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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