全英文课《Designing and Managing

1 Supply Chain System》 授课教案

Chapter 8 (Lecture 10) Strategic Alliances and VMI

OBJECTIVES

(1) Understand the framework and three types of strategic alliances.

(2) Understand the several types of retailer - supplier partnerships.
(3)Grasp the advantages and disadvantages of third-party logistics and VMI

TEACHING CONTENT

8.1 introduction
Four basic ways to ensure logistics function are completed:
(1) Internal activities: Activities that are core strengths may be the best way to
perform the activity.
(2) Acquisitions: Gives the acquiring firm full control over the way the
particular business function is performed. Can be difficult and expensive. (Culture
conflict/Competitors)
(3) 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.
(4) Strategic alliances: Multifaceted, goal-oriented, long-term partnerships.
Risks are pooled and rewards are shared. Typically lead to long-term strategic benefits
for partners.
8.2 Framework for Strategic Alliances
There are many difficult strategic issues that play a part in the selection of
appropriate strategic alliances. To determine whether a particular strategic alliance is
appropriate for your firm, consider how the alliance will help address the following
issues:
Adding value to products. A partnership with the appropriate firm can help add
value to existing products.
Improving market access. Partnerships that lead to better advertising or
increased access to new market channels can be beneficial.
Strengthening operations. Alliances between appropriate firms can help to
improve operations by lowering system costs and cycle times. Facilities and resources
can be used more efficiently and effectively.
Adding technological strength. Partnerships in which technology is shared can
help add to the skills base of both partners. Also, the difficult transitions between old
and new technologies can be facilitated by the expertise of one of the partners.
Enhancing strategic growth. Many new opportunities have high entry barriers.
Partnerships might enable firms to pool expertise and resources to overcome these
barriers and explore new opportunities.
Enhancing organizational skills. Alliances provide a tremendous opportunity
 全英文课《Designing and Managing
2 Supply Chain System》 授课教案

for organizational learning. In addition to learning from one another, partners are
forced to learn more about themselves and to become more flexible so that these
alliances work.
Building financial strength. In addition to addressing these competitive issues,
alliances can help to build financial strength. Income can be increased and
administrative costs can be shared between partners or even reduced owing to the
expertise of one or both of the partners. Of course, alliances also limit investment
exposure by sharing risk.
8.3 Third-party logistics
8.3.1 the Concept of 3PL
Third-party logistics is simply the use of an outside company to perform all or
part of the firm's materials management and product distribution functions. 3PL
relationships are typically more complex than traditional logistics supplier
relationships: they are true strategic alliances.
Although companies have used outside firms to provide particular services, such
as trucking and warehousing, for many years, these relationships had two typical
characteristics: they were transaction based and the companies hired were often
single-function specific. Modern 3PL arrangements involve long-term commitments
and often multiple functions or process management.
3PL providers come in all sizes and shapes, from small companies with a few
million dollars in revenues to huge companies with revenues in the billions. Most of
these companies can manage many stages of the supply chain. Some third-party
logistics providers own assets such as trucks and warehouses; others may provide
coordination services but not own assets on their own. Non-asset-owning third-party
logistics firms are sometimes called fourth-party logistics providers (4PL).
8.3.2 Advantages and Disadvantages of 3PL
(1) Advantages of 3PL:
Focus on Core Strengths. The most frequently cited benefit of using 3PL
providers is that it allows a company to focus on its core competencies. With
corporate resources becoming increasingly limited, it is often difficult to be an expert
in every facet of the business. Logistics outsourcers provide a company with the
opportunity to focus on that company's particular area of expertise, leaving the
logistics expertise to the logistics companies. (Of course, if logistics is one of the
company's areas of expertise, then outsourcing may not make sense.)
 全英文课《Designing and Managing
3 Supply Chain System》 授课教案

Provide Technological Flexibility. As requirements change and technology

advances, and technology becomes more prevalent, the better 3PL providers
constantly update their information technology and equipment. Often individual
companies do not have the time, resources, or expertise to constantly update their
technology. Different retailers may have different, and changing, delivery and
information technology requirements, and meeting these requirements may be
essential to a company's survival. Third-party logistics providers often can meet these
requirements in a quicker, more cost-effective way. Also, third-party providers already
may have the capability to meet the needs of a firm's potential customers, allowing the
firm access to certain retailers that might not otherwise be possible or cost-effective.
Provide Other Flexibilities. Third parties also may provide greater flexibility to
a company. One example is flexibility in geographic locations. Increasingly, suppliers
are requiring rapid replenishment, which in turn may require regional warehousing.
By utilizing third-party providers for this warehousing, a company can meet customer
requirements without committing capital and limiting flexibility by constructing a
new facility or committing to a long-term lease. Also, flexibility in service offerings
may be achieved through the use of third parties, which may be equipped to offer
retail customers a much larger variety of services than the hiring firm. In some cases,
the volume of customers demanding these services may be low to the firm, but higher
to the 3PL provider, who may be working for several different firms across different
industries. In addition, flexibility in resource and workforce size can be achieved
through outsourcing. Managers can change what would be fixed costs into variable
costs, in order to react more quickly to changing business conditions.
(2) Disadvantages of 3PL: The most obvious disadvantage of the use of 3PL
providers is the loss of control inherent in outsourcing a particular function. This is
especially true for outbound logistics where 3PL company employees themselves
might interact with a firm's customers. Many third-party logistics firms work very
hard to address these concerns. Also, if logistics is one of the core competencies of a
firm, it makes no sense to outsource these activities to a supplier who may not be as
capable as the firm's in-house expertise. In particular, if certain logistics activities are
within the core competencies of the firm and others are not, it might be wise to
employ 3PL providers for only those areas that outside providers can handle better
than the hiring firm.
 全英文课《Designing and Managing
4 Supply Chain System》 授课教案

