quality systems and customer services

SUPPLY CHAIN MANAGEMENT

Dr Vinh Thai

Module 9: Strategic Partnering & Collaboration in Supply Chain

• Some initial observations

• A framework of strategic partnering & collaboration

• Supply chain partnership models– Manufacturer and supplier partnership– Strategic partnering with logistics service providers– RSP or retailer supplier partnership– Distributor integration

Topics

• At the completion of this module you should be able to:– explain the role of strategic partnering in s integrated

supply chain management– explain what is vendor managed inventory and why

major retailers are moving towards it– outline the options available to firms when deciding on

outsourcing logistics functions of the firm– outline the scope of strategic partnering in improving

supply chain performance– identify the major challenges for new business models

and how these challenges can be converted into advantages for firms

Learning Outcomes

• Textbook: Chapter 6 (undergraduate); Chapter 1, pp. 1-24; Chapter 5, p. 240, pp. 248-252; Chapter 7, pp. 324-325

• Readings:– Undergraduate: 8.1-8.5 (N26726)– Postgraduate: 8.1-8.5 (N26726); 10.1-10.3 (N09726)

Textbook and Readings

We have roughly 30,000 employees now, and $26 billion in revenue this year. If we were vertically integrated, I don’t know how many employees I would have, but it would be some huge numbers.

- Michael Dell – in Ayers (2001)

Food for Thought...

Food for Thought...

• Recall that SCM is built on the notion of ‘integration’. So why are they, e.g. Dell, doing that, e.g. virtual instead of vertical integration?

• And what is the value to the supply chain?

• Recall that it is supply chain competing against supply chain, not individual firm against firm in business world today

• It thus makes sense for firms to collaborate so as to maximise ‘strength’ of SC

• Four basic ways to assure business function completion (Simchi-Levi et al. 2003):– Internal activities: vertical integration

• Perform activities in-house using internal resources & expertise

• Require large & capable firms

Some Initial Observations

– Acquisitions:• Acquire another firm that has expertise & resources in

other areas

• Full control gained, but culture may clash, effectiveness of acquired company may be lost

• Management is more important than ownership in achieving goals

– Arm’s-length transactions:• For many times, this is the most effective arrangement as

specialised firms (suppliers) have economies of scale

• Goals & strategies may not match

• Does not lead to long-term strategic advantage

Some Initial Observations (C)

– Strategic alliances:• Multifaceted, goal-oriented, long-term partnership

between companies

• Risks and rewards are shared

• Aiming at achieving long-term supply chain goals

• Eliminating acquisition downsides, while more resources committed for mutual goals

• Leading to long-term strategic benefits for both partners

Some Initial Observations (C)

So why is it critical to supply chain success?

• The most obvious purposes of strategic partnering & collaboration are to reduce cost & enhance better product quality

• This takes advantage of learning & innovation (coordination & collaboration) between partners

• With partnering firm would be able to focus more on their ‘core competence’– activities in which it can achieve definable pre-eminence

and provide unique value for customers– activities which are central to a company’s business, and

which it can perform more effectively than its competitors

A Framework for Strategic Partnering and Collaboration

A Framework for Strategic Partnering and Collaboration (C)

• What Does It Take to Have an Area of Core Competency?

Source: Coyle e al. (2003)

• Strategic alliance or partnership may help achieve benefits in the followings (Simchi-Levi et al. 2003):– Adding value to products –Ex: improved time to

market, distribution times, partnerships between companies with complementary product lines can add value to both companies’ products

– Improving market access – Ex: better advertising or increased access to new market channels, e. g. consumer product manufacturers cooperate to address the needs of major retailers, increasing sales for everyone


– Strengthening operations – Ex: improve operations by lowering system costs and cycle times, efficiently and effectively use facilities and resources

– Adding technological strength – Partnerships in which technology is shared can help add to the skills base of both partners

– Enhancing strategic growth –Partnerships might enable firms to pool expertise and resources to explore new opportunities by overcoming high entry barriers


• Enhancing organisational skills – Alliances provide a tremendous opportunity for organisational learning (Recall Module 8?)

• Building financial strength– Ex: income can be increased and administrative costs

can be shared between partners or even reduced owing to the expertise of one or both of the partners.

– But, alliances also limit investment exposure by sharing risk



Source: McLaren, Head & Yuan (2002, p. 355)

• What and how information is shared?

