McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 8

Strategic Alliances

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8.1 IntroductionComplexity in business environments

increasingResources required to manage are

becoming increasingly scarceMany functions need to be outsourcedFirms need to ensure that functions are

performed by the other firms

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Four Basic Ways to Ensure Tasks Are Completed

Internal activities Activities that are core strengths may be the best way to

perform the activity. Acquisitions

Gives the acquiring firm full control over the way the particular business function is performed

Can be difficult and expensive. (Culture/Competitors) Arm’s-length transactions

Most business transactions are of this type. Short-term arrangement that fulfills a particular business need

but doesn’t lead to long-term strategic advantages. Strategic alliances

Multifaceted, goal-oriented, long-term partnerships between two companies

Both risks and rewards are shared. Typically lead to long-term strategic benefits for both partners.

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8.2 Framework for Strategic Alliances: When to Go for a Strategic Alliance?

Adding value to products Improving market accessStrengthening operationsAdding technological strengthEnhancing strategic growthEnhancing organizational skillsBuilding financial strength

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DownsidesCore competencies should not be

compromisedCompetitive advantages should not be

compromised

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Three Types of Strategic Alliances

Third Party Logistics (3PL)Retailer–Supplier Partnerships (RSP)Distributor Integration (DI)

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8.3 Third Party Logistics (3PL)Use of 3PL providers to take over a

company’s logistics functionsAlmost a $85billion industry by 20048% of all logistics costs attributed to 3PL

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What Is 3PL?Strategic partnershipLong term commitmentMulti-function arrangementProcess integrationLarge range of 3PL companies

Non-asset owning 3PL companies called 4PLProvide services but not trucks, warehouses

Prevalent usage with larger companies

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3PL AdvantagesFocus on Core Strengths

Allows a company to focus on its core competencies

Logistics expertise left to the logistics experts

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3PL AdvantagesProvides Technological Flexibility

Technology advances adopted by better 3PL providers

Adoption possible by 3PLs in a quicker, more cost-effective way

3PLs may have the capability to meet the needs of a firm’s potential customers

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3PL AdvantagesProvides Other Flexibilities

Flexibility in geographic locations. Flexibility in service offerings Flexibility in resource and workforce size

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3PL Disadvantages Loss of control inherent in outsourcing a

particular function. Outbound logistics 3PLs interact with a firm’s

customers. Many third-party logistics firms work very hard to

address these concerns. Painting company logos on the sides of trucks, dressing

3PL employees in the uniforms of the hiring company, and providing extensive reporting on each customer interaction.

Logistics is one of the core competencies of a firm Makes no sense to outsource these activities to a

supplier who may not be as capable as the firm’s in-house expertise

Wal-Mart, pharmaceutical companies

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3PL IssuesCosts and Customer Orientation

Know your own costs Compare with the cost of using an outsourcing firm. Use activity-based costing techniques

Customer orientation of the 3PL Ability of provider to understand the needs of the

hiring firm and to adapt its services to the special requirements of that firm.

Reliability. Flexibility of the provider

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3PL IssuesSpecialization of the 3PL

Consider firms whose roots lie in the particular area of logistics that is most relevant to the logistics requirements in question.

Firms may have even more specialized requirements

Firms can use one of its trusted core carriers as its third-party logistics provider.

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3PL Issues Asset-Owning vs Non-Asset-Owning

3PL Asset-owning companies

Significant size, human resources, customer base, economies of scope and scale, and systems

May be bureaucratic with a long decision-making cycle.

Non-asset-owning companies May have limited resources and bargaining power May be more flexible Able to tailor services and have the freedom to mix

and match providers. May have low overhead costs and specialized

industry expertise at the same time

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3PL Implementation IssuesBuying company

Should devote enough time to start-up considerations (First 6-12 months most critical)

Must identify exactly what it needs for the relationship to be successful

Be able to provide specific performance measures and requirements to the 3PL firm.

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3PL Implementation Issues3PL company:

Must consider and discuss requirements honestly and completely, including their realism and relevance

Both parties:Must dedicate time and effort for the

relationshipTreat as a mutually beneficial allianceNo “transaction pricing” mentality

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Other Issues The third party and its service providers must

respect the confidentiality of the data. 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

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8.4 Retailer-Supplier Relationships

Cooperative relationship between suppliers and retailers to use one another’s knowledge

Suppliers have better knowledge of lead times and production capacities

Retailers have better knowledge of demands

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Types of RSPQuick Response Strategy

Suppliers receive POS data from retailers Suppliers use this information to

synchronize their production and inventory activities with actual sales at the retailer.

Retailers still prepare individual orders POS data are used by suppliers to

improve forecasting and scheduling and to reduce lead time

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Types of RSPContinuous Replenishment Strategy

Also called rapid replenishment Suppliers receive POS data Suppliers use these data to prepare shipments

at previously agreed-upon intervals to maintain specific levels of inventory.

Advanced form of continuous replenishment Suppliers may gradually decrease inventory levels at

the retail store or distribution center as long as service levels are met.

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Types of RSPVendor Managed System (VMI)

Also called vendor-managed replenishment (VMR) system

Supplier decides on the appropriate inventory levels and the appropriate inventory policies to maintain these levels.

