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SheilaDubinValueManagedRelationshipsDecember1998Author:1Aftercompletingthismodule,youwillbeableto:UnderstandVMRconceptandapplicationArticulatetypesofcostsavingsopportunitiescreatedbyVMRsUsetheBainframeworktoconductaVMRRefertorealexamplesofBain’sVMRprocessandsuccessValueManagedRelationshipsObjectives2

VMRConceptVMRKeySuccessFactorsVMRSourcesOfValueBainVMRProcessExampleKeyTakeawaysAgendaa.tr3

AValueManagedRelationship(VMR)isafullpartnershipbetweenacustomerandasupplier.Itsgoalistomaximizequalityandminimizetotalsystemcostsofdoingbusinessthroughcollaborativesharingofinformationandresources.AVMRcreatesawin/winrelationship.VMRDefinition4“Partnership”TrueVMR

ProcurementStrategiesValueManagedRelationshipSoleSourceVerticalIntegrationCompetitiveBidShort-termContract/SpotLong-termContractAVMRisoneprocurementstrategytomaximizecostsavingsandstrategicvalue.WhatisaVMR?5

AValueManagedRelationshipcanexceedthevaluepotentialofbothverticalintegrationandtraditionallynegotiated"arm'slength"transactions:aconsolidationofpurchasestooneorfewsupplierswhoarecapableofmaintaininglongtermcompetitiveeconomics,highqualityandefficientdeliveryparticipantsmustsharesinglegoalofachievinglowestindustrysystemscostsavingsshouldbesharedtoprovidemutualongoingincentivestoeliminateredundanciesAVMR,whenappropriate,exceedsthevalueofall

othertypesofrelationships.HowDoesaVMRWork?6Fragmentedsupplierbase,sporadiccommunicationSingleorsmallnumberofsuppliers,frequentcommunicationIn-housesupply,communicationfrequentTraditional"ArmsLength"ApproachVerticalIntegrationInvestmentsbaseduponmanufacturer'sneedsPotentialforcustomizedinvestmentinfacilities/equipmentMayrequireinvestmentinweakstrategicbusinessAdversarialbidnegotiationstoobtainlowestunitpriceLong-termcommitmentfocuseduponlowesttotalsystemscostusingvaluechainperspectivesFocusdrivenbyinternalincentives/transferpricesSeparateproductdesignJointproductdesignandcrossfunctionalparticipationJointproductdesignoftenatoddsVMRVMRscanexceedthevalueofbothtraditionalcontractsaswellasverticalintegration.StrategicPurchasingOptionsa.tr7

HighPotentialHighLowHighLowPurchasingvolume(relativetototalsuppliersales)Value-added/engineeredlevelProductredesignMaterialsubstitutionProductredesignMaterialsubstitutionVolumediscountSystemcostimprovementModeratePotentialVolumediscountSomesystemcostNo/Littleopportunity(needtocluster)VMRsaremostappropriatewherehighvolume

andsignificantvalueaddedoccurs.Medium/lowpotential

WhereAreVMRsAppropriate?8LargedollarpurchaseHighlevelofvalue-addedcostinproductFragmentationacrossmanydivisionsandsuppliersClientrepresentssignificantpartofindustryoutputIndustrycompetitiveintensityhigh:capacityutilizationdroppingconsolidationinprogressmanynewplantslookingforvolumehistoricalindustrypriceumbrellasVMRsaremosteffectiveinlargedollar,highvalueaddedproducts.InWhichCategoriesAreVMRsMostEffective?9Consolidatevolumeinlong-termpartnershipIncreasedpaceofinnovationleadstostrategicbenefitsforbothEnsurescontinuedsupplyforbuyerandcapacityutilizationforsupplierCommitmentandscalejustifiesjointinvestmentincostsavingsandR&D/technologyJointeffortsleadtosystem-widebenefitsforbothAddedvalueleadstomorereasonstocollaborateAsuccessfulVMRwillcontinuetocreatevalueastherelationshipprogresses.ValueCycle10VMRscreatevalueforthebuyer.HigherqualityandfewerrejectsSuperiorservicePartnerinjointsystemcostreductionInnovationTechnologicalexpertisepackageperformanceimprovementsspecconsolidationproductredesignandmaterialssubstitutionPricingcommensuratewithlarger,longervolumecommitmentsCommitmenttocontinuousimprovementofthepartnershipValueOfVMRs—Buyera.tr11VMRscreatevalueforsuppliers.Largervolumesinfeweritemslongerrunlengthsandfewerset-upshighercapacityutilizationlearningcurvebenefitsStablelongtermdemandSharinginbuyer’sstrongcommitmenttofuturegrowthPartnerinjointsystemcostreductionResourcesandstabilitytoinvestintechnologyCommitmenttocontinuousimprovementofthepartnershipValueOfVMRs—Supplier12VMRshaveaveraged15%to20%costsavings.AverageRangeBainExperienceinVMRs13Althoughthevaluemanagedrelationshipcanbesophisticatedandcomplex,theresultsarequantifiableandsimple.100%ofvolumewithonesupplierforthreeyearsUpfrontpricereductionof7%Guaranteed9.8%recurrentsavingswithinthreeyearsCost-basedindexedpricingovertime50/50savingssharingPenaltiesandinspectionsbuilt-inEtc.VMRSampleAgreementa.tr14VMRConceptVMRKeySuccessFactorsVMRSourcesOfValueBainVMRProcessExampleKeyTakeawaysAgendaa.tr15Overonehalfofexistingpartnershipsdonotmeetexpectations.ThisrealityincreasestheneedtounderstandandfocusonthekeysuccessfactorsPartnershipsExpectations16Strategy,organizationandprocessmustbeinplaceinordertoensureVMRsuccess.ClarityofandagreementonstrategyandgoalsStrategyAppropriatelevelofinvolvementinandacrossorganizationsOrganizationDetailedandstructuredprocessforidentifyingandimplementingopportunitiesProcessKeySuccessFactors17Longtermrelationshipsfocusedontotalvaluearecriticalstrategicissuesthatmustbeclearlyarticulated.VMRspursuedonlywhereappropriateTruesupplierpartnershipslong-termrelationshipswithoneorfewsuppliersrelationshipsatallorganizationallevelsextensivetwo-wayinformationsharingsharingofallsavingswillingtoaddressinherentrisksFocusontotalvalue-chain,notinputpricesuppliersselectedbasedonlong-termtotalvalueopportunitiesidentifiedandcapturedacrossentiresupplychainKeySuccessFactors—Strategy18Involvementandcooperationacrosstheorganizationiscriticaltosuccess.Seniormanagementdirectinvolvementandongoinginterest/supportCross-functionalinvolvementinscheduling,logistics,designanddevelopmentImplementationdrivenat"grassroots"levelClearprocess"champions"FormalizedstructureandprocesstoperpetuatepartnershipKeySuccessFactors—Organization19Adetailedprocessmustbeinplacetomaximizevalueandensureongoingopportunityidentification.UpfrontidentificationofopportunitiesanduniquevalueeachpartneroffersDocumentedexistenceofsignificantuntappedsystemscostvalueRigorousandfact-basedsupplierselectionExtensiveconsensusbuildingSystemsandstructurestoperpetuateprocessKeySuccessFactors—Processa.tr20Scopeofpartnershiplimitednotwin/winFocusonpriceinsteadoftotalvaluesupplierselectionbasedonpricefailuretoconsidertotalsystemassourceofsavingsChosenstrategyinappropriateforpurchasecategoryAninappropriatestrategycanprohibitawin/winrelationship.ReasonsforPartialSuccess—Strategya.tr21LimitedseniormanagementparticipationLittlecross-functionalinvolvement"Over-centralized"decisionmaking:Notparticipative/inclusiveAdhocstructuresetuptoimplementstrategyPartialsuccesscanbecausedbyseniororlineorganizationalinadequacies.ReasonsforPartialSuccess—Organizationa.tr22LackofinternalandexternalconsensusbuildingLackof"relentlesspursuit"Supplierselectionnotrigorousandfact-basedTechnicalopportunitiesnotidentifiedupfrontLackofsystemsandstructurestoperpetuatetheprocessAnincompleteprocesscanalsocauselimitedsuccess.ReasonsforPartialSuccess—Processa.tr23ToachievesuccessfulVMRs,thereareseveralareasofpotentialobstaclestowatchoutfor.Benefitsarevagueandunqualifiedno“fullpotential