Chapter 8 S

Report
Chapter 8
Strategic
Alliances
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
8.1 Introduction
Complexity in business environments
increasing
 Resources required to manage are
becoming increasingly scarce
 Many functions need to be outsourced
 Firms need to ensure that functions are
performed by the other firms

8-2
Four Basic Ways to Ensure Tasks
Are Completed

Internal activities


Acquisitions



Gives the acquiring firm full control over the way the particular
business function is performed
Can be difficult and expensive. (Culture/Competitors)
Arm’s-length transactions



Activities that are core strengths may be the best way to
perform the activity.
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.
Strategic alliances



Multifaceted, goal-oriented, long-term partnerships between
two companies
Both risks and rewards are shared.
Typically lead to long-term strategic benefits for both partners.
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8.2 Framework for Strategic Alliances:
When to Go for a Strategic Alliance?
Adding value to products
 Improving market access
 Strengthening operations
 Adding technological strength
 Enhancing strategic growth
 Enhancing organizational skills
 Building financial strength

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Downsides
Core competencies should not be
compromised
 Competitive advantages should not be
compromised

8-5
Three Types of Strategic
Alliances
Third Party Logistics (3PL)
 Retailer–Supplier Partnerships (RSP)
 Distributor Integration (DI)

8-6
8.3 Third Party Logistics (3PL)
Use of 3PL providers to take over a
company’s logistics functions
 Almost a $85billion industry by 2004
 8% of all logistics costs attributed to 3PL

8-7
What Is 3PL?
Strategic partnership
 Long term commitment
 Multi-function arrangement
 Process integration
 Large range of 3PL companies


Non-asset owning 3PL companies called 4PL
 Provide

services but not trucks, warehouses
Prevalent usage with larger companies
8-8
3PL Advantages

Focus on Core Strengths
Allows a company to focus on its core
competencies
 Logistics expertise left to the logistics experts

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3PL Advantages

Provides Technological Flexibility
Technology advances 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

8-10
3PL Advantages

Provides Other Flexibilities
Flexibility in geographic locations.
 Flexibility in service offerings
 Flexibility in resource and workforce size

8-11
3PL Disadvantages

Loss of control inherent in outsourcing a
particular function.


Outbound logistics 3PLs interact with a firm’s
customers.
Many third-party logistics firms work very hard to
address these concerns.


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 inhouse expertise

Wal-Mart, pharmaceutical companies
8-12
3PL Issues
Costs and Customer Orientation

Know your own costs



Compare with the cost of using an outsourcing firm.
Use activity-based costing techniques
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.
Flexibility of the provider
8-13
3PL Issues
Specialization of the 3PL
Consider firms whose roots lie in the
particular area of logistics that is most
relevant to the logistics requirements in
question.
 Firms may have even more specialized
requirements
 Firms can use one of its trusted core
carriers as its third-party logistics provider.

8-14
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
May be bureaucratic with a long decision-making
cycle.
Non-asset-owning companies




May have limited resources and bargaining power
May be more flexible
Able to tailor services and have the freedom to mix
and match providers.
May have low overhead costs and specialized
industry expertise at the same time
8-15
3PL Implementation Issues

Buying company
Should devote enough time to start-up
considerations (First 6-12 months most
critical)
 Must identify exactly what it needs for the
relationship to be successful
 Be able to provide specific performance
measures and requirements to the 3PL firm.

8-16
3PL Implementation Issues

3PL company:


Must consider and discuss requirements
honestly and completely, including their
realism and relevance
Both parties:
Must dedicate time and effort for the
relationship
 Treat as a mutually beneficial alliance
 No “transaction pricing” mentality

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Other Issues






The third party and its service providers must
respect the confidentiality of the data.
Specific performance measures must be agreed
upon.
Specific criteria regarding subcontractors should be
discussed.
Arbitration issues should be considered before
entering into a contract.
Escape clauses should be negotiated into the
contract.
Methods of ensuring that performance goals are
being met should be discussed
8-18
8.4 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

8-19
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

8-20
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.
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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
Goal of many VMI programs is to eliminate retailer
oversight on specific orders.
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
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Main Characteristics of RSP
Criteria →
Type ↓
Decision maker
Inventory Ownership
New skills employed by
vendors
Retailer
Forecasting skills
Either party
Forecasting and
inventory control
Quick response
Retailer
Continuous
replenishment
Contractually agreedto levels
Advanced
continuous
replenishment
Contractually agreedto and continuously
improved levels
Either party
Forecasting and
inventory control
VMI
Vendor
Either party
Retail management
8-23
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
8-24
RSP Inventory Ownership


Who makes the replenishment decisions?
Who owns the inventory until it is sold?

