Module 9: Strategic Partnering

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SUPPLY CHAIN MANAGEMENT
Dr Vinh Thai

• Module 9 Strategic Partnering Collaboration in
  Supply Chain

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Topics

• Some initial observations
• A framework of strategic partnering
  collaboration
• Supply chain partnership models
• Manufacturer and supplier partnership
• Strategic partnering with logistics service
  providers
• RSP or retailer supplier partnership
• Distributor integration

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Learning Outcomes

• At the completion of this module you should be
  able to
• explain the role of strategic partnering in s
  integrated supply chain management
• explain what is vendor managed inventory and why
  major retailers are moving towards it
• outline the options available to firms when
  deciding on outsourcing logistics functions of
  the firm
• outline the scope of strategic partnering in
  improving supply chain performance
• identify the major challenges for new business
  models and how these challenges can be converted
  into advantages for firms

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Textbook and Readings

• Textbook Chapter 6 (undergraduate) Chapter 1,
  pp. 1-24 Chapter 5, p. 240, pp. 248-252 Chapter
  7, pp. 324-325
• Readings
• Undergraduate 8.1-8.5 (N26726)
• Postgraduate 8.1-8.5 (N26726) 10.1-10.3 (N09726)

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Food for Thought...

• We have roughly 30,000 employees now, and 26
  billion in revenue this year. If we were
  vertically integrated, I dont know how many
  employees I would have, but it would be some huge
  numbers.
• - Michael Dell in Ayers (2001)

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Food for Thought...

• Recall that SCM is built on the notion of
  integration. So why are they, e.g. Dell, doing
  that, e.g. virtual instead of vertical
  integration?
• And what is the value to the supply chain?

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Some Initial Observations

• Recall that it is supply chain competing against
  supply chain, not individual firm against firm in
  business world today
• It thus makes sense for firms to collaborate so
  as to maximise strength of SC
• Four basic ways to assure business function
  completion (Simchi-Levi et al. 2003)
• Internal activities vertical integration
• Perform activities in-house using internal
  resources expertise
• Require large capable firms

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Some Initial Observations (C)

• Acquisitions
• Acquire another firm that has expertise
  resources in other areas
• Full control gained, but culture may clash,
  effectiveness of acquired company may be lost
• Management is more important than ownership in
  achieving goals
• Arms-length transactions
• For many times, this is the most effective
  arrangement as specialised firms (suppliers) have
  economies of scale
• Goals strategies may not match
• Does not lead to long-term strategic advantage

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Some Initial Observations (C)

• Strategic alliances
• Multifaceted, goal-oriented, long-term
  partnership between companies
• Risks and rewards are shared
• Aiming at achieving long-term supply chain goals
• Eliminating acquisition downsides, while more
  resources committed for mutual goals
• Leading to long-term strategic benefits for both
  partners

So why is it critical to supply chain success?
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A Framework for Strategic Partnering and
Collaboration

• The most obvious purposes of strategic partnering
  collaboration are to reduce cost enhance
  better product quality
• This takes advantage of learning innovation
  (coordination collaboration) between partners
• With partnering firm would be able to focus more
  on their core competence
• activities in which it can achieve definable
  pre-eminence and provide unique value for
  customers
• activities which are central to a companys
  business, and which it can perform more
  effectively than its competitors

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A Framework for Strategic Partnering and
Collaboration (C)

• What Does It Take to Have an Area of Core
  Competency?

Source Coyle e al. (2003)
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A Framework for Strategic Partnering and
Collaboration (C)

• Strategic alliance or partnership may help
  achieve benefits in the followings (Simchi-Levi
  et al. 2003)
• Adding value to products Ex improved time to
  market, distribution times, partnerships between
  companies with complementary product lines can
  add value to both companies products
• Improving market access Ex better advertising
  or increased access to new market channels, e. g.
  consumer product manufacturers cooperate to
  address the needs of major retailers, increasing
  sales for everyone

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A Framework for Strategic Partnering and
Collaboration (C)

• Strengthening operations Ex improve operations
  by lowering system costs and cycle times,
  efficiently and effectively use facilities and
  resources
• Adding technological strength Partnerships in
  which technology is shared can help add to the
  skills base of both partners
• Enhancing strategic growth Partnerships might
  enable firms to pool expertise and resources to
  explore new opportunities by overcoming high
  entry barriers

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A Framework for Strategic Partnering and
Collaboration (C)

• Enhancing organisational skills Alliances
  provide a tremendous opportunity for
  organisational learning (Recall Module 8?)
• Building financial strength
• Ex income can be increased and administrative
  costs can be shared between partners or even
  reduced owing to the expertise of one or both of
  the partners.
• But, alliances also limit investment exposure by
  sharing risk

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A Framework for Strategic Partnering and
Collaboration (C)
Source McLaren, Head Yuan (2002, p. 355)
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A Framework for Strategic Partnering and
Collaboration The Value of Information

• What and how information is shared?

Source Matchette and Siekel (2005, p. 1)
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Supply Chain Partnership Models

• Two types of partnership (Ayers 2002)
• Vertical partnerships spanning different
  businesses in a common supply chain
• Ex partnership between suppliers retailers,
  manufacturer 3PL, etc.
• Streamlining existing capabilities
• Horizontal partnerships spanning different
  supply chains
• Ex partnership between shipping companies,
  airlines, 3PLs, etc.
• Creating new strategic capabilities, access to
  new markets, new products and services, and the
  like

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Supply Chain Partnership Models (C)
Source Ayers (2002)
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Supply Chain Partnership Models (C)

• Four types of vertical partnership in
  consideration are
• manufacturer and supplier partnership
• manufacturer and 3PL service providers
  partnership
• manufacturer and distributor partnership
• suppliers and retailers partnership

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Supply Chain Partnership Models
Manufacturer-Supplier Partnership

• Traditional adversarial relationship between
  manufacturer and supplier shifted to a
  collaborative relationship
• manufacturer and supplier interact like partners
• Main tangible benefits
• integrated SCM through integration of business
  processes information
• transparency in information and cooperation
  in activities

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Supply Chain Partnership Models
Manufacturer-Supplier Partnership (C)

• Partnership with suppliers came originally from
  Japanese business culture, keiretsu, a sort of
  supplier cooperative or association, was found to
  be linked with each major manufacturer
• Examples
• Dell with virtual integration
• HP
• Chrysler Corporation (Reading 8.1 N26 726)

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Supply Chain Partnership Models Partnership with
3PL

• The use of an outside company to perform all or
  part of the firms material management and
  distribution functions
• 3PL relationships are truly strategic alliances
  long-term commitment, not based on transactions,
  multi-functional
• Not simply trucking or warehousing
• Most prevalent among large companies
• Ex Whirlpool Corporations inbound logistics
  handled by Ryder Dedicated Logistics, IKEA
  Maersk, NIKE PONL (Now MAERSK), etc.

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Supply Chain Partnership Models Partnership with
3PL (C)
Source Brown Allen (2001)
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Supply Chain Partnership Models Partnership with
3PL (C)
Source Carding (1998)
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Supply Chain Partnership Models Partnership with
3PL (C)
Source Adapted from European Distribution
Logistics, January 2001
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Supply Chain Partnership Models Partnership with
3PL (C)

• Advantages of 3PL partnership (Simchi-Levi 2003,
  Brown and Allen 2001)
• Concentrating capital investment management on
  core competencies
• Gaining access to the latest technology and
  equipment employed by the third-party provider
• Proving other flexibilities, i.e. geographic
  locations, in service offerings, etc.
• The need for investment in new equipment and
  premises is avoided

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Supply Chain Partnership Models Partnership with
3PL (C)

• There are potential cost reductions, for example
• shared use may give better utilisation of
  vehicles and warehouses, leading to lower unit
  costs due to the consolidation of different
  customers demands
• the specialisation of the contractor may allow
  volume buying of vehicles, warehouses, and
  mechanical handling equipment and systems
• the labour costs of a third-party operator may be
  lower

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Supply Chain Partnership Models Partnership with
3PL (C)

