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Strategic Alliances and Partnerships

To create synergy resultant from the integration of business functions and activities, a growing number of firms have made a conscious effort to forge strategic alliances (or partnerships) with other firms. Generally speaking, a strategic alliance is a voluntary relationship between two or more organizations that is formed based on the mutual need of these independent organizations (e.g., suppliers, manufacturers, distributors, retailers) without being constrained by ownership, control, and equity investment (Devlin and Bleackley, 1988; Varadarajan and Cunningham, 1995). In a strategic alliance, business decisions are made jointly to achieve the agreed goals of aligned organizations that share resources, information, profits, knowledge, and risk. Those goals are to: (1) gain access to new customer bases; (2) offer more product/service offerings for the customers; (3) pool resources in light of the large outlay required; (4) to learn new know-how from the alliance partners; (5) utilize the existing personal network to reach new supplier bases; (6) enhance the market position in present markets; (7) add credibility to the business (Pucik, 1988; Doz, 1996; Das and Teng, 1998). For example, Daimler AG, the world’s biggest truck maker, aligned with the Chinese truck manufacturer Foton to build Mercedes-Benz trucks in China and sell the Chinese brand models of its partner internationally because of rising demand for low-cost commercial vehicles in emerging markets. In exchange for its favor, Daimler AG would offer Foton’s Auman brand trucks in emerging markets such as Africa and the Middle East to save on design and labor costs to build new vehicles specifically for those markets. As such, both Daimler AG and Foton would have a chance to penetrate into new market bases in emerging economies through this strategic alliance.

Similarly, Nissan and Renault once formed an alliance to expand their presence in both Asian and U.S. markets. Although these examples illustrate a horizontal alliance between competitors in the same industry, a strategic alliance can be formed vertically between trading partners across the supply chain. An example of a vertical alliance includes an earlier supplier involvement that brings the expertise and collaborative synergy of parts/components suppliers into the new product design process of a manufacturer. For example, in the 1990s, Chrysler established an alliance with its supplier to develop new antilock brake technology for Neon with the promise of a long-term purchase contract for that supplier. This alliance saved Chrysler a substantial amount of R&D costs.

Despite numerous benefit potentials, inter-organizational alliances have often been plagued by ambiguities in the level of commitments (or responsibilities) from each partner; a lack of mutual trust between partners and the subsequent lack of information sharing; imbalances in the channel power and risk sharing; and differences in organizational culture and strategic focus. For example, GM and the now-defunct Korean automaker Daewoo signed a deal in 1999 that would help GM’s effort to double its share of sales in the Asian market to 10% in five years, while helping Daewoo bring in much-needed capital and radically streamlining its sprawling global production operations. In addition, this alliance was intended to help GM gain access to “cheap” labor in Korea, while it allowed Daewoo to gain access to GM’s “superior” engineering skills and an entry into the U.S. auto market. Unfortunately, this alliance failed mainly due to corporate cultural differences and a lack of strategic fit between the two companies—Daewoo was known for its aggressive market expansion strategy whereas GM was in the process of downsizing its production capacity. To make matters worse, labor in Korea was no longer cheap, owing to rapid economic growth and the presence of a strong labor union, thus causing an unexpected cost increase in this alliance’s Korean operations.

To cope with these risks and challenges, firms entering into a strategic alliance should understand what kind of partnership they are forming, what kind of role each partner should play, and how they should manage the partnership. Such understanding will be enhanced by defining the structures of their partnership. Following the conceptual framework suggested by Cooper et al. (1997b), these structures are classified as follows:

  • The type of a supply chain partnership
  • The structural dimensions of a supply chain network
  • The characteristics of process links among supply chain partners

The Type of a Supply Chain Partnership

When a supply chain network is being structured, it is necessary to identify who the partners of the supply chain are. Yet, an inclusion of all potential partners may complicate the total network because it may explode the number of partners added from one tier level to another (Cooper et al., 1997a). The key is to identify the type of the partners who are critical to the value-added activities and determine a manageable number of the supply chain partners given resources.

Lambert et al. (1998) classify supply chain partners into two distinctive types: primary and secondary partners. In general, primary partners  (focal companies) are autonomous channel captains or strategic business units that actually perform operational and/or managerial activities designed to create a specific product or service for a particular customer or market. These primary partners can be manufacturers such as Dell or mass-merchants such as Walmart and Target. In contrast, supporting partners are companies that simply provide resources (e.g., assets, application software, real-estate property), knowledge, and utility for the supply chain. These supporting partners can be transportation carriers, consulting firms, third-party logistics providers, IT service providers, online brokers, and educational institutions. The categories are not exclusive, however, because a firm can be both a primary partner and a supportive partner of the supply chain, performing primary activities related to one process and supportive activities related to another process.

