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Re-engineering global supply Re-engineering

global supply
chains chains

Alliances between manufacturing firms

and global logistics services providers 13
Rohit Bhatnagar and S. Viswanathan Received October 1998
Revised February 1999
Nanyang Business School, Nanyang Technological University, Singapore Accepted August 1999
Keywords Supply-chain management, Logistics, Alliances, Strategic planning, Asia
Abstract During the 1990s, globalization and time-based competition have emerged as
important business strategies leading to renewed emphasis on the logistics function. This has
opened up opportunities for strategic alliances between manufacturing firms and specialized
logistics services providers, with each partner focusing on its core area of competence. Although
such alliances are common in North America and Europe, the determinants of success of such
partnerships in the global context are not well researched and understood. Moreover this
concept is relatively new in Asia. This paper presents an overview of the issues that impact the
success of a strategic partnership between manufacturing firms and global logistics services
providers (GLSPs). A case study featuring Motorola's Semiconductor Products Sector and
United Parcel Service (UPS) is described, for bringing out the important tradeoffs in such an
alliance.

Introduction
During the 1980s and 1990s, the imperatives of cost efficiency and customer
responsiveness have pushed firms to aggressively pursue two business strategies
± global location of production/distribution facilities (referred to hereinafter as
globalization) and time-based competition. Both these strategies have dramatically
transformed the way in which business activities are organized and carried out.
Gobalization motivated by pressures like cost-effectiveness, access to new markets
and economies of scale, among others, has led to the emergence of a borderless
organization with globally located suppliers and production/distribution facilities.
This trend towards globalization, aided by the liberalization of trade policies by
governments all over the world, is likely to strengthen in future. However, the
impetus for time-based competition has come from more exacting customers, who
demand a wide variety of products with minimal lead-time. This trend is also
likely to intensify in the future as companies adopt mass customization, leading to
greater choice for customers.
The chief difficulty that a firm faces in the implementation of these
strategies ± globalization and time-based competition ± is that they make
somewhat contradictory demands on its resources. For instance, globalization
increases the uncertainty in the company's operations, and the need to deal
International Journal of Physical
The authors acknowledge the useful contributions of Mr Abdul Halim Selamat and Distribution & Logistics
Management, Vol. 30 No. 1, 2000,
Mr Yam Hein Leong of United Parcel Service, and the anonymous referees whose comments pp. 13-34. # MCB University Press,
and suggestions considerably improved this paper. 0960-0035
IJPDLM with this uncertainty leads to considerably increased inventories and longer
30,1 lead-times through global supply chains. Hewlett-Packard Company (H-P)
estimated that in 1994 it had more than $3 billion invested in worldwide
inventories (Billington, 1994). Larger work-in-process inventories at different
points in the supply chain could result in longer lead-times when there is a
mismatch between the products that are demanded and the products that are in
14 inventory. This degrades cost performance and customer responsiveness and
hence diminishes the ability of the firm to compete on time (de Treville, 1992).
A supply chain is used here to refer to a network of facilities that procures raw
materials, transforms the raw materials into intermediate and finished goods at
processing centers, and delivers the finished goods to customers through
distribution warehouses (see Figure 1).
To ensure effective management of global supply chains, managers will
have to resolve the contradictory demands of globalization and time-based
competition. For effective supply chain management, managers must resolve
the tradeoffs between asset costs (facilities, capital equipment, and inventory),
time-based performance measures (lead-time and variance of customer
delivery), and other cost factors (transportation costs). See Stock and Lambert
(1987) and Davis (1993) for details. Given the complexity of accounting for all
the above factors simultaneously, a commonly adopted objective for this
decision problem is to minimize the total costs while ensuring that lead-time
falls within an acceptable range and does not exhibit sizable variability. The
fulfillment of such an objective depends crucially on both manufacturing and
distribution functions. Manufacturing cost and lead-time performance is a

