OPER3208-001 Supply Chain Management

1. OPER3208-001Supply Chain Management Fall 2006 Instructor: Prof. Setzler

2. Simchi-Levi, Chapter 6

3. Chapter 6: Strategic Alliances (Simchi-Levi) • Introduction • It may not always be effective to perform all of the key business functions in-house • Complex business processes are essential • Financial and managerial resources are becoming scarce • Companies may find other firms with special resources and technical knowledge to perform some business functions

4. Chapter 6: Strategic Alliances (Simchi-Levi) • Introduction • Even if a firm can perform a task, another firm in the SC may sometimes be better suited to perform that task • Often a combination of position in SC, resources, and expertise determines the most appropriate firm to perform a particular function • Steps must be taken so that the function is performed by the appropriate firm

5. Chapter 6: Strategic Alliances (Simchi-Levi) • Introduction • There are 4 basic ways for a firm to ensure that a logistics-related business function is completed • Internal activities • Acquisitions • Arm’s-length transactions • Strategic alliances

6. Chapter 6: Strategic Alliances (Simchi-Levi) • Focus of this chapter is strategic alliances • A framework for analyzing the advantages and disadvantages • 3 most important types of SC-related strategic alliances • Third-party logistics (3PL) • Retailer-supplier partnership (RSP) • Distributor integration (DI)

7. Chapter 6: Strategic Alliances (Simchi-Levi) • A framework for strategic alliances • The following issues should be considered to determine whether a particular strategic alliance is appropriate for a firm • Adding value to products • Improving market access • Strength operations • Adding technological strength • Enhancing strategic growth • Enhancing organizational skills • Building financial strength

8. Chapter 6: Strategic Alliances (Simchi-Levi) • A framework for strategic alliances • Adding value to products • Partnerships that improve time to market, distribution times, or repair times • Partnerships between companies with complementary product lines

9. Chapter 6: Strategic Alliances (Simchi-Levi) • A framework for strategic alliances • Improving market access • Partnerships that lead to better advertising or increased access to new market channels

10. Chapter 6: Strategic Alliances (Simchi-Levi) • A framework for strategic alliances • Strength operations • Partnerships that improve operations by lowering system costs and cycle times • Facilities and resources can be used more efficiently and effectively • Companies with complementary seasonal products can effectively use warehouses and trucks year-round

11. Chapter 6: Strategic Alliances (Simchi-Levi) • A framework for strategic alliances • Adding technological strength • Partnerships in which technology is shared can help add to the skills base of both partners • Difficult transitions can be facilitated by the expertise of one of the partners

12. Chapter 6: Strategic Alliances (Simchi-Levi) • A framework for strategic alliances • Enhancing strategic growth • Many new opportunities have high entry barriers • Partnerships might allow firms to pool expertise and resources to overcome these barriers and explore new opportunities

13. Chapter 6: Strategic Alliances (Simchi-Levi) • A framework for strategic alliances • Enhancing organizational skills • Partnerships provide an opportunity for organizational learning • Partners are forced to learn more about themselves and to become more flexible so that the alliance will work

14. Chapter 6: Strategic Alliances (Simchi-Levi) • A framework for strategic alliances • Building financial strength • Alliances can help to build financial strength • Income can be increased and administrative costs can be shared between partners or even reduced owing to the expertise of one or both partner • Limit investment exposure by sharing risk

15. Chapter 6: Strategic Alliances (Simchi-Levi) • A framework for strategic alliances • Downside • Each company has its core strengths or competencies • Specific talents that differentiate the company from its competitors • These core strengths must not be weakened by the alliance • Key differences with competitors must not be diminished

16. Chapter 6: Strategic Alliances (Simchi-Levi) • Third-party logistics • What is 3PL • Simply the use of an outside company to perform all or part of the firm’s materials management and product distribution functions • True strategic alliances, therefore more complex than traditional logistics supplier relationships

17. Chapter 6: Strategic Alliances (Simchi-Levi) • Advantages and Disadvantages of 3PL • Focus on core strengths • Provides technological flexibility • Provides other flexibilities • Important disadvantages of 3PL

18. Chapter 6: Strategic Alliances (Simchi-Levi) • 3PL Issues and requirements • Know you own costs • Customer orientation of the 3PL • Specialization of 3PL • Asset-owning versus non-asset-owning 3PL

19. Chapter 6: Strategic Alliances (Simchi-Levi) • A 3PL implementation issues • Other important issues to discuss with potential 3PL providers • Third party and its service providers must respect the confidentiality of 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

20. Chapter 6: Strategic Alliances (Simchi-Levi) • Retailer-Supplier partnerships (RSP) • Suppliers have a greater knowledge of their lead times and production capacities than retailers • As margins get tighter and customer satisfaction becomes even more important, it makes sense to create cooperative efforts between suppliers and retailers in order to leverage the knowledge of both parties

21. Chapter 6: Strategic Alliances (Simchi-Levi) • Retailer-Supplier partnerships (RSP) • Types of RSP • The types of RSP can be viewed on a continuum • One end: information sharing—helps vendor plan more efficiently • Other end: consignment scheme—the vendor completely manages and owns the inventory until the retailer sells it

