Strategic Alliances1 Slides 4 Strategic Alliances Global Supply Chain Management

Strategic AlliancesSlide 2 Introduction  Complexity business environments is up  Resources required to manage are becoming increasingly scarce  Flexibility is required, so: focus on core competencies and meanwhile build alliances

Strategic AlliancesSlide 3 Why strategic alliances?  Adding value to products (adding services)  Improving access to markets  Strengthening operations (quality, efficiency)  Adding technological strength (efficiency, opportunities)  Enhancing/allowing strategic growth  Downside 1: core competencies should not be compromised  Downside 2: competitive advantages should not be compromised

Strategic AlliancesSlide 4 Main Types of Strategic Alliances  Third Party Logistics (3PL)  Retailer–Supplier Partnerships (RSP)  Distributor Integration (DI)

Strategic AlliancesSlide 5 Third Party Logistics (3PL)  Use of 3PL providers to take over a company’s logistics functions and even more……  About 40% (20%) of all logistics efforts (expenses) in 2013 (2008) due to 3PL

Strategic AlliancesSlide 6 What Is 3PL?  Strategic partnership  Long term commitment, multi-function arrangement, process get integrated  Large range of 3PL companies, some are in trucking, other in DCs or WHs, or in containers, or in DC or WH technologies  Non-asset owning 3PL companies: 4PL – More holistic, on top, managing a whole network – Provide services, so no trucks or warehouses – Marketing/sales, IT-services/web sites, payment (example: Amazon !), but could also entail reverse logistics, e.g. for repair or maintenance

Strategic AlliancesSlide 7 3PL Advantages  Focus on Core Strengths – Allows a company to focus on its core competencies – Logistics expertise left to the logistics experts  Provides Technological Flexibility – Technology advances are adopted by 3PL providers, company can benefit – So by using technology (IT and other technologies) 3PLs may help meeting needs of a company’s potential customers

Strategic AlliancesSlide 8 3PL Advantages  Provides Other Flexibilities – Flexibility in geographic locations – Flexibility in capacities/infrastructure – Flexibility in service offerings – Flexibility in resource and workforce size

Strategic AlliancesSlide 9 3PL Disadvantages  Loss of control inherent in outsourcing a particular function. – In case of outbound logistics the 3PLs interact with a firm’s customers..….. – Company and 3PL can address this: Painting company logos on the sides of trucks, dressing 3PL employees in the uniforms of the hiring company, providing extensive reporting on each customer interaction.  In case Logistics is one of the core competencies of a firm – It makes no sense to outsource these activities to a supplier who may not be as capable as the firm’s in-house expertise Large groceries, pharmaceutical companies

Strategic AlliancesSlide 10 Retailer-Supplier Partnerships  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

Strategic AlliancesSlide 11 Types of RSP Quick Response  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

Strategic AlliancesSlide 12 Types of RSP Continuous Replenishment  Also called rapid replenishment  Suppliers receive POS data  Suppliers use these data to prepare shipments at 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.

Strategic AlliancesSlide 13 Types of RSP Vendor Managed System (VMI)  Often called vendor-managed replenishment (VMR)  Supplier decides on the appropriate inventory levels and on the inventory policies to maintain these levels  Supplier suggestions initially approved by retailer  Wal-Mart and Procter & Gamble VMI – Partnership, begun already in 1985 – Has improved P&G’s on-time deliveries to Wal-Mart while increasing inventory turns

Strategic AlliancesSlide 14 Main Characteristics of RSP Criteria → Type ↓Decision makerInventory Ownership New skills employed by vendors Quick responseRetailer Forecasting skills Continuous replenishment Contractually agreed- to levelsEither party Forecasting and inventory control Advanced continuous replenishment Contractually agreed- to and continuously improved levelsEither party Forecasting and inventory control VMIVendorEither partyRetail management

Strategic AlliancesSlide 15 RSP Requirements  Presence of advanced information systems  Top management commitment – Especially because information will be shared across companies  A level of trust among partners – Supplier manages retailer’s inventory – Retailer provides sales information to supplier – Reduced inventory leads to space savings etc. Can it be given to competitors ?

Strategic AlliancesSlide 16 RSP Inventory Ownership  Who makes the replenishment decisions?  Who owns the inventory until it is sold? – Consignment relationship in VMI programs Supplier owns the inventory until it is sold  Issues with consignment relationship: – Retailer lowers inventory cost – Supplier can manage inventory more effectively, but also higher costs because of longer inventory holding – Supplier can move as much inventory as allowed – Power relationship between supplier and retailer may influence supply contract when addressing savings

Strategic AlliancesSlide 17 Positive aspects of RSP  Better knowledge the supplier has about order quantities gives – an ability to control the bullwhip effect – Shorter LTs, lower stock levels  Provides an option for reengineering of the retailer–supplier relationship. eliminate redundant order entries manual tasks can be automated reassign tasks for better efficiency eliminate unnecessary control steps

Strategic AlliancesSlide 18 Difficult aspects of RSP (1)  It is necessary to use advanced, expensive technology  It is essential to develop trust  Often the supplier ends up having more tasks than before, forcing the supplier to build new capabilities and/or add personnel to meet this responsibility, all leading to higher expenses as well

Strategic AlliancesSlide 19 Difficult aspects of RSP (2)  Arrangement may increase inventory costs for the supplier as retailers may force the supplier to own the inventory until goods are sold  Retailers may more easily monitor suppliers and make decision on their performance. Leading to enhanced competition between suppliers  Forward integration (e.g. DE)  Backward integration (e.g. AH)

Strategic AlliancesSlide 20 Example Tesco  Tesco – What are the advantages and disadvantages of the VMI for Tesco? – What are the advantages and disadvantages of the VMI for Tesco’s suppliers? – Why did only a few suppliers fundamentally change the way they work? – Success or Failure?

Distributor Integration (DI)  Distributors an important partner in the supply chain  Distributors have a wealth of information about customer needs and wants – Successful manufacturers use this information when developing new products, product lines.  Distributors typically rely on manufacturers to supply the necessary parts and expertise Slide 21Strategic Alliances

Changing views on Distributors  Strong and effective distribution network cannot always meet challenges – Rush orders cannot be met by the inventory…. – Customer might require some specialized technical expertise that the distributor does not have….  In the past, issues were addressed by adding inventory and by adding personnel  Modern IT now may offer another solution: – Distributor Integration Expertise and inventory located at one distributor is available to the other distributors. Slide 22Strategic Alliances

Types of Distributor Integration  Addresses 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.  Addresses customer’s specialized technical service requests – Steer such requests to those distributors best suited to handle them – Example: Centers of Excellence at Otra (a large Dutch holding company now part of Sonepar, see 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 – Services/capabilities pooling: you do not need to have all services in house in order to offer them Slide 23Strategic Alliances

Issues in Distributor Integration  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 other distributors. It is not surprising that distributors might be nervous about losing these skills and abilities.  The Distributor Integration relationship requires fulfillment of a challenging set of conditions: – large commitment of resources/effort by the manufacturer – pledges and guarantees from the manufacturer to ensure distributor commitment – a long-term alliance – trust among the different participants (the distributors) Slide 24Strategic Alliances

SUMMARY  Various types of partnerships can be used to manage the supply chain effectively.  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): – Risk-pooling opportunities are created across the various distributors, – Enables different distributors to develop different areas of expertise. Slide 25Strategic Alliances