Strategic Alliances

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Strategic Alliances

• Jerry Banks

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Who should perform a logistics related activity?

• Internal
• Use internal resources if available
• If a core strength
• Stick to your own knitting

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About 90 of CFOs report they use outsourcing
(BW, 7/8/02)
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Savings Tip Dont do it yourself, BW, 6/23/03

• 100s of companies are BPO (business process
  outsourcing)
• Human resources, accounting, claims processing
• First Data Corporation handles credit card
  transactions for 1400 companies
• Many of these tasks have been moved to India, The
  Philippines, Caribbean

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Savings Tip Dont do it yourself, BW, 6/23/03

• Outsourcers often improve the quality
• Unisys took over Abbey Life Assurances claims
  processing
• Transaction error rate fell from 5 to 2
• Handling time fell from 10 days to 6 days
• Make sure that the contract includes penalties if
  the outsourcer doesnt meet agreed upon service
  levels

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Who should perform a logistics related activity?

• Acquisition
• Acquire a firm that possesses the expertise
• Provides complete control
• But, can have lots of negatives
• Expensive to acquire a successful firm
• May clash with acquiring company
• Acquiring company may have dealt with competitors
  of the company being acquired
• Could lose business because of it

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Who should perform a logistics related activity?

• Arms-length transaction
• Most business transactions are this way
• Hire a trucking firm to deliver a load
• Fulfills a business need
• But, doesnt have any long term advantages

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Who should perform a logistics related activity?

• Strategic alliances
• Long-term partnerships
• Risks and rewards are shared
• Mutual goals lead to commitment of resources on
  both sides
• Possible long-term benefit to both sides

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Framework for strategic alliances

• In determining whether to engage in a strategic
  alliance, consider the issues in the following
  slides

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Framework for strategic alliances

• Adding value to products
• Decrease time to market
• Decrease repair time
• Increase value of the firm
• Complementary product lines can add value

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Framework for strategic alliances

• Improving market access
• Complementary consumer product
• Manufacturers can cooperate improving the sales
  of both parties

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Framework for strategic alliances

• Strengthen operations
• Lower system costs and cycle time
• Increase efficiency and effectiveness
• Example, seasonal products can use warehouses and
  trucks year-round

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Framework for strategic alliances

• Add technological strength
• Partner with a firm that has the technology
  needed by a customer

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Framework for strategic alliances

• Enhance strategic growth
• Many opportunities have high barriers
• Capital to begin the operation
• Long training period
• Licenses, standards, etc.
• Strategic alliance can overcome this barrier

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Framework for strategic alliances

• Enhance organizational skills
• Learn from one another

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Framework for strategic alliances

• Build financial strength
• Administrative costs can be shared
• Income can be increased
• Exposure to risks can be shared

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Negatives

• Resources might have to be diverted from the core
  strengths

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Core strengths

• How a company differentiates itself from the
  competition

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Example IBM/PC

• IBM outsourced key business functions of the PC
  in 1981
• Intel microprocessor
• Microsoft operating system
• PC entered the market in a span of 15 months
• Apple was displaced
• IBM cornered 40 of the market

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Example IBM/PC

• Downside
• Compaq and others entered the marketplace
• IBM tried to regain control with the PS/2
  computer and OS/2 operating system
• But others didnt follow
• By the end of 1995, IBMs market share had
  dropped to 8

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Strategic alliances in SCM

• Third-party logistics (3PL)
• Retailer-supplier partnerships (RSP)
• Distributor integration (DI)

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3PL

• The use of an outside company to perform all or
  part of a firms logistics activities
• Modern 3PL relationships involve long-term
  commitments and multi-functions
• Ryder Logistics has a five-year agreement to
  design, manage, and operate all of Whirlpools
  inbound logistics
• Large companies are more predominantly the users
  of 3PL

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Advantages of 3PL

• Focus on core strengths
• Most frequently cited benefit
• Leave logistics to logistics companies

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Example BP and Chevron

• The two formed Atlas Supply
• Partnership of 80 suppliers
• Delivers spark plugs, tires, etc. to about 6500
  service stations
• Atlas outsources all logistics to GATX
• GATX runs 5 distribution centers and maintains
  inventories of 6500 SKUs at each service station

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Advantages of 3PL

• Provides technological flexibility
• The better 3PLs constantly update their
  information technology

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Advantages of 3PL

• Provides other flexibilities
• When suppliers require rapid replenishment
• 3PLs already have a network of warehouses to make
  this possible
• Flexibility in resources and workforce size can
  be achieved through outsourcing
• Fixed costs can become variable costs

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Example Simmons and Ryder

• Simmons completely changed the way it does
  business
• Before
• Simmons warehoused 20,000 to 50,000 mattresses at
  each of its manufacturing facilities to meet
  customer demand in a timely fashion

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Example Simmons and Ryder

• Now
• Ryder maintains an on-site logistics manager at
  Simmons manufacturing plant
• When orders arrive the logistics manager develops
  an optimal sequence and route to deliver the
  mattress to customers
• Logistics plan is then transmitted to the factory
  floor where the mattresses are manufactured in
  time for shipment
• Simmons doesnt hold inventory these days

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Disadvantages of 3PL

• Loss of control, especially for outbound
• Efforts to overcome this
• Painting company logos on the sides of trucks
• Dressing 3PL employees in company uniforms
• Providing thorough reports on customer interaction

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3PL issues and requirements

• Know your own costs
• So you can compare them to the cost of using an
  outsourcing firm

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3PL issues and requirements

• Customer orientation of the 3PL
• More than cost
• How does this 3PL provider fit into your plan?
• Can the 3PL fit into the way you do business?
• Is the 3PL reliable?

