Sategs of Strategic Alliance

The Power matrix of Supplier-Buyer RelationshipBuyer DominanceSupplier Dominance

(moral hazard)Independence

(adverse selection)Inter-dependenceLowHighRelative utility and scarcity of supplier resources for buyersRelative utility and scarcity of buyers resources for suppliersHighLowSource: Andrew Cox, 20001Adverse Selection refers to a process by which practitioners fail to understand the pre-contractual power situation. Because of this failure, managers make inappropriate sourcing decisions and select the wrong suppliers.Moral Hazard refers to a process by which managers fail initially to create effective contractual safeguards so that they find themselves highly dependent on opportunistic suppliers post-contractually.

Critical success factors to SATrustCooperationcommunication2Trust involves a belief that each stage is interested in the others welfare and would not take actions without considering their impact on the other stages.Ways to Operate a CompanyInternal activitiesAcquisitionArms length transactionOutsourcingStrategic allianceStages of Strategic AllianceInitial EuphoriaHoneymoon periodDawning realizationAftershockDamage controlConceptual model of alliance developmentAlliance conceptualizationAlliance pursuanceAlliance confirmationAlliance implementation/continuity

5Alliance conceptualization begins when a firm determines a collaborative arrangement has appeal and provides a potential alternative to the current arrangement.Alliance pursuance decision to form an alliance is finalized and the firm establishes the strategic and operational considerations that will be used to select the alliance partner.Alliance confirmation focuses on partner selection and confirmation.Alliance implementation/continuity creates a feedback mechanism to determine and assess performance continually to determine whether the alliance will be sustained, modified or terminated.

Types of allianceOpportunistic allianceComplementary strategic allianceWhy Strategic Alliance?Adding value to products/servicesImproving market accessStrengthening operationsAdding technological strengthEnhancing strategic growthBuilding financial strengthTypes of AllianceThird-party logistics (3PL)Fourth-party logistics (4PL)Retailer-supplier partnerships (RSP)Distributor integration (DI)Third Party LogisticsWhat is 3PL?Outside firms perform materials management and logistics functionsLong term commitments and multiple functionsWhat are the advantages of 3PL?Focus on core strengthsProvides technological flexibilityProvides flexibility ingeographyworkforce sizeadditional servicesresource flexibility3PLUse of an outside company to perform all or part of the forms materials management and product distribution function

Relationship vs. transactional basedSingle-function vs. multi-functionLong-term vs. short-term commitments3PLDisadvantagesLoss of control3PL employees may interact with customers3PLs address this with uniforms, logos, etcSharing of confidential infoExamplesSimmons and Ryder Integrated LogisticsOn site rep, all logistics managed by Ryder, JIT manufacturingSonicAirRapid delivery of spare parts67 warehousesSophisticated software for inventory and rapid delivery4PLIt refers to the evolution in logistics from suppliers focused on warehousing and transportation (third-party logistics providers) to suppliers offering a more integrated solution. Among other services, fourth-party logistics providers include supply chain management and solutions, change management capabilities, and value added services in their offering. Strategic Alliance:Types of SAQuick 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.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, KmartAdvanced 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

Strategic Alliance:Types of SARequirements for Effective Strategic AllianceAdvanced information systemsTop management commitmentInformation must be sharedPower and responsibility within an organization might change (for example, contact with customers switches from sales and marketing to logistics)Mutual trustInformation sharingManagement of the entire supply chainInitial loss of revenuesImportant SA IssuesInventory ownership:Retailer owns inventorySupplier owns the goods until they are sold (consignment)Why would a firm do this?Performance measures: Fill rate, inventory level, inventory turns

Important SA IssuesConfidentialityCommunication and cooperationWhen 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.Steps in SA ImplementationContractual negotiationsOwnershipCredit termsOrdering decisionsPerformance measuresDevelop or integrate information systemsDevelop effective forecasting techniquesDevelop a tactical decision support tool to assist in coordinating inventory management and transportation policiesMain Characteristics of SA

Advantages of SAFully utilize system knowledgeConsider 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.Advantages of SADecrease required inventory levelsImprove service levelsDecrease work duplicationImprove forecastsDisadvantages of SAExpensive 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?

Examples of SA Successes and FailuresWestern 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 WesternExamples of SA Successes and FailuresVF 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.

Examples of SA Successes and FailuresSpartan StoresSpartan 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 beforeThis 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.Examples of SA Successes and FailuresSpartan 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.

Distributor IntegrationParts are shared across the distributor networkSpecialized service requests are steered to appropriate dealers or distributors.What is required?TrustPledgesGuarantees from the manufacturerAdvanced information systemsDisadvantagesIncentives for dealers are they giving away competitive advantages?Skills and responsibilities are taken from some dealers/distributors.Examples - Caterpillar, OkumaInformation for Coordination of SystemsInformation is required to move from local to global optimizationQuestions:Who will optimize?How will savings be split?Information is needed :Production status and costsTransportation availability and costsInventory informationCapacity informationDemand informationRole of Information in Supply Chain Success

29When managers have good information, they have supply chain visibility, enabling them to take a global scope. With this global scope, they are able to make best decisions for the supply chain. Therefore, information is key to supply chain success.

Information is most important when it is used to create a global scope across all staged and drivers of a supply chain. This allows decision to be made that maximize total supply chain profitability.

Information Technology in a Supply Chain: Legacy Systems

30Advantages of legacy system:1) They tend to get the operational work done. Less risky than untested systems.2) Less incremental investments to run.Disadvantages:1)They focus on a small part of the supply chain2)Have only transactional capabilities3) The are based on mainframe technologiesInformation Technology in a Supply Chain: ERP SystemsSupplierCustomerRetailerDistributorManufacturerStrategicPlanningOperationalERPPotentialERPPotentialERP31ERP systems provide an integrated view of information across functions within a company and with the potential to fo across companies.They are good at providing real-time information.Examples include:SAP, Oracle, PeopleSoft, JD Edwards, Baan, etc.

Information Technology in a Supply Chain: Analytical ApplicationsSupplierCustomerRetailerDistributorManufacturerStrategicPlanningOperationalSupplierAppsSCMMESDem PlanTransport execution &WMSAPSTransport & InventoryPlanningCRM/SFA32Information is the glue that holds the entire supply chain together and allows it to function, making information the most important supply chain driver.

Criteria

TypesDecision

MakerInventory

OwnershipNew Skills

Employed by vendors

Quick

ResponseRetailerRetailerForecasting Skills

Continuous

ReplenishmentContractually Agreed to LevelsEither

PartyForecasting & Inventory Control

Advanced

Continuous

ReplenishmentContractually agreed to & Continuously

Improved LevelsEither

PartyForecasting & Inventory Control

VMIVendorEither

PartyRetail

Management

Supply Chain Success

Coordinated Decisions

Global

Scope

Information

Distributor

Manufacturer

Supplier

Retailer

Customer

Operational

Planning

Strategic