CHAPTER 6: (C8 trong sách) strategic alliances

Case: How Kimberly-Clark Keeps Client Costco in Diapers

1. Why are major retailers moving toward relationships in which the supplier manages
inventory levels at the retailer?
Traditionally, the retailer handles the replenishment process, and the supplier has no clear
information on the demand side or warning about the out-of-stock situation. As a result, the
supplier tends to maintain a certain level of safety stocks as a "buffer" to facilitate sales, and the
customer would also keep some safety stocks in case of none-supply. This results in a long
supply chain and a lacks flexibility.
Through supplier-managed inventory programs, suppliers get to know the actual supply and
demand and deploy better logistic plans to respond to the fluctuating market situation. For
example, suppliers now can make better decisions on how to deploy goods across various
customer locations based on different consumer preferences, which helps decrease transportation
and storage costs and leads to higher customer service levels and flexibility.
2. When should a company handle its logistics needs in-house, and when should
external sources be used?
Adopting a supplier-managed inventory program depends on the specific conditions of the
company and how much control over the distribution channel the company has.
For example, there is only minimal uncertainty on a domestic supply chain, the supplier only
needs to focus on the POS data and local traffic situation to plan their replenishment.
But for companies that operate in a multinational environment with multiple origins and
diverse concentrations of suppliers, the coordination work usually takes more than handle the
logistical work in-house. The ultimate goal of a supplier-managed inventory program still lies in
the efficiency issue. The cost to integrate the information flow between the supplier and retailer
should be measured against the potential benefit of making wise decisions.
3. What other types of business partnerships can be used to improve supply chain
performance?
Collaborative forecasting is also an excellent way to increase supply chain efficiency. In the
traditional approach, retailers collect and analyze POS data to prepare their sales to plan. In
collaborative forecasting, data are collected in the retailer's POS; consumers and suppliers also
play essential roles in sharing their opinions. Collaborative forecasting is usually more accurate
because the forecast is integrated with the suppliers' feasibility, the retailer's sales plan, and the
customers' preference.

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 Collaborative CRM (Customer Relationship Management) is another example of business
partnerships. By sharing the customer complaint information among various company
departments like marketing, sales, purchase, and the vendor, the company can improve the
product quality or features more efficiently. The suppliers can get to know their products'
deficiencies while the companies can cooperate with the suppliers to design the products to fit
their customer's demands better.
4.Can pressures such as the ones described in this case be used to a company's
advantage?
In this case, the retailer is under the pressure of keeping diapers in stock and making it as
cheap as possible in order to trigger sales. However, we can view it differently.
For example, the customers are generally very price-driven for diapers, which means as long
as the company keeps good track of their supply chain management of these products, the
company can save tons of money in marketing these products and can also leverage the product's
ability to attract customers to the store to trigger other sales. As in this case, Costco leveraged
Kimberly-Clark for the diaper inventory management, then Costco can turn to focus on
marketing other products such as baby lotion or baby food to stimulate its revenue.

Case: AUDIO DUPLICATION SERVICES, INC. (ADS)

1. Why are ADS’s customers’ customers moving towards VMI arrangements?
ADS’s customers’ customers (i.e. retailers) are moving towards the VMI arrangement so that
the likelihood of being out of stock is reduced and the inventory level in the supply chain is also
reduced. This will be achieved because through VMI the retailers could provide a continuously
updated point-of-sale (POS) to the record companies. By then, the decisions that will be made by
the record companies like how much of each album, CD, and cassette title is delivered and when
each delivery is made will be more accurate because the records company’s data is updated.
2. How will this impact ADS’s business? How can ADS management take advantage of
this situation?
This decision on VMI arrangement will have a big impact on ADS. The ADS management
should take advantage in the new arrangement because through this they could maintain a more
accurate inventory level.
Because in this kind of arrangement, the ADS takes full responsibility for the inventory level,
and through VMI they could have a more accurate inventory level, and also ADS could deliver
the product on time.
3. How should ADS manage logistics? The ADS should manage logistics by hiring a
third party logistics to manage the logistics in their supply chain.

