Chapter Eight “Strategic Alliances” Logistics and Supply Chain Management

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 Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

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 Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

Downsides Core competencies should not be compromised Competitive advantages should not be compromised Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

Internal Activities If we have core competencies in this business function, doing it as an internal activity may be the best way to do it. Firm A

Internal Activities Acquisitions Firm A can control how Firm B does the business function. However, it might be expensive, there may be problems blending the cultures of the two firms and Firm B may have had past dealings with Firm A’s competitors Firm B Firm A .

Arm’s Length transactions Firm B Firm A $

Arm’s Length transactions Firm B Firm A

Arm’s Length transactions Firm B Firm A $

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. Order Firm B Firm A

Extreme Alliances – the strange story of virtual airlines Owned no aircraft Contracted maintenance Leased airport gates Leased reservation systems Mainly provided cash flow for owners – companies involved in things like real estate

Three Types of Strategic Alliances Third Party Logistics (3PL) Retailer–Supplier Partnerships (RSP) Distributor Integration (DI) Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

8.3 Third Party Logistics (3PL) Use of 3PL providers to take over a company’s logistics functions Almost a $85 billion industry by 2004 8% of all logistics costs attributed to 3PL Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

Key Logistics Activities Customer service. Demand forecasting. Inventory management. Logistics communication. Materials handling. Order processing. Packaging. Parts and service support. Plant and warehouse site selection. Procurement. Reverse logistics. Traffic, transportation Warehousing, storage. We have the key activities of logistics. Let’s see how they fit into supply chain management.

“…internal and external components of the supply system…” Supply Chain Management: “…internal and external components of the supply system…” Customers Suppliers Organization Demand forecasting. Plant and warehouse site selection. Inventory management. Materials handling. Warehousing, storage. Packaging. Order processing. And let’s focus on the internal components.

…internal and external components of the supply system… Supply Chain Management: …internal and external components of the supply system… Customers Suppliers Organization Procurement. Parts and service Support. Traffic. Transportation. Customer service Parts and service support Reverse logistics Traffic, transportation And there are external dimensions, things outside the organization. . .

Two Basic Types of Third Party Logistics Providers Asset-based Trucks Warehouses Information systems Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

Two Basic Types of Third Party Logistics Providers Asset-based Trucks Warehouses Information systems Non-asset based Primarily are coordinators. Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

Reasons for Third Party Logistics Allows company to focus on its core competencies. Business – including logistics – is becoming so complicated it is difficult to keep up with all developments. Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

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 Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

3PL Advantages Focus on Core Strengths Allows a company to focus on its core competencies Logistics expertise left to the logistics experts Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

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 Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

3PL Advantages Provides Other Flexibilities Flexibility in geographic locations. Flexibility in service offerings Flexibility in resource and workforce size Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

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 Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

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 Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”