THE ABC’S OF STRATEGIC ALLIANCES
KURT SALMON ASSOCIATES OFFERS A BLUEPRINT FOR PLANNING A MERCHANT/VENDOR PARTNERSHIP.
NEW YORK — The concept of retailers and vendors working together to sell merchandise may sound simple, but strategic alliances in the apparel industry require a complex relationship built on trust, investment in infrastructure and a commitment to process improvement.
Kurt Salmon Associates, a global management consulting firm specializing in consumer products and retailing, defines a true strategic alliance as a partnership between a manufacturer and a retailer working in a particular supply chain that leverages the core competencies of each firm.
By combining their specific strengths and abilities, the strategic alliance partners create a supply-process synergy that results in increased profitability, efficiency and market share for the firms involved, and — most importantly — greater value to the consumer.
“The ultimate strategic alliance, which the industry has just begun to embrace, should completely redefine and reengineer the supply complex from concept to consumer. It should eliminate all duplication of processes, infrastructures and checkpoints throughout the supply chain,” said Jeff Stiely, a manager with KSA.
When implemented properly, the strategic alliance supply chain between the partners will look like a well-run vertical company, according to KSA.
Process efficiencies will be completely redefining and reengineering the entire supply-chain process rather than simply making the existing processes within or between companies more efficient. Market weeks could be eliminated. The role of the buyer would change dramatically. Quality control would be performed by only one party. Chargebacks would no longer exist.
The stronger the alliance, the more internal, non-value-added controls could be eliminated, making the supply-chain process as efficient and cost-effective as possible for all parties involved.
“A successful strategic alliance requires a significant time, human resource, financial and operational investment from both parties and an unwavering commitment to make the alliance work for all the partners and for the consumer,” Steely said.
“It is built on a foundation not typically found in the adversarial manufacturer/retailer relationship: trust, information sharing, responsibility transfer, strategic vision and joint decision making.
The traditional supply chain relationship between supplier and manufacturer or manufacturer and retailer was a win-lose scenario: The more powerful partner told the weaker one: You have to cut your costs or become more efficient so I can have a bigger gross margin.
However, a strategic partnership must be win-win: Both partners work together to take costs or inefficiencies out of the system, and both reap the benefits of greater profitability and volume. In addition, they work together to pass some of those benefits on to the consumer through greater value and lower prices.
Today’s strategic alliances are driven by supply chain processes. Taking a cue from the grocery industry’s Efficient Consumer Response model, the most practical areas for strategic alliances are:
Assortment — category management, planning, development.
Introduction — product development, product testing, marketing.
Replenishment — in-stock, fast turns.
Strategic alliances emerged as the retail environment became more competitive and the consumer became more demanding. With fewer retailers and a more powerful consumer, manufacturers and retailers were forced to become partners to have greater access and to deliver more value to the consumer.
These partnerships began as power shifted to the retailers during the consolidation of the Eighties. Retailers demanded that manufacturers perform value-added functions such as inventory management and in-store merchandising. It was in this era that processes such as Vendor-Managed Inventory and Quick Response were born.
In the Nineties, however, power is shifting from retailer to consumer, and the vendors and merchants have found themselves serving the same master. Driven by a desire to please this more demanding consumer, retailers and manufacturers have begun to work together to get the shopper the right products at the right time at the right price. The concept of a strategic alliance has begun to emerge.
“Today’s store-in-store arrangements come the closest to a true strategic alliance,” said Adelle Kirk, manager of consumer marketing at GSA. “Each partner focuses on what they do best — their true core competency — in order to deliver the greatest value to the consumer.”
The manufacturer knows the category, how to merchandise and display their lines, and best understands their target consumer.
The retailer knows how to develop and deliver a unique store personality and shopping experience, how to create the theater in which consumers will shop and how best to serve the consumer. Together, they make an efficient and productive team.
The manufacturer can select the best line from its assortment, and the retailer can offer that line to consumers in an entertaining and enjoyable environment and without having to learn all the intricacies of the line and its target consumer.
