Chapter 6 Strategic Alliances Qi Xu Professor of Donghua

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Chapter 6 Strategic Alliances

• Qi Xu
• Professor of Donghua University
• Tel [phone]
• E-mail xuqi_at_dhu.edu.cn

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Outline
Strategic Alliances
Section I
The third Party Logistics
Section II
Case FreeMarkets Online
Section III
Section IV
Section V
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Strategic Alliances
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Strategic Alliances

• Strategic alliances are typically
  multifaceted(????), goal-oriented, long-term
  partnerships between two companies in which both
  risks and rewards are shared.

• The problems of outright acquisition(????) can be
  avoided while at the same time mutual goals can
  lead to the commitment of many more resources
  than in the case of arms-length transactions.

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???????????????Festiva?,???????????,?????????
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1?????,???????????????????
2???????,????????????????????????????????
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• Strategic alliances typically lead to long-term
  strategic benefits for both partners.

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Strategic PartneringTypes of SP

• 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 Millikens textile plants to
  final clothing receipt at several of the
  department stores involved was reduced from
  eighteen weeks down to three weeks.

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• Milliken is one of the largest privately held
  textile and chemical manufacturers in the world.

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Strategic PartneringTypes of SP

• 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,
• Advanced Continuous Replenishment Suppliers may
  gradually decrease inventory levels at the
  retailers store or distribution center as long
  as service levels are met. Inventory levels are
  thus continuously improved in a structured way.
• Kmart

Kmart
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Strategic PartneringTypes of SP

• Vendor Managed Inventory (VMI)JITD
• VMI Projects at Dillard Department Stores,
• J.C. Penney, and Wal-Mart have shown sales
  increases of 20 to 25 percent, and 30 percent
  inventory turnover improvements.

All JC Penney (JCP) vendors are required to
upgrade their XpressChain software installations
as a result of new EDI requirements and changes
mandated by JC Penney. JCP vendors must be
compliant with the new requirements, or they will
incur chargebacks from JCP.
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Requirements for Effective SP

• 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

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Important SP 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

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Important SP 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.

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Steps in SP 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

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Main Characteristics of SP
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Advantages of SP

• 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.

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Advantages of SP

• Decrease required inventory levels
• Improve service levels
• Decrease work duplication
• Improve forecasts

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Disadvantages of SP

• 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?

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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 childrens 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.
• 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

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Examples of SP Successes and Failures

• VF Corporations 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.
• VFs program is considered one of the most
  successful in the apparel industry.

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Examples of SP Successes and Failures

• Spartan Stores One of the nation's leading
  grocery suppliers and retailers

Spartan Stores owns and operates 54 supermarkets
and 20 deep-discount drugstores in Michigan and
Ohio. It also supplies more than 40,000
private-label national brand products to more
than 330 independent grocery stores
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• 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 didnt 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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??
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• Spartan Stores (continued)
• Suppliers didnt 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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Strategic Alliances
Section I
Section II
The third Party Logistics
Section III
FreeMarkets Online
Procurement
Section IV
Section V
Outsourcing
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Third Party Logistics

• What is 3PL?
• Outside firms perform materials management and
  logistics functions
• Long term commitments and multiple functions

Characteristics of 3PL

• Perform outsourced logistics activities
• Process management / Multiple activities
• More customized services
• Mutually beneficial and risk-sharing relationship
• Long-term commitments (1 3 years)

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Third Party Logistics
Outsourced Operation
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Current State -- Market Size
3PL market is growing
( Billions )
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Current use of 3PL by industry

• Industry

• Percentage of 3PL use in different industries

Computer
Consumer
Retail
Chemical
Medical
Auto
Source "What's ahead for 3PLs Modern Materials
Handling, April, 2000
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3PL

• What are the advantages of 3PL?
• Focus on core strengths
• Provides technological flexibility
• Provides flexibility in
• geography
• workforce size
• additional services
• resource flexibility

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3PL

• Disadvantages
• Loss of control
• 3PL employees may interact with customers
• 3PLs 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

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95?UPS???SonicAir ??,?UPS????????????"??????"?????
????8???????

• UPS SonicAir When every minute counts, rely on
  UPS SonicAir for same-day shipping around the
  world -- 24 hours a day, seven days a weekFast
  Pickup and ReliabilityUPS SonicAir, same-day
  service, ensures customers the earliest delivery
  of urgent shipments to more than 180 countries
  worldwide.Fast pickup from your location --
  usually within 60 minutes of order placement
• Automated routing system provides the quickest,
  most efficient delivery options for your shipment
  
• Guaranteed on-time delivery to every address in
  the U.S.