8.4 Retailer-Supplier Relationships

8.4.1 Types of RSP
In a basic quick response strategy, suppliers receive POS data from retailers
and use this information to synchronize their production and inventory activities with
actual sales at the retailer. In this strategy, the retailer still prepares individual orders,
but the POS data are used by the supplier to improve forecasting and scheduling and
to reduce lead time.
In a continuous replenishment strategy, sometimes called rapid replenishment,
vendors receive POS data and use these data to prepare shipments at previously
agreed-upon intervals to maintain specific levels of inventory. In an 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. Thus, in a
structured way, inventory levels are continuously improved. In addition, the inventory
levels need not be simple levels, but could be based on sophisticated models that
change the appropriate level based on seasonal demand, promotions, and changing
consumer demand.
In a vendor-managed inventory (VMI) system, sometimes called a
vendor-managed replenishment (VMR) system, the supplier decides on the
appropriate inventory levels of each of the products (within previously agreed-upon
bounds) and the appropriate inventory policies to maintain these levels. In the initial
stages, vendor suggestions must be approved by the retailer, but eventually the goal of
many VMI programs is to eliminate retailer oversight on specific orders.

Figure 1 the system of VMI

This type of relationship is perhaps most famously exemplified by Wal-Mart and
Procter & Gamble, whose partnership, begun in 1985, has dramatically improved
P&G's on time deliveries to Wal-Mart while increasing inventory turns [31]. Other
discount stores followed suit, including Kmart, which by 1992 had developed over
200 VMI partners. These VMI projects have in general been successful: projects at
Dillard Department Stores, JCPenney, and Wal-Mart have shown sales increases of 20
to 25 percent, and 30 percent inventory turnover improvements.
 全英文课《Designing and Managing
5 Supply Chain System》 授课教案

Figure 2 the process between Wal-Mart and P&G

8.4.2 Advantages of VMI

By using VMI, suppliers become active players and take on responsibility for the
stocks of their customers. They can view current stocks, supply within fixed and
agreed maximum and minimum stock limits and thereby better plan their own
production.
The benefits for suppliers and retailers are: more transparency, lower stock levels,
higher inventory turns, reduced costs.
8.4.3 Steps in RSP Implementation
(1) Initially, the contractual terms of the agreement must be negotiated. These
include decisions concerning ownership and when it is to be transferred, credit terms,
ordering responsibilities, and performance measures such as service or inventory
levels, when appropriate.
(2) Next, the following three tasks must be executed:
• If they do not exist, integrated information systems must be developed for both
supplier and retailer. These information systems must provide easy access to both
parties.
• Effective forecasting techniques to be used by the vendor and the retailer must
be developed.
• A tactical decision support tool to assist in coordinating inventory management
and transportation policies must be developed. The systems developed, of course, will
depend on the particular nature of the partnership.
The above points can be summarized as the following "VMI" implementation
steps:
Communicate. Customers and suppliers must make the effort to sit down and
discuss the goals and objectives of implementing VMI. Both parties’ hardware and
software requirements must be identified, and an understanding must be reached in
terms of how both companies’ systems will communicate. Then a plan for
implementation must be mapped, specifically identifying each party’s financial and
 全英文课《Designing and Managing
6 Supply Chain System》 授课教案

other responsibilities.
Sharing precise information. Suppliers must have visibility into the customer’s
internal sales and inventory information. Without accurate data, ability to quickly
meet demand will be impaired.
Reliable transmission, receipt, and use of information. To facilitate step 2, the
supplier must be able to guarantee that the customer’s trusted information will be
communicated, received, and utilized securely and thoroughly to meet the
designated needs. Time should be spent during the planning phase discussing
information precision and reliability.
Sufficiently test systems before going live. As with any new system, testing
will uncover any bugs or inefficiencies and can help to avoid future headaches.
Expect implementation to be a process not a project. Remember that there is
no on/off switch. Adjustments will have to be made as demand levels fluctuate, and
no system will be perfect 100% of the time.
Plan to spend sufficient time and money to make it work. Most successful
VMI systems we’ve read about took 2-2.5 years to put into operation, and cost
hundreds of thousands of dollars for IT and training. Spending (or finding) the time to
create a comprehensive system can be a challenge.

QUESTIONS

1. Consider a manager developing a logistics strategy. Discuss specific situations for

which the best approach would be to
a. Employ internal logistics expertise.
b. Acquire a company with this expertise.
c. Develop a strategy, and then employ specific suppliers to carry out
well-defined portions of the strategy.
d. Develop the strategy with a third-party logistics provider.
2. Why is the third-party logistics industry growing so rapidly?
3. In this chapter, we discuss three types of retailer supplier partnerships: quick
response, continuous replenishment, and vendor-managed inventory (VMI). For each
type, discuss situations where that type would be preferred over the other two. For
instance, compare quick response to continuous replenishment: under what conditions
is one preferred over the other?
4. Consider the quick response partnership. Suppose the retailer places an order at the
beginning of each month but transfers POS data to the supplier every week. What is
the impact of the manufacturer's weekly production capacity on the benefit from
information sharing? That is, under what situations is information sharing most
beneficial: high weekly production capacity or low capacity? How should the supplier
use the weekly demand data received from the retailer?
5. Discuss the various possibilities for inventory ownership policies in a VMI
arrangement. What are the advantages and disadvantages of each of these policies?