The Power matrix of Supplier-Buyer 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
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The Power matrix of Supplier-Buyer 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 SA
• Trust• Cooperation• communication
Ways to Operate a Company• Internal activities• Acquisition• Arm’s length transaction• Outsourcing• Strategic alliance
Stages of Strategic Alliance• Initial Euphoria• Honeymoon period• Dawning realization• Aftershock• Damage control
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
3PL• 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
4PLIt 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.
Strategic Alliance:Types 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:Types of SA
Requirements for Effective Strategic 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 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 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 Implementation• Contractual negotiations
– 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 SA• Decrease required inventory
levels• Improve service levels• Decrease work duplication• Improve forecasts
Disadvantages 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 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
Examples of SA 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.
Examples of SA 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.
Examples of SA 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.
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
Information for Coordination of 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 Supply Chain Success
Information Global Scope
CoordinatedDecisions
Supply ChainSuccess
Information Technology in a Supply Chain: Legacy
Systems
Supplier CustomerRetailerDistributorManufacturer
Strategic
Planning
Operational
Information Technology in a Supply Chain: ERP Systems
Supplier CustomerRetailerDistributorManufacturer
Strategic
Planning
OperationalERPPotential
ERPPotentialERP
Information Technology in a Supply Chain: Analytical