Chapter Eight “Strategic Alliances”

Logistics and

Supply Chain Management

8.1 Introduction

• Complexity in business environments increasing

• Resources required to manage are becoming increasingly scarce

• Many functions need to be outsourced

• Firms need to ensure that functions are performed by the other firms

Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

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

• Adding value to products

• Improving market access

• Strengthening operations

• Adding technological strength

• Enhancing strategic growth

• Enhancing organizational skills

• Building financial strength

Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

Downsides

• Core competencies should not be compromised

• Competitive advantages should not be compromised

Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

Firm A

Internal Activities

If we have core competenciesin this business function, doingit as an internal activity may be the best way to do it.

Firm A Firm B

Internal Activities Acquisitions

.

Firm A can control how Firm B doesthe business function.

However, it might be expensive, there may be problems blending the cultures of the two firms and Firm B may havehad past dealings with Firm A’s competitors

Arm’s Length transactions

Firm A Firm B

$

Arm’s Length transactions

Firm A Firm B

Arm’s Length transactions

Firm A Firm B

$

Firm A Firm B

Strategic Alliances

Order

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.

Extreme Alliances – the strange story of virtual airlines

• Owned no aircraft

• Contracted maintenance

• Leased airport gates

• Leased reservation systems

• Mainly provided cash flow for owners – companies involved in things like real estate

Three Types of Strategic Alliances

• Third Party Logistics (3PL)

• Retailer–Supplier Partnerships (RSP)

• Distributor Integration (DI)

Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

8.3 Third Party Logistics (3PL)

• Use of 3PL providers to take over a company’s logistics functions

• Almost a $85 billion industry by 2004

• 8% of all logistics costs attributed to 3PL

Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

Key Logistics Activities

• Customer service.• Demand forecasting.• Inventory

management.• Logistics

communication.• Materials handling.• Order processing.

• Packaging.• Parts and service

support.• Plant and warehouse

site selection.• Procurement.• Reverse logistics.• Traffic, transportation• Warehousing,

storage.

Organization

“…internal and external components of the supply system…”

CustomersSuppliers

Supply ChainManagement:

Demand forecasting. Plant and warehouse site selection. Inventory management. Materials handling. Warehousing, storage. Packaging. Order processing.

Organization

…internal and external components of the supply system…

CustomersSuppliers

Supply ChainManagement:

Customer service

Parts and service support

Reverse logistics

Traffic, transportation

. .

Procurement.Parts and serviceSupport. Traffic.Transportation.

Two Basic Types of Third Party Logistics Providers

• Asset-based– Trucks– Warehouses– Information systems

Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

Two Basic Types of Third Party Logistics Providers

• Asset-based– Trucks– Warehouses– Information systems

• Non-asset based– Primarily are

coordinators.

Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

Reasons for Third Party Logistics

• Allows company to focus on its core competencies.

• Business – including logistics – is becoming so complicated it is difficult to keep up with all developments.

Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

What Is 3PL?• Strategic partnership• Long term commitment• Multi-function arrangement• Process integration• Large range of 3PL companies

– Non-asset owning 3PL companies called 4PL• Provide services but not trucks, warehouses

• Prevalent usage with larger companies

Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

3PL Advantages

• Focus on Core Strengths – Allows a company to focus on its core

competencies– Logistics expertise left to the logistics experts

Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

3PL Advantages

• Provides 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

Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

3PL Advantages

• Provides Other Flexibilities – Flexibility in geographic locations. – Flexibility in service offerings – Flexibility in resource and workforce size

Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

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 companiesSimchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”

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

Simchi-Levi, Kaminsky, Simchi-Levi “Designing and Managing the Supply Chain.”