developing alliances

53
Source: STRATEGIC ALLIANCES, Managing the Supply Chain PennWell Publishing Company, Copyright, 1996, Tim Underhill Developing Business Alliances along the supply chain 1

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Page 1: Developing alliances

Source: STRATEGIC ALLIANCES, Managing the Supply Chain

PennWell Publishing Company, Copyright, 1996, Tim Underhill

Developing

Business Alliances

along the supply chain

1

Page 2: Developing alliances

Stage 1 focuses on determining the company’s needs and requirements and how to best meet them.

Three stages in alliance development

Stage #2

IMPLEMENTATION

2

Stage 2 deals with developing relationships in both organizations to fulfill both companies’ needs.

Stage 3 involves the efforts required to keep the alliance improving and adding value.

Page 3: Developing alliances

3

Strategic

Alliance

Stage 2

IMPLEMENTATION

Stage 3

MAINTENANCE

Stage 1

DISCOVERY

Alliance objective

planning

Alliance Partner

Evaluation

Alliance Partner

Selection

Improvements,

objectives agreed on

Joint management

team established

Managing joint projects

On-going evaluation

Joint needs reviewed

Modifications/adjustment

executed

Strategic alliance development stages

The more detailed the information

gathering, the high the chance of success.

Page 4: Developing alliances

4

Strategic

Alliance

Stage 1

DISCOVERY

Alliance objective

planning

Strategic alliance development stages

First, a company has determine its goals and which items or processes to jointly work on with an alliance partner.

What do you want to do?

Page 5: Developing alliances

5

Value chain and exploring company needs

Operations

&

processing

Outbound

items

&

services

Marketing

&

sales

After

sales

support

(Processing)

End Users

Technology Development

Direct Activities

Suppliers

Human Resource Management

Infrastructure

Procurement

Support

Activities

Inbound

items

&

services

(Shipping) (Marketing) (Service)(Receiving)

Value Chain Activities

Valued added, cost incurred over time and a profit margin

Page 6: Developing alliances

6

Value chain and exploring company needs

Operations

&

processing

Outbound

items

&

services

Marketing

&

sales

After

sales

support

Inbound

items

&

services

Direct Activities

End UsersSuppliers

(Processing) (Shipping) (Marketing) (Service)(Receiving)

Valued added, cost incurred over time and a profit margin

Supply Chain

Management

Information System

Customer Relations

Management

Information System

Page 7: Developing alliances

7

Value chain and exploring company needs

Operations

&

processing

Outbound

items

&

services

Marketing

&

sales

After

sales

support

(Processing)

End Users

Technology Development

Direct Activities

Suppliers

Human Resource Management

Infrastructure

Procurement

Support

Activities

Inbound

items

&

services

(Shipping) (Marketing) (Service)(Receiving)

Overhead,

fixed asset control,

management expertise

and information

systems

Valued added, cost incurred over time and a profit margin

Page 8: Developing alliances

Firm’s Value chain

8

Value chain and exploring company needs

Op

era

tio

ns &

pro

ce

ss

ing

Ou

tbo

un

d i

tem

s &

se

rvic

es

Ma

rke

tin

g &

sa

les

Aft

er

sa

les

su

pp

ort

Inb

ou

nd

ite

ms

& s

erv

ice

s

End UsersSuppliers Valued added, cost incurred over time and a profit margin

Op

era

tio

ns &

pro

ce

ss

ing

Ou

tbo

un

d i

tem

s &

se

rvic

es

Ma

rke

tin

g &

sa

les

Aft

er

sa

les

su

pp

ort

Inb

ou

nd

ite

ms

& s

erv

ice

s

Customer’s Value chain

Page 9: Developing alliances

9

Collaboration & alliances along the supply chain

Operations

&

processing

Outbound

items &

services

Marketing

&

sales

After

sales

support

Inbound

items &

services

Company “A” Direct Activities

Operations

&

processing

Outbound

items &

services

Marketing

&

sales

After

sales

support

(Processing) (Shipping) (Marketing) (Service)(Receiving)

Company “B” Direct Activities

Shared Logistics

(Processing) (Shipping) (Marketing)(Receiving)

