Strategic Partnering in Supply-Chain Management

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Strategic Alliances
Phil Kaminskykaminsky_at_ieor.berkeley.edu
David Simchi-Levi Philip Kaminsky Edith
Simchi-Levi
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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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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, Kmart
• 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

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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.

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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
• Initial loss of revenues

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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.
• 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.
• 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
• 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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Examples of SP Successes and Failures

• 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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Third Party Logistics

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

• Parts are shared across the distributor network
• Specialized service requests are steered to
  appropriate dealers or distributors.
• What is required?
• Trust
• Pledges
• Guarantees from the manufacturer
• Advanced information systems
• Disadvantages
• Incentives for dealers are they giving away
  competitive advantages?
• Skills and responsibilities are taken from some
  dealers/distributors.
• Examples - Caterpillar, Okuma