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 This decision is based on several reasons. One of these is that managing logistics is not one
of the expertises of ADS Company and by hiring a third-party logistics the ADS Company could
now focus on their competency of cassette duplication. Also, the new arrangement of direct
shipping to the stores would incur higher shipping cost for ADS because of a more complicated
route that unlike before there is a distribution center where the products are shipped; in this
situation, it is very logical for them to hire a third party logistics so that the path networks of
these stores would be managed efficiently by third-party logistics who are experts in this things.
Another reason why ADS Company should not opt to buy a fleet of trucks is that this alternative
would require a very high capital investment. Thus, ADS should hire third-party logistics to
manage their logistics.
4.Why are the large national retailers moving toward a direct shipment model?
So that the product would get into the specific stores where it is needed on time and with the
right quantity. Also, the direct shipment model is important in a business to reduce the lead time
especially for a company whose nature is already changing due to the changing technology.
Conclusions, Recommendations, References, and Other Details Conclusions Ultimately, a
business organization’s goal is to make a profit. But one cannot forsake the quality of the product
as well as the satisfaction of customers. In this case, the customers of Vanity Products made
changes in terms of ordering the products they need.
It was very challenging for the VP to adapt to the changes made by the customers since
significant changes have to be implemented to address the demands of customers. VP
encountered problems regarding cost as well as logistic service. With this, Tom White
recommended a solution where different warehouses will be established near the customers. In
the long-term, it is beneficial to the company because it decreases the cost in terms of
transportation. Recommendations From the main discussion, Tom’s proposal is the best course
for Vanity Products. The requirement of the customers that the products be delivered within five
days will be met. At the same time, the cost of VP will be lower compared to that of delivering
less than truckload quantities to a specific store or using a peddle run method to deliver full
truckload quantities to a set of stores or customers.
Thus, the best alternative or solution to the problem is to implement Tom’s proposal.

Case: the Smith Group

1. What is the advantage to the Smith group of implementing the Kanban system
described in the case?
Kanban framework is the shrewd method for executing the methodology like the VMI
technique without the need for electronic information exchange. The favorable circumstances of
the Kanban framework as depicted for the situation study are as per the following:
a) System gives Smith continuous data about client requests without the need for EDI.

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 b) A watchful investigation of the card framework utilized by the Smith Group recommends
that it successfully oversees stock at the wholesaler level.
2. Explain how the card system implies that inventory is managed on a base-stock level.
The generation in the Kanban framework will be activated by the interest through the
utilization of cards. At the point when the conveyance truck lands at the wholesaler's office, they
gather all cards that are isolated from the thing sold by the wholesalers. This gives data about the
client request that can be utilized as a part of the generation and conveyance arranging.
Henceforth, target stock can be controlled by the organization, the base stock level, and every
audit period, the stock position is evaluated and the distribution center requests enough to raise
the stock position to the base stock level.
3.How might the system allow the Smith group to switch to a make-to-order
environment?
The Kanban framework takes after the Make to request methodology. As expressed for the
situation study, when the conveyance truck touches base at the merchant's office they gather all
cards that are withdrawn from the thing sold by the wholesalers. This gives data about the client
request that can be utilized as a part of the generation and appropriation arranging. This is a
Make-To-Order approach, subsequent to the creation is done in the wake of gathering the
information from the card framework and the key idea utilized behind this is Pull Strategy.
Subsequently, the Smith gathering can change to Make-To-Order.
4.What is the risk of the Kanban system for the smith group?
a) lead time inventory may fall beneath reorder indicate due to the increment in lead time
b) sudden change in client request
c) Forecasting may fluctuate.
5. If the Kanban system is going to allow the Smith group to reduce its inventory, what
is the impact on the distributor? What are the distributors going to do with the extra
space?
The impact of the Kanban framework on the wholesaler profits. Since the supplier needs to
deal with its own particular stock, it will be more worried about overseeing it adequately.
Henceforth, this will diminish the shots of Stock out for the wholesaler, and subsequently, the
Service level can be enhanced b the merchant.

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How Kimberly-Clark Keeps Client Costco in Diapers
One morning, a Costco store in Los Angeles began running a little low on size-one and size-two
Huggies. Crisis loomed.
So what did Costco managers do? Nothing. They didn't have to, thanks to a special arrangement
with Kimberly-Clark Corp., the company that makes the diapers.
Under this deal, responsibility for replenishing stock falls on the manufacturer, not Costco. In
return, the big retailer shares detailed information about individual stores' sales. So, long before
babies in Los Angeles would ever notice it, diaper dearth was averted by a Kimberly-Clark data
analyst working at a computer hundreds of miles away in Neenah, Wis.
"When they were doing their own ordering, they didn't have as good a grasp" of inventory, says
the Kimberly-Clark data analyst, Michael Fafnis. Now, a special computer link with Costco
allows Mr. Fafnis to make snap decisions about where to ship more Huggies and other Kimberly-
Clark products.
Just a few years ago, the sharing of such data between a major retailer and a key supplier would
have been unthinkable. But the arrangement between Costco Wholesale Corp. and Kimberly-
Clark underscores a sweeping change in American retailing. Across the country, powerful
retailers from Wal-Mart Stores Inc. to Target Corp. to J.C. Penney Co. are pressuring their
suppliers to take a more active role in shepherding products from the factory to store shelves.
Changing Sizes
In some cases, that means requiring suppliers to shoulder the costs of warehousing excess
merchandise. In others, it means pushing suppliers to change product or package sizes. In the
case of Costco and Kimberly-Clark, whose coordinated plan is officially called "vendor-
managed inventory", Kimberly-Clark oversees and pays for everything involved with managing
Costco's inventory except the actual shelf-stockers in store aisles.
Whatever the arrangement and the terminology, the major focus for these big retailers is the
same: Cutting costs along the so-called supply chain, which comprises every step from lumber
mill to store shelf. The assumption is that suppliers themselves are in the best position to spot
inefficiencies and fix them.
For consumers, it all translates to lower prices at the cash register. Indeed, big companies'
increasing focus on the supply chain is one reason U.S. prices for general merchandise -- goods
from laundry detergent to wool sweaters -- fell 1.5% in 1998 and again last year and are falling
at the same rate this year, according to Richard Berner, chief U.S. economist at Morgan Stanley
Dean Witter. "Supply-chain management has had a major impact," says Mr. Berner, who
compiled his analysis from government data.
Return to Unisex

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There is also a potential downside for consumers: Fewer choices in brands and types of
packages. For example, two years ago, Kimberly-Clark stopped making separate diapers for boys
and girls and reverted to unisex-only. Less variety makes for easier inventory-tracking in its
factories and trucks, the Dallas-based company says.
To a great extent, better cooperation between retailers and suppliers has been made possible by
improved technology -- such as the computer link Kimberly-Clark uses. It's also a consequence
of the greater strength of major retailers as they consolidate and expand globally. Many
economists say that closer retailer-supplier coordination on the supply chain is the model of the
future and will ultimately determine which companies succeed in the new millennium.
"A shopper buys a roll of Bounty paper towel, and that would trigger someone cutting a tree in
Georgia," says Steve David, who heads supply-chain work for Procter & Gamble Co., the
Cincinnati consumer-products giant. "That's the holy grail."
These days, P&G stations about 250 people in Fayetteville, Ark., minutes from Wal-Mart's
headquarters in Bentonville, solely to promote its products to the discount chain and ensure they
move as quickly as possible to store shelves. The two giants share some inventory data.
The price of inefficiencies on the supply chain is high. Revlon Inc. this year slowed its product
shipments because store shelves were backed up with older inventory. Kmart Corp.'s new chief
executive, Charles Conaway, has publicly blamed the retailer's sagging profits in part on a weak
supply-chain infrastructure. Last month, he said he expects to spend $1.4 billion over the next
two years to update Kmart's technology, including systems for coordinating with suppliers. And
earlier this year, Estee Lauder Cos. hired away Compaq Computer Corp.'s executive in charge of
supply chain to bolster that operation at the cosmetics concern.
By several accounts, the close collaboration between Costco and Kimberly-Clark serves as a
model for other merchandisers, and also helps explain strong recent sales gains by the two
companies. In the past two years, Kimberly-Clark gradually expanded the program and now
manages inventory for some 44 retailers of its products. The consumer-products company says it
wrung $200 million in costs from its supply chain during that period, and it vows to squeeze out
another $75 million this year.
"This is what the information age has brought to this industry," says Wayne Sanders, chairman
and chief executive officer of Kimberly-Clark. "It gives us a competitive advantage." In fact,
Kimberly-Clark says the cost savings it achieves on its supply chain are one reason its Huggies --
and not rival P&G's Pampers -- are sold at Costco stores in most areas of the country.
"If a company finds a way to lower its costs, it gets those deals," says Richard Dicerchio,
Costco's chief operating officer. A spokeswoman for P&G says its supply chain is very efficient,
and Costco carries many of its other products.
To oversee ordering for the retailers whose inventory it manages, Kimberly-Clark employs a
staff of 24 people, including Mr. Fafnis. A Kimberly-Clark spokeswoman says the benefits of the

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program "more than offset" additional labor costs. Last year, Kimberly-Clark posted a 51% rise
in net income to $1.67 billion on $13 billion in sales, capping three years of improving results.
For Costco, the benefits of such close cooperation with a major supplier are equally clear: Costco
saves money not only on staffing in its inventory department, but also on storage. Before
Kimberly-Clark began managing Costco's inventory, in late 1997, the retailer would keep an
average of a month's supply of Kimberly-Clark products in its warehouses. Now, because
Kimberly-Clark has proven it can replenish supplies more efficiently, Costco needs to keep only
a two-week supply.
What's more, Costco says its shelves are less likely to go empty under the new system. That's
important for both retailer and supplier, because consumer studies indicate that a majority of
customers will walk out of a store empty-handed if they can't find a particular item they need.
P&G, for example, estimates that an average retailer's loss from out-of-stocks runs about 11% of
annual sales.
For Costco, which keeps its costs down by typically offering just one brand-name product and its
own private-label Kirkland Signature product in each category, maintaining supplies on shelves
is crucial. "If we're out of stock, it means we're out of a category, so the chance of a loss of a sale
is greater," Mr. Dicerchio says.
Susanne Shallon of Redondo Beach, Calif., says she always buys size-four Huggies for her 22-
month-old daughter, Beth, and Pull-Ups for her five-year old son, Emil, at a nearby Costco
because the store is well-stocked. "It's good to have the confidence that when I go into the store,
the product will be on hand," she says.
A 'Pull' Product
For now, Kimberly-Clark manages inventory in Costco stores everywhere but the Northeast.
Kimberly-Clark recently sent analysts to Costco headquarters in Issaquah, Wash., to push for a
possible next stage: expanding to the Northeast and collaborating on forecasts, not just recorded
sales.
James Sinegal, CEO of Costco, says the chain has always managed its inventory well, but "we
want to take things to a higher level." Costco has been a star performer among U.S. retailers,
posting double-digit sales growth every year since 1996. Its sales rose 13% to $26.98 billion in
the fiscal year ended Aug. 29, 1999.
At Costco, diapers are known as a "pull" product -- meaning that shoppers make a trip to the
store specifically to buy them. Parents are also particularly price-conscious, so the pressure is on
for the retailer to keep diapers in stock and to make it as cheap as possible to do so.
For Mr. Fafnis, the 34-year-old Kimberly-Clark data analyst responsible for overseeing stock at
155 Costco stores across the Western U.S., that means arriving at his cubicle at 7:30 each
morning to a stack of spreadsheets that show exactly how many boxes of Huggies, Kleenex