Inbound

items &

services

Shared Sales

Activities/Sales Staff

Shared

Production

Shared Service

(Service)

Page 10: Developing alliances

10

Collaboration & alliances along the supply chain

Company “B”

Support

Activities

Technology Development

Human Resource Management

Infrastructure

Procurement

Company “A”

Support

Activities

Technology Development

Human Resource Management

Infrastructure

Procurement

Shared buildings

and facilities

Shared personnel

activitiesShared

purchasing

Shared research

projects

Page 11: Developing alliances

Typical supply chain in the oil pipe supply

There are 33 steps in this process. 23 of them are repeated steps. To reduce inventory, handling, inspection, and testing costs, these processes can be improved on.

Notice just inventory only as an example.

Pipe user

11

Page 12: Developing alliances

Typical supply chain in the oil pipe supply

The chain can be reduced from 33 steps to 15 steps. First, it can be done by improving communications and coordination along the line which will reducing needless inventory carrying. Next, inspection processes can be moved in-house and along the production line.

Step reduction

12

Page 13: Developing alliances

The potential cost iceberg

13

30% of costs are

easy to identify and attack.

70% of costs are Harder to find and harder to reduce.

Price

Late

deliveriesExcess

inventoryPoor

product quality

Too many companies only focus on what they see and only some costs are easy to see and be reduced. Others are very hard to see but can be very costly.

If these costs are measured, they will

become visible.

Page 14: Developing alliances

Clear alliance understanding = high success chance

14

Page 15: Developing alliances

Clear alliance understanding = high success chance

15

Roles, assignments

& expectations

Training on alliance and new

assignments

Plan for alliance impact

on current operations

Need for change

Supplier selection method

Mission&

Objective

Working

together

Page 16: Developing alliances

New skillsFeeling

the rewardsPutting

project into

action

Clear alliance understanding = high success chance

16

Put in action plan

Secure our future

Conducted detailed study

Building a new team

Taking on new responsibilities

Page 17: Developing alliances

Where to collaborate: Company activities review

17

Ideal

resource

use

Explore

complete

alliances and

perform joint

total cost

analysis

Send out

and negotiate

special value

added

services

Send out on a

transactional

basis only

Completely

do internally

Just have

a supplier

do it all.

We can do it

in-house.

Discuss with

supplier what

requirements

we need.

We need

drastic costing

collaboration.

Page 18: Developing alliances

18

There are several ways to greatly lower total costs through

alliances. Each should be studied.

Types of Alliances

Single source

To reduce the cost

of certain itemsPartnership

To reduce the total

cost of processes,

functions and items

Integrated

One-stop shopping

to reduce

acquisition cost.

Outsourcing

To send out work that

specialists can do

better than in-house.

Supply chain

To reduce supply

chain process

duplications.

Working together

18

Page 19: Developing alliances

19

Timeline moving through alliance development stages

Proven Ideal timeline

Typical timeline

Implementation MaintenanceDiscovery

9 - 12 months 6 months On going if survives

Total cost measured and improvedProblems/barriers resolved quicklyFurther processes for improvement

discovered

Discovery Implementation Maintenance

Full needs assessmentPurchasing /sales plan discoveredFull partner selection evaluationIdeal partner found

Clear goals & directionSmooth executionQuick results

3 months 18-24 months On going if survives

Total cost no measuredProblems increaseDirection unclearAlliance fails or

is weakened

Quick push for resultsVague objective planningPoor partner studyRisks not considered

During implementation new issues learnedTotal cost not fully reviewed

– focus on pricingBoth company’s goals not clear & sharedMisunderstandings surface

Page 20: Developing alliances

Learn where the company stands

COMPANY NEEDS

What are the

needs of the

company, its

goals, concerns

and management

objectives?

GROUPINGS

How can those needs

be grouped so they

can be efficiently

addressed?

20

Where do we stand and what do we need?

RESOURCES

How should each

need group be

addressed? (work

on along or work

on with alliance

partner)

Page 21: Developing alliances

21

DISCOVERY - Determining product or service

Ab

ility to ad

d p

rod

uct valu

eo

r de

crease

costs

The ideal alliance opportunity is where the dollar volume of purchases is sufficient to justify the time spent building and maintaining an alliance and where the value added beyond the price can dramatically increase profits.

Value Added

High

High

Low

Low

Purchase Volume

Total volume cost to focus on...

Order receiving and processingInventory level controlShipping, invoicing, payment processingQuality level confirmation and control

Total added value to focus on…

Technology transferOperating supportSystem efficienciesOut-sourcing

Purchase volume impact

Part of integrated supply

Bid buy

Sell/purchase transaction relationship only

Prime alliance

opportunity

Page 22: Developing alliances

22

DISCOVERY – Where are the greatest costs?

As alliances will incur costs, the benefits must excessed those costs. To achieve the most benefit, studying the greatest current expenditures is important. Explore these…..

Money tied up and can not be used for other

things.

1-Inventory costs

2-Processing costs

3-Selling costs4-Transaction costs

5-Performance error costs

6-Logistics costs

Page 23: Developing alliances

23

DISCOVERY – Where are the greatest costs?

Here are some performance errors that should be measured for cost.

Missing shipping documents

Wrong “Ship-to” Address

Long lead-time required

Damaged good received

Delayed deliveries

Initial order not received

Missing items in shipment

Wrong goods received

Billing errors

Page 24: Developing alliances

24

DISCOVERY – Where are the greatest costs?

Here are some performance errors that should be measured for cost.

Missing shipping documents

Wrong “Ship-to” Address

Long lead-time required

Damaged good received

Delayed deliveries

Initial order not received

Missing items in shipment

Wrong goods received

Billing errors

Page 25: Developing alliances

Storage space

25

DISCOVERY – What is your asset utilization rate?

Assets sitting and doing nothing could be very expense. If studied and acted on, wealth could be created with those assets. Measure your utilization rates. Then, find an alliance to use those assets.

Cargo space

Personnel and skills utilization

Equipmentand facilities

utilization

Factory space, cargo space, warehouse

space utilization

Page 26: Developing alliances

26

Strategic alliance development stages

One the goals and objects are decided, a company can start to explore candidates for affiliation and collaboration.

Strategic

Alliance

Stage 1

DISCOVERY

Alliance objective

planning

Alliance Partner

Evaluation

Who can help you achieve what you want

to do and what role should they play?

Page 27: Developing alliances

Candidate selection: Collecting Information

27

Alliance

Success

Tracking

performance

Track service issues

such as on-time

deliveries

What are

the feelings of

their staff?

Track if the

candidate

keeps

commitments?

How healthy

are their

finances?

Visually

see their

operation

in action.

Site audits

Complete

questionnaire while

visually inspecting the

facilities

Surveys

Questionnaires are

distributed to learn

front-line feelings

Documentation

evaluation

Study financial statements,

quality sheets, error

tracking sheets, etc.

Initially, a list of candidates is created. From that point each is studied.

Page 28: Developing alliances

28

DISCOVERY – What is needed from supplier

Competitive pricing - Is the candidate price competitive?Cost management - Does it manage its costs well?Financial strength - Is it financially sound?Company direction - Is there a match in long-term company direction? Do you have similar goals?Management capability/stability - How strong and stable is the management team? Is there a large change in management or is it quite stable?Total quality/improvement - How active is the company on quality/claim issues? Is quality treated seriously enough?Service capacity/location - How quickly are customer requirements filled? How fast are questions/concerns addressed?

Page 29: Developing alliances

29

DISCOVERY – What is needed from supplier

Product mix and assortment - Is the company’s product range broad enough? Does it have product development ability?Sales force/support - Does the company have an active sales force that could support a new project?Delivery system/adequate warehousing - How advanced is the delivery and warehousing system?Computer capacity - How good is their computer system? Is it compatible with our system?Accounting systems - How advanced is their accounting system? What financial statements for managerial control are produced?Training personnel - What training capacity do they have?Performance history - What is their history regarding on-time deliveries, shipping/billing errors, damaged orders and other functions?

Page 30: Developing alliances

30

DISCOVERY – Deciding business relationships

ALLIANCE SUPPLIERS: Most trusted suppliers that share related costing data to reduce total cost.ENHANCED SUPPLIERS: The place a customer goes to first for special requirements in 1-volume required, 2-special back-up support or 3-specialty items.TRANSACTIONAL SUPPLIERS: Provides all non-critical products/services. They may supply specialty items but only occasionally at low volume.

