The Power matrix of Supplier-Buyer Relationship Buyer Dominance Inter-dependence High Relative utility and scarcity of buyer’s resources for suppliers Independence (adverse selection) Supplier Dominance (moral hazard) Adverse Selection – refers to a process by which practitioners fail to understand the pre-contractual power situation. Because of this failure, managers make inappropriate sourcing decisions and select the wrong suppliers. Moral Hazard – refers to a process by which managers fail initially to create effective contractual safeguards so that they find themselves highly dependent on opportunistic suppliers post-contractually. Low Low High Relative utility and scarcity of supplier resources for buyers Source: Andrew Cox, 2000

Critical success factors to SA Trust Cooperation communication Trust involves a belief that each stage is interested in the other’s welfare and would not take actions without considering their impact on the other stages.

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 Alliance conceptualization – begins when a firm determines a collaborative arrangement has appeal and provides a potential alternative to the current arrangement. Alliance pursuance – decision to form an alliance is finalized and the firm establishes the strategic and operational considerations that will be used to select the alliance partner. Alliance confirmation – focuses on partner selection and confirmation. Alliance implementation/continuity – creates a feedback mechanism to determine and assess performance continually to determine whether the alliance will be sustained, modified or terminated.

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? What are the advantages of 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 Examples Loss of control 3PL employees may interact with customers 3PL’s 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

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. Kmart

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

Main Characteristics of SA

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 addressed?

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 successful in the apparel industry.

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 trouble.

Examples of SA Successes and Failures Spartan Stores (continued) 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.

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 When managers have good information, they have supply chain visibility, enabling them to take a global scope. With this global scope, they are able to make best decisions for the supply chain. Therefore, information is key to supply chain success. Information is most important when it is used to create a global scope across all staged and drivers of a supply chain. This allows decision to be made that maximize total supply chain profitability.

Information Technology in a Supply Chain: Legacy Systems Advantages of legacy system: 1) They tend to get the operational work done. Less risky than untested systems. 2) Less incremental investments to run. Disadvantages: 1)They focus on a small part of the supply chain 2)Have only transactional capabilities 3) The are based on mainframe technologies

Information Technology in a Supply Chain: ERP Systems Strategic Planning Potential ERP Potential Operational ERP ERP ERP systems provide an integrated view of information across functions within a company and with the potential to fo across companies. They are good at providing real-time information. Examples include: SAP, Oracle, PeopleSoft, JD Edwards, Baan, etc. Supplier Manufacturer Distributor Retailer Customer

Information Technology in a Supply Chain: Analytical Applications Strategic SCM Planning APS Transport & Inventory Dem Plan Planning Supplier Apps CRM/SFA Transport execution & MES WMS Operational Information is the glue that holds the entire supply chain together and allows it to function, making information the most important supply chain driver. Supplier Manufacturer Distributor Retailer Customer