We all hear about successful and failed mergers all the time, but how can they be done successfully? I studied this sometime back working with a consultant. I prepared infographic slides on this and think you might find them interesting. It is a bit long, but even reviewing some of the slides might be helpful. I hope you like them.

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

2. 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.

3. 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.

4. 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?

5. 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

6. 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

7. 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

8. Firm’s Value chain
8
Value chain and exploring company needs
Operations&
processing
Outbounditems&
services
Marketing&
sales
Aftersales
support
Inbounditems
&services
End UsersSuppliers Valued added, cost incurred over time
and a profit margin
Operations&
processing
Outbounditems&
services
Marketing&
sales
Aftersales
support
Inbounditems
&services
Customer’s Value chain

9. 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)

10. 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
activities
Shared
purchasing
Shared research
projects

11. 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

12. 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

13. 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
deliveries
Excess
inventory
Poor
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.

14. Clear alliance understanding = high success chance
14

15. 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

16. New skills
Feeling
the rewards
Putting
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

17. 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.

18. 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 items
Partnership
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

19. 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 improved
Problems/barriers resolved quickly
Further processes for improvement
discovered
Discovery Implementation Maintenance
Full needs assessment
Purchasing /sales plan discovered
Full partner selection evaluation
Ideal partner found
Clear goals &
direction
Smooth
execution
Quick results
3 months 18-24 months On going if survives
Total cost no measured
Problems increase
Direction unclear
Alliance fails or
is weakened
Quick push for results
Vague objective planning
Poor partner study
Risks not considered
During implementation new issues learned
Total cost not fully reviewed
– focus on pricing
Both company’s goals not clear & shared
Misunderstandings surface

20. 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)

21. 21
DISCOVERY - Determining product or service
Abilitytoaddproductvalue
ordecreasecosts
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 processing
Inventory level control
Shipping, invoicing, payment processing
Quality level confirmation and control
Total added value
to focus on…
Technology transfer
Operating support
System efficiencies
Out-sourcing
Purchase volume impact
Part of integrated supply
Bid buy
Sell/purchase transaction
relationship only
Prime
alliance
opportunity

22. 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

23. 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

24. 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

25. 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
Equipment
and facilities
utilization
Factory space, cargo
space, warehouse
space utilization

26. 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?

27. 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.

28. 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?

29. 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?

30. 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 SUPPLIERS
Purchases 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 partners
ALLIANCE 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.

31. 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.

32. 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.

33. 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 impact
on 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

34. Joint
Approval
Committee
Alliance Development & Management Organization
34
Improvement
teams
Receiving company
Purchasing
Contract Administration
Alliance coordination
Supplying company
Sales
Contract Administration
Alliance coordination
Shared work teams
Members that execute
the alliance
Additions to project
Experts, 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.)

35. Task
2013
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

36. Task
2014
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

37. 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 errors
Miscommunications
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.

38. 38
Cost Driver Priorities
Process/task
Required
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

39. 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
DegreeofImpact
Shared
storage area
Study
duplication
activities

40. 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.

41. 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.

42. 42
Critical
Processes
Project
identification
Cost DriversOpportunities
Making process
changes
Evaluation
Improvement
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.

43. 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 COSTS
1. 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.

44. 44
The importance of measurements - 2
Steps to lower inventory costs
1. 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 COSTS
1. 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.

45. 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 $35
Processing 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

46. 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

47. 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 successes
1. 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.

48. 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 Costs
resulting from
improvements the current
supplier helped initiate
Risk
Losing past improvements/value
Opportunity
promised by
new supplier
Diminishing returns – Alliance reevaluation
Original operating cost at start of alliance
TotalOperatingCosts
Timeline

49. 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 requirements
Late payments
Sudden order changes
Excess inventory, people, equipment
Rush orders
Inadequate, inaccurate or limited information or forecasting provided
Poor paperwork or documentation
Cost of Business
Performancefactors
HighLow
PoorGood
Average Low
High Average
Service requirements

50. 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
Costofservice
LowAverage
AverageLow
Good Weak
Gross Margin
Average
Average LowWeak
High AverageGood
High
High

51. 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
Profitability
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

52. 52
Selling the alliance concept
Steps to selling a company on an alliance
1. 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 information
3. Just-in-time delivery

53. 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