Supply Chain Management

Week 9: Strategic Alliances

Tai Pham
Introduction

I Complexity in business environments increasing

I Resources required to manage are becoming increasingly
scarce
I Many functions need to be outsourced
I Firms need to ensure that functions are performed by the
other firms
Four Basic Ways to Ensure Tasks Are Completed
I Internal activities
I Activities that are core strengths may be the best way to
perform the activity.
I Acquisitions
I Gives the acquiring firm full control over the way the particular
business function is performed
I Can be difficult and expensive. (Culture/Competitors)
I Arm’s-length transactions
I Most business transactions are of this type.
I Short-term arrangement that fulfills a particular business need
but doesn’t lead to long-term strategic advantages.
I Strategic alliances
I Multifaceted, goal-oriented, long-term partnerships between
two companies
I Both risks and rewards are shared.
I Typically lead to long-term strategic benefits for both partners.
Framework for Strategic Alliances: When to Go for a
Strategic Alliance?

I Adding value to products

I Improving market access
I Strengthening operations
I Adding technological strength
I Enhancing strategic growth
I Enhancing organizational skills
I Building financial strength
Downsides

I Core competencies should not be compromised

I Competitive advantages should not be compromised
Three Types of Strategic Alliances

I Third Party Logistics (3PL)

I Retailer–Supplier Partnerships (RSP)
I Distributor Integration (DI)
Third Party Logistics (3PL)

I Use of 3PL providers to take over a company’s logistics

functions

I Almost a $85 billion industry by 2004

I 8% of all logistics costs attributed to 3PL

Third Party Logistics (3PL) (Cont.)

I Strategic partnership
I Long term commitment
I Multi-function arrangement
I Process integration
I Large range of 3PL companies
I Non-asset owning 3PL companies called 4PL
I Provide services but not trucks, warehouses
I Prevalent usage with larger companies
3PL Advantages

I Focus on Core Strengths

I Allows a company to focus on its core competencies
I Logistics expertise left to the logistics experts

I Provides Technological Flexibility

I Technology advances adopted by better 3PL providers
I Adoption possible by 3PLs in a quicker, more cost-effective way
I 3PLs may have the capability to meet the needs of a firm’s
potential customers

I Provides Other Flexibilities

I Flexibility in geographic locations.
I Flexibility in service offerings
I Flexibility in resource and workforce size
3PL Disadvantages

I Loss of control inherent in outsourcing a particular function.

I Outbound logistics 3PLs interact with a firm’s customers.
I Many third-party logistics firms work very hard to address
these concerns.
I Painting company logos on the sides of trucks, dressing 3PL
employees in the uniforms of the hiring company, and
providing extensive reporting on each customer interaction.

I Logistics is one of the core competencies of a firm

I Makes no sense to outsource these activities to a supplier who
may not be as capable as the firm’s in-house expertise
I Wal-Mart, pharmaceutical companies
3PL issues

I A 3PL contract is usually a major and complex business

decision.

I Apart from pros and cons listed above, there are many
considerations before entering an agreement with 3PL
providers, including
I operational cost
I customer orientation
I specialization
I asset owning versus non-asset owning
3PL issues (Cont.)
I Know your own costs
I Compare with the cost of using an outsourcing firm.
I Use activity-based costing techniques

I Customer orientation of the 3PL

I Ability of provider to understand the needs of the hiring firm
and to adapt its services to the special requirements of that
firm.
I Reliability.
I Flexibility of the provider

I Specialization of the 3PL

I Consider firms whose roots lie in the particular area of logistics
that is most relevant to the logistics requirements in question.
I Firms may have even more specialized requirements
I Firms can use one of its trusted core carriers as its third-party
logistics provider.
3PL issues (Cont.)

I Asset-owning companies
I Significant size, human resources, customer base, economies of
scope and scale, and systems
I May be bureaucratic with a long decision-making cycle.

I Non-asset-owning companies
I May have limited resources and bargaining power
I May be more flexible
I Able to tailor services and have the freedom to mix and match
providers.
I May have low overhead costs and specialized industry expertise
at the same time
3PL implementation issues
I Buying company
I Should devote enough time to start-up considerations (First
6-12 months most critical)
I Must identify exactly what it needs for the relationship to be
successful
I Be able to provide specific performance measures and
requirements to the 3PL firm.

