Chapter 8

Strategic Alliances

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8.1 Introduction
Complexity

in business environments

increasing
Resources required to manage are
becoming increasingly scarce
Many functions need to be outsourced
Firms need to ensure that functions are
performed by the other firms

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Four Basic Ways to Ensure that

business functions are completed

Internal activities
Using

internal resources and expertise

If activity is a core strength (competence), may be the best

way to perform the activity.
Core competences: specific talents that differentiate a
company from its competitors and give it an advantage in the
eyes of its customers

Acquisitions
A firm

may acquire another firm that has the expertise

and knowledge
Gives the acquiring firm full control over the way the
particular business function is performed
Can be difficult and expensive (Culture/Competitors)
In many cases may not be appropriate
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Four Basic Ways to Ensure that

business functions are completed

Arms-length transactions
Most

business transactions are of this type.

Short-term arrangement that fulfills a particular business
need but doesnt lead to long-term strategic advantages.
For example, a firm needs a specific item or service

Strategic alliances
Multifaceted,

goal-oriented, long-term partnerships

between two companies
Both risks and rewards are shared.
Typically lead to long-term strategic benefits for both
partners.

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8.2 Framework for Strategic Alliances: When to Go

for a Strategic Alliance?
Important issues to determine whether a
particular strategic alliance is appropriate:
Adding value to products
Improving market access
Strengthening operations
Adding technological strength
Enhancing strategic growth
Enhancing organizational skills
Building financial strength
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Downsides of strategic alliances

Core

competencies should not be

compromised
Competitive advantages should not be
compromised

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Three Types of Strategic

Alliances
Third

Party Logistics (3PL)

RetailerSupplier Partnerships (RSP)
Distributor Integration (DI)

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8.3 Third Party Logistics (3PL)

The

use of an outside company to perform

all or part of the firms logistics function
(distribution, warehousing, etc.)
Use of 3PL providers to take over a
companys logistics functions
Almost a $85billion industry by 2004
8% of all logistics costs attributed to 3PL

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What Is 3PL?
Strategic

partnership
Long term commitment
Multi-function arrangement
Process integration
Large range of 3PL companies
Asset

owning 3PL providers (own warehouses,

trucks,)
Non-asset owning 3PL companies called 4PL
Provide

Prevalent

services but not trucks, warehouses

usage with larger companies

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3PL Advantages
Focus

on Core Strengths

Allows

a company to focus on its core

competencies
Logistics expertise left to the logistics experts

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3PL Advantages
Provides

Technological Flexibility

Technology

advances adopted by better 3PL

providers
Adoption possible by 3PLs in a quicker, more
cost-effective way
3PLs may have the capability to meet the
needs of a firms potential customers

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3PL Advantages
Provides

Other Flexibilities

Flexibility

in geographic locations.
Flexibility in service offerings
Flexibility in resource and workforce size

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3PL Disadvantages
Loss

of control inherent in outsourcing a

particular function.
Outbound

logistics 3PLs interact with a firms

customers.
Many third-party logistics firms work very hard to
address these concerns.
Painting

company logos on the sides of trucks, dressing

3PL employees in the uniforms of the hiring company,
and providing extensive reporting on each customer
interaction.

If

logistics is one of the core competencies of a

firm
Makes

no sense to outsource these activities to a

supplier who may not be as capable as the firms inhouse expertise
Wal-Mart,

pharmaceutical companies
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3PL Issues
Costs and Customer Orientation
Know

your own costs

Compare

Customer

with the cost of using an outsourcing firm.

orientation of the 3PL

Ability

of provider to understand the needs of the

hiring firm and to adapt its services to the special
requirements of that firm.
Reliability.
Flexibility of the provider

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3PL Issues
Specialization of the 3PL
Consider

firms whose roots lie in the

particular area of logistics that is most
relevant to the logistics requirements in
question.

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3PL Issues
Asset-Owning vs Non-Asset-Owning 3PL
Asset-owning

companies

Significant

size, human resources, customer base,

economies of scope and scale, and systems
May be bureaucratic with a long decision-making
cycle.
Non-asset-owning

companies

May

have limited resources and bargaining power

May be more flexible
May have low overhead costs and specialized
industry expertise at the same time

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3PL Implementation Issues

Buying

company

Should

devote enough time to start-up

considerations (First 6-12 months most
critical)
Must identify exactly what it needs for the
relationship to be successful
Be able to provide specific performance
measures and requirements to the 3PL firm.