Figure 1.
Representation of
supply chain
function of variables such as supplier's on-time performance and quality, Re-engineering
manufacturing lotsizes, and process performance. Distribution cost and global supply
lead-time performance is determined by decisions relating to order processing, chains
transportation, inventory policies, and warehousing.
In the past decade, there have been many efforts both in the industry and
academia that have emphasized the objective of enhancing manufacturing
performance. See Karmarkar et al. (1983), Karmarkar (1987) and Cohen and Lee 15
(1988) for details of some of the scenarios. However, beyond a certain level,
improvements in manufacturing alone are not sufficient. Efficiency of the
distribution or logistics function becomes critical for good performance.
Logistics cost as a percentage of the sales dollar varies widely ± 4.4 percent for
pharmaceuticals, 14 percent for manufacturing companies, 26 per cent for
merchandising companies. See Ballou (1992), and Bowersox and Closs (1996)
for details. As globalization intensifies, and companies take more of a ``global
view'' of their operations, the importance of the distribution/logistics function
will increase considerably for firms in all sectors. Efficient logistics
performance therefore has rightly been recognized as the next source of
competitive advantage and a crucial strategic imperative for the success of
firms (Bowersox, 1990). This paper focuses on this strategic view of the
logistics function as manufacturing firms implement the strategies of
globalization and time-based competition.
To an increasing degree, companies which had previously operated an
in-house logistics department, are choosing to outsource logistics services like
transportation and warehousing to specialized logistics service providers.
Logistics service providers are firms that offer integrated logistics solutions
encompassing air freight, truck and other modes of transportation, as well as a
host of services like warehousing, inventory recording, re-labeling and
packaging, handling of customer returns, etc. On a global level, this industry
segment is dominated by giant firms like Federal Express, United Parcel
Service, TNT, DHL, etc. Because of their global reach, the term global logistics
service providers (GLSPs) is often used to refer to these firms. In recent years,
the GLSP industry has been characterized by cut-throat price wars, huge
capital investments in new technology, increased focus on service quality, and
increased globalization (Bounds, 1994; Lovelock and Bless, 1996).
There has always been important common ground between GLSPs and the
in-house logistics departments of manufacturing firms in areas like
warehousing, transportation fleet management, tracking of shipments, etc.
With the focus in the logistics industry shifting to improved customer service,
GLSPs have made substantial investments in technology relating to areas such
as ``hub and spoke'' network (ensuring quick connections between
destinations), warehouse automation, bar-code scanning, information
technology for automated reporting and online tracking of items, etc. These
companies have therefore built distinctive competence in the various aspects of
logistics services. The manufacturing firms, however, have focused primarily
on manufacturing improvements while treating logistics as a relatively
IJPDLM secondary activity. Over time, manufacturing firms and GLSPs have, therefore,
30,1 evolved in different directions and have developed distinctive competence in
the areas of manufacturing and logistics services respectively.
Manufacturing firms increasingly regard the role of GLSPs as ``strategically
complementary'' to their quest for global competitiveness, and are actively
seeking partnerships with them. Coyle et al. (1996) have suggested that the
16 nature of such relationships evolves over a continuum representing increasing
usage of outside logistics services. The different outsourcing alternatives
identified by the authors are, no outsourcing, outsourcing individual activities,
non-integrated followed by integrated outsourcing of multiple activities,
outsourcing all activities, and finally single source logistics services
outsourcing. The advantage of this arrangement is that manufacturing firms
are free to concentrate on their primary activities, while leaving the
supplementary, though crucial, activities like logistics to GLSPs, which by
virtue of their background, investment in appropriate technology, and
experience, can provide these services more competitively than ``in-house''
logistics departments. GLSPs gain too, because such an arrangement provides
them with a long term source of business volume, which results in a closer
match between available capacity and demand, and eventually improves their
profitability.
As implied in the continuum suggested by Coyle et al. (1996), the extent of
outsourcing is initially limited to individual activities like transportation,
warehousing, etc., while the coordination of the logistics function is retained
in-house. If the experience is positive, the extent of outsourcing is gradually
enhanced. This may lead ultimately to a strategic alliance between the
manufacturing firm and the GLSP, wherein both firms provide strategic benefits to
one another. In line with Bowersox (1990), we distinguish between these long-term
strategic logistics alliances and the simple outsourcing of logistics services to third-
party logistics services providers. First, such an alliance is a very extensive link
that makes the venture almost an extended organization. Unlike outsourcing in
traditional situations where cost is an overriding factor, a strategic logistics
alliance is a special business contract in which parties seek to benefit from the
synergy of working together resulting in improved cost/service for the
manufacturing firm, and assured volume for the GLSP. A second characteristic of
a strategic logistics alliance is the concentration on a ``relationship continuum''
rather than a series of single transactions. As a result of this, a high degree of
dependency develops which stimulates further cooperation. To be classified as a
strategic alliance, a logistics relationship must:
(1) yield cost benefits to both parties; and
(2) utilize the competence of each party to enhance the competitive position
of the other firm.
Evidently, such an alliance can be successful only if both firms take a long-term
view of the relationship and contribute to the critical success factors of one
another.
 Given the potentially beneficial impact for both manufacturing firms and Re-engineering
GLSPs, it is likely that logistics collaborations will increase in the future. global supply
Empirical evidence from studies in Australia (Sohal et al., 1996) and Singapore chains
(Bhatnagar, 1998) support this belief.
While there is evidence of increasing collaboration between manufacturing
firms and GLSPs to enhance their respective competitive positions, important
gaps exist in our knowledge of such partnerships. First, there is a need to 17
clarify the mutual benefits that accrue to the manufacturing firms and the
GLSPs from entering into strategic alliances. The payoffs from a strategic
alliance must be seen within the overall framework of the changing imperatives
in contemporary supply chains.
The second important gap relates to the dependence of the success of
logistics alliances on changes in the supply chain structure (supply chain
re-engineering). Recent research on the US computer industry shows that cost
savings were substantially higher when GLSPs significantly re-engineered the
original supply chain as an inherent aspect of the alliance (Kopczak, 1997). This
claim needs to be verified in settings other than the computer industry, and for
global supply chains, because Kopczak (1997) reported only two global
alliances in her research.
This paper presents an analysis of these two issues. From a regional
perspective, this paper fulfills an important gap since we report a logistics
alliance linking facilities in Asia and North America which, to our knowledge,
has not been done before. The rest of this paper is organized as follows. First,
we review the literature, and specifically discuss the principles of
postponement and consolidation, which are important constructs from the
point of view of strategic logistics alliances and provide a common platform on
which these alliances could be built. Next we focus on a real life case study
pertaining to the logistics alliance between the global supply chain of
Motorola's Semiconductor Products Sector and United Parcel Service (UPS).
The case study is used to develop the two issues on strategic logistics alliances
that have been identified above. Concluding comments and research directions
are outlined in the final section.

