Strategic Alliances

Strategic Alliances Jerry Banks

Who should perform a logistics related activity? • Internal • Use internal resources if available • If a core strength • ‘Stick to your own knitting”

About 90% of CFOs report they use outsourcing (BW, 7/8/02)

“Savings Tip: Don’t do it yourself,” BW, 6/23/03 • 100s of companies are BPO (business process outsourcing) • Human resources, accounting, claims processing • First Data Corporation handles credit card transactions for 1400 companies • Many of these tasks have been moved to India, The Philippines, Caribbean

“Savings Tip: Don’t do it yourself,” BW, 6/23/03 • Outsourcers often improve the quality • Unisys took over Abbey Life Assurances claims processing • Transaction error rate fell from 5% to 2% • Handling time fell from 10 days to 6 days • Make sure that the contract includes penalties if the outsourcer doesn’t meet agreed upon service levels

Who should perform a logistics related activity? • Acquisition • Acquire a firm that possesses the expertise • Provides complete control • But, can have lots of negatives • Expensive to acquire a successful firm • May clash with acquiring company • Acquiring company may have dealt with competitors of the company being acquired • Could lose business because of it

Who should perform a logistics related activity? • Arm’s-length transaction • Most business transactions are this way • Hire a trucking firm to deliver a load • Fulfills a business need • But, doesn’t have any long term advantages

Who should perform a logistics related activity? • Strategic alliances • Long-term partnerships • Risks and rewards are shared • Mutual goals lead to commitment of resources on both sides • Possible long-term benefit to both sides

Framework for strategic alliances • In determining whether to engage in a strategic alliance, consider the issues in the following slides

Framework for strategic alliances • Adding value to products • Decrease time to market • Decrease repair time • Increase value of the firm • Complementary product lines can add value

Framework for strategic alliances • Improving market access • Complementary consumer product • Manufacturers can cooperate improving the sales of both parties

Framework for strategic alliances • Strengthen operations • Lower system costs and cycle time • Increase efficiency and effectiveness • Example, seasonal products can use warehouses and trucks year-round

Framework for strategic alliances • Add technological strength • Partner with a firm that has the technology needed by a customer

Framework for strategic alliances • Enhance strategic growth • Many opportunities have high barriers • Capital to begin the operation • Long training period • Licenses, standards, etc. • Strategic alliance can overcome this barrier

Framework for strategic alliances • Enhance organizational skills • Learn from one another

Framework for strategic alliances • Build financial strength • Administrative costs can be shared • Income can be increased • Exposure to risks can be shared

Negatives • Resources might have to be diverted from the core strengths

Core strengths • How a company differentiates itself from the competition

Example: IBM/PC • IBM outsourced key business functions of the PC in 1981 • Intel microprocessor • Microsoft operating system • PC entered the market in a span of 15 months • Apple was displaced • IBM cornered 40% of the market

Example: IBM/PC • Downside • Compaq and others entered the marketplace • IBM tried to regain control with the PS/2 computer and OS/2 operating system • But others didn’t follow • By the end of 1995, IBM’s market share had dropped to 8%

Strategic alliances in SCM • Third-party logistics (3PL) • Retailer-supplier partnerships (RSP) • Distributor integration (DI)

3PL • The use of an outside company to perform all or part of a firm’s logistics activities • Modern 3PL relationships involve long-term commitments and multi-functions • Ryder Logistics has a five-year agreement to design, manage, and operate all of Whirlpools inbound logistics • Large companies are more predominantly the users of 3PL

Advantages of 3PL • Focus on core strengths • Most frequently cited benefit • Leave logistics to logistics companies

Example: BP and Chevron • The two formed Atlas Supply • Partnership of 80 suppliers • Delivers spark plugs, tires, etc. to about 6500 service stations • Atlas outsources all logistics to GATX • GATX runs 5 distribution centers and maintains inventories of 6500 SKUs at each service station

Advantages of 3PL • Provides technological flexibility • The better 3PLs constantly update their information technology

Advantages of 3PL • Provides other flexibilities • When suppliers require rapid replenishment • 3PLs already have a network of warehouses to make this possible • Flexibility in resources and workforce size can be achieved through outsourcing • Fixed costs can become variable costs

