Strategic Partnering in Supply Chain Management

Points Illustrated in ADS Case

Pressure for VMI Need for POS for VMI Pressure for direct shipment (to retailers) General increase in ADS shipping costs (no coherent shipping strategy) Future of audio duplication industry

Ways to Implement Logistics

1. Internal activities 2. Acquisitions 3. Arms-length transactions (short-term and most common) 4. Strategic alliance (long-term; focus of the chapter)

Which SA Approach is for You?

Consider the following points

Does the SA add value to products? Does the SA improve your market access? Does the SA strengthen your operations? Does the SA enhance your technological strength? Does the SA enhance your strategic growth? Does the SA help build up your financial strength? Will the SA weaken you core competencies (strengths)?

Types of Strategic Alliances

1. Third-Party Logistics (3PL) 2. Retailer-Supplier Partnership (RSP) 3. Distribution Integration (DI)

3PL
Traditional outsourcing characteristics:
Transaction based relationships Single-function providers

3PL Characteristics:
Long-term relationships Multi-function providers Mostly prevalent among large firms

Advantages and disadvantage of 3PL

Allows firms to focus on their core competencies Provides technological flexibility Provides other flexibility

Advantages & Disadvantages of 3PL

Advantages:
Allows firms to focus on their core competencies Provides technological flexibility Provides other flexibility

Disadvantages:
Loss of control Potential conflict with core competencies if logistics is one of firms competencies Potential new competitor

3PL Selection Issues

Know your costs Customer orientation of the 3PL (toward the hiring firm). This is cited as the most important factor Specialization of the 3PL Asset-Owning vs. Non-Asset Owning 3PL

 Inventory ownership:

Important SP Issues

Supplier owns the goods until they are sold Retailer owns the goods Performance measures: Fill rate, inventory level, inventory turns

Important SP Issues
Confidentiality
Communication and cooperation
When First Brands started partnering with Kmart, Kmart often claimed that its supplier was not living up to its agreement to keep two weeks of inventory at all times. It turned out that this was due to the fact that the two companies employed different forecasting methods.

RSP Continuum Refer to Page 137, Table 6.1

Ownership of Inventory Firm
Quick Response Continuous Replenishment Advanced Continuous Replenishment

Supplier
VMI

Consignment Low

Information Sharing Level of trust and cooperation High

Main Characteristics of SP
Criteria Types Decision Maker Inventory Ownership New Skills Employed by vendors

Quick Response Continuous Replenishme nt Advanced Continuous Replenishme nt VMI

Retailer Contractually Agreed to Levels Contractually agreed to & Continuously Improved Levels Vendor

Retailer Either Party Either Party

Forecasting Skills Forecasting & Inventory Control Forecasting & Inventory Control

Either Party

Retail Management

Strategic Partnering
Quick Response: Vendors receive POS data from retailers, and use this information to synchronize production and inventory activities at the supplier. In this strategy, the retailer still prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling. 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.

Strategic Partnering
Continuous Replenishment: Vendors receive POS data and use it prepare shipments at previously agreed upon intervals to maintain agreed to 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

Strategic Partnering
Vendor Managed Inventory (VMI):JITD 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.

Requirements of RSP
Advanced Information Technology (the most important) Top management commitment Trust (Remember Barilla SPA)
Which is the easiest to acquire?

Steps in RSP Implementation

Contractual agreement
Ownership Credit terms Ordering responsibilities Other

Establish IT Establish effective forecasting techniques Develop coordinating tools for managing inventory and transportation

Steps in SP Implementation
Contractual negotiations

Ownership Credit terms Ordering decisions Performance measures

Develop or integrate information systems Develop effective forecasting techniques

Develop a tactical decision support tool to assist in coordinating inventory management and transportation policies

Advantages and Disadvantages of SP

Advantages
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.

Advantages and Disadvantages of SP

Advantages (continued)
Decrease required inventory levels Improve service levels Decrease work duplication Improve forecasts

Advantages and Disadvantages of SP

Challenges:
Expensive advanced technology is required Supplier/retailer trust must be developed. Supplier responsibility increases. Expenses at the supplier often increase.

Examples of SP 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.

Examples of SP Successes and Failures

VF Corporations Market Response System:
The VF Corporation, which has many well known brand names (including Wrangler, Lee, Girbaud, and many others), began its VMI program in 1989. Currently, about 40 percent of its production is handled using some type of automatic replenishment scheme.

This is particularly notable because the program encompasses 350 different retailers, 40,000 store locations, and more than 15 million replenishment levels.
VFs program is considered one of the most successful in the apparel industry.

Examples of SP Successes and Failures

Spartan Stores
Spartan Stores, a grocery chain, shut down its VMI effort about one year after its inception One problem was that buyers were not spending any less time on reorders than they did before This was because they didnt trust the suppliers enough to be able to stop carefully monitoring the inventories and deliveries of the VMI items, and intervening at the slightest hint of trouble.

Examples of SP Successes and Failures

Spartan Stores (continued)
Furthermore, the suppliers didnt do much to allay these fears. The problems were not with the suppliers forecasts; instead, they were due to the suppliers inability to deal with promotions, which are a key part of the grocery business.
Since they were unable to appropriately account for promotions, delivery levels were often unacceptably low during these periods of peak demand.