Literature review
As earlier defined, a supply chain is a network of production and distribution
facilities that procures raw materials, transforms these materials into
intermediate and finished goods and distributes the finished goods to
customers (Lee and Billington, 1993). The supply chain encompasses both the
manufacturing and the logistics functions (provided either by an in-house
logistics department or an external contractor). We will address the two issues
identified earlier ± advantages for manufacturing firms from a strategic
alliance with GLSPs in the context of contemporary supply chain imperatives,
and the importance of supply chain re-engineering.
IJPDLM Supply chain imperatives and advantages of strategic alliances
30,1 The advantages that accrue to manufacturing firms from entering into
strategic partnerships with GLSPs must be seen within the overall framework
of the decision issues relating to supply chains. Considerable work has been
done by both academicians and practitioners in modeling the various tradeoffs
in efficient supply chain management. Davis (1993) provides several examples
18 of efficient management of supply chains leading to enhanced competitiveness
of the firm. The author illustrates his research through several case studies
where supply chain analysis was used as a strategic tool to improve
performance at H-P. Several actions to improve the performance of supply
chains are suggested (see Table I).
Many of the actions listed in Table I emerge from the firm's emphasis on
time-based competition and incorporate important tradeoffs between
manufacturing and logistics. For instance, postponing the localization (adding
the plug/voltage features for different countries and packing manuals in
different languages) of Deskjet printers at H-P from the manufacturing plant to
the regional distribution centers, shaved off as much as $30 million from the
inventory holding costs, while maintaining the same customer service level.
Delaying such processing, as far down in the supply chain as possible, is
referred to as the ``principle of postponement'' in literature. The principle of
postponement (Zinn and Bowersox, 1988) states that the ``time of shipment and
the location of final product processing in the distribution of a product should
be delayed until a customer order is received''. Postponement enhances the
ability of the firm to compete on time while remaining cost competitive. The
authors suggest that postponing the time of shipment until receipt of customer
order may be especially useful in firms which have high unit value products,
large number of distribution warehouses, and high uncertainty of demand. In
such an environment, emphasis would be on a responsive logistics function
that can make rapid deliveries through the supply chain. GLSPs count on such
abilities as their core competence and this provides a fertile ground for strategic
alliances between the manufacturing firms and GLSPs. As earlier described,
strategic logistics partnerships yield cost benefits to both parties and enable
each firm to utilize the competence of the partner to enhance its own
competitive position (Bowersox, 1990).

Product Process

Reduced product offerings and options Change transportational mode

Design for localization Implement better data systems
Customize products in software not hardware Improved forecasting techniques
Table I. Manage delivery expectations (customer Subcontract distribution operations
Actions to improve service requirements) Build facilities near customers
supply chain
performance Source: Davis (1993)
Several studies such as Lieb et al. (1993), Dapiran et al. (1996), McMullan, Re-engineering
(1996), Langley (1997), and Sink et al. (1996), have identified cost, service, focus global supply
on core activities, quick entry/exit from markets, and capital conservation as chains
some of the primary benefits that accrue to manufacturing firms through
strategic alliances with GLSPs. These studies have focused on a variety of
regions including, Europe, the USA, and Australia. There is very little evidence
pertaining to Asia, where manufacturing facilities of over 3000 multinational 19
corporations (MNCs) are located and which will provide the backdrop for
substantial growth in global logistics as the Asian economies grow (Islam and
Chowdhury, 1997, p. 203). Many of the other actions proposed in Table I have a
direct impact on the logistics strategies of the firm and support the idea of
strategic alliances between manufacturing firms and specialized logistics
firms. The interested reader is also referred to Lee et al. (1993) and Lee and
Billington (1993) for an exposition of the evolution of studies on supply chain
analysis implications for strategic logistics alliances between manufacturing
firms and GLSPs.
Parker (1994) overviews the role of logistics strategy within the business,
using examples from the garment industry in the UK. The author suggests that
innovation in logistics emanates from a systematic analysis of opportunities
aimed at reducing the supply chain and/or improving customer service, and
supports the idea of strategic logistics alliances between firms and GLSPs.
Gentry (1996) suggests that the important prerequisites to look for in such
alliances are, long-term commitment, information sharing, cooperative and
continuous improvement, and sharing of risks and rewards.
Overall, the above discussion brings out the benefits of strategic logistics
alliances between manufacturing firms and GLSPs in the overall context of
supply chain management. In the next section, we discuss the central role of
supply chain re-engineering as a determinant of the success of logistics
alliances.

