Strategic Alliances
Phil Simchi-Levi
Kaminsky
David
kaminsky@ieor.berkeley.edu
Philip Kaminsky
Edith Simchi-Levi
Strategic Partnering:
Types of SP

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.
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Strategic Partnering:
Types of SP

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
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Strategic Partnering:
Types of SP

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.
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Requirements for Effective
SP
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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
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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.
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Steps in SP
Implementation
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Contractual negotiations
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–
–
–
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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
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Main Characteristics of
SP
Criteria
Decision
Inventory
Types
Maker
Ownership
Quick
Retailer
Retailer
Response
Continuous
Contractually Agreed
Either
Replenishment
to Levels
Party
Advanced
Contractually agreed
Either
Continuous
to & Continuously
Party
Replenishment
Improved Levels
VMI
Vendor
Either
Party
McGraw-Hill/Irwin
New Skills
Employed by vendors
Forecasting Skills
Forecasting &
Inventory Control
Forecasting &
Inventory Control
Retail
Management
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Advantages of SP

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.
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Advantages of SP
 Decrease
required inventory levels
 Improve service levels
 Decrease work duplication
 Improve forecasts
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Disadvantages of SP
 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?
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Examples of SP
Successes and 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
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Examples of SP
Successes and 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.
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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 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.
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Examples of SP
Successes and 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.
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Third 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
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geography
workforce size
additional services
resource flexibility
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
3PL

Disadvantages
– Loss of control
– 3PL employees may interact with customers
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3PL’s address this with uniforms, logos, etc
– Sharing of confidential info

Examples
– Simmons and Ryder Integrated Logistics
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On site rep, all logistics managed by Ryder, JIT manufacturing
– SonicAir
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Rapid delivery of spare parts
67 warehouses
Sophisticated software for inventory and rapid delivery
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Distributor Integration
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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
McGraw-Hill/Irwin
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi