Unit III

Strategic Alliances
 Introduction
• Complexity in business environments increasing
• Resources required to manage are becoming increasingly
scarce
• Enable business to gain competitive advantage through
access to a partner's resources such as markets,
technologies, capital and people.
• Always not effective to perform all key business functions
in-house
• Many times other firms have special resources and technical
knowledge and better suited to perform few functions
• Ex:
✔ Labour intensive activities outsourced to India and China due to
lower wages.
✔ Electronic hardware outsourced to Taiwan
✔ Software intensive work to India
 Four Basic Ways to Ensure Tasks Are Completed
● Internal activities
● Perform the activities using internal resources and expertise if that are
core strengths. Best way to perform an activity.
● Acquisitions A B
● Gives the acquiring firm(B) full control over the way the particular
business function is performed. Ex; Corus by Tata steel
● Disadv: Can be difficult and expensive. (Culture/Competitors),
Effectiveness of acquired company (A) may be lost.
● Arm’s-length transactions
● Most business transactions are of this type.
● Short-term arrangement that fulfills a particular business need, but
doesn’t lead to long-term strategic advantages.
Ex: Delivery of a load of items, maintenance of a vehicle, design and
installation of software etc.
● Strategic alliances
● Multifaceted, goal-oriented, long-term agreement for cooperation between
two or more companies to create increased value for their customers
● Both risks & rewards are shared while remaining independent organizations
● Typically lead to long-term strategic benefits for both partners.
 Framework for Strategic Alliances: When to
Go for a Strategic Alliance?
Advantages:
● Adding Value to the Products: Partnerships
between companies can add value to products.
Ex: improve time to market, distribution times, or
repair times etc.
● Improving market access: Partnerships can lead
to better advertising or access to new
market channels. Ex: Complementary consumer
product manufacturers can increase sales for
everyone.
 Framework for Strategic Alliances: When to
Go for a Strategic Alliance?
Advantages:
● Strengthening operations: Alliance can help to
improve operations by lowering system costs and
cycle times. Ex: companies with complementary
seasonal products can effectively use
warehouses and trucks year-round.
● Adding technological strength: Alliance can help
to add to the skills base of both partners. Ex: a
supplier in need of a particular enhanced
information system can partner with a firm that
already has expertise in this system.
 Framework for Strategic Alliances: When to
Go for a Strategic Alliance?
Advantages:
● Enhancing strategic growth: Partnerships can
enable firms to pool expertise and resources to
overcome entry barriers and explore new
opportunities.
● Enhancing organizational skills: Alliances provide
a opportunity for organizational learning from one
another, & to learn more about themselves.
● Building financial strength: Alliances can help to
build financial strength. Income can be increased
and administrative costs can be shared.
 Downsides
● Core competencies should not be compromised

