Transcript Chapter 8. Strategic Alliances

Chapter 8
Strategic Alliances
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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
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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.
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8.2 Framework for Strategic Alliances:
When to Go for a Strategic Alliance?
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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
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Three Types of Strategic Alliances
• Third Party Logistics (3PL)
• Retailer–Supplier Partnerships (RSP)
• Distributor Integration (DI)
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8.3 Third Party Logistics (3PL)
• Use of 3PL providers to take over a company’s
logistics functions
• Almost a $85B industry by 2004
• 8% of all logistics costs attributed to 3PL
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What Is 3PL?
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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
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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 costeffective way
– 3PLs may have the capability to meet the needs of
a firm’s potential customers
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3PL Advantages
• Provides Other Flexibilities
– Flexibility in geographic locations.
– Flexibility in service offerings
– Flexibility in resource and workforce size
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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
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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
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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.
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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
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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.
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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
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8.4 Retailer-Supplier Partnerships
• 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
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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
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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
Quick response
Retailer
Continuous
replenishment
Contractually
agreed-to levels
Inventory
Ownership
New skills employed
by vendors
Retailer
Forecasting skills
Either party
Forecasting and
inventory control
Advanced
continuous
replenishment
Contractually
agreed-to and
continuously
improved levels
Either party
Forecasting and
inventory control
VMI
Vendor
Either party
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
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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)
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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
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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.
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eliminate redundant order entries
automate manual tasks can be automated
reassign tasks for better efficiency
Eliminate unnecessary control steps
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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
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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.
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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.
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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
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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.
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Types of Distributor Integration
• 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
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Issues in Distributor Integration
• 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:
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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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