Example: Simmons and Ryder • Simmons completely changed the way it does business • Before • Simmons warehoused 20,000 to 50,000 mattresses at each of its manufacturing facilities to meet customer demand in a timely fashion

Example: Simmons and Ryder • Now • Ryder maintains an on-site logistics manager at Simmons’ manufacturing plant • When orders arrive the logistics manager develops an optimal sequence and route to deliver the mattress to customers • Logistics plan is then transmitted to the factory floor where the mattresses are manufactured in time for shipment • Simmons doesn’t hold inventory these days

Disadvantages of 3PL • Loss of control, especially for outbound • Efforts to overcome this • Painting company logos on the sides of trucks • Dressing 3PL employees in company uniforms • Providing thorough reports on customer interaction

3PL issues and requirements • Know your own costs • So you can compare them to the cost of using an outsourcing firm

3PL issues and requirements • Customer orientation of the 3PL • More than cost • How does this 3PL provider fit into your plan? • Can the 3PL fit into the way you do business? • Is the 3PL reliable?

3PL issues and requirements • Specialization of the 3PL • Consider the roots of the 3PL • From LTL carriers • Menlo, Roadway, Yellow • From warehouse managers • Exel, GATX, USCO • From timely handlers • UPS, Fedex

3PL issues and requirements • Asset owning versus non-asset owning • Asset owning • Have size, human resources, large customer base, economy of scale, systems in place • But, may favor their own divisions, be bureaucratic, have a long decision-making cycle • Non-asset owning • May be more flexible and have lower overhead costs • But, may have limited resources and bargaining power

3PL implementation issues • For the company, identify exactly what is needed for the relationship to be successful • Have quantitative measures of performance • For the 3PL provider, make sure that the service can be provided as requested • For both parties, the relationship is supposed to be mutually beneficial • Shared risks and rewards…a partnership

Retailer-supplier partnerships • Quick response • Suppliers receive POS data from the retailers • Use this information to synchronize their production and inventory activities • Retailer still prepares orders

Example: Milliken • Worked with several clothing suppliers and major department stores • Fed POS data from the department stores to Milliken • Lead times were reduced from 18 weeks to 3 weeks

Continuous replenishment • Vendors receive POS data • Use it to prepare shipments at previously agreed upon intervals to maintain specific levels of inventory • Inventory levels are improved over time

Vendor managed inventory • Supplier decides on appropriate inventory policy • Eventually, retailer oversight is eliminated • Wal-Mart and P&G began such a system in 1985 • Dramatic improvements in on-time deliveries to Wal-Mart

Requirements for RSP • Information system • Electronic data interchange (EDI) to relay POS information to the supplier and delivery information to the retailer • Bar codes and scanners are needed to insure data accuracy • Inventory, production control, planning systems • Online, accurate, and integrated

Requirements for RSP • Top management commitment • Confidential information will now have to be shared • Power shifts may take place • Day-to-day contacts with retailers shift from sales and marketing personnel to logistics personnel

Inventory ownership in RSP • Old way • Retailer owns the goods as soon as they are received • Alternative • Retailer may own the goods only at POS • Provides an incentive for the supplier to manage the inventory properly

Issues in RSP implementation • Performance measurement criteria must exist • Information sharing is a problem if the supplier deals with competitors as well

Advantages of RSP • Reduced forecast errors lead to reduced safety stocks, reduced storage and delivery costs, and increased service levels

Problems associated with RSP • Advanced technology is a necessity • Can be expensive • Must be a trusting relationship • Formerly, an adversarial relationship • If a consignment system is being used, costs are transferred back to the supplier • Both parties should share in the savings • Vendors lose the 30 to 90 day float

In groups, decide what is appropriate in the following table:

Successes and failures • There have been many examples, and some failures of RSP

Example: Western Publishers • Using VMI for children’s books at some retailers and 2,000 Wal-Mart locations • POS data automatically triggers reorders when inventory falls below the reorder point • Ownership switches to Wal-Mart when delivery is made

Example: Western Publishers • At Toys “R” Us, Western Publishing manages the entire book section • Including books from other publishers • For both cases, Western Publishing says their increased costs (additional inventory management duties) has been outweighed by the benefits

Example: Mead-Johnson • Mead-Johnson has complete POS data at Wal-Mart • It reacts to this POS data, instead of orders • Inventory turns at Wal-Mart have gone from <10 to >100

Strategic Alliances