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Strategic Alliances

Strategic Alliances . Ways to ensure that a logistics-related business function is completed Internal activities (“in-house”) Acquisitions Arm’s-length transactions Strategic alliances Strategic alliances Third party logistics Retailer-supplier partnerships Distributor integration.

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Strategic Alliances

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  1. Strategic Alliances • Ways to ensure that a logistics-related business function is completed • Internal activities (“in-house”) • Acquisitions • Arm’s-length transactions • Strategic alliances • Strategic alliances • Third party logistics • Retailer-supplier partnerships • Distributor integration

  2. A framework for strategic alliances • Benefits of strategic alliances • Adding value to the products • Improving market access • Strengthening operations • Adding technological strength • Enhancing strategic growth • Enhancing organizational strength • Building financial strength • Core strengths (or competencies) should not be weakened by strategic alliances • Resources should not be diverted from core strengths • Key technology should not be shared as a result of an alliance

  3. Example – IBM • Apple dominates the PC market since the introduction of its first PC, Apple I, in 1976 • IBM decides to enter the PC market in late 1981 • No infrastructure for personal computers • Alliances with • Intel for microprocessors (4.77 MHz 8088 processor) • Microsoft for operating system (MS-DOS) • First IBM PC ($1,565=>$4,000 value in 2003), time to market – 15 months • In 1985, IBM reaches a market share of 40%, dominating Apple • Competitors like Compaq (founded in 1982) and Dell (founded 1984) soon used the same suppliers Intel and Microsoft and take away the market share from IBM • In 2001, IBM has a market share of only 8% falling behind Compaq

  4. Third party logistics (3PL) • 3PL: use of an outside company to perform all or part of the firm’s materials management and production distribution functions • 3PL arrangements involve long term commitments and often multiple functions, as opposed to transaction based and single-function specific • 3PL is most prevalent among large companies • 3M, Eastman Kodak, General Motors, BP, Fiat • Example: Exel offering 3PL services to Gillette in Turkey • Warehousing • Distribution (inbound and outbound) • Customs clearance • Sub-contracting for packaging and re-labeling

  5. Gillette and Exel

  6. 3PL examples – Turkey • Ekol logistics • Founded in 1990 • 67 M DM revenue, 500 employees, in 2001 • 200 vehicles, 60,000 m2 warehouse space • Specializes in textiles, provides 3PL services for • Beymen, Carsi, Benetton, Adidas, Marks and Spencer • TNT logistics • Horoz logistics • Aras Kargo • Yurtici Kargo

  7. 3PL advantages and disadvantages • Advantages • Focus on core strengths • Provides technological flexibility • 3PL providers are better able to constantly update their information technology and equipment • 3PL providers may already have the capability to meet the needs of a firm’s potential customers • Provides other flexibilities • Economies of scale: warehousing, distribution • Disadvantages • Loss of control: 3PL companies face the firm’s customers • Core competency: e.g., Wal-Mart, Caterpillar

  8. Retailer-supplier partnerships • Quick response: Suppliers receive POS data from retailers to synchronize their production and inventory activities with actual sales at the retailers • Continuous replenishment: Suppliers receive POS data and use these data to prepare shipments at previously agreed-upon intervals to maintain specific levels of inventory • Advanced continuous replenishment: Continuous replenishment with targeted, gradual decrease in inventory levels • Vendor managed inventory: Supplier decides on the appropriate inventory levels of each of the product and the appropriate inventory policies

  9. Main characteristics

  10. Requirements for Effective SP • Advanced information systems • Top management commitment • Information must be shared • Power and responsibility within an organization might change (for example, contact with customers switches from sales and marketing to logistics) • Mutual trust • Information sharing • Management of the entire supply chain • Initial loss of revenues

  11. Important SP Issues • Inventory ownership: • Retailer owns inventory • Supplier owns the goods until they are sold (consignment) • Why would a firm do this? • Performance measures: Fill rate, inventory level, inventory turns • Confidentiality • Communication and cooperation

  12. Advantages and disadvantages of retailer-supplier partnerships • Advantages • Fully utilize system knowledge (retailer) • Manufacturer may predict demand better • Reduce bullwhip effect (vendor) • Reduced inventory and/or increased service level • Focus on retailing rather than logistics (retailer) • Ability to coordinate replenishments to different retailers (vendor) • Disadvantages • Expensive advanced information technology is required. • Supplier/retailer trust must be developed. • Supplier responsibility increases. • Expenses at the supplier often increase. • Why? How can this be addressed?

  13. Distributor Integration • Parts are shared across the distributor network • Specialized service requests are steered to appropriate dealers or distributors. • What is required? • Trust • Pledges • Guarantees from the manufacturer • Advanced information systems • Disadvantages • Incentives for dealers – are they giving away competitive advantages? • Skills and responsibilities are taken from some dealers/distributors. • Examples - Caterpillar, Okuma

  14. Outsourcing • An “easy way” to increase profits • Nike, Cisco, Apple outsource most of their manufacturing • Each could focus on research, marketing • Each has gotten into trouble • 2001 – Nike reported unexpected profit shortfalls due to inventory problems • 2000 – Cisco had to write down billions in obsolete inventory • 1999 – Apple was unable to meet customer demand for new products

  15. Outsourcing Benefits and Risks • Benefits • Economies of scale reduce manufacturing costs • Risk pooling – demand uncertainties are transferred • Reduced capital investment • Focus on core competencies • Increased flexibility • Ability to better react to changes in customer demand • Ability to use the supplier’s technical knowledge to accelerate product development cycle time • Ability to gain access to new technologies and innovation • Risks • Loss of competitive knowledge • Conflicting objectives • Flexibility vs. long-term, stable commitments, etc.

  16. A Framework for Outsourcing • Reasons for outsourcing • Dependency on capacity • Dependency on knowledge • Product architecture • Integral products – components are tightly related • Designed as a system • Not off-the-shelf components • Evaluated based on system performance • E.g. Automobile engine • Modular products –independent components • Components are interchangeable • Standard interfaces are used • Component can be designed or upgraded independently • E.g. Automobile stereo system

  17. A Framework for Outsourcing

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