In this arrangement, everyone benefits from greater sell-through, better assortments and an easier and more pleasant shopping experience. All the firms focus their time and resources on perfecting their core competencies, and the consumer enjoys the benefits of this strategic alliance.
Strategic alliances are implemented through process integration, shared decision-making, developing common goals and defining and committing to a vision or strategy for the partnership. Firms looking to form such as partnership should pay close attention to the following checklist.
How to Build A Strategic Alliance
1. Identify your company’s core competencies.
2. Identify core competency gaps.
3. Identify all potential partners that fill those gaps.
4. Develop a long-range plan to reengineer the supply complex.
5. Evaluate partners for strategic fit the same way a company would appraise a potential merger or acquisition candidate.
6. Define a working relationship through an objective evaluation of both companies.
7. Redesign the supply complex as one process, eliminating duplication of processes and infrastructure between partners.
8. Define metrics of the partnership.
9. Understand and share risks, rewards and benefits.
10. Set long-term goals.
From the true strategic alliance to its pretenders, KSA describes the different types of relationships that exist in the industry as follows:
“A” Companies = Strategic Alliance
Based on integrating the core competencies of each company, allowing each partner to perform activities that add the most value to the relationship.
Power is shifted to the consumer, with both parties in the alliance acting as equal partners to serve consumer needs.
Partners share rewards and risks equally.
Consumer enjoys measurable value from the alliance.
Information analysis is conducted jointly, and information is readily shared.
Alliance results in a more efficient supply chain.
Example: A department store and apparel manufacturer agree to a method of allowing the manufacturer to automatically draft against the retailer’s bank account when goods are shipped. The retailer is losing on the equation in float costs, and the vendor is gaining the benefit of float plus reduced processing costs, enabling them to reduce the overall price of their product.
Since the entire pipeline is more efficient, the retailer can be compensated for its sacrifice by sharing the cost savings with the vendor. Thus, the cost savings are split between the consumer and the alliance members.
“B” Companies = Operational Partnership
Partnership is based on leveraging one partners’ core competency.
Power equality exists at only one place in the supply chain process.
Both partners benefit, but not always equally.
Risk is greater for one partner.
Consumer receives only some value from the partnership.
Information is shared on a selective basis.
Partnership merely shifts costs and efficiencies within the supply chain.
Example: A mass merchant requires a battery vendor to bypass the distribution center and ship inventory directly to the stores based on actual sell-through information. The merchant demands that the vendor forecast production, determine assortment and manage stock in return for access to all POS movement data. Consumer benefits from fewer stock-outs and more appropriate assortments.
“C” Companies = Opportunistic Agreement
Based on one party performing activities that the other no longer will.
Power inequity results in greater demands on one of the two parties.
Results in one partner benefiting, often at the expense of the other.
Risks are always greater for one party.
Consumer does not receive greater value as a result of the agreement.
Information is rarely shared.
Cost reduction or increased efficiency in the supply chain is ignored.
Examples: A department store demands that merchandise be flat-packed to allow for cross-docking (immediately shipping merchandise when received without putting it into inventory) at the distribution center. It requires that the vendor produce Automatic Shipping Notices and flat-pack all merchandise. The result is that the consumer receives merchandise that looks like it’s been through the wringer. The retailer benefits from an automated distribution center, but the vendor and consumer lose out.
The Future Of Strategic Alliances
“In the next few years, the power shift from retailer to consumer will be complete, and it will be consumer pull-through that drives the supply complex,” Kirk said. “The consumer will truly manage all aspects of the supply chain: design, development, distribution and display. Consumers will dictate what they want, when they want it, and how they want to purchase it.
“Trends such as mass customization, on-line retailing and consumer involvement in actual product design will become institutionalized. Strategic alliance partners will operate as one company, with little to no duplication in process, organizational infrastructure or systems. Supply chain efficiency will be maximized.”