by dealing with suppliers that are flexible enough to meet the demands of the customer.

“Supply chain managers have to be more integrated than ever in the product creation process, working with designers, engineers, and suppliers to find better, less costly, and more efficient solutions, possibly even redesigned parts using alternate materials. The supply chain objective is to be so well integrated that it can respond to needs driven by the end consumer’s desires. Ideally, the moment a consumer thinks about a product, we should be out there mining the ore to build it.”

 

“You don’t want to starve the personal from a business partnership. You need it if you want the relationship to grow and mature,” notes David Barna of U-Line Corporation.

 

Describe the challenges imposed upon the purchasing function, and the industry as a whole by the global marketplace.

John Mahony: “The thorniest problem we’ve been facing has been the spike in commodity pricing resulting from the increased use of raw materials in China and elsewhere. China, in particular, is buying more of everything. Suppliers in that country are even buying up scrap in North America. They’re using everything they can get their hands on in their rush to make products. The edge they enjoy material-wise, coupled with the low labor rates they pay has allowed the Chinese to sell products much more cheaply than we can in Europe and North America. Appliance producers in the West are forced to sell for less, and since we are selling at a slimmer profit margin, we’ve had to find ways to make up for the loss. You get around the problem by opening up plants in places where labor costs are lower, and by improving productivity at home. Right now [W.C. Wood] has plants in Canada, the U.S., and Mexico.

“Globalization has also put tremendous pressure on North American manufacturers to buy components offshore instead of acquiring them at home. There’s a lot of trouble entailed in that. You often deal with long wait times, potential shortages due to logistical problems, and increased carrying costs resulting from having to maintain higher inventories. This has been a growing problem over the course of the past 3 to 5 years, and at this point, it’s escalating dramatically. We’ve informed some of our North American government officials about the problem, but as yet, there hasn’t been much response. That doesn’t make a lot of sense given the tax drain created by this situation. Both the Canadian and U.S. governments are taking a hit due to the loss of local jobs and the diminishing revenues they get from the taxation of domestic raw materials. Taken as a whole, these problems have made our industry very competitive.”

Atul Vir: “Equator has earned its reputation building handsome, energy-efficient products. Traditionally, we’ve looked to Europe for supply, but now we’re seeing cost increases as high as 40 percent due to the recent fluctuations of the euro. This has been good for Chinese companies because the yuan is linked to the U.S. dollar at a fixed rate. In its frenzy to develop, the country found it more practical to peg its currency to the dollar so that overseas buyers wouldn’t be frightened away by exchange risks. This has proved an extremely effective tactic. Many companies are finding it very comfortable to do business with China, especially major manufacturers who can no longer afford to buy European components because of the spiraling cost of the euro.

“European manufacturers have also been reluctant to adopt U.S. specs and standards. Dishwashers are a good example. The Europeans have refused to change the height of their machines from 32 inches to the 34 inches favored by the American market. This has given China yet another edge, as they have been perfectly happy to adapt their specs and standards to foreign demand. Continental manufacturers are getting hurt in other areas as well. Europe-made refrigerators do not come with icemakers, but everyone [in North America] has to have them. The Chinese and Koreans freely accommodate this demand, and it’s given them yet another leg-up over the Europeans.”

David Barna: “It’s all about subtleties. There are a surprising number of variables to mull over, even for something as simple as a piece of raised wood on a component. You have to be cognizant of the type of wood you’re buying, its UV sensitivity, and so forth. The wood you get in China may be exactly the same as what you get at home, but what about the sealant used by the manufacturer? There are lots and lots of nuances to consider, and that’s why purchasing people in this company work so closely with the engineers.

“Then there are the cultural barriers. You don’t run into them so much in Mexico or Brazil, but in China they can be murder. Cultural and linguistic hurdles can frustrate the relationship a Western company has with its Chinese suppliers. The perception has been that the Chinese are only interested in one-shot deals involving huge numbers. This is a misconception. Like everyone else, they want to establish long-term relationships. Cultural and linguistic barriers sometimes get in the way, however, and this applies to both sides of the fence. U-Line recently hired a Chinese global sourcing manager to help both us and our Chinese suppliers get around these communication challenges. When dealing with China, you have to be very specific about what you want and leave no wiggle room at all. You may still have problems with the first few orders, but once everyone in the relationship is on track, your Chinese suppliers will prove very consistent.