Suppliers sales

TRANSATIONAL only

Purchases made

ALLIANCE SUPPLIERSPurchases placed

with dedicated alliance partners

ENHANCED SUPPLIERS

Purchases placed with close suppliers

that offer special services/products

Approximately 20% of purchases

could be made on a service/value

added relationship.

Less than 5% of a customer’s suppliers are

likely to be alliance partnersALLIANCE CUSTOMERS

ENHANCED CUSTOMERS Sales made with value

added services OR support attached

TRANSACTIONAL CUSTOMERS

Sales on a transactional basis

only (mainly price based)

65% of the sales made could

be on a price or transactional

basis only

35% of the sales made

could be from an enhanced

relationship

Price only purchases are likely to

account for as little as 5% - 10%

of total purchases.

These may as much as 75% of the

items purchased.

Transactions could be made with 1-complete outside suppliers (transactional purchases), with 2-close value added suppliers or 3-with alliance partners.

Page 31: Developing alliances

31

DISCOVERY – Decision making process

1. Study what processes or products to build alliance on.2. Establish team to do product/service study.3. Study internal product/service requirement needs.4. Determine cost drivers of selected product/service.5. Decide if product/service groups for alliance exists.6. If none exist, return to #3 above.7. If product groups exist, is there is a functional group in the company that

can evaluate these products?8. If none exists, return to #5.9. If an attractive group exists, determine potential suppliers and

requirements needed.10. Do survey and evaluated supplier candidates.11. Determine if qualified candidates exist.12. If none exist, return to #9.13. If qualified candidates exist, do evaluation of each candidates.14. Identify ideal candidate.15. Clarify joint objects and goals and reevaluate candidate’s intentions.16. Confirm endorsements within the candidate company.17. If successful and all are in agreement, move to the implementation stage.

Page 32: Developing alliances

32

Alliance development stages - Implementation

Once the alliance partner is decided, the company can move to the implementation stage and jointly working together.

Strategic

Alliance

Stage 2

IMPLEMENTATION

Stage 1

DISCOVERY

Alliance objective

planning

Alliance Partner

Evaluation

Alliance Partner

Selection

Improvements,

objectives agreed on

Joint management

team established

Managing joint projects

Next, we should build a structure that will insure

collaboration success.

Page 33: Developing alliances

Joint

Approval

Committee

Buyer

Alliance Development & Management Organization

33

Major alliance and collaboration projects – However, as the alliance relationship and collaboration expands and deepens into more difficult cost drivers, the two companies must work far more closely. The impacton each other becomes too great. Therefore, setting up a Joint Approval Committee is necessary.

Simple transactions between companies – Most transactions are a simple, single cost driver like a single item purchasing price. For them there is little need for anything more than good communication between the customer and supplier organizations.

Seller

Page 34: Developing alliances

Joint

Approval

Committee

Alliance Development & Management Organization

34

Improvement

teams

Receiving companyPurchasing

Contract Administration

Alliance coordination

Supplying companySales

Contract Administration

Alliance coordination

Shared work teamsMembers that execute

the alliance

Additions to projectExperts, outside members

new skills, added technology

Purchasing/sales - Groups of goods and service selected to be studied for total cost reduction. All costing processes are reviewed to determine the lowest possible joint cost. Customer service is deeply reviewed.Contract Administration - In both companies there are assigned personnel that determine total cost objectives, improvement projects and performance in acquisitions, storage and disposal.Alliance coordinator- In both companies there is a direct contact person that guides information to the appropriate people.Joint Approval Committee – This committee approves all major projects and negotiates for resources among the companies.Shared work teams - These are members from both companies that identify additional projects and improvement opportunities. They document and measure cost results and report to the Joint Approval Committee.Additions to project- These are additional requirements not available in either company that is required for success (computer systems, specialists, etc.)