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Menlo Worldwide Companies
Menlo Worldwide, global logistics, transportation
and supply chain management companies. Menlo
Worldwide specializes in the integration of all
functions across the supply chain, from sourcing
of raw materials through product manufacturing to
the distribution of finished goods.
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• Transportation Management Services
• Warehouse Management Services
• Value Added Services
• Professional Services
• Supply Chain Management Technology Solutions
• Collaborative Supply Chain Services

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Niche Markets Online Logistics Providers

• Online Freight Marketplaces
• Spot market
• Auction and RFQ
• Exchange
• Meta-marketplaces
• Application Service Providers (ASPs)
• Purchasing Consolidation Market
• Infomediaries

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Online Logistics Providers-Opportunity

• The Freight Transportation Industry is Ideally
  Suited e-commerce
• High Fragmentation of Shippers and Carriers
• Many Intermediaries
• Complex Supply Chains
• High Search Costs
• Significant Opportunities for Economies of Scale
  
• Several Models Emerging

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Niche Markets Online Service Providers

• Spot market
• Auction and RFQ
• Exchange
• Meta-marketplaces
• Application Service Providers (ASPs)
• Purchasing Consolidation market
• Infomediaries

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Niche Markets Online Service Providers

• Spot market
• Auction and RFQ
• Exchange
• Meta-marketplaces
• Application Service Providers (ASPs)
• Purchasing Consolidation market
• Infomediaries

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Niche Markets Online Service Providers

• Spot market
• Auction and RFQ
• Exchange
• Meta-marketplaces
• Application Service Providers (ASPs)
• Purchasing Consolidation market
• Infomediaries

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Niche Markets Online Service Providers

• Spot market
• Auction and RFQ
• Exchange
• Meta-marketplaces
• Application Service Providers (ASPs)
• Purchasing Consolidation market
• Infomediaries

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Niche Markets Online Service Providers

• Spot market
• Auction and RFQ
• Exchange
• Meta-marketplaces
• Application Service Providers (ASPs)
• Purchasing Consolidation market
• Infomediaries

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Niche Markets Online Service Providers

• Spot market
• Auction and RFQ
• Exchange
• Application Service Providers (ASPs)
• Purchasing Consolidation market
• Infomediaries

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Niche Markets Online Service Providers

• Spot market
• Auction and RFQ
• Exchange
• Application Service Providers (ASPs)
• Co-ops
• Infomediaries

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Strategic Alliances
Section I
Section II
The third Party Logistics
Section III
FreeMarkets Online
Procurement
Section IV
Section V
Outsourcing
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FreeMarkets Online

• FreeMarkets is an online market making firm that
  enabled industrial buyers to link up with their
  potential suppliers in a live electronic bidding
• The end result of such interaction among a
  network of suppliers was procurement cost savings
  of about 15 for the buyers
• The company was founded in 1995 and was on the
  verge of breaking even in 1998
• It was expecting to receive commissions and fees
  of nearly 6 million for arranging procurement of
  200 million worth of industrial components and
  parts

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• FreeMarkets????
• 95??????,???Meakem?
• ??????????????,?????????6000????????
• ???????????????????????????????,?????????????????
  ????????????,??????????????????
• FreeMarkets???????????

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The Move to B2B Commerce
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B2B is Huge...
Source Forrester Research, Inc.
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Highly Fragmented

• Most product categories are highly fragmented,
  with numerous suppliers each offering different
  level of quality, service and pricing options
• Buyers incur significant cost in the actual
  purchase process
• A buyer must invest internal resources to manage
  the process of collecting, analyzing and acting
  upon all the information in the market
• In addition to purchase price companies spend
  over 10 in additional procurement costs
• On the suppliers side, there are significant
  costs in using the manufacturing reps
• These commissions range from 4 to 7 of purchase
  price

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How Does FreeMarkets Online Create Value for its
Customers?

• Consulting/Purchase outsourcing
• Distribution Intermediary
• Network Enabler/Software Provider
• Putting together specs, drawings, lot sizes,
  documentation and RFQs????
• Identifying potential savings opportunities
• Identifying and qualifying suppliers
• Educating and training buyers
• Conducting the Competitive Bidding Event (CBE)
• Providing post bid analysis and support

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How Does FreeMarkets Online Create Value for its
Customers?

• Consulting/Purchase outsourcing
• Distribution Intermediary

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Traditional B2B Trading Exchanges
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Internet Based B2B Trading Exchanges
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How Does FreeMarkets Online Create Value for its
Customers?

• Consulting/Purchase outsourcing
• Distribution Intermediary
• Network Enabler/Software Provider

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Which suppliers benefit from this model?

• Low cost, quality suppliers will benefit as they
  drive competition out of the market
• The FreeMarkets model would be beneficial for
  large more efficient suppliers
• It will also provide opportunities for a host of
  small suppliers, especially if they are located
  overseas

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The Revenue Model

• A hybrid of service fees and sales commissions??
• FreeMarkets charged monthly fee from the buyer
  based on the size of the market making team
  dedicated to the event
• Winning supplier paid sales commissions this was
  paid in installments as suppliers shipped
  products
• ????????????,?????????????????

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Problems with the revenue model

• Buyer side
• FreeMarkets invests substantially in a project
• Consulting revenue is independent of the value
  created
• Does not lead to another intensive purchasing
  study for the customer
• Gross margin on consulting is about 22
• Supplier side
• FreeMarkets does not represent the supplier
• FreeMarkets success depends on their ability to
  identify many potential suppliers
• Suppliers pay commissions to the company that
  reduced their margins

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Vertical vs Horizontal Focus?
??????????

• Vertical
• Advantage FreeMarkets can capitalize on its deep
  knowledge of supplier industries
• Disadvantage Hard to scale-up
• Horizontal
• Advantage Ability to generate multiple contracts
  from one buyers
• Disadvantage FreeMarkets does not bring much
  expertise to the transaction

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By the end of 1998

• FreeMarkets was pursuing the horizontal market
  expansion
• In 2000, the company started licensing its
  software

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The company went public in 12/99...
Freemarkets Stock Price
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• ?95????97??,?????15????????38?????????,??40???????
  ??7000????????,?????1?????43???????

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Where is FreeMarkets today?

• For the three months ended in 3/31/01
• Revenue totaled 33M
• Net loss(???) totaled 43.7M
• For the three months ended in 12/31/01
• Revenue totaled 44.8M
• Net loss totaled 2.8M

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E-Marketplaces The Initial (95-99) business model

• The e-marketplace concept started as a new way to
  procure products.
• E-marketplaces
• Expand everyones market reach
• Generate lower price for the buyers
• Cut operational costs for buyers and suppliers
• Automating the procurement process will reduce
  processing cost per order from as high as 150 to
  as low as 5 per order
• Focus on liquidity
• Transaction fee paid by the suppliers
• Serve as a virtual distributor

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Consider Instill Corp.

• Instill.com focuses on the food service industry
  and provides an infrastructure which links
  together operators, i.e., restaurants,
  distributors and manufacturers. This
  e-marketplace provides value to its customers by
  offering not only procurement services, but also
  forecasting, collaboration and replenishment
  tools.

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• Instill.com?????????,?????????????????????????????
  ??????????????????

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Consider eSkye.com

• In the alcoholic beverage industry, eSkye has
  tailored an offering that provides the supply
  chain with real value. eSkye now links retail
  stores, distributors and suppliers providing
  visibility into a supply chain where little data
  existed. eSkye adds value by automating the
  ordering process for the retailer while providing
  product flow information to distributors and
  suppliers.
• ?????,eSkye??????????????????,eSkye???????????
  ?????,?????????????????eSkye????????????????,?????
  ?????????????

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E-Marketplaces???????

• Private e-Markets ???
• Consortia-based e-markets ???
• Content based e-markets ???

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Evolving Market Types
???????

• Private e-Markets
• Valuechain.Dell.com (Dell), eHub (Cisco)
• IBM, Sun Microsystems and Wal-Mart
• These companies use the marketplace to improve
  supply chain collaboration
• Providing suppliers with demand information and
  production data

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Evolving Market Types

• Consortia-based e-markets
• Covisint (automotive) Trade-Ranger (oil)
  Omnexus (chemicals) e2Open and Converge
  (high-tech)
• Objective of the consortia is
• Aggregate activities and use the buying power of
  consortia members
• Provide suppliers with standard systems that
  support all buyers and allows suppliers to reduce
  cost

• ??????,???????????
• ??????????,??????,?????????

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Evolving Market Types

• Content based e-markets.
• Focus on Maintenance, Repair and Operations (MRO)
  goods
• These are components that are not part of the
  finished product or the manufacturing process but
  are essential for the business
• Examples include lighting, office supply,
  fasteners,

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E-marketplace Examples
Independent VerticalExchanges (IVX)
Independent Horizontal Exchanges (IHX)
Private Trading Exchanges (PTX)
Consortia TradingExchanges (CTX)
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A Framework for eProcurement(1)

• Type of Component
• Strategic Components
• Part of the finished product
• Not industry specific company specific
• Examples PC motherboard and chassis
• Commodity Products
• Can be purchased from a large number of suppliers
• Price is determined by market forces
• Examples Memory unit in a PC
• Indirect Material
• ??????????,????????????