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3PL issues and requirements

• Specialization of the 3PL
• Consider the roots of the 3PL
• From LTL carriers
• Menlo, Roadway, Yellow
• From warehouse managers
• Exel, GATX, USCO
• From timely handlers
• UPS, Fedex

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3PL issues and requirements

• Asset owning versus non-asset owning
• Asset owning
• Have size, human resources, large customer base,
  economy of scale, systems in place
• But, may favor their own divisions, be
  bureaucratic, have a long decision-making cycle
• Non-asset owning
• May be more flexible and have lower overhead
  costs
• But, may have limited resources and bargaining
  power

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3PL implementation issues

• For the company, identify exactly what is needed
  for the relationship to be successful
• Have quantitative measures of performance
• For the 3PL provider, make sure that the service
  can be provided as requested
• For both parties, the relationship is supposed to
  be mutually beneficial
• Shared risks and rewardsa partnership

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Retailer-supplier partnerships

• Quick response
• Suppliers receive POS data from the retailers
• Use this information to synchronize their
  production and inventory activities
• Retailer still prepares orders

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Example Milliken

• Worked with several clothing suppliers and major
  department stores
• Fed POS data from the department stores to
  Milliken
• Lead times were reduced from 18 weeks to 3 weeks

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Continuous replenishment

• Vendors receive POS data
• Use it to prepare shipments at previously agreed
  upon intervals to maintain specific levels of
  inventory
• Inventory levels are improved over time

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Vendor managed inventory

• Supplier decides on appropriate inventory policy
• Eventually, retailer oversight is eliminated
• Wal-Mart and PG began such a system in 1985
• Dramatic improvements in on-time deliveries to
  Wal-Mart

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Requirements for RSP

• Information system
• Electronic data interchange (EDI) to relay POS
  information to the supplier and delivery
  information to the retailer
• Bar codes and scanners are needed to insure data
  accuracy
• Inventory, production control, planning systems
• Online, accurate, and integrated

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Requirements for RSP

• Top management commitment
• Confidential information will now have to be
  shared
• Power shifts may take place
• Day-to-day contacts with retailers shift from
  sales and marketing personnel to logistics
  personnel

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Inventory ownership in RSP

• Old way
• Retailer owns the goods as soon as they are
  received
• Alternative
• Retailer may own the goods only at POS
• Provides an incentive for the supplier to manage
  the inventory properly

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Issues in RSP implementation

• Performance measurement criteria must exist
• Information sharing is a problem if the supplier
  deals with competitors as well

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Advantages of RSP

• Reduced forecast errors lead to reduced safety
  stocks, reduced storage and delivery costs, and
  increased service levels

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Problems associated with RSP

• Advanced technology is a necessity
• Can be expensive
• Must be a trusting relationship
• Formerly, an adversarial relationship
• If a consignment system is being used, costs are
  transferred back to the supplier
• Both parties should share in the savings
• Vendors lose the 30 to 90 day float

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In groups, decide what is appropriate in the
following table
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In groups, decide what is appropriate in the
following table
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Successes and failures

• There have been many examples, and some failures
  of RSP

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Example Western Publishers

• Using VMI for childrens books at some retailers
  and 2,000 Wal-Mart locations
• POS data automatically triggers reorders when
  inventory falls below the reorder point
• Ownership switches to Wal-Mart when delivery is
  made

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Example Western Publishers

• At Toys R Us, Western Publishing manages the
  entire book section
• Including books from other publishers
• For both cases, Western Publishing says their
  increased costs (additional inventory management
  duties) has been outweighed by the benefits

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Example Mead-Johnson

• Mead-Johnson has complete POS data at Wal-Mart
• It reacts to this POS data, instead of orders
• Inventory turns at Wal-Mart have gone from 100

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Example VF Corporation

• VF has many well known brands
• Wrangler, Lee, etc.
• VFs Market Response System is a success story
  for VMI
• About 40 of its production is handled through
  some automatic replenishment scheme
• Encompassing 350 different retailers and 40,000
  store locations

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Example Spartan Stores

• Spartan Stores is a grocery chain
• Shut down their VMI effort about one year after
  it began

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Example Spartan Stores

• Why did it fail?
• Retailers didnt trust the suppliers and
  continued to monitor their inventories and
  interfere with reordering
• Suppliers didnt do enough to overcome the
  retailers fears
• Suppliers couldnt deal with product promotions
• Delivery levels were often too low during
  promotions

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Distributor integration

• Advice of business consultants
• Treat your distributors like partners
• Appreciate the value of distributors
• They have the relationship with end users
• They have information about customers needs and
  wants
• Successful suppliers can use this information to
  develop new products
• Support your distributors to enhance their
  success

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Distributor integration

• But, even a strong distributor network cannot
  always meet the needs of customers
• A rush order might be impossible to meet from
  inventory
• Distributor integration can help
• Inventory located at one distributor is available
  to the others

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Distributor integration

• Each distributor can check the inventory of other
  distributors
• Distributors are contractually bound to exchange
  inventory under specified conditions and with
  appropriate remuneration
• Improves service level at each distributor and
  lowers the total system inventory required

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Distributor integration

• Possible because of sophisticated information
  systems
• Allow distributors to review each others
  inventory
• Integrated logistics systems allow parts to be
  delivered cheaply and efficiently

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Distributor integration

• Another possibilityimproving distributors
  perceived technical ability
• Different distributors build expertise in
  different areas
• Customers request is routed to the dealer with
  the most expertise

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Distributor integration

• Major issues
• Distributors may be skeptical of the rewards in
  participation
• The distributor with the larger inventory is
  taking care of the distributor with the smaller
  inventory
• Distributors have to rely on other distributors
  that they might not even know

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End