Supply chain re-engineering

The imperatives of the two strategies ± globalization and time-based
competition ± make contradictory demands on the firm. Competing on time
requires firms to ship small quantities as near to the time of demand as
possible. As earlier discussed, the principle of postponement has been
increasingly emphasized to make this possible. Globalization, in contrast,
creates the need to efficiently plan inter-continental transportation of products.
This often motivates the shippers to utilize the ``principle of consolidation''.
Consolidation is a powerful economic force in strategic planning because it
results in substantial economies of scale that are present in the transport rate
structure (Ballou, 1992). For example, orders arriving at a warehouse may be
combined with orders received in a later time period, to increase the size of the
average shipment, which in turn would lower the average shipping costs per
unit. Potentially lower customer service resulting from increased delivery time
must be balanced with the cost benefits of order consolidation.
IJPDLM Resolving the contradictions between the requirements of globalization and
30,1 time-based competition in a complex supply chain requires an effective balance
between the principle of postponement and the principle of consolidation. An
alliance between the manufacturing firm and GLSP can achieve this by
restructuring or re-engineering the original supply chain of the manufacturer,
to resemble the existing network of the GLSP (Kopczak, 1997; Berry et al.,
20 1994). This creates possibilities for integrating the beneficial effects of both
postponement and consolidation. The benefits of postponement are realized by
coordinating the manufacturing and distribution functions and shipping goods
from the manufacturing facilities as close as possible to the time of customer
demand. The benefits of consolidation are achieved by streamlining and
successively combining the material flow between the manufacturing facilities
and customers, leading to larger average shipments as compared to
uncoordinated shipments.
Kopczak (1997) has investigated the linkage between the success of strategic
logistics alliances and supply chain restructuring by surveying the US
computer industry. The author defined restructuring as ``significant changes in
supply chain structure'', implying one or more of the following:
. Change in the warehouse structure (number of tiers, number of
warehouses, substitution of direct shipment for warehousing).
. Reassignment of tasks between tiers.
. Redistribution of inventory between tiers (e.g. centralized versus
distributed stocking).
. Significant changes in transportation network, mode, consolidation
points.
. Significant reassignment of roles and responsibilities among supply
chain entities.
The results of the survey indicate that restructurers differ from non-
restructurers in that they see ``restructuring'' of the original supply chain as the
primary driver of the strategic alliance, in contrast to the non-restructurers who
are driven primarily by ``focus on core business'' and ``organizational
downsizing''. Restructurers realized much greater improvement in order cycle
time (a 55 percent improvement) than did non-restructurers (a 9 percent
improvement). The author suggests that restructuring firms tend to include
outsourcing of full processes that are regional or global in nature, while
non-restructuring partnerships are more limited in scale.
Restructuring firms therefore appear to have evolved further on the
continuum suggested by Coyle et al. (1996). Restructuring leads to
significant changes in the manufacturer's supply chain, owing to
elimination of stocking points and changes in shipping strategies. Post-
restructuring, the material flow in the downstream supply chain of the
manufacturer starts to approximate the GLSP's network without having to
pass through a warehouse. This is similar to the cross-docking operations
practised by firms such as Wal-Mart where distribution systems are Re-engineering
designed to keep ``inventory in motion''. Interested readers are referred to global supply
Stalk et al. (1992), La Londe and Masters (1994), and O'Byrne (1997) for an chains
overview of the cross-docking operations. Re-engineering of original supply
chains therefore emerges as a primary reason for the enhanced logistics
performance for firms when they enter into alliance with GLSPs.
In summary, our review of literature in this section suggests that strategic
21
alliances between manufacturing firms and global logistics services providers
are an important direction for the future. However, at a detailed level, there are
key gaps in our knowledge about:
. Payoffs from strategic logistics alliances within an overall framework of
global supply chain imperatives.
. Supply chain re-engineering as a determinant of success of such
alliances.
In the next section we use a detailed case study relating to the strategic alliance
between Motorola and UPS, to elaborate these issues.

Methodology
The methodology used in this paper is the case study method. The logistics
alliance between Motorola's Semiconductor Products Sector (manufacturer)
and United Parcel Service (GLSP) is described. Case studies typically
answer the how and why of a decision problem. In our previous discussion
of literature, the two important issues to emerge were:
(1) Advantages of strategic logistics alliances in the context of supply chain
imperatives.
(2) The linkage between logistics alliances and supply chain re-engineering.
While a number of authors have reported survey-based empirical results, there
is an important need to describe the implementation of logistics strategies at a
detailed level in a particular organization. Case studies are an appropriate
methodology when focusing on one organisation/entity, which is investigated
in-depth, with careful attention to detail. Several authors such as Lovelock and
Bless (1996), O'Byrne (1997), among others, have used the case study method to
describe different facets of the logistics function. For the current study, the
primary sources of information were UPS executives including those
responsible for the finance function, warehouse management and general
management. These contacts gave us an overall picture of the alliance. The
structure of the contact primarily comprised face-to-face interviews and a site
visit to UPS's Singapore logistics facility. Follow-up clarification was obtained
through phone calls or e-mails. Finally, interviews were conducted with
logistics personnel in Motorola.
IJPDLM Case study: Motorola's strategic alliance with United Parcel Service
30,1 Motorola Inc. is a well-known US-based, electronics multinational corporation,
diversified in eight business sectors. These business sectors, which are
autonomous, operate independently of each other. Each business sector
comprises several product lines, with production facilities and sales outlets
located around the world. The focus of our discussion in this paper will be
22
Motorola's Semiconductor Products Sector (SPS). SPS has several major
production facilities whose locations are shown in Table II. Worldwide,
Motorola is ranked fourth after NEC, Toshiba and Intel, in terms of
semiconductor sales. The turnover of SPS in 1998 was US $8.0 billion.
The case study is organized around the seven locations in Asia, comprising
13 manufacturing plants, and their logistics inter-linkage with the customer
plants in North America. The manufacturing sites cater to the supply of
semiconductors to customers in the USA and Canada. These customers are
either downstream plants belonging to Motorola (internal customers) or
independent external customers.
Given the competitive pressures in the semiconductor industry, one of
Motorola's critical initiatives over the last few years has been the reduction of
business cycle times, i.e. compression of lead-times from the point of order
receipt to delivery of shipment at the customer's doorstep. While dramatic
progress was made in improving manufacturing cycle times, particularly in the
direct value added portions, in the late 1980s and early 1990s, there were still
untapped opportunities to improve cycle time in the non-value added portions
of manufacturing as well as the support functions. Such opportunities for cycle
time reduction were often lost when supply chain processes were studied on a
entity-by-entity basis, rather than for the business as a whole.
As part of its long-term initiative, Motorola implemented steps to reduce the
business cycle time right from the product development process to the routing
of products to customers. Motorola responded to customer requirements of
improved service levels, increased flexibility, and responsiveness by
developing the seven-day or 168 hours plan which required that the time from