● Competitive advantages should not be

compromised
 Three Types of Strategic
Alliances
● Third Party Logistics (3PL)
● Retailer–Supplier Partnerships (RSP)
● Distributor Integration (DI)
 Third Party Logistics (3PL)
● The use of an outside company to perform all or
part of the firm's materials management and
product distribution functions.
● It is a Strategic partnership and Long term
commitment
● Ex: Ryder Dedicated Logistics has an agreement
to design, manage, and operate all of Whirlpool
Corporation's inbound logistics. Safe Express
also provides 3PL services to
many firms in India.
● 4PL:Non-asset owning 3PL companies. Provide
services but not trucks, warehouses
 3PL Advantages
● Focus on Core Strengths
● Allows a company to focus on its core competencies
● Logistics expertise left to the logistics experts
● Provides Technological Flexibility
● Technology advances are adopted by better 3PL providers
● Adoption possible by 3PLs in a quicker, more cost-effective way
● 3PLs may have the capability to meet the needs of a firm’s
potential customers
● Provides Other Flexibilities
● Flexibility in geographic locations.
● Flexibility in service offerings
● Flexibility in resource and workforce size
 3PL Disadvantages
● Loss of control inherent in outsourcing a particular
function.
● Outbound logistics 3PLs interact with a firm’s
customers.
● Corrective Action: 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.
● Logistics is one of the core competencies of a firm
● Makes no sense to outsource these activities to a
supplier who may not be as capable as the firm’s
in-house expertise
● Wal-Mart, managing its own DCs.
 3PL Issues and Requirements
● Know your own costs
● Compare with the cost of using an outsourcing firm.
● Customer orientation of the 3PL
● Ability of provider to understand the needs of the hiring firm and
to adapt its services to the special requirements of that firm.
● Reliability and
● Flexibility of the provider: react to changing needs of hiring firm
● Specialization of 3PL
● Consider firms which are specialized in particular area of expertize.
● Ex: Blue Dart is major LTL carriers. Federal Express small package
carriers
● Asset-Owning vs Non-Asset-Owning 3PL
 3PL Issues
Asset-Owning vs Non-Asset-Owning 3PL
● Asset-owning companies
● Significant size, human resources, customer base,
economies of scope and scale, and systems
● Non-asset-owning companies
● May have limited resources
● May be more flexible
● Able to tailor services and have the freedom to mix and
match providers.
 Retailer-Supplier Relationships
● Cooperative relationship between suppliers
and retailers to use one another’s knowledge
● Suppliers have better knowledge of lead times
and production capacities
● Retailers have better knowledge of demands
 Types of RSP
Quick Response Strategy
● Suppliers receive POS data from retailers
● Suppliers use this information to synchronize
their production and inventory activities with
actual sales at the retailer.
● Retailers still prepare individual orders
● POS data are used by suppliers to improve
forecasting and scheduling and to reduce lead
time
 Types of RSP
Continuous Replenishment Strategy
● Also called rapid replenishment
● Suppliers receive POS data
● Suppliers use these data to prepare shipments
at previously agreed-upon intervals to
maintain specific levels of inventory.
● Advanced form of continuous replenishment
● Suppliers may gradually decrease inventory
levels at the retail store or distribution
center as long as service levels are met.
 Types of RSP
Vendor Managed System (VMI)
● Also called vendor-managed replenishment (VMR)
system
● Supplier decides on the appropriate inventory levels
and the appropriate inventory policies to maintain
these levels.
● Supplier suggestions initially approved by retailer
● Wal-Mart and Procter & Gamble VMI
● Partnership, begun in 1985
● Has improved P&G’s on-time deliveries to
Wal-Mart while increasing inventory turns
Main Characteristics of RSP
 RSP Requirements

