Framework for Strategic Alliances

Introduction

  • overview
    • it may not always be effective to perform all of key business functions in-house
    • 4 basic ways to ensure that a logistics related business function is completed
      • internal activities
        • a firm can perform the activity using internal resources and expertise, if they are available
        • if this activity is one of the core strengths of the firm, this may be the best way to perform the activity
      • acquisitions
        • a firm does not have the expertise or specialized resources internally, it can acquire another firm that does
        • several possible drawbacks
          • difficult and expensive
          • culture may clash with that of the acquiring company
          • company's competitors
      • arm's-length transactions
        • most business transactions are of this type
        • specific item or service
          • delivery of a load of items
          • maintenance of a vehicle
          • design and installation of logistics management software
          • purchases or leases the item or service
        • short-term arrangement fulfils a particular business need - but doesn't lead to long-term strategic advantages
      • strategic alliances
        • typically multifaceted, goal-oriented, long- term partnerships between two companies in which both risks & rewards are shared
        • typically lead to long-term strategic benefits for both partners
  • strategic partners
    • with supply chain partners
    • with non-supply chain partners
      • financial company
      • logistics company
      • IT company
    • homogeneous partners (the same type people)
    • heterogeneous partners (different types people)
  • potential benefits of alliances
    • adding value to products
      • for example, partnerships that improve time to market, distribution times, or repair times help to increase the perceived value of a particular firm
      • similarly, partnerships between companies with complementary product lines can add value to both companies’ products
      • one product is popular in winter, and the other one is popular in summer, they can share
    • improving market access
      • partnerships that lead to better advertising or increased access to new market channels can be beneficial
      • for example, complementary consumer product manufacturers can cooperate to address the needs of major retailers, increasing sales for everyone
    • strengthening operations
      • alliances with appropriate firms can help improve operations - system costs and cycle times. Facilities and resources can be used more efficiently and effectively
      • for example, companies with complementary seasonal products can effectively use warehouses and trucks year-round
    • adding technological strength
      • partnerships in which technology is shared can help add to the skills base of both partners. The difficult transitions between old and new technologies can be facilitated by the expertise of one of the partners
      • for example, a supplier may need a particular enhanced IS to work with a certain customer. Partnering with a firm already has expertise makes it easier to address difficult technological issues
    • enhancing organizational skills
      • alliances provide a tremendous opportunity for organizational learning
      • in addition to learning from one another, partners are forced to learn more about themselves and to become more flexible so that these alliances work
    • enhancing strategic growth
      • many new opportunities have high entry barriers
      • partnerships might enable firms to pool expertise and resources to overcome these barriers and explore new opportunities
    • building financial strength
      • income can be increased and administrative costs can be shared between partners owing to the expertise of the partners
      • alliances also limit investment exposure by sharing risk
  • provisions of alliances
    • the core strengths or competencies must not be weakened by the alliance
    • key differences with competitors must not be diminished
      • determining Core Strength is important & difficult
    • partners
      • internal – vertical, horizontal
      • external – operational, technological, financial

Retailer-Supplier Partnerships (RSP)

RSP features

  • information sharing
    • helps the vendor plan more efficiently
  • consignment scheme
    • the vendor completely manages and owns the inventory until the retailer sells it
  • includes
    • CAO (Computer Assisted Ordering)
    • CMI (Co-Managed Inventory)
    • VMI (Vendor Managed Inventory)
  • inventory ownership in RSP
    • incentive for retailers and suppliers
      • coordinate distribution and production
      • global optimization vs. local optimization
      • share overall system savings
    • advanced strategic alliances
      • joint forecasting, joint product development, etc.
  • main characteristics of RSP

CAO (computer assisted ordering)

  • quick response
    • suppliers receive POS data from the retailers and use this information to synchronize their production and inventory activities to improve forecasting and scheduling
    • retailer still prepares individual orders

CMI (co-managed inventory)

  • continuous replenishment or rapid replenishment
    • vendors receive POS data and use these data to prepare shipments at previously agreed upon intervals to maintain specific levels of inventory at the retail store or distribution center
  • advanced continuous replenishment
    • gradually decrease inventory levels at the retail store or distribution center as long as service levels are met - in a structured way, inventory levels are continuously improved

VMI (vendor managed inventory)

  • vendor managed inventory (VMI) or vendor managed replenishment (VMR)
    • the supplier decides on the appropriate inventory levels of each of the products (within previously agreed upon grounds), and the appropriate inventory policies to maintain these levels
  • quick view of VMI

Pros & cons

  • advantages
    • knowledge the supplier has about order quantities - control the bullwhip effect
    • reduced forecasting uncertainties \(\rightarrow\) reduced safety stocks, reduced storage and delivery costs and increased service levels
  • disadvantages
    • employ advanced technology, which is often expensive
    • develop trust in what once may have been an adversarial supplier-retailer relationship
    • inventory may initially be shifted back to the supplier; if a consignment arrangement is used, inventory costs in general may increase for the supplier - a contractual relationship that the retailer shares decreased system inventory costs with the supplier
    • the supplier often has much more responsibility than formerly – personnel and expenses often increase
    • retailers who have become accustomed to waiting 30 - 90 days to pay for goods may now have to pay upon delivery, even if they pay only when their goods are sold, this could be much sooner than their usual period of float

Requirements for RSP

  • advanced information systems
    • electronic data interchange (EDI)
    • bar coding and scanning
  • top management commitment
    • information must be shared
    • power and responsibility within an organization might change (e.g. contact with customers switches from sales/marketing to logistics)
  • cost allocation issues
  • develop a certain level of trust
    • mutual trust
    • initial loss of revenues

