Designing & Managing the Supply Chain Strategic Alliances Designing & Managing the Supply Chain Chapter 6 Yao yaxian yyx@pusan.ac.kr

Outline How Kimberly-Clark keeps client Costco in diapers Introduction A framework for strategic alliances Third-party logistics Retailer-supplier partnerships Distributor integration

CASE: How Kimberly-Clark keeps client Costco in diapers Introduction Kimberly-Clark is a company which products diapers Costco is a retailer who sales Kimberly-Clark’s productions The retailer pressures their suppliers to make a more active role in shepherding products from factory to store shelves

CASE: How Kimberly-Clark keeps client Costco in diapers Changing sizes In some cases, suppliers shoulder the costs of warehousing excess merchandise. In others, it means pushing suppliers to change product or package sizes. In this case, the plan is officially called ”vendor-managed inventory,” Kimberly-Clark oversees and pays for everything involved with managing Costco’s inventory except the actual shelf-stockers in store aisles

CASE: How Kimberly-Clark keeps client Costco in diapers Return to unisex Less variety makes for easier inventory-tracking in its factories and trucks Better cooperation between retailers and suppliers has been made possible by improved technology Costco’ shelves are less likely to go empty under the new system A “Pull” product It means that shoppers make a trip to the store specifically to buy them

CASE: How Kimberly-Clark keeps client Costco in diapers A canceled order The drive for efficiency creates new problems Costco store managers complain that some deliveries are incomplete Some drivers accidentally unloading items intend for a later stop Now, Kimberly-Clark uses a simple cardboard divider to separate each store’ order

Introduction As with any business function, there are four basic ways for a firm to ensure that a logistics-related business function is completed: 1. internal activities. A firm can perform the activity using internal resources and expertise, if they are available. 2. acquisitions. If a firm doesn’t have the expertise or specialized resources internally, it can acquire another firm that does.

Introduction 3. arm’s-length transactions. This kind of short-term arrangement fulfills a particular business need but does not lead to long-term strategic advantages 4. strategic alliances. These are typically multifaceted, goal-oriented, long-term partnerships between two companies in which both risks and rewards are shared

A framework for strategic alliances To determine whether a particular strategic alliance is appropriate for your firm, consider how the alliance will help address the following issues: Adding value to products Improving market access Strengthening operations Adding technological strength Enhancing strategic growth Enhancing organizational skills Building financial strength

Third-party logistics What is 3PL? Third-party logistics is simply the use of an outside company to perform all or part of the firm’s management and product distribution They are true strategic alliances Advantages and disadvantages of 3PL Focus on core strengths Provides technological flexibility Provides other flexibilities Important disadvantages of 3PL Loss of control inherent in outsourcing a particular function No sense to out source these activities to a supplier if logistics is one of the core competencies of a firm order stream

Third-party logistics 3PL issues and requirements Know your own costs to compare with the cost of using an outsourcing firm Customer orientation of the 3PL Specialization of the 3PL Asset-owning versus non-asset-owning 3PL 3PL implementation issues Agreements need to be reached and appropriate efforts must be made by both companies to initiate the relationship effectively Both parties must be committed to devoting the time and effort needed to making a success of the relationship

Third-party logistics Other important issues to discuss with potential 3PL providers including the following: The third party and its service providers must respect the confidentiality of the data that you provide them 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

Retailer-supplier partnerships Types of RSP At one end is information sharing, which helps the vendor plan more efficiently At the other is a consignment scheme, where the vendor completely manages and owns the inventory until the retailer sells it Requirements for RSP The most important requirement for an effective retailer-supplier partnership, especially one toward the VMI end of the partnership spectrum, is advanced information systems, on both the supplier and retailer sides of the supply chain

Retailer-supplier partnerships Requirements for RSP As in all initiatives that can radically change the way a company operates top management commitment is required for the project to success. Finally, RSP requires the partners to develop a certain level of trust without which the alliance is going to fail. Inventory ownership in RSP Now, some VMI partnerships are moving to a consignment relationship in which the supplier owns the goods until they are sold The benefit of this kind of relationship to the retailer is obvious: lower inventory cost

Retailer-supplier partnerships Inventory ownership in RSP In VMI, one tries to optimize the entire system by coordinating production and distribution. In addition, the supplier can further decrease total cost by coordinating production and distribution for several retailers. In addition to inventory and ownership issues, advanced strategic alliances can cover many different areas. Issues such as joint forecasting, meshed planning cycles, and even joint product development are sometimes considered.

Retailer-supplier partnerships Issues in RSP implementation For any agreement to be a success, performance measurement criteria must also be agreed to When information is being shared between retailers and suppliers, confidentiality becomes an issue When entering any kind of strategic, it is important for both parties to realize that there will initially be problems that can only be worked out through communication and cooperation The supplier in a partnership commits to fast response to emergencies and situational changes at the retailer

Steps in RSP implementation 1. the contractual terms of the agreement must be negotiated 2. if they do not exist, integrated information systems must be developed for both supplier and retailer 3. effective forecasting techniques to be used by the vendor and the retailer must be developed 4. a tactical decision support tool to assist in coordinating inventory management and transportation policies must be developed

Advantages and disadvantages of RSP The knowledge the supplier has about order quantities, implying an ability to control the bullwhip effect Through transfer of customer demand information that allows the supplier to reduce lead time In VMI, controlling the variability in order quantities Decrease managerial expenses and decreased inventory costs are obvious Reduce forecast uncertainties and thus better coordinate production and distribution

Advantages and disadvantages of RSP It is necessary to employ advanced technology, which is often expensive It is essential to develop trust in what once may have been an adversarial supplier-retailer relationship The supplier often has much more responsibility than formerly. This may force the supplier to add personnel to meet this responsibility Finally, expenses at the supplier often increase as managerial responsibilities increase

Distributor integration Types of distributor integration In term of inventory, DI can be used to create a large pool of inventory across the entire distributor network, lowering total inventory costs while raising service levels DI can be used to meet a customer’s specialized technical service requests by steering these requests to the distributors best suited to address them

Issues in Distributor Integration First, distributors may be skeptical of the rewards of participating in such a system. In addition, participating distributors will be forced to rely upon other distributors, some of whom may not know This new kind of relationship also tends to take certain responsibilities and areas of expertise away from certain distributors, and concentrate them on a few distributors

Issues in Distributor Integration Establishing a DI relationship requires a large commitment of resources and effort on the part of the manufacturing Distributors must feel sure that this is a long-term alliance Organizers must work hard to build trust among the participants The manufacturer may have to provide pledges and guarantees The manufacturer may have to provide pledges and guarantees to ensure distributor commitment

Summary In this chapter, we examined various types of partnerships that can be used to manage the supply chain more effectively Increasingly, third-party logistics providers are taking over some of a firm’s logistics responsibilities Retailer-supplier partnerships, in which the supplier manages a portion of the retailer’s business-typically retail inventories-are also becoming common Finally, we discussed a class of alliances, called distributor intergration