Page 35: Developing alliances

Task2013

Jul Aug Sep Oct Nov Dec

Prepare agreement

Jointly prepare objectives

Obtain management commitment

Present alliance concept

Create improvement projects

Develop incentive schemes

Determine cost drivers

Create improvement teams

General Implementation Plan – Joint Approval Committee

Once the structure is established, the Joint Approval Committee can develop project tasks and responsibilities. Here is an example…

35

Page 36: Developing alliances

Task2014

Jan Feb Mar Apr May Jun

Determine pilot project

Determine project goals

Establishment process

Brainstorm opportunities

Confirm cost drivers

Develop improvement method

Determine measurement system

Report improvement results

General Implementation Plan – Improvement Team

After the project orientation and task assignment, the improvement team can go to work. Its activities and scheduling must be tracked. Here is an example…

36

Page 37: Developing alliances

37

Inventory

Obsolete items

Excess items

Consignment

Dead stock

Lost/stolen items

Quality Issues

Defects

Back orders

Billing errors

Product returns

Pricing

Payment delays

One item freight charges

Bad debts

Rebates

Product

Over-engineered

Under-engineered

Substitute items

General

Forecasting errorsMiscommunications

Equipment

Maintenance

Machine tools

Specification errors

Processing

Accounting

One item invoicing

Coding

Lead-time requirements

Excess promotions

Construction

Rework

Certification

approvals

Damage

Installation delays

Maintenance/disposal

Repairs

Removal

Cost Driver Categories

Cost drivers – Every process or task has a cost. These costs are called “Cost Drivers”. They are any activity that creates an expenditure of resources or lost opportunity for revenue. These costs must be identified and measured before they can be reduced.

Page 38: Developing alliances

38

Cost Driver Priorities

Process/taskRequired

Cost Drivers

Improvement Project

Financial impact

Level of concern

Ease to do

As too many projects (and their cost drivers) will confuse everyone, it is ideal to set priorities. Which cost drivers are easy to address and show quick results? What is the financial impact of them? What concerns are there if implemented totally?

Common inventory issues could be consignment to distributors, vendor managed inventory, just-in-time delivery system and warehouse outsourcing.

Inventory cost reduction

Inventory data processing

Receiving

Inventory management

Paper work

Equipment

Purchase order confirmation

Storage area

Items handling

Ownership

Computer maintenance

Data entry

Page 39: Developing alliances

39

Categories of opportunities

If you still can’t decide on priority improvement projects brainstorm with several key people. Have them suggestion projects and then determine if the suggestion are ease to implement. After that, determine there degree of impact of importance. Here is an example………….

DifficultEasy

Low

High

Ease of implementation

De

gre

e o

f Im

pa

ct Shared

storage area

Study duplication

activities

Page 40: Developing alliances

40

IMPLEMENTATION – Decision making process

1. Negotiate agreement.2. Negotiation successful.3. If not successful, negotiate with other supplier.4. If no other supplier, return to DISCOVERY process.5. If successful, notify unsuccessful candidates and thank them for their effort.6. Set up joint approval committee.7. Develop joint objectives.8. Create Improvement Plan (plan on a two year plan).9. Create vision for all stakeholders.10. Map primary processes.11. Identify cost drivers.12. Prioritize opportunities.13. Choose the pilot improvement opportunity.14. Define performance measures.15. Develop incentive schemes.16. Create improvement teams.17. Analyze systems.18. Develop action plan for achievement.19. Is improvement possible? (yes or no)20. If yes, implement. If no, return to #13.21. Evaluate results after implementation.22. Explore other opportunities.23. If opportunities possible, return to #16 and set up new development teams.24. If no opportunities possible, return to #13 and look for next opportunity.

Page 41: Developing alliances

41

Strategic

Alliance

Stage 2

IMPLEMENTATION

Stage 3

MAINTENANCE

Stage 1

DISCOVERY

Alliance objective

planning

Alliance Partner

Evaluation

Alliance Partner

Selection

Improvements,

objectives agreed on

Joint management

team established

Managing joint projects

On-going evaluation

Joint needs reviewed

Modifications/adjustment

executed

Alliance development stages - Maintenance

After several successful alliance projects, future opportunities should be explored. Start with

performance measures.

