Whirlpool Improves Profitability by Cutting Material Cost

Case Type: improve profitability; business competition, competitive benchmarking
Consulting Firm: Roland Berger Strategy Consultants 2nd round job interview.
Industry Coverage: consumer electronics; household goods.

Case Interview Question #00378: Our client Whirlpool Corporation (NYSE: WHR) is a multinational manufacturer of major home appliances. Headquartered in Benton Charter Township, Michigan, United States, the company has more than 70 manufacturing and technology research centers around the world employing more than 70,000 employees. Annual revenue is approximately $18.4 billion in fiscal year 2010.

Whirlpool is the second largest manufacturer of white electronics (microwave ovens, dishwashers, refrigerators, freezers, washing machines, dryers, air conditioners, etc) in the US. The client’s profitability has declined over the last few years (no specific decline given). You have been hired by the CEO of Whirlpool to address this issue. How would you approach/analyze the situation? Make a recommendation.

Additional Information: (to be given to you if asked)

There are 7 players competing in the US market: GE, Whirlpool, LG Electronics, Panasonic, Bosch, Electrolux, Sharp. The market leader GE and our client Whirlpool both lose money while the third largest player LG is profitable.

The industry is growing at a very slow rate, primarily driven by demographics, and margins are increasingly under pressure due to both domestic and foreign competitors. We assume, however, that manufacturing and R&D of all foreign competitors is done in the US.

Possible Approach:

The usual profitability framework (Profits = Revenues – Costs) can be used here for this case.

There is limited information available on the revenue side. Given the broad range of client’s products, there is no average price. All we know is that our client is the second largest in the industry in terms of revenues. We can also assume that pricing strategies are comparable to our competitors with low-end and high-end products.

In terms of cost, the following information is provided (in percent of revenues):

• Labor 30%
• Material (including components) 60%
• Overhead 15%

Hint: The sum is greater than 100%. The client’s financial losses equal to 5% of the revenues.

As mentioned before, player #3 LG Electronics is the only profitable competitor. Its costs in percent of revenues are:

• Labor 30%
• Material (including components) 50%
• Overhead 15%

Several possible ways can be explored to identify why our client has higher material costs:

• Raw material: most of the raw material is steal and plastic => commodities. Our client has a large volume of sales => economies of scale => purchase of raw material represents an advantage over its competitors.
• Components: Our client has the same suppliers as its competitors. There is, therefore, no difference in terms of quality and price per unit.
• Design. The Research & Development (R&D) people claim that Whirlpool products are modified in order to improve quality and functionality, and to meet any new market demand. It appears, however, that our client’s product with the exact same functionality, price, and comparable quality has 30% more components than competitor #3 LG’s. This explains the difference in material cost between our client Whirlpool and competitor #3 LG Electronics.

Conclusion:

Our client Whirlpool is an R&D driven company (the value added chain can also be part of the analysis). Their products are of good quality, yet more expensive and more complicated to assemble than those of competitor #3 LG.

How would you prove to your client that their products are more complex? One possible solution is to take two products (from our client and LG Electronics) and compare the number of components.

Product mix is not an issue here. It has remained the same for several years and margins are about the same for all product-lines.

Fixed and variable costs are not an issue and do not explain the difference in profitability.