Semiconductor manufacturing plants Downstream plants and marketing

in Asia offices in the rest of the world

Malaysia ± 1 plant USA

The Philippines ± 1 plant Canada
Table II. Hong Kong ± 2 plants Europe
Location of major Taiwan ± 2 plants
facilities for Motorola's South Korea ± 2 plants
Semiconductor China ± 4 plants
Products Sector (SPS) Japan ± 1 plant
the receipt of customer order to the arrival of goods at the customer's dock Re-engineering
should not exceed 168 hours. The planned seven-day time line can be global supply
segmented as shown in Figure 2. chains
During the late 1980s, Motorola concentrated its efforts primarily on
reducing its manufacturing cycle time to 96 hours (or four days). Order,
assembly, test, pick and pack times were improved with the help of a new
upgraded automation and scheduling software. While this achievement helped 23
Motorola become more competitive, it was still unable to achieve its seven-day
goal on account of its distribution cycle which took longer than its
manufacturing cycle. Cycle time from assembly of shipment to arrival at
customer's dock took 111 hours on average in 199X[1]. The structure of the
original supply chain in 199X and the average transit times are shown in
Figure 3.
To achieve its seven-day goal, Motorola realized that it not only had to
adhere to the current mode of transportation by air but it also had to find other

Factory Destination
Origin Customer Dock

24 hours 24 hours 24 hours 24 hours 72 hours Figure 2.

Order Order Assembly Motorola's seven-day
Shipment
Processing Test, Pick and Pack timeline

Current Arrangement
Production Customs Warehouses Customer
Sites Clearance (Handling)

Korea Phoenix

Manila Mesa North

Malaysia Los Chandler American

Angeles
Taiwan Oakhill Region

China Tempe Customers

Others Toronto

48 hours 8 hours 12 hours 24 hours 19 hours

Figure 3.
Average transit times
Transit 1 (Air) Transit 2(Truck) Transit 3(Truck)
through the original
supply chain in 199X
IJPDLM ways of improving the shipment time. At this time, Motorola started
30,1 interacting with UPS. The initial objective was relatively narrow ± cut down
shipment time to the required limits. Motorola and UPS jointly developed
methods to trace and study the times taken at every step of the distribution
process, from the point of order to delivery. Based on this, they also developed a
best case scenario under ``perfect conditions'' using current resources. The
24 conclusion was that under the current supply chain structure, the distribution
time could be brought down to 90 hours under ``perfect conditions''. The best
case transit times through the supply chain are shown in Figure 4.
Since the required reduction in cycle times went beyond the best case level,
Motorola and UPS started looking at the rationalization of the entire process of
manufacturing and distribution. This laid the ground for the two firms to enter
into a strategic alliance so that the distinctive competence/resources of both
firms could be synergized. Several distinguishing features of the semiconductor
industry, as well as the transit times through the supply chain (as outlined in
Figures 3 and 4) must be underlined here.
. Products have a high value/weight ratio. The use of air transport over
long distances is justified because investment in pipeline inventory
increases considerably if slower transport is used. The semiconductor
industry is characterized by rapid product obsolescence, which makes
pipeline inventory minimization an eminent goal.
. Almost half (49.5 percent) of the overall transit time in the supply chain
is spent between the point the shipment is cleared through customs, and
the point of delivery to customers. This time consists of transport from
Los Angeles to the warehouses, handling at the warehouses, and finally
transit to customers. A substantial amount of time is therefore spent
directing the shipments to the warehouses, and eliminating this step
could enhance performance.
. UPS, given its extensive air/ground network, would have a distinct
advantage in handling the transportation of shipments from the point of
entry into North America to the locations of individual customers.

48 hours 6 hours 10 hours 7 hours 19 hours

Transit 1 (Air) Transit 2(Truck) Transit 3(Truck)

Figure 4. Customs Clearance Handling at Warehouses

Best case transit times
through the original
supply chain Total Transit Time Under Best Case Scenario = 90 hours
After assessing the various tradeoffs, Motorola and UPS decided to re-engineer Re-engineering
the supply chain. They adopted the following guidelines: global supply
(1) Shipments should be routed from the manufacturing site to the chains
customers directly via Anchorage (UPS's hub for flights to the Far East),
without any routing through an intervening warehouse. This is referred
to as primary routing.
25
(2) Routing to a warehouse if unavoidable, (secondary routing), was to be
done only as a possible back-up procedure. Under such circumstances,
shipments should go through no more than one warehouse on the route.
This idea of primary routing is similar to the cross-docking operations
practiced at Wal-Mart to keep inventory in motion, as described by Stalk et al.
(1992). In the case of Wal-Mart, goods from suppliers are continuously
delivered to warehouses, where they are selected, repacked, and then
dispatched to stores, often without ever sitting in inventory. Instead of
spending valuable time sitting in the warehouse, goods just cross from one
loading dock to another in 48 hours or less. In the case of Motorola, products
arriving from the Asian plants are sorted at Anchorage and are sent directly to
the North American customers.
Using the above guidelines, the supply chain for the SPS was modified to
incorporate direct air linkages between point of entry into North America,
Anchorage, and the customer location via Louisville (UPS's North American
hub), without routing the products through any warehouse. The transit times
required for this arrangement are shown in Figure 5. Almost 90 percent of the
volume handled went through the re-engineered supply chain, leaving about
10 percent of shipments to go through the warehouses.
The overall objective achieved was a reduction in distribution cycle time
from 111 hours to 72 hours, a 35 percent reduction in lead-time. UPS utilized its
existing network of owned air routes connections, using its own aircraft. The
existing network has daily flights from the USA, covering three major routes.
These form the main flight routes and are complemented by commercial
international flights that feed into these routes, as well as domestic flights
within the USA. The main air routes within Asia and the USA cover the
following flight paths:
Route 1: US air hub (Louisville) ± Anchorage ± Seoul ± Taipei ± Singapore ±
Kuala Lumpur ± Taipei ± Seoul ± Anchorage ± US Air Hub
(Louisville).
Route 2: US Air Hub (Louisville) ± Anchorage ± Hong Kong ± Anchorage ±
US Air Hub (Louisville) (.
Route 3: US Air Hub (Louisville) ± Anchorage ± Narita ± Anchorage ± US
Air Hub (Louisville).
These routes enable UPS to provide with Motorola with an extensive network,
linking source and destination points. Furthermore, UPS's vast experience in
IJPDLM New Structure Using UPS

