Strategic Alliances

Ways to ensure that a logistics-related business function is completed

Internal activities (in-house) Acquisitions Arms-length transactions Strategic alliances

Strategic alliances
Third party logistics Retailer-supplier partnerships Distributor integration

A framework for strategic alliances

Benefits of strategic alliances
Adding value to the products Improving market access Strengthening operations Adding technological strength Enhancing strategic growth Enhancing organizational strength Building financial strength

Core strengths (or competencies) should not be weakened by strategic alliances

Resources should not be diverted from core strengths Key technology should not be shared as a result of an alliance

Example IBM
Apple dominates the PC market since the introduction of its first PC, Apple I, in 1976 IBM decides to enter the PC market in late 1981
No infrastructure for personal computers Alliances with
Intel for microprocessors (4.77 MHz 8088 processor) Microsoft for operating system (MS-DOS) First IBM PC ($1,565=>$4,000 value in 2003), time to market 15 months

In 1985, IBM reaches a market share of 40%, dominating Apple Competitors like Compaq (founded in 1982) and Dell (founded 1984) soon used the same suppliers Intel and Microsoft and take away the market share from IBM In 2001, IBM has a market share of only 8% falling behind Compaq

Third party logistics (3PL)

3PL: use of an outside company to perform all or part of the firms materials management and production distribution functions 3PL arrangements involve long term commitments and often multiple functions, as opposed to transaction based and singlefunction specific 3PL is most prevalent among large companies
3M, Eastman Kodak, General Motors, BP, Fiat

Example: Exel offering 3PL services to Gillette in Turkey

Warehousing Distribution (inbound and outbound) Customs clearance Sub-contracting for packaging and re-labeling

Gillette and Exel

3PL examples Turkey

Ekol logistics
Founded in 1990 67 M DM revenue, 500 employees, in 2001 200 vehicles, 60,000 m2 warehouse space Specializes in textiles, provides 3PL services for
Beymen, Carsi, Benetton, Adidas, Marks and Spencer

TNT logistics Horoz logistics Aras Kargo Yurtici Kargo

3PL advantages and disadvantages

Advantages
Focus on core strengths Provides technological flexibility
3PL providers are better able to constantly update their information technology and equipment 3PL providers may already have the capability to meet the needs of a firms potential customers

Provides other flexibilities

Economies of scale: warehousing, distribution

Disadvantages
Loss of control: 3PL companies face the firms customers Core competency: e.g., Wal-Mart, Caterpillar

Retailer-supplier partnerships
Quick response: Suppliers receive POS data from retailers to synchronize their production and inventory activities with actual sales at the retailers Continuous replenishment: Suppliers receive POS data and use these data to prepare shipments at previously agreed-upon intervals to maintain specific levels of inventory Advanced continuous replenishment: Continuous replenishment with targeted, gradual decrease in inventory levels Vendor managed inventory: Supplier decides on the appropriate inventory levels of each of the product and the appropriate inventory policies

Main characteristics
Alliance type Decision maker Inventory ownership
Retailer

New skills required by vendors

Forecasting skills

Quick response

Retailer

Continuous replenishment
Advanced continuous replenishment Vendor managed inventory

Contractually agreedto levels

Contractually agreedto and continuously improved levels Vendor

Either party Forecasting and inventory control

Either party Forecasting and inventory control Either party Retail management

Requirements for Effective SP

Advanced information systems Top management commitment
Information must be shared Power and responsibility within an organization might change (for example, contact with customers switches from sales and marketing to logistics)

Mutual trust
Information sharing Management of the entire supply chain Initial loss of revenues

Important SP Issues
Inventory ownership:
Retailer owns inventory Supplier owns the goods until they are sold (consignment)
Why would a firm do this?

Performance measures: Fill rate, inventory level, inventory turns Confidentiality Communication and cooperation

Advantages and disadvantages of retailer-supplier partnerships

Advantages
Fully utilize system knowledge (retailer)
Manufacturer may predict demand better

Reduce bullwhip effect (vendor)

Reduced inventory and/or increased service level

Focus on retailing rather than logistics (retailer) Ability to coordinate replenishments to different retailers (vendor)

Disadvantages
Expensive advanced information technology is required. Supplier/retailer trust must be developed. Supplier responsibility increases. Expenses at the supplier often increase. Why? How can this be addressed?

Distributor Integration
Parts are shared across the distributor network Specialized service requests are steered to appropriate dealers or distributors. What is required?
Trust Pledges Guarantees from the manufacturer Advanced information systems

Disadvantages
Incentives for dealers are they giving away competitive advantages? Skills and responsibilities are taken from some dealers/distributors.

Examples - Caterpillar, Okuma

Outsourcing
An easy way to increase profits Nike, Cisco, Apple outsource most of their manufacturing
Each could focus on research, marketing Each has gotten into trouble
2001 Nike reported unexpected profit shortfalls due to inventory problems 2000 Cisco had to write down billions in obsolete inventory 1999 Apple was unable to meet customer demand for new products

Outsourcing Benefits and Risks

Benefits
Economies of scale reduce manufacturing costs Risk pooling demand uncertainties are transferred Reduced capital investment Focus on core competencies Increased flexibility
Ability to better react to changes in customer demand Ability to use the suppliers technical knowledge to accelerate product development cycle time Ability to gain access to new technologies and innovation

Risks
Loss of competitive knowledge Conflicting objectives
Flexibility vs. long-term, stable commitments, etc.

A Framework for Outsourcing

Reasons for outsourcing
Dependency on capacity Dependency on knowledge

Product architecture
Integral products components are tightly related
Designed as a system Not off-the-shelf components Evaluated based on system performance E.g. Automobile engine Components are interchangeable Standard interfaces are used Component can be designed or upgraded independently E.g. Automobile stereo system

Modular products independent components

A Framework for Outsourcing

Product

Dependent: knowledge, capacity Outsourcing risky

Independent Knowledge; Dependent capacity Outsourcing an opportunity

Independent knowledge capacity Outsourcing can reduce cost Keep internal

Modular

Integral

Outsourcing very Outsourcing option risky