Strategic Alliances in Supply Chain Management
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Published: Mon, 18 Jun 2018
Strategic alliance or partnership is solely depended on trust, faith relationship between simultaneous stages in Supply Chain. This increases ability and dependability of various stages involved in the supply chain. As strategic alliances can be between two or more organisations so each stage should be managed by welfare of the others’ and should not change or use that stages for own advantage without consideration of the organisation involved. This alliance is kept formal in relationship between two or more organisation to achieve some beneficial goals through business by supply chain. Here organisations also work on their desired needs. Some of the Strategic alliance resources are:
- Distribution channels
- Manufacturing capability
- Project funding
- Capital equipment
- Expertise or intellectual property
This alliance is actually a collaboration of firms to work together to form a greater effect than before. There are some reasons which can improve the performance which are :
- Decision making is done by the consideration of other party.
- Easy coordination between the parties by their managers with the trust. This result in better operational implementation and scheme valuation.
- It will lead to redundancy due increase in supply chain productivity.
- This ensures proper sharing of sales and production information, hence helping in coordinate production and distribution decisions.
Above diagram shows the model of forming strategic alliances. Here operating strategy is divided into three structures:
Building strategic alliance and its trust
Building these types of alliances is totally dependent on Managers of the organization. Mostly this is done by sharing clean information trusted by every results matching with supply and demand throughout the supply chain processes and lower cost. Here it shows that better relationship helps to lower the cost between the supply chain stages.
Example: As far as trust over here is concerned a supplier can avoid forecasting about information received for the retailer. Similarly the retailer can lessen the receiving effort by decreasing counting and inspections on the trust of the supplier’s quality and delivery. This ensures better coordination between supplier and retailer. Wal-Mart and P&G have been trying to build a strategic alliance that will help for better coordination and actions can be mutually beneficial.
A typical strategic alliance formation consists of some steps which are:
- Strategy Development: development involves feasibility of alliance, objectives and goals, decisions, focus on critical issues, technology and people with their challenges and resources.
- Partner Assessment: In this assessment partner’s strength, potential, developing managing styles, preparing criteria for partner selection and understanding their motives for joining alliances.
- Contract Negotiation: It is the development of realistic objectives among the group and forming the high calibre or developing synergy. Consideration on security of information, termination clauses, and penalties for poor performance is formulated.
- Alliance Operation: it is linking of budgets and resources to fulfil the strategic priorities, measuring the performance etc.
- Alliance Termination: It is the winding down of partnership due to failure or not meeting the clauses decided before.
Advantages of Strategic Alliance
- Each partner can concentrate on different stages of the supply
- Developing competences and learning form the partners
- Suitability and protection of resources is maintained
- Developing low cost models hence financial benefit.
Types of strategic alliances
- Joint venture: In this type of alliance two or more firms create legally independent company to develop competitive advantage
- Equity Strategic Alliance: There is sharing of different percentages of the company.
- Non-equity Strategic Alliance: It is alliance on a contractual- relationship to share the unique resources.
- Global Strategic Alliances: It is formed between a company and foreign company.
Achieving Strategic Alliance by any Organization:
It is agreed that the cooperation and the trust in supply chain are quite important and develops the value but it very hard to maintain, sustain and develop till the last point. Therefore two views have been analysed to categorize into any supply chain relationship.
Those views are as follows:
- Deterrence-based view: In this view a variety of formal contracts are formed amongst to ensure cooperation
- Process-based view: with this view the development of trust and cooperation is built over a long time with the series of interactions between the parties.
In practical situation the contract established between parties and design of such contract is impossible to make where all contingency is accounted in future by all parties so the only way out here is to trust each other and have a long relationship relying on developed contract.
Example: If there is a situation where supplier sign the initial contract containing the contingencies with the manufacturers and then those manufacturers turns out of not referring that contract again. So here hope remains to resolve such contingencies with the negotiation.
Designing a relationship with Cooperation and Trust
Main steps for this are:
- Assessing the value of the relationship
- Identifying operational roles and decision rights for each party
- Creating effective contracts
- Designing effective conflict resolution mechanism
- Assessing the value of the relationship
First step always becomes the designing of mutual benefit that relationship provides. In most supply chain, member of partnership brings distinct skills needed to tp supply customer order.
Example: A manufacturer produces the product which transported to retailer by passing it through various stages and retailer makes it appear to customer. Here next step is to identify the criteria used for evaluating the relationship as well as the contribution of the member. These criterions are to increase the total profits.
Stages in supply chain alliances help managers to carry out productive decisions and it makes easy for producing correct decision by managerial level. Therefore leading in productivity of flow in the supply chains.
Example: When suppliers work hard to reduce replenishment lead times, the supply chain benefits because of reduced safety inventories at manufactures and retailers. Suppliers are unlikely to put in the effort if the manufacturers and retailers are not willing to share the increase in profit with them. Thus, supply chain relationship is likely to be sustainable only if profits are increased with proper sharing
In this step clarification of contribution of each member should be done accurate. For this flexible mechanisms should be designed to monitor the relationship periodically.