I 3PL company:
I Must consider and discuss requirements honestly and
completely, including their realism and relevance

I Both parties:
I Must dedicate time and effort for the relationship
I Treat as a mutually beneficial alliance
I No “transaction pricing” mentality
Other implementation issues

I The third party and its service providers must respect the
confidentiality of the data.
I Specific performance measures must be agreed upon.
I Specific criteria regarding subcontractors should be discussed.
I Arbitration issues should be considered before entering into a
contract.
I Escape clauses should be negotiated into the contract.
I Methods of ensuring that performance goals are being met
should be discussed
Retailer-Supplier Relationships

I Cooperative relationship between suppliers and retailers to use

one another’s knowledge

I Suppliers have better knowledge of lead times and production

capacities

I Retailers have better knowledge of demands

I Types of retailer-supplier relationshops (RSP) include

I Quick Response Strategy
I Continuous Replenishment Strategy
I Vendor Managed System (VMI)
Quick Response Strategy

I Suppliers receive POS data from retailers

I Suppliers use this information to synchronize their production

and inventory activities with actual sales at the retailer.

I Retailers still prepare individual orders

I POS data are used by suppliers to improve forecasting and

scheduling and to reduce lead time
Continuous Replenishment Strategy

I Also called rapid replenishment

I Suppliers receive POS data

I Suppliers use these data to prepare shipments at previously

agreed-upon intervals to maintain specific levels of inventory.

I Advanced form of continuous replenishment

I Suppliers may gradually decrease inventory levels at the retail
store or distribution center as long as service levels are met.
Vendor Managed System (VMI)
I Also called vendor-managed replenishment (VMR) system

I Supplier decides on the appropriate inventory levels and the

appropriate inventory policies to maintain these levels.

I Supplier suggestions initially approved by retailer

I Goal of many VMI programs is to eliminate retailer oversight

on specific orders.

I Wal-Mart and Procter & Gamble VMI

I Partnership, begun in 1985
I Has improved P&G’s on-time deliveries to Wal-Mart while
increasing inventory turns
Main Characteristics of RSP
RSP Requirements

I Presence of advanced information systems

I Top management commitment

I Especially because information will be shared across companies

I A level of trust among partners

I Supplier manages retailer’s inventory
I Retailer provides sales information to supplier
I Reduced inventory leads to space savings
I Should not be given to competitors
RSP Inventory Ownership

I Who makes the replenishment decisions?

I Who owns the inventory until it is sold?

I Consignment relationship in VMI programs
I Supplier owns the inventory until it is sold

I Issues with consignment relationship:

I Retailer lowers inventory cost
I Supplier can manage inventory more effectively
I Supplier can move as much inventory as contract allows
I Higher costs to supplier because of longer inventory holding
I Relationship power between supplier and retailer may move the
supply contract to consider higher system savings rather than
savings from one party only (Global v.s. Local)
RSP Implementation

I Performance measurement criteria must also be agreed to.

I Non-financial measures as well as the traditional financial
measures.

I Initial problems can be worked out through communication

and cooperation.

I Manufacturing technology or capacity at supplier may need to

be modified/enhanced to respond to specifics in the contract:
I Fast response to emergencies
I Situational changes at the retailer
Steps in RSP Implementation

I Initially, the contractual terms of the agreement must be

negotiated on the following:
I Inventory ownership
I Credit terms
I Ordering responsibilities
I Performance measures such as service or inventory levels, when
appropriate.

I The following three additional steps need to be executed:

I Development of integrated information systems
I Development of effective forecasting techniques
I Establishment of a tactical decision support tool to assist in
coordinating inventory management and transportation policies
Advantages of RSP

I Better knowledge the supplier has about order quantities

I an ability to control the bullwhip effect

I A variety of side benefits

I provides a good opportunity for the reengineering of the
retailer–supplier relationship.
I eliminate redundant order entries
I automate manual tasks can be automated
I reassign tasks for better efficiency
I Eliminate unnecessary control steps
Disadvantages of RSP

I Necessary to employ advanced technology, which is often

expensive.
I Essential to develop trust in what once may have been an
adversarial supplier– retailer relationship.
I Supplier often has much more responsibility than formerly.
I May force the supplier to add personnel to meet this
responsibility.
I Expenses at the supplier often increase as managerial
responsibilities increase.
I Consignment arrangement may increase inventory costs for
the supplier.
I Float
I Retailers accustomed to waiting 30 to 90 days to pay for goods
may now have to pay upon delivery
Examples of SP Successes and Failures