Consignment relationship in VMI programs


Supplier owns the inventory until it is sold
Issues with consignment relationship:


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

Retailer lowers inventory cost
Supplier can manage inventory more effectively
Supplier can move as much inventory as contract
allows
Higher costs to supplier because of longer inventory
holding
Power relationship between supplier and retailer may
move the supply contract to consider higher system
savings rather than savings from one party only
(Global v. Local)
8-25
RSP Implementation

Performance measurement criteria must also be
agreed to.



Non-financial measures as well as the traditional
financial measures.
Initial problems can be worked out through
communication and cooperation.
Manufacturing technology or capacity at supplier
may need to be modified/enhanced to respond
to specifics in the contract:


Fast response to emergencies
Situational changes at the retailer
8-26
Steps in RSP Implementation

Initially, the contractual terms of the agreement
must be negotiated on the following:


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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
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Advantages of RSP

Better knowledge the supplier has about
order quantities


an ability to control the bullwhip effect
A variety of side benefits

provides a good opportunity for the
reengineering of the retailer–supplier
relationship.
 eliminate
redundant order entries
 automate manual tasks can be automated
 reassign tasks for better efficiency
 Eliminate unnecessary control steps
8-28
Disadvantages of RSP



Necessary to employ advanced technology, which is
often expensive.
Essential to develop trust in what once may have
been an adversarial supplier– retailer relationship.
Supplier often has much more responsibility than
formerly.




May force the supplier to add personnel to meet this
responsibility.
Expenses at the supplier often increase as
managerial responsibilities increase.
Consignment arrangement may increase inventory
costs for the supplier.
Float

Retailers accustomed to waiting 30 to 90 days to pay
for goods may now have to pay upon delivery
8-29
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.

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.
8-30
Examples of SP
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
successful in the apparel industry.
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Examples of SP
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 trouble.
8-32
Examples of SP
Successes and Failures

Spartan Stores (continued)

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.

Since they were unable to appropriately account
for promotions, delivery levels were often
unacceptably low during these periods of peak
demand.
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8.5 Distributor Integration (DI)
Distributors an important partner in the
supply chain
 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
8-34
Changing View Regarding Distributors

Strong and effective distribution network cannot
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.
8-35
Types of DI

Addresses both inventory-related and service-related
issues


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Inventory pooling across the entire distributor network
Each distributor checks inventories of other distributors to
locate a needed product or part.
Dealers are contractually bound to exchange the part
under certain conditions and for agreed-upon
remuneration.



lowers total inventory costs
increases service levels.
Can meet a customer’s specialized technical service
requests


Steer special requests to the distributors best suited to address
them
Centers of Excellence for Otra, a large Dutch holding company
 70 electrical wholesale subsidiaries
 some designated as centers of excellence
 Other subsidiaries, as well as customers, are directed to
these centers of excellence to meet particular requests
8-36
Issues in DI

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Distributors may be skeptical of the rewards of
participating in such a system
Participating distributors will be forced to rely upon other
distributors, some of whom they may not know, to help
them provide good customer service.
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.
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.
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SUMMARY

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Various types of partnerships can be used to manage
the supply chain effectively.
Framework that can help in selecting the most
appropriate way to address a particular logistics issue.
3PLs are becoming more prevalent.
Both advantages and disadvantages to outsourcing the
logistics function
Many important issues to consider once the decision has
been made and a 3PL agreement is being implemented.
RSPs are also becoming common.


Issues and concerns relating to the implementation of RSP
types of arrangements
Distributor Integration (DI)


Create risk-pooling opportunities across the various
distributors
Enable different distributors to develop different areas of
expertise.
8-38

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