ValueManagedRelationships

1、sheila dubinvalue managed relationshipsdecember 1998author:value managed relationships2after completing this module, you will be able to: understand vmr concept and applicationarticulate types of cost savings opportunities created by vmrsuse the bain framework to conduct a vmrrefer to real examples

2、of bains vmr process and successvalue managed relationships objectivesvalue managed relationships3a.tr vmr conceptvmr key success factorsvmr sources of valuebain vmr processexamplekey takeawaysagendavalue managed relationships4 a value managed relationship (vmr) is a full partnership between a custo

3、mer and a supplier.its goal is to maximize quality and minimize total system costs of doing business through collaborative sharing of information and resources.a vmr creates a win/win relationship. vmr definitionvalue managed relationships5“partnership”true vmr procurement strategiesvalue managed re

4、lationshipsole sourcevertical integrationcompetitive bidshort-term contract / spotlong-term contracta vmr is one procurement strategy to maximize cost savings and strategic value.what is a vmr?value managed relationships6 a value managed relationship can exceed the value potential of both vertical i

5、ntegration and traditionally negotiated arms length transactions:a consolidation of purchases to one or few suppliers who are capable of maintaining long term competitive economics, high quality and efficient deliveryparticipants must share single goal of achieving lowest industry systems costsaving

6、s should be shared to provide mutual ongoing incentives to eliminate redundanciesa vmr, when appropriate, exceeds the value of all other types of relationships.how does a vmr work?value managed relationships7a.trfragmented supplier base, sporadic communicationsingle or small number of suppliers, fre

7、quent communicationin-house supply, communication frequenttraditional arms length approachvertical integrationinvestments based upon manufacturers needspotential for customized investment in facilities/equipmentmay require investment in weak strategic businessadversarial bid negotiations to obtain l

8、owest unit pricelong-term commitment focused upon lowest total systems cost using value chain perspectivesfocus driven by internal incentives/ transfer pricesseparate product designjoint product design and cross functional participationjoint product design often at oddsvmrvmrs can exceed the value o

9、f both traditional contracts as well as vertical integration.strategic purchasing optionsvalue managed relationships8 high potentialhighlowhighlowpurchasing volume(relative to total supplier sales)value-added / engineered levelproduct redesignmaterial substitutionproduct redesignmaterial substitutio

10、nvolume discountsystem cost improvementmoderate potentialvolume discountsome system costno / little opportunity (need to cluster)vmrs are most appropriate where high volume and significant value added occurs. medium/low potential where are vmrs appropriate?value managed relationships9large dollar pu

11、rchasehigh level of value-added cost in productfragmentation across many divisions and suppliersclient represents significant part of industry outputindustry competitive intensity high:capacity utilization droppingconsolidation in progressmany new plants looking for volumehistorical industry price u

12、mbrellasvmrs are most effective in large dollar, high value added products.in which categories are vmrs most effective?value managed relationships10consolidate volume in long-term partnershipincreased pace of innovation leads to strategic benefits for bothensures continued supply for buyer and capac

13、ity utilization for suppliercommitment and scale justifies joint investment in cost savings and r&d/technologyjoint efforts lead to system-wide benefits for bothadded value leads to more reasons to collaboratea successful vmr will continue to create value as the relationship progresses.value cyc

14、levalue managed relationships11a.trvmrs create value for the buyer. higher quality and fewer rejectssuperior servicepartner in joint system cost reductioninnovationtechnological expertisepackage performance improvementsspec consolidationproduct redesign and materials substitutionpricing commensurate

15、 with larger, longer volume commitmentscommitment to continuous improvement of the partnershipvalue of vmrsbuyervalue managed relationships12vmrs create value for suppliers. larger volumes in fewer itemslonger run lengths and fewer set-upshigher capacity utilizationlearning curve benefitsstable long

16、 term demandsharing in buyers strong commitment to future growthpartner in joint system cost reductionresources and stability to invest in technologycommitment to continuous improvement of the partnershipvalue of vmrssuppliervalue managed relationships13 lab suppliesmedical suppliesflexiblepackaging

17、gasespunchesand dyesdrinkspackagingoffice suppliessbs foldingcartonselectricalsuppliesrigid injectionmolded plasticproductscorrugatedboxesfreightflex packagingthermoformedpartsmotorsautomotivepartsmolded plasticbottlespower equipmentproductsrecycledpaperboardcartonsbrickglassoils and lubeschemicalsd

18、extrosecoalbicycle partsadhesivesresins47%37%33%33%30%30%27%25%22%22%19%19%18%17%16%15%15%13%12%12%11%10%10%9%8%7%7%0%10%20%30%40%50%cost savings as a percentage of spendingvmrs have averaged 15% to 20% cost savings.average rangebain experience in vmrsvalue managed relationships14a.tralthough the va

19、lue managed relationship can be sophisticated and complex, the results are quantifiable and simple.100% of volume with one supplier for three yearsup front price reduction of 7%guaranteed 9.8% recurrent savings within three yearscost-based indexed pricing over time50/50 savings sharingpenalties and

