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

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

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

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

Gillette and Exel

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

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

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

Main characteristics

Alliance type Decision maker Inventory ownership

New skills required by vendors

Quick response Retailer Retailer Forecasting skills

Continuous replenishment

Contractually agreed-to levels

Either party Forecasting and inventory control

Advanced continuous replenishment

Contractually agreed-to and continuously improved levels

Either party Forecasting and inventory control

Vendor managed inventory

Vendor Either party Retail management

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

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

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?

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

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

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.

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

A Framework for Outsourcing

Product Dependent:knowledge, capacity

Independent

Knowledge;Dependent capacity

Independent

knowledgecapacity

Modular Outsourcing risky

Outsourcing an opportunity

Outsourcing can reduce cost

Integral Outsourcing very risky

Outsourcing option Keep internal