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A Framework for eProcurement (2)

• Level of Risk
• Uncertain Demand (Inventory risk)
• Volatile(???) market price (Price Risk)
• Component availability (Shortage Risk)

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(e.g.) Risk Commodity Products

• Can be purchased either
• in the open market through on-line auction, or
• through the use of long term contracts to supply
• Long term contracts guarantee certain level of
  supply but may be risky for the buyer
• Inventory risk, shortage risk or price risk

???????????
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Analysis about Framework for eProcurement

• (1) Indirect Material
• Typically low risk and hence the focus is on
  content based hubs(????).
• The objective is to use an MRO-hub that
  specializes in unifying catalogs from many
  suppliers
• Examples MRO.com, Grainger on-line catalogs

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Grainger

• W. W. Grainger has been selling industrial
  supplies for 72 years
• In 1995 Grainger established Grainger.com, an
  on-line catalogue for more than 220,000 products
  from 12,000 suppliers
• In 1999, Grainger experienced revenue growth of
  102M through its internet channel
• The MRO supply industry is growing at a rate of
  3-4 a year. From 1996 to 1999 Grainger internet
  sales grew 32 a year and 20 in offline due to
  customers that were lured to Grainger from the
  web site

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• Grainger???????72?
• 1995?,Grainger???Grainger.com,???12000???????22000
  0??????
• 1999?, Grainger????????1.02????????
• MRO??????????3?4??1996?? 1999?,Grainger????????
  ??32,??20???????????Grainger???

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Analysis about Framework for eProcurement (2)

• (2)Strategic Components
• Typically high risk components that can be
  purchased from a small number of suppliers
• The objective is to use private(???) or
  consortia-based(???) e-marketplace.
• The focus is on an e-marketplace that allow
  collaboration with the suppliers

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Analysis about Framework for eProcurement(3)

• (3)Commodity Products
• Products go directly into finished goods
• High risk
• Many potential options to choose from
• Long Term Contracts
• Buyer and supplier commit to certain volume
  (called the commitment level)
• Supplier guarantees a level of supply for a
  committed price
• Flexible, or Option Contracts
• Buyer pre-pay a relatively small fraction of the
  product price up-front, in return for a
  commitment from the supplier to satisfy demand up
  to a certain level (called the option level)
• The buyer can purchase any amount up to the
  option level by paying additional price for each
  unit purchased
• Spot Purchasing

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A Framework for eProcurement A Portfolio(??)
Approach
???????????????????
Option Level

N/A
Inventory Risk (Supplier)
H L
Inventory Risk (Buyer)
Price, Shortage Risks (Buyer)
Commitment Level
L H
??????
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E-Procurement The reality

• Companies conducting greater than 20 of
  procurement transactions online have reduced
  their transaction processing cost by nearly a
  third (Hackett Benchmarking)
• ????????20????????????1/3(??????)
• Product savings and process cost improvements
  effect operating cost by 10 (Credit Suisse First
  Boston Technology Group)
• ?????????????????????10

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E-Procurement The reality

• To capture this benefits purchasing organization
  needs to invest heavily in
• Changing internal procurement processes
• Integrating e-marketplaces in internal systems
• Purchasing B2B applications software
• Paying e-marketplace transaction fee/subscription
  fee

Source Forrester Research
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Positive Aspects of Trading Exchanges (Companies
who use exchanges)

• Reduce costs or labor (31)
• Better access to products/vendors (24)
• Increase speed or efficiency (29)
• Access to more customers (21)

Source AMR Research
97
Positive Aspects of Trading Exchanges (Companies
who plan to use exchanges)

• Reduce costs or labor (43)
• Better access to products/vendors (26)
• Increase speed or efficiency (23)
• Access to more customers (10)

Source AMR Research
98
Negative Aspects of Trading Exchanges (Companies
use exchanges)

• Security trust (17)
• Start Up cost (5)
• Loss of face-to-face relationships (12)
• Lack of standards (5)
• Immature technology (5)
• Integration issues (7)

Source AMR Research
99
Negative Aspects of Trading Exchanges (Companies
who plan to use exchanges)

• Security trust (16)
• Start Up cost (15)
• Loss of face-to-face relationships (11)
• Lack of standards (6)
• Immature technology (6)
• Integration issues (4)
• Pricing pressure (6)

Source AMR Research
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