A Framework for Strategic Partnering and Collaboration: The Value of Information

Source: Matchette and Siekel (2005, p. 1)

• Two types of partnership (Ayers 2002):– Vertical partnerships: spanning different businesses

in a common supply chain• Ex: partnership between suppliers & retailers,

manufacturer & 3PL, etc.• Streamlining existing capabilities

– Horizontal partnerships: spanning different supply chains

• Ex: partnership between shipping companies, airlines, 3PLs, etc.

• Creating new strategic capabilities, access to new markets, new products and services, and the like

Supply Chain Partnership Models

Supply Chain Partnership Models (C)

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Source: Ayers (2002)

• Four types of vertical partnership in consideration are:

– manufacturer and supplier partnership– manufacturer and 3PL service providers partnership– manufacturer and distributor partnership– suppliers and retailers partnership

Supply Chain Partnership Models (C)

• Traditional adversarial relationship between manufacturer and supplier shifted to a collaborative relationship– manufacturer and supplier interact like partners

• Main tangible benefits– integrated SCM through integration of business

processes & information– ‘transparency’ in information and ‘cooperation’ in

activities

Supply Chain Partnership Models: Manufacturer-Supplier Partnership

• Partnership with suppliers came originally from Japanese business culture, keiretsu, a sort of supplier cooperative or association, was found to be linked with each major manufacturer

• Examples:– Dell: with ‘virtual integration’– HP– Chrysler Corporation (Reading 8.1 – N26 726)

Supply Chain Partnership Models: Manufacturer-Supplier Partnership (C)

• The use of an outside company to perform all or part of the firm’s material management and distribution functions

• 3PL relationships are truly strategic alliances: long-term commitment, not based on transactions, multi-functional– Not simply trucking or warehousing

• Most prevalent among large companies– Ex: Whirlpool Corporation’s inbound logistics

handled by Ryder Dedicated Logistics, IKEA & Maersk, NIKE & PONL (Now MAERSK), etc.

Supply Chain Partnership Models: Partnership with 3PL

Supply Chain Partnership Models: Partnership with 3PL (C)

Source: Brown & Allen (2001)


Source: Carding (1998)


Source: Adapted from European Distribution & Logistics, January 2001

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• Advantages of 3PL partnership (Simchi-Levi 2003, Brown and Allen 2001):– Concentrating capital investment &management on

core competencies– Gaining access to the latest technology and

equipment employed by the third-party provider– Proving other flexibilities, i.e. geographic locations,

in service offerings, etc.– The need for investment in new equipment and

premises is avoided


– There are potential cost reductions, for example:• shared use may give better utilisation of vehicles and

warehouses, leading to lower unit costs due to the consolidation of different customers’ demands;

• the specialisation of the contractor may allow volume buying of vehicles, warehouses, and mechanical handling equipment and systems;

• the labour costs of a third-party operator may be lower


• Disadvantages of 3PL partnership (Simchi-Levi 2003, Fernie 1990):– Cost issue:

• Operations at cost plus could be run more cheaply in-house, assuming other variables remain equal, because the third-party logistics company needs to make a profit on its operations

• Monitoring and control of costs is easier when the distribution function remains in-house

• The cost of monitoring the performance of the logistics can be high and is also sometimes difficult to achieve effectively

• Some companies do not have the necessary information or expertise to assess which logistics providers are offering good services at competitive prices


– Control issue:• In-house logistics and distribution operations can provide

the company with more control over important customer service considerations

• Flexibility of operations is also seen as a possible advantage of retaining an in-house distribution function, with the loyalty of the distribution operation not torn between several customers

• There is also the concern that outsourcing could result in a loss of security and that confidential information will be passed to competitors


• Fourth-party Logistics (4PL) or supply chain logistics, or Lead Logistics Provider (LLP): – Manages and runs complex logistics operations including

resources, control room, and architecture/integrator function – Thought of as supply chain integrator, a firm that

“assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution.”

– Developed from 3PL but covering the broader scope including 3PL, information technology (IT) services, and business process management

– A single contact that manages and integrates all kinds of resources and oversees 3PL functions throughout the supply chain for the reach of global market, strategic advantages, and long -term relationship



Source: Coyle e al. (2003)


• Fifth-party Logistics (5PL):– Developed to serve the e-business market. They are

those 3PL and 4PL providers managing all the parties in the supply chain on e-commerce. The key to success in this area is the information technology and system

Supply Chain Partnership Models: Issues & Requirements in Partnership with 3PL

• Know your own cost, compared with cost of using outsourcing firm

• Customer orientation of the 3PL: how a 3PL fits into the firm’s strategic logistics plan, e.g. flexibility, reliability, cost saving, etc.