Page 42: Developing alliances

42

Critical

Processes

Project

identification

Cost DriversOpportunities

Making process

changes

EvaluationImprovement

Measurements

Communication

Components of alliance maintenance

Training Incentives

Alliance Plan

& Objectives

Projects - There is always a limit to how many projects can be implemented. Therefore, long-term scheduling is important.Critical processes – As the team measures the cost of each joint task, it can spot critical processes that may require special attention.Cost drivers – Cost drivers should continually be reviewed (for changes in situation).Opportunities – New opportunities often show up as cost drivers are reviewed.Process changes – Reengineering, process improvements can been seen when many people are looking at the problems from different perspectives.Evaluation – Learning achievements will propel the alliance to the next project.Communication – Better communication with different people generates ideas. Incentives – As wealth is created, better incentives can be introduced. Training – Joint training can add new skills.Measurements – With detailed measurements, costs/improvements are exposed and reduced.

Page 43: Developing alliances

43

The importance of measurements – 1

Usually, the performance criteria focused on is pricing only. This can be short-sighted as companies need to work together in setting performance measures for each other.Together, they must study cost drivers and revenue opportunities to achieve today’s ideal total cost system.Two of the most critical cost drivers are joint inventory and processes between the companies. Lets look at some costs tracking per process examples, starting with the possession of inventory.There are two types of inventory costs, HARD COSTS and SOFT COSTS.

HARD COSTS1. INTEREST EXPENSES: If funds are tied up in inventory, they can not be used

elsewhere which may generate more wealth. Also, if there is borrowing to finance that inventory, the interest charge is an expense.

2. TAXES: In many countries, there is a tax on assets each year of which average inventory is one asset.

3. SHRINKAGE & SPOILAGE: The potential of lost items or damage is always a concern.

4. INSURANCE: The higher the inventory, the higher the insurance will be to protect that inventory against unforeseen events.

Page 44: Developing alliances

44

The importance of measurements - 2

Steps to lower inventory costs1. STEP #1: Determine the items and its quantities to be reduced.2. STEP #2: Determine the past average inventory level in money (US$, etc.) prior

to alliance.3. STEP #3: Determine the average inventory now (after alliance).4. STEP #4: Determine the average price of the items in inventory and calculate the

total amount.5. STEP #5: Subtract the previous average (#2) from the current amount (#4) to

come up with the funds freed up. 6. STEP #6: Determine the savings, which is the amount freed up by the carrying

costs (interest, taxes, shrinkage, damage, etc.) Usually, 20% of freed up funds.

SOFT COSTS1. WAREHOUSE-STORAGE: If space is not used for another purpose and not used

for inventory it could be sold, leased or rented. If it just sits there, it is both a cost and a lost opportunity.

2. EQUIPMENT: Shelves, handling equipment and inventory control equipment may be freed for sale or other uses.

3. PEOPLE: Job descriptions and assignments should be reviewed. If need be, people could be moved to more added value positions.

4. PROCESSES: Some tasks could be reduced, some eliminated and some added. This should be reviewed.

Page 45: Developing alliances

45

Measuring process costs: Traditional invoicing

vs. electronic data exchange (EDI)

Receive

electronically

Stop

Receive into

computer

Goods received-to-

invoicing matching

Authorize

payment

Start

Electronic fund

transfer

$0

$5

$15

$10

$5

Cost per task

Total $35Processing Cost

Receive invoice

in mail

Stop

Enter into

computer

Goods received-to-

invoicing matching

Authorize

payment

Start

Write and send

check

$5

$15

$15

$10

$15

Cost per task

$60 Total Processing Cost

X

Electronic data Exchange (EDI)

Traditional invoicing

Page 46: Developing alliances

46

Alliance positive/negative forces

Creating an alliance will bring change. With change there will be people who will be in favor of the change and others who will be against it. These forces must be identified. Notice this example….

Status Quo

Alliance Forces

Forces Against ChangeForces For Change

Alliance will increase workIncrease opportunities

Alliance will not stop declineSurvive in declining industry

Costs will increaseProfits will improve

Lack of resourcesImprove competitiveness

Risks will increaseSpread risk among partners

Page 47: Developing alliances

47

Promoting internally the alliance

In every company, there will be people that do not want an alliance as there may be a lot of work and expense. The benefits must surpass these liabilities. Once the savings have been measured, they must be used to promote the success of the alliance.

