Strategic Alliances in Supply Chain

Management
 The Power matrix of Supplier-
Buyer Relationship

High
Buyer Dominance Inter-dependence

Relative utility
and scarcity of
buyer’s
resources for
suppliers Independence Supplier Dominance

(adverse selection) (moral hazard)

Low

L
o
w
 Critical success factors to SA
• Trust
• Cooperation
• communication
 Ways to Operate a Company
• Internal activities
• Acquisition
• Arm’s length transaction
• Outsourcing
• Strategic alliance
 Stages of Strategic Alliance
• Initial Euphoria
• Honeymoon period
• Dawning realization
• Aftershock
• Damage control
Conceptual model of alliance development
• Alliance conceptualization
• Alliance pursuance
• Alliance confirmation
• Alliance implementation/continuity
 Types of alliance
• Opportunistic alliance
• Complementary strategic alliance
 Why Strategic Alliance?
• Adding value to products/services
• Improving market access
• Strengthening operations
• Adding technological strength
• Enhancing strategic growth
• Building financial strength
 Types of Alliance
• Third-party logistics (3PL)
• Fourth-party logistics (4PL)
• Retailer-supplier partnerships (RSP)
• Distributor integration (DI)
 Third Party Logistics
• What is 3PL?
– Outside firms perform materials management
and logistics functions
– Long term commitments and multiple
functions
• What are the advantages of 3PL?
– Focus on core strengths
– Provides technological flexibility
– Provides flexibility in
• geography
• workforce size
• additional services
• resource flexibility
 3PL
• Use of an outside company to perform
all or part of the form’s materials
management and product distribution
function

• Relationship vs. transactional based

• Single-function vs. multi-function
• Long-term vs. short-term
commitments
 3PL
• Disadvantages
– Loss of control
– 3PL
employees
may interact
with
customers
• 3PL’s address
this with
uniforms,
logos, etc
– Sharing of
confidential
info
• Examples
 4PL
It refers to the evolution in logistics from
suppliers focused on warehousing and
transportation (third-party logistics providers) to
suppliers offering a more integrated solution.
Among other services, fourth-party logistics
providers include supply chain management and
solutions, change management capabilities, and
value added services in their offering.
 Strategic Alliance:
Types of SA
• Quick Response:
– Vendors receive POS data from retailers, and
use this information to synchronize production
and inventory activities at the supplier.
– The retailer still prepares individual orders, but
the POS data is used by the supplier to
improve forecasting and scheduling.
– Example: Milliken and Company: The lead time
from order receipt at Milliken’s textile plants
to final clothing receipt at several of the
department stores involved was reduced from
eighteen weeks down to three weeks.
 Strategic Alliance:
Types of SA
• Continuous Replenishment: Vendors
receive POS data and use it prepare
shipments at previously agreed upon
intervals to maintain agreed to levels of
inventory.
– Wal-Mart, Kmart
• Advanced Continuous Replenishment:
Suppliers may gradually decrease
inventory levels at the retailer’s store or
distribution center as long as service
levels are met. Inventory levels are thus
continuously improved in a structured
way.
Requirements for Effective Strategic Alliance

• 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 SA 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
 Important SA Issues
• Confidentiality
• Communication and cooperation
– When First Brands started partnering
with Kmart, Kmart often claimed that its
supplier was not living up to its
agreement to keep two weeks of
inventory at all times. It turned out that
this was due to the fact that the two
companies employed different
forecasting methods.
 Steps in SA Implementation
• Contractual negotiations
– Ownership
– Credit terms
– Ordering decisions
– Performance measures
• Develop or integrate information systems
• Develop effective forecasting techniques
• Develop a tactical decision support tool to
assist in coordinating inventory
management and transportation policies
 Advantages of SA
• Fully utilize system knowledge
– Consider the partnership between
White-Hall Robbins (W-R), who makes
over-the-counter drugs such as Advil,
and Kmart. W-R initially disagreed with
Kmart about forecasts, and in this case,
it turned out that W-R forecasts were
more accurate because they have a
much more extensive knowledge of
their products than Kmart does.
 Advantages of SA
• Decrease required inventory
levels
• Improve service levels
• Decrease work duplication
• Improve forecasts
 Disadvantages of SA
• Expensive advanced technology
is required.
• Supplier/retailer trust must be
developed.
• Supplier responsibility
increases.
• Expenses at the supplier
often increase.
–Why? How can this be
 Examples of SA 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.
– 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.
– Extra sales, increased costs to Western
Examples of SA Successes and Failures
• VF Corporation’s Market Response
System:
– The VF Corporation, which has many well
known brand names (including Wrangler, Lee,
Girbaud, and many others), began its VMI
program in 1989.
– Currently, about 40 percent of its production is
handled using some type of automatic
replenishment scheme.
– This is particularly notable because the
program encompasses 350 different retailers,
40,000 store locations, and more than 15
million replenishment levels.
– VF’s program is considered one of the most
Examples of SA Successes and Failures
• Spartan Stores
– Spartan Stores, a grocery chain, shut
down its VMI effort about one year after
its inception.
– One problem was that buyers were not
spending any less time on reorders than
they did before
– 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
 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
Information for Coordination of Systems

• Information is required to move from local

to global optimization
• Questions:
– Who will optimize?
– How will savings be split?
• Information is needed :
– Production status and
costs
– Transportation availability
and costs
– Inventory information
– Capacity information
– Demand information
 Role of Information in Supply Chain
Success

Information Global Coordinated Supply Chain

Decisions Success
Scope
 Supply Chain: Legacy Systems
Strategic

Planning

Operational

Supplier Manufacturer Distributor Retailer Customer

 Information Technology in a Supply
Strategic Chain: ERP Systems

Planning

Potential ERP Potential

Operational ERP ERP

Supplier Manufacturer Distributor Retailer Customer

 Information Technology in a
Supply Chain: Analytical
Applications
Strategic

SCM

Planning APS Transport & Inventory Dem Plan

Planning
Supplier
Apps
Transport execution & CRM/
MES SFA
WMS
Operational

Supplier Manufacturer Distributor Retailer Customer