Although the distinction between primary and supporting supply chain partners is not obvious in all cases, it allows the firm to define who the furthest upstream and downstream members of the supply chain are and identify where customer demand actually starts. The furthest upstream members of the supply chain typically represent supporting partners, whereas the furthest downstream represent the end of the supply chain where no further value is added and the product and/or service is consumed. The furthest downstream (or point of consumption) may coincide with a value-offering point (VOP), where a customer allocates demand to his or her upstream supply chain partner (e.g., retailer, distributor, or manufacturer). According to Holmstrom et al. (1999), a VOP determines how and when customer demand is triggered to upstream supply chain partners and defines the economics of the customer (i.e., the tradeoff between value creation and transaction costs). Such a clarification of the supply chain network eventually helps supply chain partners understand what scope of the supply chain problem should be addressed.

The Structural Dimensions of the Supply Chain

Understanding the structural dimensions of a supply chain is a prerequisite for building the supply chain link. In general, there are two structural dimensions: horizontal structure and vertical structure. The horizontal structure refers to the number of tiers across the supply chain. The supply chain may be lengthy, with numerous tiers, or it may be short, with just a few tiers. The vertical structure refers to the number of suppliers and customers represented within each tier, as illustrated by Figure 1.4 (Lambert et al., 1998, p. 3).

Figure 1.4

Figure 1.4. Supply chain dimensions

As such, an increase or reduction in the number of suppliers and/or customers will alter the dimension of the supply chain. For example, as some companies make strategic moves toward either supply base reduction or customer selectivity, the supply chain becomes narrower. Outsourcing (inclusion of third-party logistics providers) or functional spin-offs will also alter the supply chain dimension by lengthening and widening the supply chain.

The Characteristics of Supply Chain Links

Porter (1985) stresses the strategic importance of linkages among supply chain activities, because the linkages could lead to competitive advantages. To fully exploit the benefits of such linkages, a firm should understand the specific characteristics of the linkages (or links) to which it is connected. Lambert et al. (1998) have identified four distinctive characteristics of supply chain links:

  • Managed business process links
  • Monitored business process links
  • Unmanaged business process links
  • Non-member business links

Managed process links are the ones where the firm (typically a primary supply chain partner or a channel captain) integrates a supply chain process with one or more customers/suppliers. These links may connect multi-tier supply chain partners as the firm is actively involved in the management of tier one and a number of other links beyond tier one. Due to its direct involvement, the firm may allocate resources (e.g., manpower, equipment, technology, and know-how) to its partners and share information with them. Monitored process links are not fully controlled by a firm (typically a primary supply chain partner), but the firm is involved in monitoring or auditing how the links are integrated and managed. Unmanaged process links are the ones that the firm neither actively manages nor monitors. With these links, the firm fully trusts its partners’ ability to manage the process links appropriately and consequently leaves the management responsibility up to them. Non-member process links are the ones between both partners and non-members of the company’s supply chain. Such links are not integral parts of the firm’s supply chain structure, but can dictate the performance of the firm. Additionally, different characteristics of supply chain links affect the firm’s allocation of resources and the subsequent supply chain planning. Therefore, those characteristics should be factored into the supply chain partnership process.

Supply Chain Drivers

Because the establishment of common goals is critical for successful strategic alliances, goal setting will be the first step of the supply chain partnership. To set common goals, supply chain partners need to figure out what will be the major driving forces (drivers) behind the supply chain linkages. These drivers include customer service initiatives, monetary value, information/knowledge transactions, and risk elements (Min and Zhou, 2002).

Customer Service Initiatives

Though difficult to quantify, the ultimate goal of a supply chain is customer satisfaction. Put simply, customer satisfaction is the degree to which customers are satisfied with the product and/or service received. The following list represents typical service elements in a supply chain:

  • Product availability—Due to random fluctuations in the demand pattern, downstream supply chain partners often fail to meet the real-time needs of customers.
  • Response time—Response time represents an important indicator of the supply chain flexibility. Examples of response time include time-to-market, on-time delivery (a percentage of a match between the promised product delivery date and the actual product delivery date), order processing time (the amount of time from when an order is placed until the order is received by the customer), transit time (duration between the time of shipment and the time of receipt), cash-to-cash cycle time (the amount of time from when a product has begun its manufacturing until it is completely sold; this metric is an indicator of how quickly customers pay their bills), and downtime (a percentage of time resources that are not operational due to maintenance and repair).