• Disadvantages of 3PL partnership (Simchi-Levi
  2003, Fernie 1990)
• Cost issue
• Operations at cost plus could be run more cheaply
  in-house, assuming other variables remain equal,
  because the third-party logistics company needs
  to make a profit on its operations
• Monitoring and control of costs is easier when
  the distribution function remains in-house
• The cost of monitoring the performance of the
  logistics can be high and is also sometimes
  difficult to achieve effectively
• Some companies do not have the necessary
  information or expertise to assess which
  logistics providers are offering good services at
  competitive prices

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Supply Chain Partnership Models Partnership with
3PL (C)

• Control issue
• In-house logistics and distribution operations
  can provide the company with more control over
  important customer service considerations
• Flexibility of operations is also seen as a
  possible advantage of retaining an in-house
  distribution function, with the loyalty of the
  distribution operation not torn between several
  customers
• There is also the concern that outsourcing could
  result in a loss of security and that
  confidential information will be passed to
  competitors

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Supply Chain Partnership Models Partnership with
3PL (C)

• Fourth-party Logistics (4PL) or supply chain
  logistics, or Lead Logistics Provider (LLP)
• Manages and runs complex logistics operations
  including resources, control room, and
  architecture/integrator function
• Thought of as supply chain integrator, a firm
  that assembles and manages
  the resources, capabilities,
  and technology of its own organization with
  those of complementary service providers to
  deliver a comprehensive supply chain solution.
• Developed from 3PL but covering the broader scope
  including 3PL, information technology (IT)
  services, and business process management
• A single contact that manages and integrates all
  kinds of resources and oversees 3PL functions
  throughout the supply chain for the reach of
  global market, strategic advantages, and long
  -term relationship

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Supply Chain Partnership Models Partnership with
3PL (C)
Source Coyle e al. (2003)
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Supply Chain Partnership Models Partnership with
3PL (C)

• Fifth-party Logistics (5PL)
• Developed to serve the e-business market. They
  are those 3PL and 4PL providers managing all the
  parties in the supply chain on e-commerce. The
  key to success in this area is the information
  technology and system

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Supply Chain Partnership Models Issues
Requirements in Partnership with 3PL

• Know your own cost, compared with cost of using
  outsourcing firm
• Customer orientation of the 3PL how a 3PL fits
  into the firms strategic logistics plan, e.g.
  flexibility, reliability, cost saving, etc.
• Specialisation of 3PL 3PL whose roots lie in
  particular area relevant to logistics requirement
  in question should be considered
• Asset-owning versus non-asset-owning 3PL
• Asset-owning 3PL significant size, access to HR,
  large customer base, economies of scale scope,
  etc. but bureaucratic, long decision-making cycle
• Non-asset-owning 3PL limited resources, lower
  bargaining power, but more flexible, be able to
  tailor service, etc.

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Supply Chain Partnership Models Implementation
Issues in 3PL Partnership

• Enough time to start-up considerations should be
  devoted
• The firm must identify exactly what it needs
• The firm must provide specific performance
  measures requirements
• The 3PL must discuss these requirements,
  (including their realism relevance)
• Effective communication is essential
• Within the firm, managers must communicate to
  each other employees on why to outsource what
  to expect
• Communication between the firm and its 3PL is
  critical, e.g. between information systems, etc.

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Supply Chain Partnership Models Implementation
Issues in 3PL Partnership(C)

• Other important issues for successful
  implementation (Simchi-Levi et al. 2003)
• Respect of confidentiality of data shared
• Specific performance measures must be agreed upon
• Specific criteria regarding subcontractors should
  be discussed
• Arbitration issues should be considered.
• Escape clauses should be negotiated
• Methods to assure achievement of performance
  goals should be discussed

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Supply Chain Partnership Models Factors for
Success in 3PL Partnership

• Five factors that are critical to the success of
  a logistics partnership (Bowersox 1992)
• Selective matching All organisations have
  compatible corporate cultures and values
• Information sharing Partners openly share
  strategic and operational information
• Role specification Each party in the partnership
  is clear about the specifics of its role
• Ground rules Procedures and policies are clearly
  spelled out
• Exit provisions A method for terminating the
  partnership is defined

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Supply Chain Partnership Models Other Factors
for Success in 3PL Partnership

• Trust
• the most significant factor to succeed in
  outsourcing logistics because companies have to
  share information, benefits, and risks to each
  other
• Performance evaluation
• the major factor to measure the success and
  maintain the achievement after outsourcing starts
• If the performance is not satisfied, the
  outsourcing can be ceased or failed because the
  objective of outsourcing is not achieved
• To maintain the alliance and succeed in the long
  term, it is necessary to measure or evaluate the
  performance regularly

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Supply Chain Partnership Models Other Factors
for Success in 3PL Partnership (C)

• Sharing information maintaining communication
• This leverages the efficiency and effectiveness
  in logistics outsourcing because both partners
  know what they want and provide the relevant
  information
• Lack of information sharing and communication
  maintaining can fail the outsourcing especially
  in strategic partnership
• Top managements commitment support
• If top management are fully committed and support
  staff in performing their jobs, the whole company
  will function in a defined direction and thus
  achieve concrete goals
• The lack of commitment and support from top
  management will discourage the operations levels
  decision in management, sharing information, and
  communication

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Supply Chain Partnership Models Other Factors
for Success in 3PL Partnership (C)

• Having clear goals, vision, and roles
• Goal, vision and roles are required to avoid
  confusion between staff and staff, and between
  two companies
• They should be clarified at the early stage and
  updated from time to time to prevent the risks
  that the partners may work in the different
  directions
• Other key critical factors can be relationship
  commitment, sharing benefits and risks,
  flexibility, etc.
• Both sides may have to consider these issues in
  their specific condition and context

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Supply Chain Partnership Models
Retailer-Supplier Partnerships (RSP)

• Types of RSL Quick response, Continuous
  Replenishment, Advance Continuous Replenishment,
  VMI (Simchi-Levi et al. 2003)
• Quick Response
• Vendors receive POS data from retailers, and use
  this information to synchronize production and
  inventory activities at the supplier
• The retailer still prepares individual orders,
  but the POS data is used by the supplier to
  improve forecasting and scheduling
• Example Milliken and Company The lead time from
  order receipt at Millikens textile plants to
  final clothing receipt at several of the
  department stores involved was reduced from
  eighteen weeks down to three weeks

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Supply Chain Partnership Models
Retailer-Supplier Partnerships (C)

• Continuous Replenishment Vendors receive POS
  data and use it to prepare shipments at
  previously agreed upon intervals to maintain
  agreed-upon levels of inventory
• Wal-Mart, Kmart
• Advanced Continuous Replenishment
• Suppliers may gradually decrease inventory levels
  at the retailers store or distribution center as
  long as service levels are met
• Inventory levels are thus continuously improved
  in a structured way
• Kmart

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Supply Chain Partnership Models
Retailer-Supplier Partnerships (C)

• Vendor Managed Inventory (VMI)
• Supplier/vendor is usually manufacturer, but can
  also be a distributor
• Supplier/vendor is in charge of ordering
  inventory replenishment decisions, thus reduce
  cost improve service level through information
  sharing eliminating factors of bullwhip effect
• It also leads to better manufacturing scheduling,
  supplies to retailers, improved service level
  with coordinated distribution transshipment of
  inventory between retailers
• VMI Projects at Dillard Department Stores, J.C.
  Penney, and Wal-Mart have shown sales increases
  of 20 to 25 percent, and 30 percent inventory
  turnover improvements

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Supply Chain Partnership Models Requirements for
Effective RSP

• Advanced information systems on both sides
• 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 manufacturer serves many
  competing retailers
• Management of the entire supply chain inventory
  of manufacturer and retailers
• Initial loss of revenues

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Supply Chain Partnership Models Important RSP
Issues

• Inventory ownership
• Traditionally retailer owns inventory when
  received
• In VMI supplier owns the goods until they are
  sold (consignment relationship)
• Why would a firm do this?
• Performance measures must be agreed upon POS
  accuracy, fill rate, inventory level, inventory
  turns, lead time
• Confidentiality
• Communication cooperation
• Ex the case of First Brands Kmart

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Supply Chain Partnership Models Advantages and
Disadvantages of RSP

• Fully utilize system knowledge
• Consider the partnership between White-Hall
  Robbins (W-R), who makes over-the-counter drugs
  such as Advil, and Kmart
• W-R initially disagreed with Kmart about
  forecasts, and in this case, it turned out that
  W-R forecasts were more accurate because they
  have a much more extensive knowledge of their
  products than Kmart does
• This implies the ability to control the bullwhip
  effect

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Supply Chain Partnership Models Advantages and
Disadvantages of RSP (C)

• Other advantages
• Decrease required inventory levels
• Improve service levels
• Decrease work duplication
• Improve forecasts
• Disadvantages
• Expensive advanced technology is required
• Supplier/retailer trust must be developed
• Supplier responsibility increases
• Expenses at the supplier often increase
• Why? How can this be addressed?

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Supply Chain Partnership Models Distributor
Integration (DI)

• Manufacturers treat their distributors as
  partners
• Value of distributors their relationship with
  end users are appreciated
• Manufacturer can use information about customer
  needs wants acquired by distributors
• Necessary support, i.e. parts services are
  provided to distributors by manufacturer
• In modern distributor integration, expertise
  inventory located at one distributor is available
  to the others (Simchi-Levi et al. 2003)
• Examples Caterpillar their dealers

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Supply Chain Partnership Models Distributor
Integration (C)

• DI is used to address both inventory-related
  service-related issues
• Parts are shared across the distributor network
• Specialized service requests are steered to
  appropriate dealers or distributors
• Each distributor can check inventories of others
  they are also contractually bound to exchange
  parts for agreed-upon remuneration
• How does this improve supply chain performance?
• What does it need to be realised?

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Supply Chain Partnership Models Distributor
Integration (C)

• Issues in DI
• Incentives for dealers are they giving away
  competitive advantages?
• Skills and responsibilities are taken from some
  dealers/distributors
• What is required?
• Trust, e.g. be assured about long-term alliance
• Pledges
• Guarantees from the manufacturer, in terms of
  commitment of resources effort
• Advanced information systems

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References

• Ayers, J. B. 2001, Handbook of supply chain
  management, CRC Press.
• Ayers, J.B. 2002, Supply Chain Management (SCM),
  the Wheel and the Manufacturing Engineer,
  CASA/SMA Blue Book Series, http//www.ayers-consul
  ting.com/download/SME20Blue20Book20for20Postin
  g.pdf
• Bowersox, D. 1992, Logistical Excellence, Digital
  Press, Burlington Quinn, J. Hilmer, F. 1994,
  Strategic outsourcing, Sloan Management Review,
  vol. 35, pp, 4355.
• Brown, M. Allen, J. 2001, Logistics
  out-sourcing, Handbook of Logistics and Supply
  Chain Management, Elsevier Science.
• Carding, T. 1998, Centralized sites serve
  Pan-European distribution needs,
  http//www.supplychainbrain.com/archives/1.98.PanE
  uropean.htm?adcode50
• Coyle, J. J., Bardi, E. J. Langley, C. J. 2003,
  The Management of Business Logistics A Supply
  Chain Perspective, 7th edn, South-Western/Thomson
  Learning, Mason, OH.
• Kim, B. 2005, Supply Chain Management, Mastering
  Business in Asia, John Wiley Sons (Asia).
• Matchette, J. Seikel, M.A. 2005, Inquiries and
  insights on supply chain collaboration, ASCET,
  vol. 7, http//www.ascet.com/documents.asp?d_id34
  72
• McLaren, T., Head, M. Yuan, Y. 2002, Supply
  chain collaboration alternatives Understanding
  the expected costs and benefits, Internet
  Research, vol. 12, no. 4.
• Simchi-Levi, D., Kaminsky, P. Simchi-Levi, E.
  2003, Designing and Managing the Supply Chain,
  2nd edition, McGraw-Hill, USA.

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Preparation for next Module Supply Chain and
Product Design Issues

• Textbook Chapter 9 (undergraduate) Chapter 4
  (postgraduate)
• Readings
• Undergraduate 10.1-10.5 (N26726)
• Postgraduate 10.1-10.5 (N26726)