• Specialisation of 3PL: 3PL whose roots lie in particular area relevant to logistics requirement in question should be considered

• Asset-owning versus non-asset-owning 3PL: • Asset-owning 3PL: significant size, access to HR, large

customer base, economies of scale & scope, etc. but bureaucratic, long decision-making cycle

• Non-asset-owning 3PL: limited resources, lower bargaining power, but more flexible, be able to tailor service, etc.

Supply Chain Partnership Models: Implementation Issues in 3PL Partnership

• Enough time to start-up considerations should be devoted: The firm must identify exactly what it needs The firm must provide specific performance measures

& requirements The 3PL must discuss these requirements, (including

their realism & relevance)• Effective communication is essential:

• Within the firm, managers must communicate to each other & employees on why to outsource & what to expect

• Communication between the firm and its 3PL is critical, e.g. between information systems, etc.

• Other important issues for successful implementation (Simchi-Levi et al. 2003):– Respect of confidentiality of data shared– Specific performance measures must be agreed upon– Specific criteria regarding subcontractors should be

discussed– Arbitration issues should be considered.– Escape clauses should be negotiated– Methods to assure achievement of performance goals

should be discussed

Supply Chain Partnership Models: Implementation Issues in 3PL Partnership(C)

Supply Chain Partnership Models: Factors for Success in 3PL Partnership

• Five factors that are critical to the success of a logistics partnership (Bowersox 1992):– Selective matching: All organisations have compatible

corporate cultures and values– Information sharing: Partners openly share strategic

and operational information– Role specification: Each party in the partnership is

clear about the specifics of its role– Ground rules: Procedures and policies are clearly

spelled out– Exit provisions: A method for terminating the

partnership is defined

Supply Chain Partnership Models: Other Factors for Success in 3PL Partnership

• Trust– the most significant factor to succeed in outsourcing logistics

because companies have to share information, benefits, and risks to each other

• Performance evaluation:– the major factor to measure the success and maintain the

achievement after outsourcing starts

– If the performance is not satisfied, the outsourcing can be ceased or failed because the objective of outsourcing is not achieved

– To maintain the alliance and succeed in the long term, it is necessary to measure or evaluate the performance regularly

Supply Chain Partnership Models: Other Factors for Success in 3PL Partnership (C)

• Sharing information & maintaining communication:– This leverages the efficiency and effectiveness in logistics

outsourcing because both partners know what they want and provide the relevant information

– Lack of information sharing and communication maintaining can fail the outsourcing especially in strategic partnership

• Top management’s commitment & support:– If top management are fully committed and support staff in

performing their jobs, the whole company will function in a defined direction and thus achieve concrete goals

– The lack of commitment and support from top management will discourage the operations level’s decision in management, sharing information, and communication

Supply Chain Partnership Models: Other Factors for Success in 3PL Partnership (C)

• Having clear goals, vision, and roles:– Goal, vision and roles are required to avoid confusion

between staff and staff, and between two companies – They should be clarified at the early stage and updated

from time to time to prevent the risks that the partners may work in the different directions

– Other key critical factors can be relationship commitment, sharing benefits and risks, flexibility, etc.

– Both sides may have to consider these issues in their specific condition and context

• Types of RSL: Quick response, Continuous Replenishment, Advance Continuous Replenishment, VMI (Simchi-Levi et al. 2003)

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

Supply Chain Partnership Models: Retailer-Supplier Partnerships (RSP)

• Continuous Replenishment: Vendors receive POS data and use it to prepare shipments at previously agreed upon intervals to maintain agreed-upon levels of inventory– Wal-Mart, Kmart

• Advanced Continuous Replenishment:– Suppliers may gradually decrease inventory levels at

the retailer’s store or distribution center as long as service levels are met

– Inventory levels are thus continuously improved in a structured way

– Kmart

Supply Chain Partnership Models: Retailer-Supplier Partnerships (C)

• Vendor Managed Inventory (VMI):– Supplier/vendor is usually manufacturer, but can also be

a distributor– Supplier/vendor is in charge of ordering & inventory

replenishment decisions, thus reduce cost & improve service level through information sharing & eliminating factors of bullwhip effect

– It also leads to better manufacturing scheduling, supplies to retailers, improved service level with coordinated distribution & transshipment of inventory between retailers

– 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

Supply Chain Partnership Models: Retailer-Supplier Partnerships (C)

• Advanced information systems on both sides• 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: manufacturer serves many

competing retailers– Management of the entire supply chain: inventory of

manufacturer and retailers– Initial loss of revenues

Supply Chain Partnership Models: Requirements for Effective RSP

• Inventory ownership:– Traditionally retailer owns inventory when received– In VMI supplier owns the goods until they are sold

(consignment relationship)• Why would a firm do this?

• Performance measures must be agreed upon: POS accuracy, fill rate, inventory level, inventory turns, lead time

• Confidentiality• Communication & cooperation:

– Ex: the case of First Brands & Kmart

Supply Chain Partnership Models: Important RSP Issues

• 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

– This implies the ability to control the bullwhip effect

Supply Chain Partnership Models: Advantages and Disadvantages of RSP

• Other advantages:– Decrease required inventory levels– Improve service levels– Decrease work duplication– Improve forecasts

• Disadvantages:– 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?

Supply Chain Partnership Models: Advantages and Disadvantages of RSP (C)

• Manufacturers treat their distributors as partners– Value of distributors & their relationship with end

users are appreciated– Manufacturer can use information about customer

needs & wants acquired by distributors– Necessary support, i.e. parts & services are provided

to distributors by manufacturer

• In modern distributor integration, expertise & inventory located at one distributor is available to the others (Simchi-Levi et al. 2003)

• Examples: Caterpillar & their dealers

Supply Chain Partnership Models: Distributor Integration (DI)

• DI is used to address both inventory-related & service-related issues– Parts are shared across the distributor network– Specialized service requests are steered to

appropriate dealers or distributors

• Each distributor can check inventories of others; they are also contractually bound to exchange parts for agreed-upon remuneration– How does this improve supply chain performance?– What does it need to be realised?

Supply Chain Partnership Models: Distributor Integration (C)

• Issues in DI– Incentives for dealers – are they giving away

competitive advantages?– Skills and responsibilities are taken from some

dealers/distributors

• What is required?– Trust, e.g. be assured about long-term alliance– Pledges– Guarantees from the manufacturer, in terms of

commitment of resources & effort– Advanced information systems

Supply Chain Partnership Models: Distributor Integration (C)

Ayers, J. B. 2001, Handbook of supply chain management, CRC Press.Ayers, J.B. 2002, ‘Supply Chain Management (SCM), the Wheel and the

Manufacturing Engineer’, CASA/SMA Blue Book Series, http://www.ayers-consulting.com/download/SME%20Blue%20Book%20for%20Posting.pdf

Bowersox, D. 1992, Logistical Excellence, Digital Press, Burlington Quinn, J. & Hilmer, F. 1994, ‘Strategic outsourcing’, Sloan Management Review, vol. 35, pp, 43–55.

Brown, M. & Allen, J. 2001, ‘Logistics out-sourcing’, Handbook of Logistics and Supply Chain Management, Elsevier Science.

Carding, T. 1998, Centralized sites serve Pan-European distribution needs, http://www.supplychainbrain.com/archives/1.98.PanEuropean.htm?adcode=50

Coyle, J. J., Bardi, E. J. & Langley, C. J. 2003, The Management of Business Logistics: A Supply Chain Perspective, 7th edn, South-Western/Thomson Learning, Mason, OH.

Kim, B. 2005, Supply Chain Management, Mastering Business in Asia, John Wiley & Sons (Asia).

Matchette, J. & Seikel, M.A. 2005, ‘Inquiries and insights on supply chain collaboration’, ASCET, vol. 7, http://www.ascet.com/documents.asp?d_id=3472

McLaren, T., Head, M. & Yuan, Y. 2002, ‘Supply chain collaboration alternatives: Understanding the expected costs and benefits’, Internet Research, vol. 12, no. 4.

Simchi-Levi, D., Kaminsky, P. & Simchi-Levi, E. 2003, Designing and Managing the Supply Chain, 2nd edition, McGraw-Hill, USA.

References

http://www.ayers-consulting.com/download/SME%20Blue%20Book%20for%20Posting.pdf

http://www.ayers-consulting.com/download/SME%20Blue%20Book%20for%20Posting.pdf

http://www.supplychainbrain.com/archives/1.98.PanEuropean.htm?adcode=50

http://www.ascet.com/documents.asp?d_id=3472

• Textbook: Chapter 9 (undergraduate); Chapter 4 (postgraduate)

• Readings:– Undergraduate: 10.1-10.5 (N26726)– Postgraduate: 10.1-10.5 (N26726)

Preparation for next Module: Supply Chain and Product Design Issues

quality systems and customer services

Documents

role of strategic partnering

scope of strategic partnering

strategic alliances

partnering firm

longterm strategic advantage

longterm strategic benefits

supply chain performance

longterm supply chain