The Power matrix of Supplier-The Power matrix of Supplier-Buyer RelationshipBuyer Relationship

Buyer Dominance

Supplier Dominance

(moral hazard)

Independence

(adverse selection)

Inter-dependence

Low High

Relative utility and scarcity of supplier resources for buyers

Relative utility and scarcity of buyer’s resources for suppliers

High

Low

Source: Andrew Cox, 2000

Critical success factors to Critical success factors to SASA

• Trust• Cooperation• communication

Ways to Operate a Ways to Operate a CompanyCompany

• Internal activities• Acquisition• Arm’s length transaction• Outsourcing• Strategic alliance

Stages of Strategic AllianceStages of Strategic Alliance• Initial Euphoria• Honeymoon period• Dawning realization• Aftershock• Damage control

Conceptual model of alliance Conceptual model of alliance developmentdevelopment

• Alliance conceptualization• Alliance pursuance• Alliance confirmation• Alliance implementation/continuity

Types of allianceTypes of alliance• Opportunistic alliance• Complementary strategic alliance

Why Strategic Alliance?Why Strategic Alliance?• Adding value to products/services• Improving market access• Strengthening operations• Adding technological strength• Enhancing strategic growth• Building financial strength

Types of AllianceTypes of Alliance• Third-party logistics (3PL)• Fourth-party logistics (4PL)• Retailer-supplier partnerships (RSP)• Distributor integration (DI)

Third Party LogisticsThird Party Logistics• What is 3PL?

– Outside firms perform materials management and logistics functions

– Long term commitments and multiple functions• What are the advantages of 3PL?

– Focus on core strengths– Provides technological flexibility– Provides flexibility in

• geography• workforce size• additional services• resource flexibility

3PL3PL• Use of an outside company to perform

all or part of the form’s materials management and product distribution function

• Relationship vs. transactional based• Single-function vs. multi-function• Long-term vs. short-term commitments

3PL3PL• Disadvantages

– Loss of control– 3PL employees may interact with customers

• 3PL’s address this with uniforms, logos, etc– Sharing of confidential info

• Examples– Simmons and Ryder Integrated Logistics

• On site rep, all logistics managed by Ryder, JIT manufacturing

– SonicAir• Rapid delivery of spare parts• 67 warehouses• Sophisticated software for inventory and rapid delivery

4PL4PLIt refers to the evolution in logistics from It refers to the evolution in logistics from

suppliers focused on warehousing and suppliers focused on warehousing and transportation (third-party logistics transportation (third-party logistics

providers) to suppliers offering a more providers) to suppliers offering a more integrated solution. Among other services, integrated solution. Among other services,

fourth-party logistics providers include fourth-party logistics providers include supply chain management and solutions, supply chain management and solutions,

change management capabilities, and value change management capabilities, and value added services in their offering. added services in their offering.

Strategic Alliance:Strategic Alliance:Types of SATypes of SA

• 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 Milliken’s textile plants to final clothing receipt at several of the department stores involved was reduced from eighteen weeks down to three weeks.

• 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 retailer’s store or distribution center as long as service levels are met. Inventory levels are thus continuously improved in a structured way.– Kmart

Strategic Alliance:Strategic Alliance:Types of SATypes of SA

Requirements for Effective Requirements for Effective Strategic AllianceStrategic Alliance

• 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 SA IssuesImportant SA 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

Important SA IssuesImportant SA 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.

Steps in SA ImplementationSteps in SA 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

Main Characteristics of SAMain Characteristics of SA

CriteriaTypes

DecisionMaker

InventoryOwnership

New SkillsEmployed by vendors

QuickResponse

Retailer Retailer Forecasting Skills

ContinuousReplenishment

Contractually Agreedto Levels

EitherParty

Forecasting &Inventory Control

AdvancedContinuous

Replenishment

Contractually agreedto & ContinuouslyImproved Levels

EitherParty

Forecasting &Inventory Control

VMI Vendor EitherParty

RetailManagement

Advantages of SAAdvantages of SA• 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 of SAAdvantages of SA

• Decrease required inventory levels

• Improve service levels• Decrease work duplication• Improve forecasts

Disadvantages of SADisadvantages of SA• 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?

Examples of SA Successes Examples of SA Successes and Failuresand Failures

• Western Publishing-Golden Books:– Western Publishing is using VMI for its Golden Books line

of children’s 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.

– Extra sales, increased costs to Western

Examples of SA Successes Examples of SA Successes and Failuresand Failures

• VF Corporation’s 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.

– VF’s program is considered one of the most successful in the apparel industry.

Examples of SA Successes Examples of SA Successes and Failuresand 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 didn’t 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 SA Successes Examples of SA Successes and Failuresand Failures

• Spartan Stores (continued)– Suppliers didn’t 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.

Distributor IntegrationDistributor 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

Information for Coordination Information for Coordination of Systemsof Systems

• Information is required to move from local to global optimization

• Questions:– Who will optimize?– How will savings be split?

• Information is needed :– Production status and costs– Transportation availability and costs– Inventory information– Capacity information– Demand information

Role of Information in Role of Information in Supply Chain SuccessSupply Chain Success

Information Global Scope

CoordinatedDecisions

Supply ChainSuccess

Information Technology in a Information Technology in a Supply Chain: Legacy Supply Chain: Legacy

SystemsSystems

Supplier CustomerRetailerDistributorManufacturer

Strategic

Planning

Operational

Information Technology in a Information Technology in a Supply Chain: ERP SystemsSupply Chain: ERP Systems

Supplier CustomerRetailerDistributorManufacturer

Strategic

Planning

OperationalERPPotential

ERPPotentialERP

Information Technology in a Information Technology in a Supply Chain: Analytical Supply Chain: Analytical

ApplicationsApplications

Supplier CustomerRetailerDistributorManufacturer

Strategic

Planning

Operational

SupplierApps

SCM

MES

Dem Plan

Transport execution &WMS

APS Transport & InventoryPlanning

CRM/SFA