Issues in RSP implementation

  • performance measurement criteria
    • traditional financial measures
    • non-financial measures – POS accuracy, info quality, inventory accuracy, shipment and delivery accuracy, lead times and customer fill rates
  • confidentiality
    • one retailer vs. several suppliers
  • communication & cooperation
    • e.g., first brands and kmart – initially 2 companies employed different forecasting methods

Steps in RSP implementation

  • contractual terms of negotiated agreement
    • decisions concerning ownership and when it is to be transferred, credit terms, ordering responsibilities, and performance measures (e.g. service or inventory levels), when appropriate
  • integrated information systems
  • effective forecasting techniques
  • a tactical decision support tool
    • assist in coordinating inventory management and transportation policies

Distributor Integration (DI)

Overview

  • role of the distributors
    • distributors have a wealth of information about customer needs and wants, and 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
    • 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 (DI)
      • expertise and inventory located at one distributor is available to the others
  • details of DI
    • DI can be used to create a large pool of inventory across the entire distributor network, lowering total inventory costs while raising service levels
    • dealers are contractually bound to exchange the part under certain conditions and for agreed-upon remuneration
    • DI can be used to meet a customer's specialized technical service requests by steering these requests to the distributors best suited to address them
    • sophisticated information systems allow distributors to review each others‘ inventory, and integrated logistics systems allow parts to be delivered cheaply and efficiently

Good, bad, and evil

  • advantages
    • improve each distributor’s perceived technical ability and ability to respond to unusual customer requests
    • different distributors build expertise in different area
  • disadvantages
    • distributors may be skeptical of the rewards
      • provide some of their expertise in inventory control to less skilled partners, especially larger and have bigger inventories than others
      • 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
    • large commitment of resources and effort on the part of the manufacturing company
      • long-term alliance, build trust, etc.

Third Party Logistics (3PL) / Fourth Party Logistics (4PL)

3PL

  • definition
    • 3PL is the use of an outside company to perform all or part of the firm's materials management & product distribution function
      • e.g. trucking and warehousing
      • past - transaction based and single function
      • now - long-term commitments and often multiple function or process management
  • benefits
    • focus on core strengths
    • provides technological flexibility
    • provides other flexibilities
  • risks
    • loss of control
      • outbound logistics where 3PL company employees themselves might interact with a firm’s customers
      • painting company logos on the sides of trucks, dressing 3PL employees in the uniforms of the hiring company, providing extensive reporting on each customer interaction, etc.
    • loss of core competency
      • employ 3PL providers for only those areas that they can handle better than the hiring firm
  • requirements
    • know your own cost
      • know your own costs so they can be compared with the cost of using an outsourcing firm
      • activity Based Costing (ABC) techniques – tracing overhead & direct costs back to specific products & services
    • customer orientation of the 3PL
      • how would a 3PL provider fit into this plan?
        • the ability of the provider to understand the needs of the hiring firm and to adapt its services to the special requirements of that firm
        • reliability
        • flexibility
        • cost saving
    • specialization of the 3PL
      • the particular area of logistics that is most relevant to the logistics requirements in question
      • sometimes, a firm can use one of its trusted core carriers as its third party logistics provider
    • asset-owning vs. non-asset-owning 3PL
      • non-asset-owning companies may be more flexible and able to tailor services, and have the freedom to mix and match providers
      • have low overhead costs and specialized industry expertise at the same time \(\uparrow\)
      • limited resources and lower bargaining power \(\downarrow\)
  • implementation
    • devote enough time to start-up considerations
    • effective communication
      • the 3rd party and its service providers must respect the confidentiality of the data
      • specific agreed performance measures
      • specific criteria regarding subcontractors should be discussed
        • arbitration issues before entering into a contract
        • escape clauses negotiated into the contract
        • method of ensuring that performance goals are being met should be discussed
  • changing faces of 3PL-driving forces
    • emergence of technology
    • increased demand of capabilities
    • globalization

4PL

  • definition
    • 4PL is an integrator that assembles the resources, capabilities & technology of its own organization and other organizations to design, build, & run comprehensive supply chain solutions
  • integration of SC network
    • supports integration of all partners across geographical and company boundaries
    • “single point of contact” to organize, coordinate, manage and administer information and operations responsibilities
    • focus shifted from individual 3PLs level to the frame of network activities and strategic cooperation
  • sustainable benefits
    • reduce logistics interfaces
      • focus on core competencies
    • reduce “total” supply chain cost
      • universal solutions
    • improve communications
      • real time global visibility
  • main players
    • management consultants
      • already involved in logistics decision making
      • possess knowledge, experiences and expertise
    • IT services providers
      • information is key component to global trades
      • possess advanced IT infrastructure and expertise
    • existing 3PLs
      • accelerated M&A to enhance capabilities
      • acquire specific knowledge to compete with 4PLs
    • others
      • e-marketplace, financial companies, etc.
  • a radical viewpoint (future)
    • “hands-off” approach
    • focus on management of “brand” and “customers”
    • retain SCM responsibilities
    • require vigorous and stringent outsourcing policies and procedures
  • future challenges
    • ability to adequately define tasks and responsibilities of each partner
    • capability to facilitate the transition of existing responsibilities
    • vision to explore / identify future logistics
      • identification / standardization of 4PL processes and development of code of practices
      • identification / justification of 4PL benefits
      • investigating / defining of scope of services of 4PL and application of web-based technology opportunities