20、inspections built-inetc.vmr sample agreementvalue managed relationships15a.tr vmr conceptvmr key success factorsvmr sources of valuebain vmr processexamplekey takeawaysagendavalue managed relationships16partnership not meeting expectationspartnership meeting expectationspartnership exceeding expecta

21、tions 0%20%40%60%80%100%total partnershipsover one half of existing partnerships do not meet expectations.this reality increases the need to understand and focus on the key success factorspartnerships expectationsvalue managed relationships17strategy, organization and process must be in place in ord

22、er to ensure vmr success.clarity of and agreement on strategy and goalsstrategyappropriate level of involvement in and across organizationsorganizationdetailed and structured process for identifying and implementing opportunitiesprocesskey success factorsvalue managed relationships18long term relati

23、onships focused on total value are critical strategic issues that must be clearly articulated.vmrs pursued only where appropriatetrue supplier partnershipslong-term relationships with one or few suppliersrelationships at all organizational levelsextensive two-way information sharingsharing of all sa

24、vingswilling to address inherent risksfocus on total value-chain, not input pricesuppliers selected based on long-term total valueopportunities identified and captured across entire supply chainkey success factorsstrategyvalue managed relationships19involvement and cooperation across the organizatio

25、n is critical to success.senior management direct involvement and ongoing interest/supportcross-functional involvement in scheduling, logistics, design and developmentimplementation driven at grass roots levelclear process championsformalized structure and process to perpetuate partnershipkey succes

26、s factorsorganizationvalue managed relationships20a.tra detailed process must be in place to maximize value and ensure ongoing opportunity identification.up front identification of opportunities and unique value each partner offersdocumented existence of significant untapped systems cost valuerigoro

27、us and fact-based supplier selectionextensive consensus buildingsystems and structures to perpetuate processkey success factorsprocessvalue managed relationships21a.trscope of partnership limitednot win/winfocus on price instead of total valuesupplier selection based on pricefailure to consider tota

28、l system as source of savingschosen strategy inappropriate for purchase categoryan inappropriate strategy can prohibit a win/win relationship.reasons for partial successstrategyvalue managed relationships22a.trlimited senior management participationlittle cross-functional involvementover-centralized

29、 decision making: not participative/inclusivead hoc structure set up to implement strategypartial success can be caused by senior or line organizational inadequacies.reasons for partial successorganizationvalue managed relationships23a.trlack of internal and external consensus buildinglack of relent

30、less pursuitsupplier selection not rigorous and fact-basedtechnical opportunities not identified up frontlack of systems and structures to perpetuate the processan incomplete process can also cause limited success.reasons for partial successprocessvalue managed relationships24 to achieve successful

31、vmrs, there are several areas of potential obstacles to watch out for.benefits are vague and unqualifiedno “full potential” economics analysis has been developed for both partiesprocess challengesassumptions are made by suppliers that vmrs are a one-time trickcommunication challengeswatchoutsconcern

32、s about sharing expense and product informationsufficient communication of the benefits of change throughout both organizationsthere is a lack of understanding and commitment to changing the way business is donebenefits of the vmr are split in a lop-sided mannersku proliferationno ongoing value real

33、ization agenda has been created and/or no vmr champions are empowered to actorganizational barriers (e.g. multi-divisional companies)watchoutsvalue managed relationships25 vmr conceptvmr key success factorsvmr sources of valuebain vmr processexamplekey takeawaysagendavalue managed relationships26 im

34、proved quality due to reduced variabilityimproved communicationslonger commitments allow for longer run lengthspurchasing economiesa strong vmr can capture the value inherent in vertical integration while allowing the client to focus both capital and management resources on its primary business.exam

35、ple sources of value:primary sources of valuevolume/scaleeconomiesvalue engineering and quality improvement system costreductiontechnology and capability sharing to create lowest cost, highest value productjoint determination of potential for:material substitutionreduction of material contentstandar

36、dization of materialsjoint identification of redundant/duplicate processes, e.g.quality controlorder processingtransportationengineeringmanagement functionsimproved inventory controlcross company logisticssharing of transportation and distribution operations (e.g., leveraged backhaul opportunities,

37、shared delivery runs)estimate percent of total value created:25%50%25%sources of value (1 of 2)value managed relationships27value engineering and systems cost reduction are most difficult to implement and require the most senior involvment.source of valuemethodologydifficulty of implementationsenior

38、 management involvementan open dialogue regarding product design begins to optimize design/cost trade-offsvalue engineering and quality improvementbuyer and supplier jointly examine current methods of interaction and begin to eliminate redundanciessystems cost reductionconsolidation of suppliers all

39、ows the buyer to negotiate for share of incremental profitvolume/scale economicssources of value (2 of 2)value managed relationships28disguised exampleclientpurchasescurrentincrementalclient volume78%100%0%25%50%75%100%weighted average plant capacity utilizationincrease of 3.2 timesprofitfixed costs

40、variablecostsindustry coststructureincrementalclient volume100%100%0%20%40%60%80%100%percent of sales6% profit improvementrelevant plant capacity utilizationincremental margin impactincreasing a suppliers utilization by 22% had a 6% profit impact.volume/scale economiesexamplevalue managed relationsh