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3PL Implementation Issues

3PL

company:

Must

consider and discuss requirements

honestly and completely, including their
realism and relevance

Both

parties:

Must

dedicate time and effort for the

relationship
Treat as a mutually beneficial alliance

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Other Issues
The third party and its service providers must
respect the confidentiality of the 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

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8.4 Retailer-Supplier Partnerships (RSP)

Cooperative

relationship between
suppliers and retailers to use one
anothers knowledge
Suppliers have better knowledge of lead
times and production capacities
Retailers have better knowledge of
demands

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Types of RSP
1. Quick Response Strategy
2. Continuous Replenishment Strategy
3. Vendor Managed System (VMI)

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Types of RSP
1. Quick Response Strategy
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
Decision maker: retailer
inventory ownership: retailer
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Types of RSP
2. Continuous Replenishment Strategy
Also

called rapid replenishment

Suppliers receive POS data
Suppliers use these data to prepare shipments
at previously agreed-upon intervals to maintain
specific levels of inventory.
Decision maker: contractually agreed-to levels
Inventory ownership: either party
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.
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Types of RSP
3. Vendor Managed System (VMI)

Also called vendor-managed replenishment (VMR)

system
Supplier decides on the appropriate inventory levels and
the appropriate inventory policies to maintain these
levels.
Supplier suggestions initially approved by retailer
Goal of many VMI programs is to eliminate retailer
oversight on specific orders.
Wal-Mart and Procter & Gamble VMI
Partnership, begun in 1985
Has improved P&Gs on-time deliveries to Wal-Mart while
increasing inventory turns

Decision maker: supplier

Inventory ownership: either party

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Main Characteristics of RSP

Criteria
Type

Decision maker

Inventory Ownership

New skills employed by

vendors

Retailer

Forecasting skills

Either party

Forecasting and
inventory control

Quick response

Retailer

Continuous
replenishment

Contractually agreedto levels

Advanced
continuous
replenishment

Contractually agreedto and continuously

improved levels

Either party

Forecasting and
inventory control

VMI

Vendor

Either party

Retail management

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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 retailers inventory

Retailer provides sales information to supplier
Reduced inventory leads to space savings
Should

not be given to competitors

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RSP Inventory Ownership

Who

makes the replenishment decisions?

Who owns the inventory until it is sold?
Consignment
Supplier

Issues

relationship in VMI programs

owns the inventory until it is sold

with consignment relationship:

Retailer

lowers inventory cost

Supplier can manage inventory more effectively
Supplier can move as much inventory as contract
allows
Higher costs to supplier because of longer inventory
holding

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RSP Implementation
Performance

agreed to.

measurement criteria must also be

Non-financial

measures as well as the traditional

financial measures.

Initial

problems can be worked out through

communication and cooperation.
Manufacturing technology or capacity at supplier
may need to be modified/enhanced to respond
to specifics in the contract:
Fast

response to emergencies
Situational changes at the retailer

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Steps in RSP Implementation

Initially,

the contractual terms of the agreement

must be negotiated on the following:
Inventory

ownership
Credit terms
Ordering responsibilities
Performance measures such as service or inventory
levels, when appropriate.
The

following three additional steps need to be

executed:
Development

of integrated information systems

Development of effective forecasting techniques
Establishment of a tactical decision support tool to
assist in coordinating inventory management and
transportation policies
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Advantages of RSP
Better

knowledge the supplier has about

order quantities
an

ability to control the bullwhip effect

A variety

of side benefits

provides

a good opportunity for the

reengineering of the retailersupplier
relationship.
eliminate

redundant order entries

automate manual tasks can be automated
reassign tasks for better efficiency
Eliminate unnecessary control steps
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Disadvantages of RSP
Necessary to employ advanced technology, which is
often expensive.
Essential to develop trust in what once may have
been an adversarial supplier retailer relationship.
Supplier often has much more responsibility than
formerly.

May

force the supplier to add personnel to meet this

responsibility.

Expenses at the supplier often increase as

managerial responsibilities increase.
Consignment arrangement may increase inventory
costs for the supplier.
Float

Retailers

accustomed to waiting 30 to 90 days to pay

for goods may now have to pay upon delivery
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Examples of SRP
Successes and Failures

Western Publishing-Golden Books:

Western

Publishing is using VMI for its Golden

Books line of childrens books at several retailers.

POS

data automatically triggers re-orders when

inventory falls below a reorder point.

This

inventory is delivered either to a distribution

center, or in many cases, directly to the store.

Ownership

of the books shifts to the retailer once

deliveries have been made.

In

the case of Toys R Us, the company has even

managed the entire book section for the retailer,
including inventory from suppliers other than
Western Publishing.
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8.5 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 and product
lines.

Distributors

typically rely on manufacturers

to supply the necessary parts and
expertise
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Changing View Regarding Distributors

Strong

and effective distribution network cannot

always meet challenges
Rush

order might be impossible to meet from

inventory
Customer might require some specialized technical
expertise that the distributor does not have.
In

the past, issues were addressed by adding

inventory and personnel
Modern information technology leads to a third
solution
Distributor

Integration

Expertise

and inventory located at one distributor is

available to the others.
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Types of DI

Addresses both 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.

Can meet a customers specialized technical service

requests

Steer special requests to the distributors best suited to address

them
Centers of Excellence for Otra, a large Dutch holding company
70 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

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Issues in DI

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 distributors. It is not surprising that
distributors might be nervous about losing these skills
and abilities.
DI relationship requires:

a large commitment of resources and effort for the manufacturer

a long-term alliance.
trust among the participants.
pledges and guarantees from the manufacturer to ensure
distributor commitment.
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SUMMARY

Various types of partnerships can be used to manage

the supply chain effectively.
Framework that can help in selecting the most
appropriate way to address a particular logistics issue.
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)

Create risk-pooling opportunities across the various
distributors
Enable different distributors to develop different areas of
expertise.

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