Example: Chrysler negotiates a certain level of improvement per year with supplier.
Identifying operational roles and decision rights for each party
In identifying such things managers responsible of various members should know the interdependence between the members. A source of any conflict may ruin the level of trust and may also the level of dependency. There can also be the structure of sequential interdependence where dependency precedes on members. While in reciprocal interdependencies partners come together and exchange information and inputs in both direction.
Example: Wal-Mart and P&G are attempting to create reciprocal interdependence through collaborative forecasting and replenishment teams.
Major example of operational roles is as follows:
The relationship among Dell, Sony, and Airborne. Here dell takes order for computers it assembles and monitors that Sony Manufactures. Airborne picks up computers from Dell warehouse in Texas and monitors from the Sony warehouse in Mexico. It then Merges two and sends a combined order to customer.
Creating effective contracts
Handling and encouraging towards sudden contingencies arouse within alliance is difficult for managers without contracts. So contracts are most effective for governance when complete information is available and all future contingencies are can be accounted for. Contracts play only partial role over long time in maintaining effective partnership in supply chain.
Example: Caterpillar and its Dealerships can terminate agreements without cause with 90 days’ notice.
Designing effective conflict resolution mechanism
As conflicts are bound to arise in relationships, unsatisfactory resolutions cause the partnership to worsen, whereas satisfactory resolutions strengthen the alliance. So a proper conflict mechanism should give the parties an opportunity to communicate and work through their differences, in the process building greater trust. It is important to be sensitive to the context of the partnership while designing the conflict-resolution mechanisms.
Managing Supply Chain Relationship for Cooperation and Trust
Effective management of relationship develops cooperation and trust while poorly managed relationship leads to loss in supply chain profits. Good alliance evolves and matures through following stages:
- Organisational SWOT analysis
- Core competence identification and focus
- Outsourcing and partnership need establishment
- Intent and expectation statement
- Requirement clarification
- Partner search and selection
- Partnership contract and negotiation
- Contract formulation
- Operationalization of emerging joint endeavour
- Monitoring and Performance evaluation
- Staffing and people issues resolution
- Continual relationship management
Example: Relationship between Marks & Spencer and manufacturer of kitchen product provides an excellent example of fair sharing of benefits. After sometime of the product’s introduction, the manufacturer realized that costs had been miscalculated and exceeded the price at which the product was being sold to Marks & Spencer. Meanwhile, given its low retail price, customers found the product an outstanding value and made it a big hit.
Strategic Alliances help to Supply Chain of the business
There are many benefits of Strategic alliance but managing it is been a difficult task and with probability of forthcoming conflicts in such alliances and businesses. Finally significant part in such alliances is that it helps a lot in supply chain business. Which are discussed as follows?
For developing an effective collaborative relationship with the supply chain partner the one thing that will help the most to improve communication is ability to understand the value of the supply chain that partner needs to receive from the relationship.
Example: Some procurement department might believe that its supply partner should cut their price so low that they no longer make a profit. This is simply crazy. If an effort to understand the total value of supply partner needs and help them to receive that total value package, they will perceive you as a great partner and communication will become easier.
Difficult challenge to overcome in collaborating with suppliers and customers comes when sharing of information is to be made clearly. Where the challenge of integrating inter-company processes is to be made for execution. To improve resource utilisation among all supply-chain partners and to increase end-consumer satisfaction across the various enterprises is a new openness that will be guaranteed for all the cooperating players in alliance. The main challenge is to overcome divulge of “profit” secrets.
Supply Chain Improvements
Supply chain improvement areas available for strategic alliance relationships:
- Management of supply channel conflict
- On-time product delivery
- Prompt response to complaints
- Greater consistency in parts, supplies, semi-assembled, and completed products
- Detailed agreement as to handling of product problems and customer complaints
- Improved supply chain productivity
- Specific (quarterly, yearly, etc.) volume commitments
- Key contacts that are dedicated to your account
- Improved supplier loyalty
- Prompt response to quote requests and price problems
- Confidentiality of shared business strategy
Example: Just-in-time inventory purchasing and supplying as exemplified by the famous relationship between Wal-Mart and Procter & Gamble has continued to prove successful.
Home Depot and Dell Computers have also built powerful alliances with their suppliers for cost saving just-in-time inventory in similar applications
Supply chain strategic alliances can help logistics teams provide value
Mainly seen that cost centres, logistic departments are most crucial for customer care and good working of supply chain operation.
Example: Supply chain management issues are related with aspects as logistics, distribution, and transportation in the paper industry which can be changed to facilitate promising value for customers and end users.
In todays’ businesses the logistics and its associated activities are an integral function of most business transactions. So Logistics service providers account for the local cross-town delivery of a product to a customer or the activities required to facilitate an important global shipment between companies located on different continents.
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