● Presence of advanced information systems

● Top management commitment
● Especially because information will be shared
across companies
● A level of trust among partners
● Supplier manages retailer’s inventory
● Retailer provides sales information to supplier
● Reduced inventory leads to space savings
● Should not be given to competitors
 RSP Implementation
● Performance measurement criteria both
Non-financial and financial measures must be
agreed to.
● Initial problems can be worked out through
communication and cooperation.
● Both the parties must respect confidentiality
of information shared
● Arbitration issues should be considered
before entering into a contract.
● Escape clauses should be negotiated into the
contract.
 Steps in RSP Implementation
● Initially, the contractual terms of the agreement
must be negotiated on the following:
● Inventory ownership
● Credit terms
● Ordering responsibilities
● Performance measures such as service or inventory levels,
when appropriate.
● The following three additional steps need to be
executed:
● Development of integrated information systems
● Development of effective forecasting techniques
● Establishment of a tactical decision support tool to assist in
coordinating inventory management and transportation
policies
 Advantages of RSP
● Better knowledge the supplier has about order
quantities to control the bullwhip effect
● Reduces overall system costs and improve
service levels
● Provides a good opportunity for reengineering
of the RSP.
● eliminate redundant order entries
● manual tasks can be automated
● reassign tasks for better efficiency
● Eliminate unnecessary control steps
 Examples of SP Successes and
Failures
● Western Publishing-Golden Books:
● Western Publishing is using VMI for its Golden
Books line of children’s books at several
retailers.
● POS data automatically triggers re-orders
when inventory falls below a reorder point.
● This inventory is delivered either to a
distribution center, or in many cases, directly
to the store.
● Ownership of the books shifts to the retailer
once deliveries have been made.
 Distributor Integration (DI)
● Distributor is treated as important partner in
the supply chain
● Appreciating value of distributors and their
relationship with end users and providing
them with necessary support to be successful.
● Distributors have a wealth of information
about customer needs and wants. Successful
manufacturers use this information when
developing new products and product lines.
● Distributors typically rely on manufacturers to
supply the necessary parts and expertise
 Changing View Regarding Distributors
● Strong and effective distribution network can always
meet challenges
● Rush order might be impossible to meet from inventory
● Customer might require some specialized technical
expertise that the distributor does not have.
● In the past, issues were addressed by adding
inventory and personnel
● Modern information technology leads to a third
solution
● Distributor Integration
● Expertise and inventory located at one distributor is
available to the others.
 Types of DI
● DI that addresses inventory-related issues:
● Inventory pooling across the entire distributor
network
● Each distributor checks inventories of other
distributors to locate a needed product or part.
● lowers total inventory costs
● increases service levels.
● DI that addresses service-related issues:
● Can meet a customer’s specialized technical service
requests
● Steer special requests to the distributors best suited
to address them
 Issues in DI
● DI relationship requires:
● a large commitment of resources and effort
for the manufacturer
● a long-term alliance.
● trust among the participants.
● pledges and guarantees from the
manufacturer to ensure distributor
commitment.
 Outsourcing Strategies
• Outsourcing means -- going "out" to find the
"source" of what you need.
• Outsourcing is a cost-saving strategy used by
different companies by transferring portions
of work to outside suppliers rather than
completing it internally.
– Ex: Fashion Industry –Nike- outsources all
manufacturing activities
– Electronics Industry - Apple outsources over 70%
of components.
– Cisco - didn’t build most of what it sold.
– Taiwanese companies design and manufacture
most laptop sold around the world
Motivation for Outsourcing/ Outsourcing Benefits
• Economies of Scale: Aggregation of
orders from many different buyers allows
economy of scale both in manufacturing
and purchasing.
• Risk Pooling:
– Demand uncertainty transferred to the suppliers
– Suppliers reduce uncertainty through the
risk-pooling effect by aggregating demand.
• Reduce capital investment
– Capital investment transferred to suppliers.
– Suppliers’ higher investment shared between
customers.
Motivation for Outsourcing/ Outsourcing Benefits
• Focus on core competency
– Buyer can focus on its core strength
– Allows buyer to differentiate from its competitors
• Increased flexibility
– The ability to better react to changes in customer
demand
– The ability to use the supplier’s technical
knowledge to accelerate product development
cycle time
– The ability to gain access to new technologies and
innovation.
– Critical in certain industries:
• High tech where technologies change very
frequently
• Fashion where products have a short life cycle
 Outsourcing Risks
1.Loss of Competitive Knowledge
• Outsourcing critical components to suppliers may
open up opportunities for competitors
• Outsourcing implies that companies lose their ability
to introduce new designs based on their own agenda
rather than the supplier’s agenda
• Outsourcing the manufacturing of various
components to different suppliers may prevent the
development of new insights, innovations, and
solutions that typically require cross-functional
teamwork
 Outsourcing Risks
2.Conflicting Objectives
• Objective of Buyer: Increased flexibility.
• Objective of Supplier: Cost reduction, Long term &
stable commitment
• Ex: - Buyers insist on flexibility
•would like to solve design problems as fast as
possible
– Suppliers focus on cost reduction
•implies slow responsiveness to design
changes.
Two Main Reasons for Outsourcing

• Dependency on capacity
– Firm has the knowledge and the skills required to
produce the component
– For various reasons decides to outsource
• Dependency on knowledge
– Firm does not have the people, skills, and
knowledge required to produce the component
– Outsources in order to have access to these
capabilities.
 Outsourcing Decisions at Toyota
• About 30% of components in-sourced
• Engines:
– Company has knowledge and capacity
– 100% of engines are produced internally
• Transmissions
– Company has the knowledge
– Designs all the components
– Depends on its suppliers’ capacities
– 70 % of the components outsourced
• Vehicle electronic systems
– Designed and produced by Toyota’s suppliers.
– Company has dependency on both capacity and
knowledge
 Product Architectures
• Modular product
– Made by combining different components
– Components are independent of each other
– Components are interchangeable
– Customer preference determines the product
configuration.
• Integral product
– Made up from components whose functionalities
are tightly related.
– Evaluated on system performance, not on
component performance
– Components perform multiple functions.
A Framework for Make/Buy Decisions
Hierarchical Model to Decide Whether
to Outsource or Not
• Customer Importance
– How important is the component to the customer?
– What is the impact of the component on customer experience?
– Does the component affect customer choice?
• Component Clockspeed
– How fast does the component’s technology change relative to other
components in the system?
• Competitive Position
– Does the firm have a competitive advantage producing this
component?
• Capable Suppliers
– How many capable suppliers exist?
• Architecture
– How modular or integral is this element to the overall architecture of
the system?
Examples of Decisions