”economicsanalysishasbeendevelopedforbothpartiesProcessChallengesAssumptionsaremadebysuppliersthatVMRsareaone-timetrickCommunicationChallengesWatchoutsConcernsaboutsharingexpenseandproductinformationSufficientcommunicationofthebenefitsofchangethroughoutbothorganizationsThereisalackofunderstandingandcommitmenttochangingthewaybusinessisdoneBenefitsoftheVMRaresplitinalop-sidedmannerSKUproliferationNoongoingvaluerealizationagendahasbeencreatedand/ornoVMRchampionsareempoweredtoactOrganizationalbarriers(e.g.multi-divisionalcompanies)Watchouts24VMRConceptVMRKeySuccessFactorsVMRSourcesOfValueBainVMRProcessExampleKeyTakeawaysAgenda25ImprovedqualityduetoreducedvariabilityImprovedcommunicationsLongercommitmentsallowforlongerrunlengthsPurchasingeconomiesAstrongVMRcancapturethevalueinherentinverticalintegrationwhileallowingtheclienttofocusbothcapitalandmanagementresourcesonitsprimarybusiness.ExampleSourcesofValue:PrimarySourcesofValueVolume/ScaleEconomiesValueEngineeringand

QualityImprovementSystemCostReductionTechnologyandcapabilitysharingtocreatelowestcost,highestvalueproductJointdeterminationofpotentialfor:materialsubstitutionreductionofmaterialcontentstandardizationofmaterialsJointidentificationofredundant/duplicateprocesses,e.g.qualitycontrolorderprocessingtransportationengineeringmanagementfunctionsimprovedinventorycontrolCrosscompanylogisticssharingoftransportationanddistributionoperations(e.g.,leveragedbackhaulopportunities,shareddeliveryruns)EstimatePercentofTotalValueCreated:25%50%25%SourcesofValue(1of2)26Valueengineeringandsystemscostreductionaremostdifficulttoimplementandrequirethemostseniorinvolvment.SourceofValueMethodologyDifficultyofImplementationSeniorManagementInvolvementAnopendialogueregardingproductdesignbeginstooptimizedesign/costtrade-offsValueengineeringandqualityimprovementBuyerandsupplierjointlyexaminecurrentmethodsofinteractionandbegintoeliminateredundanciesSystemscostreductionConsolidationofsuppliersallowsthebuyertonegotiateforshareofincrementalprofitVolume/scaleeconomicsSourcesofValue(2of2)27DisguisedexampleIncreaseof3.2times6%ProfitImprovementRelevantPlantCapacityUtilizationIncrementalMarginImpactIncreasingasupplier’sutilizationby22%hada6%profitimpact.Volume/ScaleEconomies——Example28NewDesignsIndexedQualityIndexedCostValueengineeringidentifiedthreenewproductoptionsthatincreasedqualityandreducedcost.*ProtypesdevelopedjointlywithsupplierDisguisedexampleValueEngineering—Example29BeforeVMR(5QualityControlFTEs)AfterVMR(3QualityControlFTEs)SupplierCustomerJointQualityControlCustomerDirecttopackagingoperations=QCinspectionpersonnelInthisexampleofsystemscostVMR,thesupplierandBainclienteliminatedredundancyandsaved40%ofqualitycontrolcosts.TopackagingoperationsOngoingFeedbacktoVendorSystemsCosts—Example30Overall,thisclientachieveda19%costreductionthroughtheVMRexampleshown.SummaryofCostSavings—Example31Volume/pricesavingsandsomelevelofvalueengineering/qualitybenefitsarerealizedveryearlyintherelationshipAdditionalvalueengineeringsavingsandsystemcostreductionsaremorelikelytocomelaterBainexperiencehasfoundthatthevaluefromVMRisdevelopedoverseveralyears.YearsintoVMRValueengineeringandqualityimprovementSystemcostreductionVolume/priceeffectTypicalTiming32VMRConceptVMRKeySuccessFactorsVMRSourcesOfValueBainVMRProcessExampleKeyTakeawaysAgenda33IdentifyVMROpportunitiesUnderstandIndustryCostStructureSelectVMRCandidatesObtainTopManagementCommitmentIdentifySpecificCostReductionOpportunitiesImplementVMROpportunitiesTrackVMRSavingsSelectproductsforVMRbasedonpurchasingvolumeandvalue-addedAnalyzeindustryeconomicstodevelopsavingshypothesesAnalyzesupplierstoselectbestVMRcandidatesEnsureseniormanagementofclientandsupplierarefullycommittedConductanalysistoprovehypothesesandquantifysavingsopportunitiesFormalizerelationshipandimplementopportunitiesTrackprogressofsavingsandrelationshipsVMRProcess34EXAMPLEIdentifyVMROpportunitiesUnderstandIndustryCostStructureSelectVMRCandidatesObtainTopManagementCommitmentIdentifySpecificCostReductionOpportunitiesImplementVMROpportunitiesTrackVMRSavingsVMRProcess35ThismatrixwillhelpyouprioritizewhichopportunitiesaremostappropriateforaVMR.No/LittleOpportunity(needtocluster)HighLowLowHighPurchasingVolume(RelativetoTotalSupplierSales)Value-Added/EngineeredLevelProductredesignMaterialsubstitutionVolumediscountSystemcostimprovementVolumediscountSomesystemcostProductredesignMaterialsubstitutionModeratepotentialHighpotentialMedium/lowpotentialPurchasingCategoryPriority36BecausetheVMRprocessislengthyandtimeconsuming,qualitativeissuesmustalsobeevaluatedinselectingwheretoimplementaVMR.SuppliersandclientorganizationsmustbewillingtoworkcloselytogethercommitmanagementtimeandeffortprioritizesuccessofVMRTopmanagementofsupplierandclientmusthaveauthoritytocoverfullscopeofVMRBalanceamountofcostsavingswithlevelofsensitivityassociatedwithproductcategoryPurchasingCategorySelection37IdentifyVMROpportunitiesUnderstandIndustryCostStructureSelectVMRCandidatesObtainTopManagementCommitmentIdentifySpecificCostReductionOpportunitiesImplementVMROpportunitiesTrackVMRSavingsVMRProcess38UnderstandingtheindustrystructurevalidatesopportunitiesthatwereidentifiedinthefirstVMRprocessstep.IndustryCostStructureandDriversIndustryCompetitiveStructureIndustryCapacityUtilizationHowsuitableisthismarketanditscompetitivedynamicsforaVMR?Howimportantistheclientasacustomerinthisindustry?Whatisthecoststructureoftheindustry?ExampleQuestions:Whoarethekeyplayers?Whatistheindustrycapacityutilization?Whatdrivesthiscoststructure?Howfragmentedistheindustry?Whatistheutilizationofeachplayer?Whattypeofcostsavingsopportunitiesmightexist?Onwhatfactorsdokeyplayerscompete?Whatdrivesutilization?UnderstandIndustryStructure39IdentifyVMROpportunitiesUnderstandIndustryCostStructureSelectVMRCandidatesObtainTopManagementCommitmentIdentifySpecificCostReductionOpportunitiesImplementVMROpportunitiesTrackVMRSavingsVMRProcess40VMRpartnersmustbeabletoperformintherelationshipandbeawillingpartner.PotentialforlowcostpositionStrongtechnology/qualityNewproductdevelopmenttrackrecordAdequatefinancialresourcesLongTermWinnersCapabilityandWillingnesstoDevelopaPartnershipImportantcategoryforsupplierClientimportanttosupplierPartnershipswithothersuppliersScaletohandlevolumeParentcompanysupportIdealPartnersSupplierPrioritization41Initialanalysisofthesuppliermustbeconductedtodeterminepotentialforbeingalong-termwinnerandcapability/willingnesstodevelopapartnership.ExampleAnalyses:SizeandmarketshareStrategyProfitabilityCashflowQualityphilosophyandimplementationTechnologyapplicationImportanceofclient’’sbusinesstosupplierInitialSupplierEvaluation42TofurtherdeterminewhetheraspecificsupplierisagoodVMRcandidate,evaluatethevendoronavarietyofcriteria.QualityofServiceSupplierCommitmentMagnitudeofCostReductionPotentialLong-TermLeadershipPotentialProduct/delivery/systemsGeographiccoverageDedication/dependenceInterestinVMRSystemseconomicsFlexibilityofapproachCredibilityofplan/resourcesTechnologyScaleFinancialSupplierEvaluation43PartnershipDevelopmentProcessIdentifyVMROpportunitiesUnderstandIndustryCostStructureSelectVMRCandidatesObtainTopManagementCommitmentIdentifySpecificCostReductionOpportunitiesImplementVMROpportunitiesTrackVMRSavingsVMRProcess44ImplementationSetuppartnershipmanagementstructureandrolloutNegotiationsShareaggregateresponsesSupplierProposalsAnalysisReceiveresponsesInitialContactwithSuppliersDescribeproposedrelationshipSelectionofsupplier(s)ComparativeanalysisElicitsuppliers'attitudesonapartnershipwiththeclientTrainstafftomanageprocess,expandtootherareasIdentificationofBDPandsystemcostreductiontargetsFollow-upwithplanttours,qualitychecks,etc.HandovercategorystrategyandvolumeexpectationsTheoptimalpartnershipdevelopmentprocessisexplicitandclearlyarticulated.PartnershipDevelopmentProcess45NumberofSuppliers:OligopolyGiant(s)andManyFragmentedSoleSourceGiant(s)andFew15-3015-302-52-51SupplierConcentration:~80%to6-8suppliersRestwith10-20suppliers~80%to1or2suppliersRestwith15-30suppliersEvenlyamongsuppliers~80%to1or2suppliersRestwith1-4suppliers100%to1supplierLongtermcompetitivebidsShorttermcompetitivebidsVMRLongtermcompetitivebidsShorttermcompetitivebidsVMRLongtermcompetitivebidsShorttermcompetitivebidsVMRLongtermcompetitivebidsShorttermcompetitivebidsVMRLongtermcompetitivebidsPotentialRelationshipOptions:Arangeofsupplierconfigurationoptions,shouldbeevaluated.SupplierConfigurationAlternatives46PeopleIsseniormanagementcommittedtomakingthiswork?Haveallorganizational,cultural,andskillchangesbeenaddressedAretheincentivesappropriatetoensureemployeecommitment?OperationalExecutionWhatisthegovernancestructure?Howisprogressmonitored?Howwillroadblocksberesolved?Isthereopensharingofrequiredinformation?CanalltheinformationsystemschangesbeidentifiedandspecifiedHowwillswitchdisruptionsbeminimized?PartnerSelectionWhatistheoptimalnumberofsuppliers?Dowereallyunderstandsupplier'scurrentandfuturecostposition?Hasthesupplierscreenincludednon-costparameters?Hasthesuppliermadearealisticcommitment?Isthesuppliercommittedtodeliveringontheagreement?ValueIsthistherightinputtotargetforaVMR?industrytrackrecordproportionofbuyercoststructureDoesthebenefitoutweightherisks?switchingcostsbuyerleverageWhereisthevalue?Stages1,2and3shortvs.long-termIsthevaluerealizable?potentialhurdlesandroadblocksEachoftheseissuesshouldbeconsideredinevaluatingaVMR.ChecklistforSuccessfulExecution47IdentifyVMROpportunitiesUnderstandIndustryCostStructureSelectVMRCandidatesObtainTopManagementCommitmentIdentifySpecificCostReductionOpportunitiesImplementVMROpportunitiesTrackVMRSavingsVMRProcess48Ameaningfultrackingmechanismmustbeputinplaceacrossmultiplevariablestoensureongoingresults.SavingsproductcostsystemscostRelationshipstatusTimingofsavingsmilestoneachievementsIndustrychangesinindustrydynamicsintroductionofnewtechnology,etc.Tracking49VMRConceptVMRKeySuccessFactorsVMRSourcesOfValueBainVMRProcessExampleKeyTakeawaysAgendaa.tr50Clientislargeconglomerateproducing15majorproductlinesCurrentrelationshipwithsuppliersistraditionalandsomewhatadversarialattimesAlldataandvendorshavebeendisguised,howeverthisisanactualBainclientandcaseProductAiscalledwidgetsthroughouttheexamplewidgetSKUsarecalledred,blueandgreenContext:VMRExample51EXAMPLEIdentifyVMROpportunitiesUnderstandIndustryCostStructureSelectVMRCandidatesObtainTopManagementCommitmentIdentifySpecificCostReductionOpportunitiesImplementVMROpportunitiesTrackVMRSavingsVMRProcess52UponevaluationofABC'sproductpurchases,ProductAisthemostattractiveVMRopportunity.EXAMPLEABCPurchasedProductsABCCompanyPurchasingCategoryPriority53ProductcategoryAhasthemostsupplierandclientsupport.ProductExecutiveCommitmentCorporateWillingnesstoProductChangeRankingSupplierCommitmentSupplierCooperationProductCategory1ProductA(Widgets)2ProductDEXAMPLE3ProductB4ProductCPurchasingCategorySelection54EXAMPLEIdentifyVMROpportunitiesUnderstandIndustryCostStructureSelectVMRCandidatesObtainTopManagementCommitmentIdentifySpecificCostReductionOpportunitiesImplementVMROpportunitiesTrackVMRSavingsVMRProcess55MarketTrendsMarketOverview$1.5Bcustomwidgetmarket7%industrygrowthrateHighlyfragmentedmarketlargest15vendorscomprise60%SupplierstendtowardsmaterialsspecializationsecondarymaterialsoftenoutsourcedCustomer/SupplierRelationshipsIndustry-wide,closeretailer-supplierpartnershipsarenotcommonHowever,allsupplierssurveyedhavehadsomepartnershipexperienceexamplesinclude:volumedrivenpricediscountsjointR&D/productdesigneliminationofduplicateprocessesSuppliertrendsconsolidationmovementtoone-stopshopsprovisionofadditionalservicesCustomertrendsstrongpricefocusshort-termcontractcommitmentsmovementtomulti-materialfixturesSupplierEconomicsVariablecostsrepresent66%oftotalsuppliercostsRawmaterialscostsrepresent40%oftotalsupplier’’scostsCustomsuppliersachieve5%EBITmarginsonaverage,butsignificantrangesexistsSupplierssurveyedreinvest5%ofannualrevenuesOpportunityexistsforoperationalimprovementoperationsarenothighlyautomatednotfullyleveragingmaterialspurchasingacrossdivisionsorcustomersEXAMPLEWidgetIndustryOverview56Thecustomwidgetmarketishighlyfragmentedwiththetop15supplierscomprisingapproximately60%ofthe$1.5Btotalmarket.EXAMPLEU.S.WidgetMarket57Thecustomwidgetmarketisfurtherfragmentedbycolor.EXAMPLEU.S.CustomWidgetMarketbyColor58EXAMPLEIdentifyVMROpportunitiesUnderstandIndustryCostStructureSelectVMRCandidatesObtainTopManagementCommitmentIdentifySpecificCostReductionOpportunitiesImplementVMROpportunitiesTrackVMRSavingsVMRProcess591997AnnualRevenues:BusinessStrategyFocus:PrimaryColor:CustomerConcentration(PercentofSalestoTopFiveCustomers):AverageCapacityUtilization:ExperiencewithClient:Widgetmanufacturersdiffersignificantlyintermsofsizeandcapabilities.DVolumeRed,blue60%60%Limited$60MBCustomizationBlueN/A80%No$80MAOne-stopshoppingBlue40%70%Yes$100MCOne-stopshoppingRed,blue33%75%No$75MELowcostwidgetsRed42%50%Yes$50MEXAMPLESupplierProfiles60Mostplayersinthecustomwidgetindustrytendtospecializeinredorblue,manyoftenoutsourcethesecondarycolor.EXAMPLESupplierMaterialsFocus61EBITG&ACOGSSupplierCostStructure(AverageCustomSupplier)38%24%7%12%10%4%5%Rent&UtilitiesWhilemanufacturers’sizeandproductfocusimpacttheircosts,preliminaryestimatesindicatethatvariablecostsaccountfor67%ofaveragewidgetsuppliers’costs,withmaterialscomprisingaround40%oftotalcost.Estimatedvariablecostapprox.=67%ofcosttotalEXAMPLESupplierEconomics:CostStructureDetail62Mostmajorfixturemanufacturersgrewfrom““mom-and-pop”operations,leavingsignificantroomforoperationalimprovementinareassuchasautomationandmaterialspurchasing.MaterialsPurchasingManymanufacturersarenotleveragingtheirvolumeinpurchasingmaterials,eitheracrosscustomersoracrossinternaldivisionsApurchasesitscustomers’redseparately,despitethefactthatthevastmajorityofitspurchasesareforthesameredproductsB’smanufacturingdivisionseachpurchaserawmaterialsseparatelyBlueFixtureManufacturersRedFixtureManufacturersManufacturingAutomationEXAMPLESupplierOperationalEfficiency63Mostvendorssurveyedreportedatleastsomeexperiencewithpartnershiparrangements.PortionofVendorsIndicatingExperienceinSomePartnershipAspectsEXAMPLEPartnershipExperience64ClientNeedsParametersSupplierRequirementsCapacityPotentially,theabilitytosupplyallofclient’sred,bluewidgetneedscurrentclientvolumeof~$80MperyearMaterialsPotentially,theabilitytomanufactureallclient’sred,bluewidgetsQualityDemonstratedabilitytomeetallqualityrequirementsathighestlevelproductqualityservice-levelsleadtimesExperienceIndustry-leadingexpertiseincustombluewidgetproductionIndustry-leadingexpertiseincustomhigh-endredwidgetproductionDemonstratedfamiliarityandexpertisewithclientwidgetsThefollowing“ideal”supplierprofilewouldenableclienttocapturefullpotentialvalue:EXAMPLEValueengineeringDemonstratedcreativityandabilitytoidentifyandimplementvalueengineeringideasSupplierRequirements65ClientNeedsParametersSupplierRequirementsPartnershipapproachDesireandcommitmenttomakeclientthe#1customerwhileservingothercustomersaswellCommitmenttocreatejointvaluetogetherwiththeclientThefollowing“ideal”supplierprofilewouldenableclienttocapturefullpotentialvalue:CostpositionLowcostpositionEXAMPLEValuecreationCommitmenttodrivevalueacrossadditionalareasautomationfixedcostleveragesystemseconomicsSupplierRequirements(Continued)66CDEABFKeyrequirementsG#5#5#5#4#4#4#3#3#3#2#2#1#1#1#2#6#6#7TotalAssessmentRank:#7#7#6Materials:Experience:Givencurrentsuppliercapabilities,Aistheclosesttothe““ideal”candidateprofile.Red&Blue:BlueOnly:RedOnly:EXAMPLECapacity:BlueQuality:Valueengineering:Valuecreation:Partnershipapproach:Red89%82%71%68%61%46%43%SupplierCapabilities67PartnershipDevelopmentProcessEXAMPLEIdentifyVMROpportunitiesUnderstandIndustryCostStructureSelectVMRCandidatesObtainTopManagementCommitmentIdentifySpecificCostReductionOpportunitiesImplementVMROpportunitiesTrackVMRSavingsVMRProcess68SourcesofValue:VolumeConsolidationSystemEconomicsFlexibilityRequirementsValueEngineeringValueDriversRedundancyeliminationFixedcostleverageMaterialspurchasingAutomationpotentialScaleefficienciesContractdurationLeadtimemanagementIdeagenerationdesignchangesmaterialssubstitutionmanufacturingefficienciesValueengineeringprocessefficiencyMulti-MaterialConsolidationFixedcostleverageMark-upeliminationOptimizedvalueengineeringImprovedefficienciesEXAMPLEMultipleopportunitieswereidentifiedforVMRvalue.ThisexamplewillfocusonvalueengineeringonlyVMRValueDrivers69LeveragePoints:IdeaGenerationDesignPrototypingApprovalEngineeringManufacturing/ImplementationGenerateasmanyideasaspossibleDesignandprototypeasquicklyandcostefficientlyaspossibleOpportunitiesforImprovement:Client:Suppliers:CreateroleforprocurementtofacilitateVEwithinternaldesigngroupPresentallideaswithcost-benefitanalysissothatinformedtrade-offscanbemadeSystematicallycaptureideasandleverageacrosssuppliers,divisions,andsimilarwidgetsMaintainlistofallideasgeneratedforfuturereferenceGenerateout-of-the-boxideasandquantifybenefitsProvideearlyinput/feedbacktoreducenumberofiterationsandimproveyieldonideasValueEngineeringProcess:Opportunitiesforimprovementforclientandthesupplierexistacrosstheentirevalueengineeringprocess.EnsuretimelyapprovalIncreaseapprovalratesEngineerandimplementascostefficientlyaspossibleProvidetimelyfeedbacktogeneratenewideasSystematicallyprovidefeedbackandinputintoideagenerationprocessProvidefrequentfeedbackonimplementationprocessandfeasibilityCreateroleforprocurementtofacilitateVEwithinternaldesigngroupPresentallideaswithcost-benefitanalysissothatinformedtrade-offscanbemadeMaintainlistofallideasgeneratedforfuturereferenceWorktoincreasespeedofapprovalprocessClarifydesignintentwhereverneededCommunicateadditiona