Alliance successes1. Alliance projects should be written

about in a company newsletter.2. The cost saving should be announced.3. The efficiency should be presented.4. The added business should be

expressed in detail.

Page 48: Developing alliances

48

Changing alliance partners

During Stage #3, the Maintenance Stage, studying the future value of the alliance is important. Did costs come down? Was improvements made? Is it best to continue the alliance with this partner or change?Returns: How much was gained with the current alliance partner in prices and other services? Will that continue? Would another supplier offer greater returns?Risks: Were any hidden value gained by working closely (familiarity of people, problems, systems and communication)? Will that value be lost with a new alliance partner?Duration: If the new alliance partner offers better prices, how long can those prices be maintained?

Actual Costsresulting from

improvements the current supplier helped initiate

RiskLosing past improvements/value

Opportunitypromised by new supplier

Diminishing returns – Alliance reevaluation

Original operating cost at start of alliance

Tota

l Op

era

tin

g C

ost

s

Timeline

Page 49: Developing alliances

49

Finding partners – Cost of business

(Service requirement & performance factors)

Customer’s service level requirements – Any supplier that creates an alliance with a customer must identify the expectations and requirements of its alliance customer beforehand. Customer performance factors – While service requirements deal mostly with what the customer requires to be satisfied, performance factors relate to the costs created by the customer. There could be many factors like these…..Re-work because of extremely high quality requirementsLate paymentsSudden order changesExcess inventory, people, equipmentRush ordersInadequate, inaccurate or limited information or forecasting providedPoor paperwork or documentation

Cost of Business

Pe

rfo

rman

ce f

acto

rs

HighLow

Po

or

Go

od

Average Low

High Average

Service requirements

Page 50: Developing alliances

50

Finding partners – Profitability

(Cost of service & gross margin)

Profitability – The cost of doing business is only part of the value of an alliance. Gross margin should also be evaluated. In general, what is the estimated profitability of an alliance? What are the risks to profit? What is the improvement potential? After that is considered, estimate the profit margin overall?

Profitability

Co

st o

f se

rvic

e

LowAverage

Ave

rage

Low

Good Weak

Gross Margin

Average

Average LowWeak

High AverageGood

Hig

h

High

Page 51: Developing alliances

51

Finding partners – Targeting alliance opportunities

After evaluating cost of business and profitability, sales volume growth with the alliance partner should be studied. By comparing profitability to new business sales volume potential, the supplier can better understand the ideal type of relationship. Also, understanding the cost-drivers involved and the potential risks involved, a wise judgment can be made.

Alliance Targeting

Pro

fita

bili

ty

LowAverage

Low

Low

Best as single source or integrated

one-stop shopping

Sales Volume Opportunity

Average

Good

Weak

Little opportunity for

alliance, transaction only

Prime opportunity for strong alliance

partner

Best as enhanced supplier for

purchases under special conditions

High WeakGood

Page 52: Developing alliances

52

Selling the alliance concept

Steps to selling a company on an alliance1. STEP #1 (Problem): Get the company to see the problem. Have the customer say

there is a problem by asking questions like these regarding inventory…..1. What is the inventory turn rate?2. How much stock is dead/obsolete?3. How often is there a stock out?4. How much time is spent finding material?5. Could the inventory space be used more productively?

2. STEP #2 (Cost of problem): Get the company to determine the cost drivers of the problems identified. For example…..

1. What does carrying the inventory cost your company? (interest expense, shrinkage, spoilage, taxes, insurance, equipment, people, space)

2. What do stock outs cost? (loss of sales, lost output, shutdowns, idle people/equipment, lower customer satisfaction, urgent order shipments)

3. What is the cost in finding inventory? (time spent locating, keeping people/processes waiting)

4. What does wasting storage space cost? (loss of production space, new building needs)

3. STEP #3 (Solution): Once the costing and estimated losses are detailed, a solution through the alliance is presented. For example….

1. Inventory consignment cooperation, VMI. Putting inventory in the ideal place between the two companies.

2. More accurate and more timely inventory reporting information3. Just-in-time delivery

Page 53: Developing alliances

I hope the ideas in this

presentation will help

you succeed in alliances

and greatly make you

competitive globally.

Thank you

53

Developing

Business Alliances

along the supply chain