High
Buyer Dominance Inter-dependence
Relative utility and scarcity of buyer’s resources for suppliers
Independence Supplier Dominance
(adverse selection ) (moral hazard)
Low
Low High
Relative utility and scarcity of supplier resources for buyers
Source: Andrew Cox, 2000

• Trust
• Cooperation
• communication

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

• Initial Euphoria
• Honeymoon period
• Dawning realization
• Aftershock
• Damage control

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

• Opportunistic alliance
• Complementary strategic alliance

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

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

• 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

• 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

• 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

4PL
It refers to the evolution in logistics from suppliers focused on warehousing and transportation (third-party logistics providers) to suppliers offering a more integrated solution. Among other services, fourth-party logistics providers include supply chain management and solutions, change management capabilities, and value added services in their offering.

• 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

• 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

• 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
– 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.

• 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 SA
Criteria
Types
Quick
Response
Continuous
Replenishment
Advanced
Continuous
Replenishment
VMI
Decision
Maker
Retailer
Contractually Agreed to Levels
Contractually agreed to & Continuously
Improved Levels
Vendor
Inventory
Ownership
Retailer
Either
Party
Either
Party
Either
Party
New Skills
Employed by vendors
Forecasting Skills
Forecasting &
Inventory Control
Forecasting &
Inventory Control
Retail
Management

• 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.

• Decrease required inventory levels
• Improve service levels
• Decrease work duplication
• Improve forecasts

• 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?

• 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

• 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.

• 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.

• 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.

• 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 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

Information Global
Scope
Coordinated
Decisions
Supply Chain
Success

Strategic
Planning
Operational
Supplier Manufacturer Distributor Retailer Customer

Strategic
Planning
Operational
Potential
ERP
ERP Potential
ERP
Supplier Manufacturer Distributor Retailer Customer

Strategic
Planning
Operational
Supplier
Apps
APS
MES
SCM
Transport & Inventory
Planning
Transport execution &
WMS
Dem Plan
CRM/SFA
Supplier Manufacturer Distributor Retailer Customer