30,1
Production Customs Louisville Customer
Sites Clearance

Korea
26
Manila North

Malaysia Anchorage American

Taiwan Region

China Customers

Others

Figure 5.
Average transit times
for Motorola's
re-engineered supply 48 hours 4 hours 5 hours 15 hours
chain
Total Transit Time Under New Structure = 72 hours

custom handling procedures has helped to cut down time wastage in this
process. UPS has thus been able to achieve the overall objective of factory to
customer dock delivery within 72 hours. An important point that arises is
whether the 72 hours timeline incorporates some slack and hence leaves scope
for future improvement. Discussions with UPS executives revealed that on a
system-wide basis, the 72-hour timeline represents a long-term optimal delivery
time. Delivery time could, of course, be reduced by initiating direct flights
between Anchorage and Motorola's customer locations in North America, but
this would severely impact UPS's cost economies which have been obtained by
consolidating the Motorola and the non-Motorola shipments along existing
UPS routes.
Prior to its alliance with UPS, Motorola was using the services of multiple
service providers. Taking a generic example, this meant that shipments
moving from Asia-Pacific to the USA were picked up from the factory of origin
by one trucking company. The trucking company tendered the shipments to an
air-freight forwarder at the cargo hub. The air-freight forwarder, who had
earlier made arrangements to book the appropriate flight, prepared the
shipments and export documents and tendered the cargo to the airport
handling agent for loading on the aircraft. On arrival at the destination airport
(Los Angeles), the shipments were cleared through customs by a Motorola-
appointed handling agent and later sent by trucks or air by yet another
operator to Motorola's distribution warehouses for sorting, prior to final
dispatch to the ultimate consumer. In all, there were at least five independent
operators involved in the chain, with whom Motorola had to make prior
arrangements and coordinate the services. In contrast, the current strategic
alliance involves a direct partnership between Motorola and UPS. UPS Re-engineering
coordinates the activities within the entire supply chain on a door-to-door basis. global supply
The relationship between Motorola and UPS has evolved to a higher level along chains
the outsourcing continuum suggested by Coyle et al. (1996).

Benefits of the alliance

The most visible improvement, from the point of view of Motorola, that can be 27
directly attributed to its alliance with UPS is the reduction of lead-time between
factory dispatch and customer delivery, from 111 hours to 72 hours. This
enables Motorola to meet its strategic goal of providing a seven-day service
between order receipt and delivery (four days manufacturing lead-time plus
three days distribution cycle). If the lead-times under the two alternatives are
compared (see Figures 3 and 5), we find improvements in cycle time at
practically all stages of the routing process ± customs clearance, consolidation
delays at transit points, and transportation. We will discuss this point further
when we evaluate the impact of supply chain re-engineering.
We now analyze the cost impact of the lead-time reduction under the new
guidelines adopted by Motorola and UPS. Table III shows key financial
statistics for Motorola for 199X. Using these figures and Little's Law (Render
and Stair, 1997) from queuing theory that reduction in lead-time results in a
proportionate decrease in inventory, the cost impact of using the re-engineered
supply chain is given in Table IV.

Profit and loss Balance sheet

(US$ millions) (US$ millions)

Net sales 4,630 Capital expenditures 348

Table III.
Cost of sales 3,590 Research and development 416 Key 199X statistics of
Other operating expenses 711 Inventory average balance 228 Motorola
Total expenses 4,301 semiconductor business
Net profits (loss) 329 sector

Inventory Inventory Inventory

holding cost holding cost holding cost
= 25 percent = 30 percent = 45 percent

Annual improvements in returns as percentage of:

Net profit 0.9 1.8 2.7 Table IV.
Research and development 0.7 1.4 2.1 Cost impact of
Capital expenditures 0.8 1.7 2.5 lead-time reduction
Notes: A ± Daily cost of cost of sales = 3,590/300 days = $11.97 million; B ± reduction in owing to strategic
transit times (days) = (111-72)/24 = 1.625 days; C ± reduction in dollar value of in-transit alliance between
inventory = (A)*(B) = $19.45 million Motorola and UPS
IJPDLM It can be seen that significant cost benefits have accrued to Motorola and these
30,1 are directly attributable to the company's alliance with UPS. For three different
values of inventory carrying costs (15 percent, 30 percent, 45 percent
respectively), the impact on net profit ranges from 0.9 percent to 2.7 percent. As
a benchmark, these savings may be compared to the 2 percent to 3 percent of
cost of sales that Wal-Mart estimates it has saved by implementing cross-
28 docking (see Stalk et al., 1992). The cost savings represent 0.7 percent to 2.1
percent of MSPS's R&D expenditure, and 0.8 percent to 2.5 percent of the
capital expenditures, respectively, for the financial year 199X. A word about
the inventory carrying costs is in order here. As outlined in Stock and Lambert
(1987), inventory carrying costs comprise capital costs incurred on inventory
investment, inventory service costs, storage space costs, and inventory risk
costs. In the semiconductor industry, product life cycles are getting
increasingly compressed, and being encumbered with obsolete products at the
end of the product life cycle is a significant disadvantage. Hence it is
appropriate that firms use a high inventory carrying cost to more accurately
reflect these high costs of obsolescence. We believe that the 45 percent cost of
carrying inventory is a correct reflection of the real life situation.
The cost improvements owing to lead-time reduction are only one aspect of
overall efficiency enhancement. An important concern of Motorola is the
service level achieved, i.e. long-term probability of on-time deliveries. Empirical
evidence of the service performance in the first full year of the Motorola-UPS
alliance showed an average of 91.5 percent on-time delivery (based on the 72
hours time commitment) and 98.4 percent on-date delivery. On average, there
was an 8 percent-9 percent failure rate in keeping with the 72-hour timeline, but
only a 1.5 percent failure rate in delivery within the day promised.
Investigation indicated that most of the service failures were due to factors
outside the complete control of UPS, e.g. snowstorms in winter. Discussions
with UPS executives revealed that there are contingency plans and backup
aircraft are pressed into service to support the 72-hour delivery commitment.
Overall, the average service level achieved under the current system was found
to be significantly better than the previous system because it eliminated the
need for Motorola to coordinate the activities of multiple service providers.
Coordination now from one stage to another is seamless via the EDI linkage
between the various facilities.
There are several other benefits which fall into a grey zone, i.e. benefits
which cannot be easily measured or quantified. These benefits can be classified
into several distinct categories:

Tracking and tracing of shipments and improved information availability

. Constant tracking and tracing of status is available to customers and
key marketing offices in real time, through UPS's electronic data
interchange (EDI) linkup.
 . Security is improved through tracking and tracing. In the event of Re-engineering
problems, loss containment and replacement process can be quickly global supply
initiated. chains
. UPS is able to provide timely, comprehensive reports on performance,
e.g. lead-times, service performance, hold-ups, customer requisitions,
weight/type of shipment, freight charges, etc. 29
The improvement in tracking and tracing is directly attributable to Motorola's
superior technology as compared to the earlier system. Information and status
updates are now available to the customers and key marketing offices in real
time.

Reduced coordination and communication needs

. UPS personnel prepare shipment documents and commercial invoices at
origin factory premises, freeing man-hours.
. Custom clearance is simplified drastically. A ``pre-alert'' system
developed by UPS ensures that shipment documentation is made
available to the US customs authorities while the aircraft is being loaded
at the origin airport.
. Motorola is freed from the aspects of coordinating and monitoring
different service providers. The coordination needs become very
demanding when hold-ups occur. Hold-ups tend to propagate through
the entire supply chain, which was very disruptive for Motorola, which
not only had to function under a tight time window but also had to deal
with five independent operators with differing information systems.
UPS, with an integrated information system, is ideally placed to deal
with such situations.

Reduced need for warehousing

. Direct shipment from plants to customers have resulted in a diminished
role for distribution warehouses in North America. Since only about 10
percent of shipments go through the warehouses in North America,
previously tied-up resources are freed. SPS, Motorola has six warehouse
locations in the USA and Canada, each occupying at least 15,000 sq.ft of
storage space and much of this space is freed for alternative use.

