Chapter 8 Strategic Alliances

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

Four Basic Ways to Ensure Tasks Are Completed Internal activities Activities that are core strengths may be the best way to perform the activity. 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 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.

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

Downsides Core competencies should not be compromised Competitive advantages should not be compromised

Three Types of Strategic Alliances Third Party Logistics (3PL) Retailer–Supplier Partnerships (RSP) Distributor Integration (DI)

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

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

3PL Advantages Focus on Core Strengths Allows a company to focus on its core competencies Logistics expertise left to the logistics experts

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

3PL Advantages Provides Other Flexibilities Flexibility in geographic locations. Flexibility in service offerings Flexibility in resource and workforce size

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 in-house expertise Wal-Mart, pharmaceutical companies

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

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.

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

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.

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

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

8.4 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

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

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.

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

Main Characteristics of RSP Criteria → Type ↓ Decision maker Inventory Ownership New skills employed by vendors Quick response Retailer Forecasting skills Continuous replenishment Contractually agreed-to levels Either party Forecasting and inventory control Advanced continuous replenishment Contractually agreed-to and continuously improved levels VMI Vendor Retail management

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

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: 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)

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

Steps in RSP Implementation Initially, the contractual terms of the agreement must be negotiated on the following: 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

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

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

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.

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.

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.

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.

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

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.

Types of DI Addresses both inventory-related and service-related issues 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

Issues in DI 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.

SUMMARY 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.