“Material shortages can also make it tough to deal with China. In recent years, there has been an enormous influx of people who want do business there, but because material resources are in short supply, some Chinese companies have actually had to turn business away. There are also many suppliers to choose from in China, some of them not up to the production capacity required by major manufacturers. Shipping limitations are a problem too, and the availability of raw materials from supplier to supplier.”

 
“We consider a delivery ‘early’ if it gets here 2 or more days before its expected arrival date, and ‘late’ if not received by 4:00 p.m. on the agreed-upon day,” says Tiffany Carter of Viking Range. “Since we plan and schedule everything well in advance, both late and early deliveries are discouraged.”
 

What standards have you set for your suppliers in terms of delivery and on-time performance?

David Barna: “We provide our suppliers with excellent forecasting to help them to anticipate our future needs. As our goal is to work in partnership with suppliers, we keep the lines of communication open. This makes everything work more smoothly. We make a point of not doing what some companies in this industry do—call our suppliers without notice, demanding huge quantities of whatever. As we see it, the more advance information you provide as a purchaser, the greater the benefit enjoyed by both parties in the relationship down the road. Such information makes informed decision making possible, and that’s a dividend you can never hope to collect shooting from the hip.

“That covers the standards we set for ourselves. Now on to those we set for suppliers. U-Line used to evaluate suppliers with a formalized rating sheet co-authored by Quality Control and Purchasing. We’ve pulled away from that in recent years because frankly, it got in the way. It’s possible to over-structure where performance standards are concerned. By doing so, you run the risk of sacrificing the human element, which is a vital component of the relationship. You don’t want to starve the personal from a business partnership. You need it if you want the relationship to grow and mature.”

Tiffany Carter: “Viking is currently in the process of implementing a formal evaluation program called ‘The Key Supplier Process.’ The program is intended to gauge a supplier’s on-time delivery performance. We consider a delivery ‘early’ if it gets here 2 or more days before its expected arrival date, and ‘late’ if not received by 4:00 p.m. on the agreed-upon day. Since we plan and schedule everything well in advance, both late and early deliveries are discouraged.”

Don Market: “We’ve implemented a score card to evaluate the quality, delivery, and the supply chain cost of the material produced by our suppliers. Our goal has been to shift the way the purchasing function operates. No longer do we refer to our suppliers as vendors. Now they’re supplier/partners. Today it is all about creating strong relationships with the right supplier partners. That’s the formula that allows both parties to prosper. You don’t have to wrangle to get a good deal. A good deal for both parties is implicit in the relationship.”

 
“The supply chain objective is to be so well integrated that it can respond to needs driven by the end consumer’s desires,” says Don Market of Electrolux Home Products North America. “Ideally, the moment a consumer thinks about a product, we should be out there mining the ore to build it.”
 

To what extent has the Internet and e-commerce impacted the purchasing function? Do you take online bids, and to what extent has the World Wide Web allowed your company to streamline its supply base?

Tiffany Carter: “Viking currently uses the Internet to track packages and shipments. We also use it to source and find new suppliers. At the moment, we don’t take bids online, as most of the items used by Viking are proprietary and custom-built. The Net has allowed us to streamline our supply base, however, and we usually allow our established suppliers first crack at quoting new items.”

Don Market: “We definitely do take online bids, and we work closely with suppliers over the Internet. The Net enhances the purchasing process with clarity, speed, and continuous flow. Information is open and immediate through the chain. The days of sending a fax are over, and the same applies to overnight shipments to bid rooms. Paperwork used to tie you up for weeks, but now you get instantaneous information and a level of fluidity completely lacking before the advent of the World Wide Web and e-commerce. The Web is also making the supply chain transparent, which allows all of its parts to react and respond. The Internet is a vital health component of an inspired supply chain—its vitamins, if you like.”

David Barna: “While we don’t yet take online bids from suppliers, we view that as a future option. E-commerce is an expanding area for U-Line. Currently we use the Web to buy online and check open orders with suppliers. We also use it to pre-qualify sources, especially in China. A quick review of a Chinese supplier’s Web site will help you determine in advance whether or not the company is positioned to do business with you. We do the same with our sources in Brazil and Mexico. E-mail has become important to us as well, as it provides real-time data. E-commerce is changing everything in this business, in all business really, and we definitely intend to take greater advantage of the benefits it offers in the near future.”