22. Chapter 6: Strategic Alliances (Simchi-Levi) • Retailer-Supplier partnerships (RSP) • Types of RSP

23. Chapter 6: Strategic Alliances (Simchi-Levi) • Retailer-Supplier partnerships (RSP) • Inventory ownership in RSP • One major issue—who makes the replenishment decisions • This can be done in stages, first with information and, later, decision making, which is shared between partners • Inventory ownership issues are critical • Especially one involving VMI • Originally, ownership of goods transferred to the retailer when goods were received • Now, some VMI are moving to consignment relationships (i.e., supplier owns goods until they are sold) • The benefit of this to retailer—lower inventory costs • Problem: the vendor needs incentive to keep inventory low

24. Chapter 6: Strategic Alliances (Simchi-Levi) • Retailer-Supplier partnerships (RSP) • Inventory ownership in RSP • Why is consignment arrangement beneficial to the supplier • Many times the supplier doesn’t have a choice because the market dictates this kind of arrangement • Example, Wal-Mart • Even if this is not the case, consignment arrangements are beneficial to the supplier because it allows the supplier to coordinate distribution and production, thus reducing total cost • The objective of VMI is to optimize the entire system by coordinating production and distribution • The vendor can further decrease total cost by coordinating production and distribution for several retailers

25. Chapter 6: Strategic Alliances (Simchi-Levi) • Retailer-Supplier partnerships (RSP) • Issues in RSP implementation • Performance measurement criteria must be agreed to • Should include non-financial measures as well as traditional financial measures • Non-financial measures—point-of-sale (POS) accuracy, inventory accuracy, shipment and delivery accuracy, lead time, and customer fill rate

26. Chapter 6: Strategic Alliances (Simchi-Levi) • Retailer-Supplier partnerships (RSP) • Issues in RSP implementation • When information is being shared between retailers and suppliers, confidentiality becomes an issue • Retailers who deals with several suppliers within the same product category may find that category information important to the supplier in making accurate forecasts and stocking decisions • There may be a relationship between stocking decisions made by several suppliers • The retailer must maintain the confidentiality of each partner

27. Chapter 6: Strategic Alliances (Simchi-Levi) • Retailer-Supplier partnerships (RSP) • Steps in RSP implementation (VMI implementation) • Contractual terms must be negotiated • Decisions concerning ownership and when it is transferred, credit terms, ordering responsibilities, and performance measures (e.g., service or inventory levels) • The following 3 tasks need to be completed • Integrated information systems • Must provide easy access for both parties • Effective forecasting techniques must be developed • A tactical decision support tool to assist in coordinating inventory management and transportation policies must be developed

28. Chapter 6: Strategic Alliances (Simchi-Levi) • Retailer-Supplier partnerships (RSP) • Advantages and Disadvantages of RSP • A huge advantage of RSPs is the knowledge the suppliers has about order quantities, implying an ability to control the bullwhip effect • In QR, knowledge is the transfer of customer demand information that allows the supplier to reduce lead time • In VMI, in addition to the transfer of customer demand information to suppliers, but also the supplier makes ordering decisions • Completely controlling the variability in order quantities • This knowledge can reduce overall system costs and improve overall system service levels

29. Chapter 6: Strategic Alliances (Simchi-Levi) • Retailer-Supplier partnerships (RSP) • Advantages and Disadvantages of RSP • The benefits to the supplier in terms of better service levels, decreased managerial expenses, and decreased inventory costs • The vendor should be able to reduce forecast uncertainties and thus better coordinate production and distribution • Reduced forecast uncertainties leads to reduced safety stocks, reduced storage and delivery costs, and increased service levels • Float with EDI implementation is another issue • Retailers who have become used to waiting 30 to 90 days to pay for goods may have to pay upon delivery with VMI

30. Chapter 6: Strategic Alliances (Simchi-Levi) • Retailer-Supplier partnerships (RSP) • Advantages and Disadvantages of RSP • Summary • It is necessary to employ advanced technology • It is essential to develop trust in what once may have been an adversarial RSP • In a strategic partnership, the supplier often has much more responsibility than formerly • Expenses at the supplier often increase as managerial responsibilities increase • Inventory may initially be shifted back to the supplier • If consignment arrangement is used, inventory costs may increase for the supplier • It may be necessary to work out a contractual relationship in which the retailer shares decreased system inventory costs with the supplier

31. Chapter 6: Strategic Alliances (Simchi-Levi) • Distributor integration • Distributors have a lot of information about customer needs and wants • Successful manufacturers use this information when developing new products and product lines • Rush orders might be impossible to meet from inventory or the customer might require some specialized technical expertise • In the past, these issues were addressed by adding inventory and personnel • Modern information technology allows for distributors to be integrated so that the expertise and inventory located at one distributor is available to the others

32. Chapter 6: Strategic Alliances (Simchi-Levi) • Distributor integration • Issues in distributor integration • 2 major issues involved in implementing a DI alliance • Distributors may be skeptical of the rewards of participating in such system • Distributors will be forced to rely upon other distributors to help them provide good customer service • Tends to take certain responsibilities and areas of expertise away form certain distributors and concentrate them on a few distributors • Some distributors might be upset about losing skills and abilities • Distributors must feel sure that this is a long-term alliance