Strategic Alliances

Strategic Alliances Designing & Managing the Supply Chain Chapter 6 Yao yaxian yyx@pusan.ac.kr

Outline • How Kimberly-Clark keeps client Costco in diapers • Introduction • A framework for strategic alliances • Third-party logistics • Retailer-supplier partnerships • Distributor integration

CASE: How Kimberly-Clark keeps client Costco in diapers • Introduction • Kimberly-Clark is a company which products diapers • Costco is a retailer who sales Kimberly-Clark’s productions • The retailer pressures their suppliers to make a more active role in shepherding products from factory to store shelves

CASE: How Kimberly-Clark keeps client Costco in diapers • Changing sizes • In some cases, suppliers shoulder the costs of warehousing excess merchandise. • In others, it means pushing suppliers to change product or package sizes. • In this case, the plan is officially called ”vendor-managed inventory,” Kimberly-Clark oversees and pays for everything involved with managing Costco’s inventory except the actual shelf-stockers in store aisles

CASE: How Kimberly-Clark keeps client Costco in diapers • Return to unisex • Less variety makes for easier inventory-tracking in its factories and trucks • Better cooperation between retailers and suppliers has been made possible by improved technology • Costco’ shelves are less likely to go empty under the new system • A “Pull” product • It means that shoppers make a trip to the store specifically to buy them

CASE: How Kimberly-Clark keeps client Costco in diapers • A canceled order • The drive for efficiency creates new problems • Costco store managers complain that some deliveries are incomplete • Some drivers accidentally unloading items intend for a later stop • Now, Kimberly-Clarkuses a simple cardboard divider to separate each store’ order

Introduction • As with any business function, there are four basic ways for a firm to ensure that a logistics-related business function is completed: • 1. internal activities. A firm can perform the activity using internal resources and expertise, if they are available. • 2. acquisitions. If a firm doesn’t have the expertise or specialized resources internally, it can acquire another firm that does.

Introduction • 3. arm’s-length transactions. This kind of short-term arrangement fulfills a particular business need but does not lead to long-term strategic advantages • 4. strategic alliances. These are typically multifaceted, goal-oriented, long-term partnerships between two companies in which both risks and rewards are shared

A framework for strategic alliances • To determine whether a particular strategic alliance is appropriate for your firm, consider how the alliance will help address the following issues: • Adding value to products • Improving market access • Strengthening operations • Adding technological strength • Enhancing strategic growth • Enhancing organizational skills • Building financial strength

Third-party logistics • What is 3PL? • Third-party logistics is simply the use of an outside company to perform all or part of the firm’s management and product distribution • They are true strategic alliances • Advantages and disadvantages of 3PL • Focus on core strengths • Provides technological flexibility • Provides other flexibilities • Important disadvantages of 3PL • Loss of control inherent in outsourcing a particular function • No sense to out source these activities to a supplier if logistics is one of the core competencies of a firm order stream

Third-party logistics • 3PL issues and requirements • Know your own costs to compare with the cost of using an outsourcing firm • Customer orientation of the 3PL • Specialization of the 3PL • Asset-owning versus non-asset-owning 3PL • 3PL implementation issues • Agreements need to be reached and appropriate efforts must be made by both companies to initiate the relationship effectively • Both parties must be committed to devoting the time and effort needed to making a success of the relationship

Third-party logistics • Other important issues to discuss with potential 3PL providers including the following: • The third party and its service providers must respect the confidentiality of the data that you provide them • 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

Retailer-supplier partnerships • Types of RSP • At one end is information sharing, which helps the vendor plan more efficiently • At the other is a consignment scheme, where the vendor completely manages and owns the inventory until the retailer sells it • Requirements for RSP • The most important requirement for an effective retailer-supplier partnership, especially one toward the VMI end of the partnership spectrum, is advanced information systems, on both the supplier and retailer sides of the supply chain

Retailer-supplier partnerships • Requirements for RSP • As in all initiatives that can radically change the way a company operates top management commitment is required for the project to success. • Finally, RSP requires the partners to develop a certain level of trust without which the alliance is going to fail. • Inventory ownership in RSP • Now, some VMI partnerships are moving to a consignment relationship in which the supplier owns the goods until they are sold • The benefit of this kind of relationship to the retailer is obvious: lower inventory cost

Retailer-supplier partnerships • Inventory ownership in RSP • In VMI, one tries to optimize the entire system by coordinating production and distribution. • In addition, the supplier can further decrease total cost by coordinating production and distribution for several retailers. • In addition to inventory and ownership issues, advanced strategic alliances can cover many different areas. • Issues such as joint forecasting, meshed planning cycles, and even joint product development are sometimes considered.

Retailer-supplier partnerships • Issues in RSP implementation • For any agreement to be a success, performance measurement criteria must also be agreed to • When information is being shared between retailers and suppliers, confidentiality becomes an issue • When entering any kind of strategic, it is important for both parties to realize that there will initially be problems that can only be worked out through communication and cooperation • The supplier in a partnership commits to fast response to emergencies and situational changes at the retailer

Steps in RSP implementation • 1. the contractual terms of the agreement must be negotiated • 2. if they do not exist, integrated information systems must be developed for both supplier and retailer • 3. effective forecasting techniques to be used by the vendor and the retailer must be developed • 4. a tactical decision support tool to assist in coordinating inventory management and transportation policies must be developed

Advantages and disadvantages of RSP • Advantages • The knowledge the supplier has about order quantities, implying an ability to control the bullwhip effect • Through transfer of customer demand information that allows the supplier to reduce lead time • In VMI, controlling the variability in order quantities • Decrease managerial expenses and decreased inventory costs are obvious • Reduce forecast uncertainties and thus better coordinate production and distribution

Advantages and disadvantages of RSP • Disadvantages • It is necessary to employ advanced technology, which is often expensive • It is essential to develop trust in what once may have been an adversarial supplier-retailer relationship • The supplier often has much more responsibility than formerly. This may force the supplier to add personnel to meet this responsibility • Finally, expenses at the supplier often increase as managerial responsibilities increase

Distributor integration • Types of distributor integration • In term of inventory, DI can be used to create a large pool of inventory across the entire distributor network, lowering total inventory costs while raising service levels • 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

Issues in Distributor Integration • First, distributors may be skeptical of the rewards of participating in such a system. • In addition, participating distributors will be forced to rely upon other distributors, some of whom may not know • This new kind of relationship also tends to take certain responsibilities and areas of expertise away from certain distributors, and concentrate them on a few distributors

Issues in Distributor Integration • Establishing a DI relationship requires a large commitment of resources and effort on the part of the manufacturing • Distributors must feel sure that this is a long-term alliance • Organizers must work hard to build trust among the participants • The manufacturer may have to provide pledges and guarantees • The manufacturer may have to provide pledges and guarantees to ensure distributor commitment

Summary • In this chapter, we examined various types of partnerships that can be used to manage the supply chain more effectively • Increasingly, third-party logistics providers are taking over some of a firm’s logistics responsibilities • Retailer-supplier partnerships, in which the supplier manages a portion of the retailer’s business-typically retail inventories-are also becoming common • Finally, we discussed a class of alliances, called distributor intergration

Strategic Alliances