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Strategic Alliances Phil Kaminsky David Simchi-Levi Philip Kaminsky Edith Simchi-Levi
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Strategic Partnering: Types of SP 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 Millikens textile plants to final clothing receipt at several of the department stores involved was reduced from eighteen weeks down to three weeks.
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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 retailers store or distribution center as long as service levels are met. Inventory levels are thus continuously improved in a structured way. –Kmart Strategic Partnering: Types of SP
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Vendor Managed Inventory (VMI):JITD –VMI Projects at Dillard Department Stores, J.C. Penney, and Wal-Mart have shown sales increases of 20 to 25 percent, and 30 percent inventory turnover improvements. Strategic Partnering: Types of SP
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Important SP 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.
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Steps in SP 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
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Main Characteristics of SP
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Advantages of SP 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.
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Advantages of SP Decrease required inventory levels Improve service levels Decrease work duplication Improve forecasts
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Disadvantages of SP 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 addressed?
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Examples of SP Successes and Failures Western Publishing-Golden Books: –Western Publishing is using VMI for its Golden Books line of childrens 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
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Examples of SP Successes and Failures VF Corporations 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 –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. –VFs program is considered one of the most successful in the apparel industry.
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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 didnt 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.
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi Examples of SP Successes and Failures Spartan Stores (continued) –Suppliers didnt 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.
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi 3PL Disadvantages –Loss of control –3PL employees may interact with customers 3PLs address this with uniforms, logos, etc –Sharing of confidential info Examples –Simmons and Ryder Integrated Logistics On site rep, all logistics managed by Ryder, JIT manufacturing –SonicAir Rapid delivery of spare parts 67 warehouses Sophisticated software for inventory and rapid delivery
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi 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
Strategic Partnering: Types of SP Quick Response: –Vendors receive POS data from retailers, and use this information to synchronize production and inventory.
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