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tissues and Scott paper towels sit on the shelves. He's privy to more sales and inventory detail
than many Costco executives can see.
His mission: to keep each store's inventory as low as possible without risking empty shelves.
That allows him very little margin for error, as it takes an average of a week from the time he
types an order into his computer until a truck pulls up to a Costco store.
Scanning the spreadsheets one morning a few months ago, Mr. Fafnis, who studies baseball
statistics as a hobby, quickly spots the potential problem in Los Angeles. The store's supply of
size-one and size-two Huggies is down to 188 packages; in the past week, 74 were sold. That
means the store could drop below its safety stock -- typically, two weeks' worth of inventory --
within days. The computer spits out a suggested order, but Mr. Fafnis cuts it by a few packages.
As the father of a two-year-old Huggies wearer, he has a certain instinct for the market. "When
the next truck pulls in, you want to be right at your safety stock. That's the ideal situation," Mr.
Fafnis says.
Mr. Fafnis, who has never been inside a Costco (there aren't any in Wisconsin), tries to tailor
orders to shoppers' whims and the needs of particular neighborhoods. On a bulletin board in his
cubicle, he posts a list of special requests heavily marked with orange highlighter. For example, a
store in Reno, Nev., can receive deliveries only early Monday mornings to get around city noise
ordinances.
After Mr. Fafnis enters orders in his computer, a Kimberly-Clark transportation analyst at the
company's logistics center in Knoxville, Tenn., calls up the same computer file and assigns the
order to a trucking company.
A Canceled Order
Complaints are handled by Kimberly-Clark customer-service analyst Rachel Pope, who sits a
few cubicles away from Mr. Fafnis. One afternoon, a Costco merchandise manager calls to say
that a store in Spokane, Wash., is under construction and doesn't want its delivery. Ms. Pope
phones the logistics center in Knoxville, which tells her the truck destined for Spokane is already
at a loading dock in Ogden, Utah. She reaches the driver, via conference call, just before he
begins filling the truck. "This was close," she says.
The drive for efficiency creates new problems. Last year, Costco store managers complained that
some deliveries were incomplete. Kimberly-Clark managers visited 13 Costco stores and spotted
some drivers accidentally unloading items intended for a later stop. Now, Kimberly-Clark uses a
simple cardboard divider to separate each store's order.
Scouting store shelves for out-of-stocks is Donna Imes, Kimberly-Clark's saleswoman for
Costco. Ms. Imes, who lives near Costco's headquarters, typically logs in to her home computer
at 4:30 every morning, scanning reports from Mr. Fafnis. She walks every aisle of at least five
Costco stores a week, taking notes in a spiral-ring pad about displays and competitors' prices and
chatting up store managers and customers.

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Recently, when Ms. Imes saw shoppers stowing diapers on the bottom rung of their carts, she
called Huggies brand managers to caution them not to make the packages wider. Noticing that a
particular store often ran low on Depend incontinence underwear at the beginning of the month,
a Costco manager told Ms. Imes that residents of a retirement center next door always shopped
then. So she alerted Mr. Fafnis, who programmed his computer accordingly.
The importance of supply chain hasn't been lost on Kimberly-Clark itself, which is trying to
apply the same principles to its own suppliers. These days, it keeps less than a month's supply of
diapers in its own warehouses, down nearly 50% over the past two years.
For now, raw-material shipments remain the weak link. Advances are small, focusing on such
details as how the company stocks Velcro tabs for its diapers. Two years ago, Kimberly-Clark
began sharing its production plans with Velcro USA Inc. via weekly e-mails. That cut Velcro
inventory 60%, saving several million dollars.
Kimberly-Clark says it's trying to cut costs further. Jim Steffen, the company's president of U.S.
consumer sales, regularly reminds his staff that the retailer is the customer. "The last time I
looked," he says, "we didn't own any stores."

