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Strategic Alliances. Jerry Banks. Who should perform a logistics related activity?. Internal Use internal resources if available If a core strength ‘Stick to your own knitting”. About 90% of CFOs report they use outsourcing (BW, 7/8/02). “Savings Tip: Don’t do it yourself,” BW, 6/23/03.

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who should perform a logistics related activity
Who should perform a logistics related activity?
  • Internal
    • Use internal resources if available
    • If a core strength
      • ‘Stick to your own knitting”
savings tip don t do it yourself bw 6 23 03
“Savings Tip: Don’t 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
savings tip don t do it yourself bw 6 23 035
“Savings Tip: Don’t 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 doesn’t meet agreed upon service levels
who should perform a logistics related activity6
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
who should perform a logistics related activity7
Who should perform a logistics related activity?
  • Arm’s-length transaction
    • Most business transactions are this way
      • Hire a trucking firm to deliver a load
    • Fulfills a business need
      • But, doesn’t have any long term advantages
who should perform a logistics related activity8
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
framework for strategic alliances
Framework for strategic alliances
  • In determining whether to engage in a strategic alliance, consider the issues in the following slides
framework for strategic alliances10
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
framework for strategic alliances11
Framework for strategic alliances
  • Improving market access
    • Complementary consumer product
    • Manufacturers can cooperate improving the sales of both parties
framework for strategic alliances12
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
framework for strategic alliances13
Framework for strategic alliances
  • Add technological strength
    • Partner with a firm that has the technology needed by a customer
framework for strategic alliances14
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
framework for strategic alliances15
Framework for strategic alliances
  • Enhance organizational skills
    • Learn from one another
framework for strategic alliances16
Framework for strategic alliances
  • Build financial strength
    • Administrative costs can be shared
    • Income can be increased
    • Exposure to risks can be shared
  • Resources might have to be diverted from the core strengths
core strengths
Core strengths
  • How a company differentiates itself from the competition
example ibm pc
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
example ibm pc20
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 didn’t follow
  • By the end of 1995, IBM’s market share had dropped to 8%
strategic alliances in scm
Strategic alliances in SCM
  • Third-party logistics (3PL)
  • Retailer-supplier partnerships (RSP)
  • Distributor integration (DI)
  • The use of an outside company to perform all or part of a firm’s 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
advantages of 3pl
Advantages of 3PL
  • Focus on core strengths
    • Most frequently cited benefit
    • Leave logistics to logistics companies
example bp and chevron
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
advantages of 3pl25
Advantages of 3PL
  • Provides technological flexibility
    • The better 3PLs constantly update their information technology
advantages of 3pl26
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
example simmons and ryder
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
example simmons and ryder28
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 doesn’t hold inventory these days
disadvantages of 3pl
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
3pl issues and requirements
3PL issues and requirements
  • Know your own costs
    • So you can compare them to the cost of using an outsourcing firm
3pl issues and requirements31
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?
3pl issues and requirements32
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
3pl issues and requirements33
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
3pl implementation issues
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 rewards…a partnership
retailer supplier partnerships
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
example milliken
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
continuous replenishment
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
vendor managed inventory
Vendor managed inventory
  • Supplier decides on appropriate inventory policy
  • Eventually, retailer oversight is eliminated
  • Wal-Mart and P&G began such a system in 1985
    • Dramatic improvements in on-time deliveries to Wal-Mart
requirements for rsp
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
requirements for rsp40
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
inventory ownership in rsp
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
issues in rsp implementation
Issues in RSP implementation
  • Performance measurement criteria must exist
  • Information sharing is a problem if the supplier deals with competitors as well
advantages of rsp
Advantages of RSP
  • Reduced forecast errors lead to reduced safety stocks, reduced storage and delivery costs, and increased service levels
problems associated with rsp
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
successes and failures
Successes and failures
  • There have been many examples, and some failures of RSP
example western publishers
Example: Western Publishers
  • Using VMI for children’s 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
example western publishers49
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
example mead johnson
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 <10 to >100
example vf corporation
Example: VF Corporation
  • VF has many well known brands
    • Wrangler, Lee, etc.
  • VF’s 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
example spartan stores
Example: Spartan Stores
  • Spartan Stores is a grocery chain
  • Shut down their VMI effort about one year after it began
example spartan stores53
Example: Spartan Stores
  • Why did it fail?
    • Retailers didn’t trust the suppliers and continued to monitor their inventories and interfere with reordering
    • Suppliers didn’t do enough to overcome the retailer’s fears
    • Suppliers couldn’t deal with product promotions
    • Delivery levels were often too low during promotions
distributor integration
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
distributor integration55
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
distributor integration56
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
distributor integration57
Distributor integration
  • Possible because of sophisticated information systems
    • Allow distributors to review each other’s inventory
    • Integrated logistics systems allow parts to be delivered cheaply and efficiently
distributor integration58
Distributor integration
  • Another possibility…improving distributor’s perceived technical ability
    • Different distributors build expertise in different areas
    • Customer’s request is routed to the dealer with the most expertise
distributor integration59
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