Monetary Value

The monetary value is generally defined as a ratio of revenue to total cost. A supply chain can enhance its monetary value through increasing sales revenue, market share, and labor productivity, while reducing expenditures, defects, and duplication. More specifically, the monetary value is categorized as follows:

  • Asset utilization—Asset utilization can be estimated by several different metrics, such as net asset turns (a ratio of total gross revenue to working capital), inventory turns (a ratio of annual cost of goods sold to average inventory investment), and cube utilization (a ratio of space occupied to space available).
  • Return on investment (ROI)—This is a typical financial measure determining the true value of an investment. Its measure includes the ratio of net profit to capital that was employed to produce that profit, or the ratio of earnings in direct proportion to an investment.
  • Cost behavior—In the supply chain framework, cost management requires a broad focus, external to the firm. Thus, cost may be viewed as a function of strategic choices of the firm’s competitive position, rather than a function of output volume (Shank and Govindarajan, 1993). In other words, a traditional cost classification (fixed versus variable cost), which works at the single firm level, may not make sense for the supply chain network affected by multiple cost drivers (e.g., scope and scale). An alternative cost management principle for a supply chain framework includes activity-based costing (ABC), target costing, and cost of quality (COQ). Because the application of the aforementioned cost management principles to the supply chain is still at the evolutionary stage, most of the firms engaged in the supply chain still use traditional cost measures such as inventory carrying cost, inventory ordering cost, transportation cost, and product return cost.

Information/Knowledge Transactions

Information serves as the connection between the various phases of a supply chain, allowing supply chain partners to coordinate their actions and increase inventory visibility (Chopra and Meindl, 2004). Therefore, successful supply chain integration depends on the supply chain partners’ ability to synchronize and share “real-time” information. Such information encompasses data, technology, know-how, designs, specifications, samples, client lists, prices, customer profiles, sales forecasts, and order history.

  • Real-time communication—The establishment of collaborative relationships among supply chain partners is a prerequisite to information sharing. Collaborative relationships cannot be built without mutual trust among supply chain partners and technical platforms (e.g., the Internet, electronic data interchange, extensible markup language, enterprise resource planning, and warehouse management systems) for information transactions. The effectiveness of real-time communication hinges on the supply chain partners’ organizational compatibility, which facilitates mutual trust, and technical compatibility, which solidifies electronic links among supply chain partners. Because organizational and technical compatibilities are hard to measure, some surrogate metrics such as the rate of electronic data interchange (EDI) transactions (a percentage of orders received via EDI) and the percent of suppliers accepting electronic orders/payment can be used.
  • Technology transfers—The collaboration fostered by supply chain partners can be a catalyst for the research and development (R&D) process throughout the supply chain. The rationale is that a firm, which initiated technology development, can pass its technology or innovative know-how to its supply chain partners, thereby saving R&D cost and time. Therefore, a successful transfer of technology can help supply chain partners enhance their overall profitability.

Risk Elements

The important leverage gained from the supply chain integration is the mitigation of risk. In the supply chain framework, a single supply chain member does not have to stretch beyond its core competency because it can pool the resources shared with other supply chain partners. On the other hand, a supply chain can pose greater risk of failure due to its inherent complexity and volatility. Braithwaite and Hall (1999) note that a supply chain would be a veritable hive of risks unless information is synchronized, time is compressed, and tensions among supply chain members are recognized. They also observe that supply chain risks (emanating from sources external to the firm) will always be greater than risks that arise internally, because less is known about them. Thus, supply chain partners need to profile the potential risks involved in supply chain activities. The following list summarizes such profiles:

  • Risk of quality failure—As illustrated by the recall in May of 2000 of 6.5 million Firestone tires that were susceptible to tread separation in harsh driving conditions, the consequences of failing to ensure quality failure at the upstream supply chain can be enormous. This is due to the interdependence of supply chain partners. Similarly, order-picking errors and failures to schedule adherence should be prevented at the furthest upstream supply chain (if possible, at the initial source of supply).
  • Risk of information failure—One of the well-known consequences of information failure in the supply chain is the bullwhip effect, where orders at the upstream supply chain members tend to exaggerate the true consumption of end customers (e.g., Lee et al. 1997; Min 2000). Because the bullwhip effect will create phantom demand and subsequent overproduction and overstock, its risks should be assessed prior to the development of the supply chain network. One way of reducing such risks is to postpone the final assembly, branding, purchasing, packaging, and shipment of products until they are needed.
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