THE SMITH GROUP

The Smith Group is a leading U.S Manufacturer of high-quality power and hand tools, such as
electric drills, hammers, and so forth, and a major competitor to ATW*. Like ATW, Smith
enjoys a very successful partnership with their distributors and dealers, who provide the majority
of their revenue, and like, ATW, Smith has always had VMI's (Vendor-Managed-Inventory)
agreements with their large distributors.
Smith's small distributors, however, have not traditionally had the electronic data transfer
capability necessary to implement VMI. To overcome this, however, Smith implemented a
Kanban system with many of the small distributors. In this approach, the Smith Group is
imitating the Kanban approach developed by Toyota to govern the flow of material through a
plant. In the Kanban system used by Toyota, production is triggered by demand through the use
of cards. This is also the approach taken by Smith. When delivery trucks arrive at the
distributor's facility, they collect all the cards that were detached from items sold by the
distributors. This provides the Smith group with information about the customer demand that
they can use in their production and distribution planning.
The Kanban approach designed by the Smith group is a clever way of implementing an approach
similar to the VMI strategy without the need for electronic data transfer (EDI).
The system provides Smith with almost real-time information about customer demand without
the need for EDI.
A careful analysis of the card system used by the Smith group suggests that it effectively
manages inventory at the distributor level. Indeed, in this periodic review environment, the

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optimal inventory policy is known to be a base-stock policy. Interestingly, the card system
implies that inventory is managed based on a base-stock level, thus effectively reducing
distributors' inventory cost.
The system may allow the Smith Group to switch to a make-to-order environment further
reducing inventory cost on the manufacturing side. In fact, the key concept behind the Kanban
approach developed by Toyota is a pull-based process. The make-to-order strategy will make the
Smith group supply chain a pull-based system, and hence a more responsive supply chain.
Note:
* ATW - American Tool Works is a leading U.S Manufacturer of high-quality power and hand
tools, such as electric drills, hammers, and so forth. The company has manufacturing facilities all
over the world, and its main market is in Europe and North America. Products are sold through
distributors and dealers or directly to homeowners and tradesmen. The relationship between
ATW and its distributors and dealers is through the VMI agreement.
*VMI - Under a VMI (Vendor Managed Inventory) agreement, a supplier takes full
responsibility for maintaining the stock of its products at a customer's facility. Source: Designing
and Managing the Supply Chain, Concepts, strategies and Case Studies - David Simchi-Levi

AUDIO DUPLICATION SERVICES, INC. (ADS)

The strategic decision with regards to alliances is an option for firms to improve and strengthen
their respective firms. Strategic alliances is said to be a multi-faceted, goal oriented partnerships
of companies in which each shares resources and rewards but the risks involved is also shared. In
deciding whether such alliances will help your firm, several factors should be considered. These
factors are, if this would add value to the products, if this would improve the firm market access,
if this would strengthen the operation, if this would enhance strategic growth and organizational
skills, and if this would build the firm’s financial strength. The decision if one firm should make
an alliance to another company is something that is thought thoroughly.

This strategic alliance is a very big step for any firm and the firm should be very critical in
making such decisions because the benefits are high and so the risks in this kind of arrangement.
Objective of the Study This study aims to:1. Study and analyze the strategic alliances of Audio
Duplication Services, Inc. (ADS)2. Evaluate the alternative of ADS on its logistics
management3. Study and analyze the benefits of Vendor-managed inventory(VMI) KeyTerms to
Remember

 Shipping Cost – Third Party Logistics- the use of outside company to provide for a
particular services to perform all or part of the firm’s material management and product
distribution functions
 Strategic Alliances – agreement among firms in which each commits resources to achieve
a common set of objectives
 Vendor-Managed Inventory (VMI)- a family of business models in which the buyer of a
product provides certain information to a vendor Results and Discussions

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