Supplier suggestions initially approved by retailer Goal of many VMI programs is to eliminate retailer

oversight on specific orders. Wal-Mart and Procter & Gamble VMI

Partnership, begun in 1985 Has improved P&G’s on-time deliveries to Wal-Mart while

increasing inventory turns

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Main Characteristics of RSP

Criteria →Type ↓ Decision maker Inventory Ownership

New skills employed by vendors

Quick response Retailer Retailer Forecasting skills

Continuous replenishment

Contractually agreed-to levels Either party

Forecasting and inventory control

Advanced continuous replenishment

Contractually agreed-to and continuously improved levels Either party

Forecasting and inventory control

VMI Vendor Either party Retail management

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RSP RequirementsPresence of advanced information

systemsTop management commitment

Especially because information will be shared across companies

A level of trust among partnersSupplier manages retailer’s inventoryRetailer provides sales information to supplierReduced inventory leads to space savings

Should not be given to competitors

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RSP Inventory Ownership Who makes the replenishment decisions? Who owns the inventory until it is sold?

Consignment relationship in VMI programsSupplier owns the inventory until it is sold

Issues with consignment relationship: Retailer lowers inventory cost Supplier can manage inventory more effectively Supplier can move as much inventory as contract

allows Higher costs to supplier because of longer inventory

holding Power relationship between supplier and retailer may

move the supply contract to consider higher system savings rather than savings from one party only (Global v. Local)

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RSP Implementation Performance measurement criteria must also be

agreed to. Non-financial measures as well as the traditional

financial measures. Initial problems can be worked out through

communication and cooperation. Manufacturing technology or capacity at supplier

may need to be modified/enhanced to respond to specifics in the contract: Fast response to emergencies Situational changes at the retailer

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Steps in RSP Implementation Initially, the contractual terms of the agreement

must be negotiated on the following: Inventory ownership Credit terms Ordering responsibilities Performance measures such as service or inventory

levels, when appropriate. The following three additional steps need to be

executed: Development of integrated information systems Development of effective forecasting techniques Establishment of a tactical decision support tool to

assist in coordinating inventory management and transportation policies

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Advantages of RSPBetter knowledge the supplier has about

order quantitiesan ability to control the bullwhip effect

A variety of side benefitsprovides a good opportunity for the

reengineering of the retailer–supplier relationship.

eliminate redundant order entries automate manual tasks can be automatedreassign tasks for better efficiencyEliminate unnecessary control steps

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Disadvantages of RSP Necessary to employ advanced technology, which is

often expensive. Essential to develop trust in what once may have

been an adversarial supplier– retailer relationship. Supplier often has much more responsibility than

formerly. May force the supplier to add personnel to meet this

responsibility. Expenses at the supplier often increase as

managerial responsibilities increase. Consignment arrangement may increase inventory

costs for the supplier. Float

Retailers accustomed to waiting 30 to 90 days to pay for goods may now have to pay upon delivery

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Examples of SP Successes and Failures

Western Publishing-Golden Books: Western Publishing is using VMI for its Golden

Books line of children’s 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.

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Examples of SP Successes and Failures

VF Corporation’s 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.

VF’s program is considered one of the most successful in the apparel industry.

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Examples of SP Successes and Failures

Spartan Stores

Spartan 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 before

This was because they didn’t 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.

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Examples of SP Successes and Failures

Spartan Stores (continued)

Furthermore, the suppliers didn’t 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.

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8.5 Distributor Integration (DI)Distributors an important partner in the

supply chainDistributors have a wealth of information

about customer needs and wantsSuccessful manufacturers use this information

when developing new products and product lines.

Distributors typically rely on manufacturers to supply the necessary parts and expertise

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Changing View Regarding Distributors Strong and effective distribution network cannot

always meet challenges Rush order might be impossible to meet from

inventory Customer might require some specialized technical

expertise that the distributor does not have. In the past, issues were addressed by adding

inventory and personnel Modern information technology leads to a third

solution Distributor Integration

Expertise and inventory located at one distributor is available to the others.

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Types of DI Addresses both inventory-related and service-related

issues Inventory pooling across the entire distributor network Each distributor checks inventories of other distributors to

locate a needed product or part. Dealers are contractually bound to exchange the part

under certain conditions and for agreed-upon remuneration.

lowers total inventory costs increases service levels.

Can meet a customer’s specialized technical service requests Steer special requests to the distributors best suited to address

them Centers of Excellence for Otra, a large Dutch holding company

70 electrical wholesale subsidiaries some designated as centers of excellence Other subsidiaries, as well as customers, are directed to

these centers of excellence to meet particular requests

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Issues in DI Distributors may be skeptical of the rewards of

participating in such a system Participating distributors will be forced to rely upon other

distributors, some of whom they may not know, to help them provide good customer service.

Tends to take certain responsibilities and areas of expertise away from certain distributors, and concentrate them on a few distributors. It is not surprising that distributors might be nervous about losing these skills and abilities.

DI relationship requires: a large commitment of resources and effort for the manufacturer a long-term alliance. trust among the participants. pledges and guarantees from the manufacturer to ensure

distributor commitment.

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SUMMARY Various types of partnerships can be used to manage

the supply chain effectively. Framework that can help in selecting the most

appropriate way to address a particular logistics issue. 3PLs are becoming more prevalent. Both advantages and disadvantages to outsourcing the

logistics function Many important issues to consider once the decision has

been made and a 3PL agreement is being implemented. RSPs are also becoming common.

Issues and concerns relating to the implementation of RSP types of arrangements

Distributor Integration (DI) Create risk-pooling opportunities across the various

distributors Enable different distributors to develop different areas of

expertise.