John Mahony: “The Net has eliminated many paperwork hassles. We don’t mail out purchase orders anymore, and we are in the process of going to electronic format for many other functions as well. This has been a trend throughout the appliance industry. The Net has enhanced the purchasing function, saving companies both time and travel. While it has not eliminated the need for person-to-person contact, it has made it possible to communicate with suppliers around the world on a 24/7 basis.

We have no plans to accept online bids at this moment. That may change, of course. The Net has also streamlined our supply base in some areas but complicated others, as it has increased the stable of suppliers from which to choose. You need a variety of sources to remain competitive, so I really don’t see us streamlining too much more than we already have.”

 
“The Net has enhanced the purchasing function, saving companies both time and travel,” comments John Mahony of W.C. Wood. “While it has not eliminated the need for person-to-person contact, it has made it possible to communicate with suppliers around the world on a 24/7 basis.”
 

Describe the relationship you have with your suppliers. Do you form strategic partnerships with OEMs, and how would you gauge your supplier base in terms of performance?

John Mahony: “We form long-term partnerships with suppliers with mutual success in mind. Our goal and philosophy is that both parties in the relationship should be better off year after year. Otherwise, there’s no point to being in the relationship. Making such a relationship workable requires a mutual commitment to cooperation and flexibility. We want to help our suppliers remain competitive and continuously build a quality product. Our bottom line objective is to promote a win-win situation.”

Tiffany Carter: “Viking enjoys a very unique relationship with its suppliers. We work together as a team from the start of a new project to its conclusion. Our suppliers stay very much in-tune with the day-to-day activities and requirements of our business. Many have been with us for a long time, and we aim to keep it that way. We devote about 75 percent of our daily purchasing activity to maintaining old relationships, and the remaining 25 percent to cultivating new and potential suppliers.”

Looking ahead 3 years or more, what changes do you foresee for your company and your position?

Don Market: “Future demand on the part of consumers will drive technological development and inspire manufacturers to become more innovative in their product offerings. This will occur worldwide, and for that reason you’ll see vast logistical improvement that will shorten the path taken by products on the way…from here to there. Globalization is creating a global marketplace that will allow U.S. manufacturers not only to buy overseas, but to sell there as well. The best way to make it all work is through an inspired supply chain. Electrolux is already vested. We’re ready for the future.”

Atul Vir: “In the future, companies in the appliance business are going to concentrate on efficiency and quality. They will hedge their bets on the demand for products offering affordability, durability, good looks, and energy and water efficiency. Companies exclusively focused on cost may not survive. In the next 3 to 5 years, this industry will shift to a new battle zone. Global free trade will have radically changed consumer perceptions. The old idea that East Asian-made product is somehow inferior to that built in the U.S. won’t fly anymore. While most Americans will still prefer to buy American, economic reality won’t warrant it. Labor costs, labor problems, and a whole bag of other issues will have made many U.S. products price problematic. This has happened already, and the trend will continue in the future. Some U.S. companies will sink as a result. Right now every single U.S. manufacturer has a backup plan for dealing with the problem, but they are on shaky ground given the realities of the new global marketplace.”

 

Daily News

...........................................................

Oct 30, 2014: Whirlpool Corp. reports strong third-quarter

Oct 30, 2014: Statistical Portrait of the European Appliance Industry Released by Appliance Magazine

Oct 30, 2014: New Whirlpool acquisition Indesit reports profit for year so far

Oct 30, 2014: Consumer Confidence Index rebounds in October

Oct 29, 2014: New home sales up slightly in September 2014

More Daily News>>

RSS Feeds
.........................................................
Appliance Industry
Market Research

...........................................................

October 2014: Portrait of the European Appliance Industry
September 2014: Appliance Industry Focus: HVAC
June 2014: Appliance Magazine Market Insight: April 2014
May 2014: Appliance Magazine Market Insight: March 2014




 
Contact Us | About Us | Subscriptions | Advertising | Home
UBM Canon © 2014  

Please visit these other UBM Canon sites

UBM Canon Corporate | Design News | Test & Measurement World | Packaging Digest | EDN | Qmed | Plastics Today | Powder Bulk Solids | Canon Trade Shows