I Western Publishing-Golden Books:

I Western Publishing is using VMI for its Golden Books line of
children’s books at several retailers.
I POS data automatically triggers re-orders when inventory falls
below a reorder point.
I This inventory is delivered either to a distribution center, or in
many cases, directly to the store.
I Ownership of the books shifts to the retailer once deliveries
have been made.
I In the case of Toys R Us, the company has even managed the
entire book section for the retailer, including inventory from
suppliers other than Western Publishing.
Examples of SP Successes and Failures (Cont.)

I VF Corporation’s Market Response System:

I The VF Corporation, which has many well known brand names
(including Wrangler, Lee, Girbaud, and many others), began
its VMI program in 1989.
I Currently, about 40 percent of its production is handled using
some type of automatic replenishment scheme.
I This is particularly notable because the program encompasses
350 different retailers, 40,000 store locations, and more than
15 million replenishment levels.
I VF’s program is considered one of the most successful in the
apparel industry.
Examples of SP Successes and Failures (Cont.)

I Spartan Stores
I Spartan Stores, a grocery chain, shut down its VMI effort
about one year after its inception
I One problem was that buyers were not spending any less time
on reorders than they did before
I This was because they didn’t trust the suppliers enough to be
able to stop carefully monitoring the inventories and deliveries
of the VMI items, and intervening at the slightest hint of
trouble.
I Furthermore, the suppliers didn’t do much to allay these fears.
The problems were not with the suppliers’ forecasts; instead,
they were due to the suppliers’ inability to deal with
promotions, which are a key part of the grocery business.
I Since they were unable to appropriately account for
promotions, delivery levels were often unacceptably low during
these periods of peak demand.
Distributor Integration (DI)

I Distributors an important partner in the supply chain

I Distributors have a wealth of information about customer

needs and wants
I Successful manufacturers use this information when developing
new products and product lines.

I Distributors typically rely on manufacturers to supply the

necessary parts and expertise
Changing view regarding distributors

I Strong and effective distribution network cannot always meet

challenges
I Rush order might be impossible to meet from inventory
I Customer might require some specialized technical expertise
that the distributor does not have.

I In the past, issues were addressed by adding inventory and

personnel

I Modern information technology leads to a third solution

I Distributor Integration
I Expertise and inventory located at one distributor is available
to the others.
Types of DI
I Addresses both inventory-related and service-related issues
I Inventory pooling across the entire distributor network
I Each distributor checks inventories of other distributors to
locate a needed product or part.
I Dealers are contractually bound to exchange the part under
certain conditions and for agreed-upon remuneration.
I lowers total inventory costs
I increases service levels.

I Meet a customer’s specialized technical service requests

I Steer special requests to the distributors best suited to address
them
I Centers of Excellence for Otra, a large Dutch holding
company
I 70 electrical wholesale subsidiaries
I some designated as centers of excellence
I Other subsidiaries, as well as customers, are directed to these
centers of excellence to meet particular requests
Issues in DI

I Distributors may be skeptical of the rewards of participating in

such a system

I Participating distributors will be forced to rely upon other

distributors, some of whom they may not know, to help them
provide good customer service.
Issues in DI (Cont.)

I Tends to take certain responsibilities and areas of expertise

away from certain distributors, and concentrate them on a few
distributors. It is not surprising that distributors might be
nervous about losing these skills and abilities.

I DI relationship requires:
I a large commitment of resources and effort for the
manufacturer
I a long-term alliance.
I trust among the participants.
I pledges and guarantees from the manufacturer to ensure
distributor commitment.
Summary
I Various types of partnerships can be used to manage the
supply chain effectively.
I Framework that can help in selecting the most appropriate
way to address a particular logistics issue.
I 3PLs are becoming more prevalent.
I Both advantages and disadvantages to outsourcing the
logistics function
I Many important issues to consider once the decision has been
made and a 3PL agreement is being implemented.
I RSPs are also becoming common.
I Issues and concerns relating to the implementation of RSP
types of arrangements
I Distributor Integration (DI)
I Create risk-pooling opportunities across the various distributors
I Enable different distributors to develop different areas of
expertise.