41、ips29current productprototype a*prototype b*prototype c*100100136941369112188050100150indexed cost and qualitynew designsindexed qualityindexed costvalue engineering identified three new product options that increased quality and reduced cost.*protypes developed jointly with supplierdisguised exampl

42、evalue engineeringexamplevalue managed relationships30 before vmr(5 quality control ftes)after vmr(3 quality control ftes)suppliercustomerjoint qualitycontrolcustomerdirect to packaging operations= qc inspection personnelin this example of systems cost vmr, the supplier and bain client eliminated re

43、dundancy and saved 40% of quality control costs.to packaging operationsongoing feedback to vendorsystems costs examplevalue managed relationships31system costvalue engineeringvolume/scale economics19%0%5%10%15%20%percent of total costsoverall, this client achieved a 19% cost reduction through the vm

44、r example shown.summary of cost savingsexamplevalue managed relationships32 1230%20%40%60%80%100%savings capturedvolume/price savings and some level of value engineering/ quality benefits are realized very early in the relationshipadditional value engineering savings and system cost reductions are m

45、ore likely to come laterbain experience has found that the value from vmr is developed over several years.years into vmrvalue engineering and quality improvementsystem cost reductionvolume/price effecttypical timingvalue managed relationships33 vmr conceptvmr key success factorsvmr sources of valueb

46、ain vmr processexamplekey takeawaysagendavalue managed relationships34identify vmr opportunitiesunderstand industry cost structureselect vmr candidatesobtain top management commitmentidentify specific costreduction opportunitiesimplement vmr opportunitiestrack vmr savingsselect products for vmr base

47、d on purchasing volume and value-addedanalyze industry economics to develop savings hypothesesanalyze suppliers to select best vmr candidatesensure senior management of client and supplier are fully committedconduct analysis to prove hypotheses and quantify savings opportunitiesformalize relationshi

48、p and implement opportunitiestrack progress of savings and relationshipsvmr processvalue managed relationships35exampleidentify vmr opportunitiesunderstand industry cost structureselect vmr candidatesobtain top management commitmentidentify specific costreduction opportunitiesimplement vmr opportuni

49、tiestrack vmr savingsvmr processvalue managed relationships36this matrix will help you prioritize which opportunities are most appropriate for a vmr.no/little opportunity(need to cluster)highlow lowhighpurchasing volume(relative to total supplier sales)value-added/engineered levelproduct redesignmat

50、erial substitutionvolume discountsystem cost improvementvolume discountsome system cost product redesignmaterial substitutionmoderate potentialhigh potentialmedium/low potentialpurchasing category priorityvalue managed relationships37because the vmr process is lengthy and time consuming, qualitative

51、 issues must also be evaluated in selecting where to implement a vmr.suppliers and client organizations must be willing towork closely togethercommit management time and effortprioritize success of vmrtop management of supplier and client must have authority to cover full scope of vmrbalance amount

52、of cost savings with level of sensitivity associated with product categorypurchasing category selectionvalue managed relationships38identify vmr opportunitiesunderstand industry cost structureselect vmr candidatesobtain top management commitmentidentify specific costreduction opportunitiesimplement

53、vmr opportunitiestrack vmr savingsvmr processvalue managed relationships39understanding the industry structure validates opportunities that were identified in the first vmr process step.industry cost structure and driversindustry competitive structureindustry capacity utilizationhow suitable is this

54、 market and its competitive dynamics for a vmr?how important is the client as a customer in this industry?what is the cost structure of the industry?examplequestions:who are the key players?what is the industry capacity utilization?what drives this cost structure?how fragmented is the industry?what

55、is the utilization of each player?what type of cost savings opportunities might exist?on what factors do key players compete?what drives utilization?understand industry structurevalue managed relationships40identify vmr opportunitiesunderstand industry cost structureselect vmr candidatesobtain top m

56、anagement commitmentidentify specific costreduction opportunitiesimplement vmr opportunitiestrack vmr savingsvmr processvalue managed relationships41vmr partners must be able to perform in the relationship and be a willing partner.potential for low cost positionstrong technology/qualitynew product d

57、evelopment track recordadequate financial resourceslong term winnerscapability and willingness to develop a partnershipimportant category for supplierclient important to supplierpartnerships with other suppliersscale to handle volumeparent company supportideal partnerssupplier prioritizationvalue ma

58、naged relationships42initial analysis of the supplier must be conducted to determine potential for being a long-term winner and capability/willingness to develop a partnership.example analyses:size and market sharestrategyprofitabilitycash flowquality philosophy and implementationtechnology applicat

59、ionimportance of clients business to supplierinitial supplier evaluationvalue managed relationships43 to further determine whether a specific supplier is a good vmr candidate, evaluate the vendor on a variety of criteria. quality of servicesupplier commitmentmagnitude of cost reduction potentiallong

60、-term leadership potentialproduct/delivery/systemsgeographic coveragededication/dependenceinterest in vmrsystems economicsflexibility of approachcredibility of plan/resourcestechnologyscalefinancialsupplier evaluationvalue managed relationships44partnership development processidentify vmr opportunitiesu