Reduced damage
. Reduced damage resulting from less handling in the delivery process.
The above is a brief overview of the main benefits accruing from the alliance
between Motorola and UPS. For a detailed treatment of these issues the
interested reader is referred to Selamat and Chin (1996).
IJPDLM Impact of supply chain re-engineering
30,1 Comparing Figures 3 and 5, we can see that the improvements in the lead-time
have resulted from the supply chain re-engineering that has taken place as part
of the strategic alliance between Motorola and UPS. Kopczak (1997) has
described the following six strategies for supply chain restructuring
(re-engineering) in her research on the computer industry in the USA:
30
(1) Use of faster modes of transportation and more direct transportation.
(2) Consolidation of transportation routes accompanied by relocation of
consolidation/deconsolidation points.
(3) Elimination of local inventory stocking points and centralization of
inventories.
(4) Substitution of merge centers or consolidation/deconsolidation points
for warehouses as mixing points.
(5) Addition of a regional warehouse or a warehouse for a particular
customer.
(6) Reassignment of roles and responsibilities among supply chain entities.
In the case of the Motorola-UPS alliance, the supply chain re-engineering is a
composite of strategies 1, 2, 4, and 6 above. The alliance has enabled Motorola
and UPS to effectively balance the contradictory needs of globalization and
time-based competition by integrating the principles of postponement and
consolidation. Motorola's critical need ± to compete on time ± is fulfilled. The
understanding built up with UPS on time sensitivity has helped Motorola
effectively coordinate the manufacturing process with the distribution process
and effectively minimize the overall lead-time in the supply chain. The alliance
has resulted in increased freight charges for Motorola which are, on average, 10
percent-15 percent higher, as compared to the previous system of dealing with
five different service providers. However, this is more than compensated for by
the savings from reduced inventory, and lesser needs for warehousing and
coordination. From UPS's point of view, the alliance with Motorola has
provided a stable base volume and hence facilitated the consolidation process
at different points in its ``hub and spoke'' network. The UPS-Motorola alliance
has therefore yielded strategic benefits to both parties ± time postponement
benefits (at an effective price) to Motorola and volume consolidation to UPS.
Since these benefits affect the long-term competitiveness of either firm, the
alliance fulfills our earlier definition of a strategic alliance. Our study also
confirms, in the context of the Motorola-UPS global supply chain, the findings
of Kopczak (1997), that supply chain re-engineering is a dominant determinant
of improvements in logistics alliances.
The success of strategic alliances like Motorola and UPS depend crucially on
the information sharing that takes place between the two parties. Information
sharing between partners in a logistics alliance has been described as the ``glue Re-engineering
that holds these ventures together'', (Bowersox, 1990). The author describes the global supply
critical role of information as an ``enabler'' at two levels. chains
(1) In performing a specified role in a well-defined operating domain.
(2) For each party to see its assignment in terms of its contribution to the
alliance and the way it adds value for customers. 31
The first role is being fulfilled through a customized EDI linkup between
Motorola and UPS, whereby the operational sharing of critical information
takes place. The benefits that result ± tracking and tracing of shipments and
improved information availability ± have already been described earlier. The
second role of information is more tricky. The success of the alliance hinges on
the balance between the principle of postponement (Motorola's priority) and the
principle of consolidation (UPS's priority). This balance could be affected by
uncertainty in the volume at the origin points. Benchmarking the current
performance of the system, using existing data for the joint operations, can be a
very useful first step. Simulation is an appropriate tool for this purpose.
Guidelines for dealing with any deviations from the benchmark can then be
defined by Motorola and UPS in an open environment. A cooperative ``win-win''
arrangement, will reinforce the parties' trust in one another, as suggested by
Bowersox (1990) and Gentry (1996). Such modeling represents an important
direction for future research.
Our last observation is that Motorola's re-engineered supply chain and
inventory movement has some parallels with Wal-Mart's cross-docking
facility-based distribution system, in that both systems attempt to keep
``inventory in motion'' while minimizing the time spent by products idly sitting
by (Stalk et al., 1992; O'Byrne, 1997). Yet Wal-Mart's strategy of investing in its
dedicated logistics systems is radically different from Motorola's strategy of
partnering with UPS. The answer probably lies in ``capabilities-based
competition'', espoused by Stalk et al. (1992). Wal-Mart is in the business of
retailing and its stores support enough volume to see logistics as a primary
concern. It has therefore made strategic investments in a variety of interlocking
support systems (e.g. private satellite communication systems, 2,000 truck
dedicated fleet, etc.). Motorola, however, primarily sees product design and
manufacturing as its core capability, and has therefore opted to outsource its
logistics activities to UPS, through its strategic alliance. Keeping products
moving continuously by re-engineering the supply chain is a complex activity.
By aligning with UPS, Motorola has gained some of the same advantages as
Wal-Mart. Our study indicates that companies that fall into Motorola's profile
(global manufacturing supply chain, high value/weight ratio of products,
emphasis on time-based service) increasingly can be expected to enter into
strategic alliances with GLSPs. This suggests a likely transformation of the
logistics scene in Asia, where manufacturing facilities of more than 3,000
multinational companies are located.
IJPDLM Conclusions and future directions
30,1 In this paper, we analyzed several important issues relating to strategic
alliances between manufacturing firms and global logistics services providers.
The chief motivation for such an alliance is the quest for efficient supply chain
management. However, firms face contradictory pressures from two
imperatives of modern business ± globalization and time-based competition.
32 Strategic logistics alliances represent an important direction wherein
manufacturing firms and GLSPs can mutually benefit from one another while
alleviating the above pressures.
At the outset, a strategic alliance was defined as one which yielded cost
benefits to both parties and where both parties utilized the competence of the
other partner to enhance their competitive position. Using the real life case of
Motorola and UPS, the benefits realized by the two partners of a strategic
logistics alliance were demonstrated. The primary benefit of lead-time
reduction and its cost impact was outlined. It was estimated that through this
alliance, Motorola could realize potential cost savings to the extent of
2.7 percent of its net profits, while improving its service performance. Other
significant benefits realized were improved information availability, reduced
coordination and communication needs, reduced need for warehousing, and
reduced damage. For UPS, the primary benefits stemmed from enhanced
volume consolidation which improved its cost economies. These benefits affect
the long-term competitiveness of either firm, and therefore the Motorola-UPS
partnership fulfills our earlier definition of a strategic alliance.
Our study confirmed the earlier findings of Kopczak (1997), that supply
chain re-engineering is a dominant determinant of improvements in logistics
alliances. We argued that the alliance has enabled Motorola and UPS to balance
effectively the contradictory needs of globalization and time-based competition
by integrating the principles of postponement and consolidation. Our study is
one of the first ones to propose such an interpretation. This is also one of the
few studies which has reported results in the context of Asian supply chains.
Given the large number of multinational corporations that have facilities in
Asia, we foresee a transformation of the logistics sector in this region, on the
lines discussed in this study. Information sharing was identified as a critical
reinforcer of such alliances.
An interesting observation was the parallel between Motorola-UPS and
Wal-Mart. While the actual strategy adopted in the two cases was radically
different ± Motorola outsourcing its logistics activities completely to UPS
versus Wal-Mart making strategic investments in interlocking logistics
systems ± both systems are inherently trying to keep ``inventory in motion'', by
minimizing the time spent by products idly sitting by. This emerges as a
critical requirement for effectiveness of global supply chains, with the actual
strategy that is adopted depending on what the firm believes is its core
competence.
An important future direction that emerges from this research is to assess
the link between volume variability at the origin points, UPS's consolidation
process and the on-time service levels achieved. Also, other similar case Re-engineering
studies, as well as empirical research covering a larger cross-section of industry global supply
also need to be carried out. Finally the role of information in reinforcing a chains
strategic logistics alliance needs to be studied in greater detail.

Note
1. Throughout this discussion, we use the term 199X to represent the year in order to respect 33
the confidentiality request of the companies.

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