Strategic alliances
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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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Strategic alliances l.jpg

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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“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

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“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

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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?

  • 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

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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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  • 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 didn’t follow

  • By the end of 1995, IBM’s 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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  • 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

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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 doesn’t 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 rewards…a 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 P&G 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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Successes and failures table:

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

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Example: Western Publishers table:

  • 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

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Example: Western Publishers table:

  • 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 table:

  • 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

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Example: VF Corporation table:

  • 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

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Example: Spartan Stores table:

  • Spartan Stores is a grocery chain

  • Shut down their VMI effort about one year after it began

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Example: Spartan Stores table:

  • 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

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Distributor integration table:

  • 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 table:

  • 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 table:

  • 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 table:

  • 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

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Distributor integration table:

  • 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

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Distributor integration table:

  • 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 table: