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Author: Sheila
DubinValue
Managed
Relationships1December
1998Value
Managed
RelationshipsValueManagedRelationshipsObjectives2Aftercompletingthismodule,youwillbeableto:UnderstandVMRconceptandapplicationArticulatetypesofcostsavingsopportunitiescreatedbyVMRsUsetheBainframeworktoconductaVMRRefertorealexamplesofBai’nsV’
MRprocessandsuccessValue
Managed
Relationships3
a.trVMRConceptVMRKeySuccessFactorsVMRSourcesOfValueBainVMRProcessExampleKeyTakeawaysAgendaValue
Managed
Relationships4AValueManagedRelationship(VMR)isafullpartnershipbetweenacustomerandasupplier.Itsgoalistomaximizequalityandminimizetotalsystemcostsofdoingbusinessthroughcollaborativesharingofinformationandresources.AVMRcreatesawin/winrelationship.VMRDefinitionValue
Managed
Relationships“Partnership”
TrueVMRProcurementStrategiesValueManagedRelationshipSoleSourceVerticalIntegrationCompetitiveBidShort-termContract/Spot5Long-termContractAVMRisoneprocurementstrategytomaximizecostsavingsandstrategicvalue.WhatisaVMR?Value
Managed
Relationships6AValueManagedRelationshipcanexceedthevaluepotentialofbothverticalintegrationandtraditionallynegotiated"arm'slength"transactions:aconsolidationofpurchasestooneorfewsupplierswhoarecapableofmaintaininglongtermcompetitiveeconomics,highqualityandefficientdeliveryparticipantsmustsharesinglegoalofachievinglowestindustrysystemscostsavingsshouldbesharedtoprovidemutualongoingincentivestoeliminateredundanciesAVMR,whenappropriate,exceedsthevalueofallothertypesofrelationships.HowDoesaVMRWork?Value
Managed
RelationshipsFragmented
supplierbase,sporadic
communicationSingle
or
small
number
ofsuppliers,
frequentcommunicationPotential
for
customizedinvestment
infacilities/equipmentLong-term
commitmentfocused
upon
lowest
totalsystems
cost
using
valuechain
perspectivesJoint
product
design
andcross
functional
participationIn-house
supply,communication
frequentTraditional
"ArmsLength"ApproachVertical
IntegrationInvestments
based
uponmanufacturer's
needsMay
require
investment
inweak
strategic
businessAdversarial
bid
negotiationsto
obtain
lowest
unit
priceFocus
driven
by
internalincentives/
transfer
pricesSeparate
product
designJoint
product
design
often
atoddsVMR7
a.trVMRscan
exceedthevalueof
bothtraditionalcontractsas
well
as
verticalintegration.StrategicPurchasingOptionsValue
Managed
RelationshipsLowHighLowPurchasingvolume(relativeto
total
supplier
sales)Value-added
/engineeredlevelVMRsare
most
appropriatewhere
high
volumeandsignificantvalue
added
occurs.HighProductredesignMaterialsubstitutionMedium/lowpotentialProductredesignMaterial
substitutionVolume
discountSystem
costimprovementHighPotentialNo
/Little
opportunity(needtocluster)Volume
discountSomesystem
costModeratePotentialWhereAreVMRsAppropriate?8Value
Managed
RelationshipsIn
Which
CategoriesAre
VMRs
Most
Effective?9VMRsare
most
effective
in
large
dollar,highvalue
added
products.Largedollar
purchaseHighlevelof
value-addedcostin
productFragmentation
acrossmanydivisionsandsuppliersClient
represents
significantpartof
industry
outputIndustry
competitiveintensityhigh:capacityutilizationdroppingconsolidation
in
progressmanynew
plantslooking
for
volumehistoricalindustrypriceumbrellasValue
Managed
RelationshipsConsolidvolumeinlong-termpartnershipIncreasedpaceofinnovationleadstostrategicbenefitsforbothEnsurescontinuedsupplyforbuyerandcapacityutilizationforsupplierCommitmentandscalejustifiesjointinvestmentincostsavingsandR&D/technologyJointeffortlead
tosystem-widebenefitsfor
bothAddedvalue
leadstomorereasons
tocollaboratseA
successful
VMR
will
continueto
createavatelueasthe
relationship
progresses.ValueCycle10Value
Managed
RelationshipsVMRscreate
value
for
thebuyer.Higher
qualityand
fewerrejectsSuperior
servicePartner
injoint
system
cost
reductionInnovationTechnological
expertisepackage
performanceimprovementsspecconsolidationproduct
redesign
andmaterialssubstitutionPricing
commensuratewithlarger,
longervolume
commitmentsCommitmentto
continuousimprovement
ofthe
partnershipValueOfVMRs—Buyer11
a.trValue
Managed
Relationships12VMRscreate
value
for
suppliers.Larger
volumesin
fewer
itemslonger
runlengths
and
fewerset-upshigher
capacityutilizationlearning
curvebenefitsStable
long
term
demandSharing
inbuyer’s
strongcommitment
tofuture
growthPartner
injoint
system
cost
reductionResourcesand
stability
to
invest
in
technologyCommitmentto
continuousimprovement
ofthe
partnershipValueOf
VMRs—SupplierValue
Managed
RelationshipsVMRshaveaveraged
15%
to20%costsavings.AverageRange13BainExperiencein
VMRsValue
Managed
Relationships14
a.trAlthough
the
value
managed
relationshipcan
besophisticatedandcomplex,
the
resultsarequantifiable
andsimple.100%of
volumewithone
supplier
for
three
yearsUp
front
pricereductionof
7%Guaranteed9.8%recurrentsavings
withinthree
yearsCost-basedindexed
pricing
over
time50/50savings
sharingPenaltiesand
inspectionsbuilt-inEtc.VMR
SampleAgreementValue
Managed
Relationships15
a.trVMRConceptVMR
KeySuccessFactorsVMR
Sources
OfValueBainVMR
ProcessExampleKey
TakeawaysAgendaValue
Managed
RelationshipsOverone
half
of
existingpartnerships
do
notmeetexpectations.Thisreality
increases
the
needtounderstandandfocuson
the
key
successfactors16Partnerships
ExpectationsValue
Managed
RelationshipsStrategy,organization
and
processmustbeinplace
inorderto
ensureVMRsuccess.Clarityofandagreementonstrategy
andgoalsStrategyAppropriate
levelofinvolvementinandacrossorganizationsOrganizationProcessDetailed
and
structuredprocess
foridentifyingandimplementingopportunitiesKey
Success
Factors17Value
Managed
RelationshipsKey
Success
Factors—StrategyLongtermrelationships
focused
ontotalvaluearecriticalstrategicissues
that
must
beclearly
articulated.VMRspursued
only
where
appropriateTruesupplierpartnershipslong-termrelationships
with
one
orfewsuppliersrelationships
at
allorganizationallevelsextensivetwo-way
informationsharingsharing
ofallsavingswilling
toaddress
inherent
risksFocuson
totalvalue-chain,
not
inputpricesuppliersselected
basedon
long-term
total
valueopportunities
identifiedand
captured
acrossentiresupply
chain18Value
Managed
RelationshipsKeySuccessFactors—OrganizationInvolvementandcooperationacrosstheorganizationiscriticaltosuccess.Seniormanagementdirectinvolvementandongoinginterest/supportCross-functional
involvement
in
scheduling,logistics,design
anddevelopmentImplementationdrivenat"grass
roots"levelClearprocess
"champions"Formalized
structureandprocesstoperpetuatepartnership19Value
Managed
RelationshipsA
detailedprocessmustbeinplacetomaximizevalueandensureongoingopportunityidentification.Upfrontidentificationofopportunitiesanduniquevalueeachpartner
offersDocumentedexistenceofsignificantuntappedsystemscostvalueRigorousandfact-basedsupplierselectionExtensiveconsensus
buildingSystems
andstructures
to
perpetuateprocessKeySuccessFactors—Process20
a.trValue
Managed
RelationshipsReasons
forPartial
Success—StrategyScopeofpartnershiplimitednotwin/winFocusonpriceinstead
of
total
valuesupplierselectionbasedonpricefailure
to
consider
total
systemassourceofsavingsChosenstrategyinappropriateforpurchasecategoryAninappropriate
strategy
canprohibita
win/winrelationship.21
a.trValue
Managed
RelationshipsReasons
forPartial
Success—OrganizationPartial
successcan
becausedbyseniororlineorganizationalinadequacies.Limited
senior
management
participationLittle
cross-functional
involvement"Over-centralized"
decision
making:
Not
participative/inclusiveAd
hoc
structure
set
up
to
implement
strategy22
a.trValue
Managed
RelationshipsReasons
forPartial
Success—ProcessLack
of
internal
andexternalconsensusbuildingLack
of
"relentless
pursuit"Supplierselectionnot
rigorous
andfact-basedTechnicalopportunitiesnotidentifiedupfrontLack
of
systemsand
structurestoperpetuatetheprocessAnincomplete
processcan
alsocauselimitedsuccess.23
a.trValue
Managed
RelationshipsToachieve
successfulVMRs,thereare
severalareasofpotentialobstaclestowatchoutfor.BenefitsarevagueaProcess
ChallengesAssumptionsarema•dCeobnycseurpnpslaiebrosuthtsahtVarMinRgseaxrpeeanosnee-tainmdeptrroicdkuctinformaCommunication
ChallengesWatchoutsSufficientcommunicationofthebenefitsofchangethroughoutbothorga•tTiohnereisalackofunderstandinganinzdactioomnsmitment
tochangingthewaybusiness
is
done•ndunqualifiedBenefitsoftheVMRsiedceodnmomanicnsearnalysiNsohoansgboeinegndveavlueelopreeadlifzoartbioontahgpaerntideashasbeencreatedand/ornoVMRcham•a–rne“osfu“plllpitointeanltoia”pl”-Organizationalbarr•iSeKrsU(ep.rgo.mlifuelrtia-tiondivisionalcompanies)Watchouts24Value
Managed
Relationships25VMRConceptVMR
Key
Success
FactorsVMR
SourcesOf
ValueBain
VMR
ProcessExampleKey
TakeawaysAgendaValue
Managed
RelationshipsImproved
quality
duetoreduced
variabilityImprovedcommunicationsLongercommitmentsallowfor
longerrunlengthsPurchasing
economiesA
strong
VMRcan
capturethe
value
inherent
in
vertical
integration
whileallowing
the
client
tofocusbothcapital
andmanagement
resources
onitsprimarybusiness.ExampleSourcesofValue:Primary
Sources
ofValueVolume/ScaleEconomiesValueEngineeringandQualityImprovementSystemCostReductionTechnology
andcapabilitysharingtocreate
lowest
cost,highest
value
productJointdetermination
ofpotential
for:materialsubstitutionreductionofmaterial
contentstandardizationofmaterialsJointidentificationofredundant/duplicateprocesses,e.g.quality
controlorderprocessingtransportationengineeringmanagement
functionsimproved
inventorycontrolCrosscompany
logisticssharing
of
transportationanddistributionoperations(e.g.,leveraged
backhaulopportunities,shareddelivery
runs)25%EstimatePercent
ofTotal
Value26Created:
•
25%
•
50%Sources
of
Value
(1
of
2)Value
Managed
RelationshipsValueengineeringand
systemscost
reduction
aremostdifficulttoimplement
and
require
the
most
senior
involvment.Difficulty
ofSourceof
Value
Methodology
ImplementationSeniorManagementInvolvementAn
opendialogueregardingproductdesignbeginstooptimizedesign/costtrade-offsqualityimprovement
currentmetho
dsofinteractionaSystemsConsolidationofsuppliers•allows
thebuyertonegotiate•fBoursyheararenodfcostreduction
isnucprepmlieerjnotianltlyperxoafmit
ineVolume/scaleeconomicsValueengineeringandSources
of
Value
(2
of
2)27Disguised
exampleIncreaseof3.2
times
6%ProfitImprovementRelevant
Plant
CapacityUtilizationIncrementalMarginImpactIncreasing
asupplier’sutilizationby22%had
a6%
profit
impact.Value
Managed
RelationshipsVolume/ScaleEconomies—Example28Value
Managed
RelationshipsNew
DesignsIndexed
QualityIndexed
CostValueengineeringidentified
three
new
productoptionsthatincreased
qualityand
reducedcost.*Protypes
developedjointly
with
supplierDisguised
exampleValueEngineering—Example29Before
VMR
(5
Quality
Control
FTEs)
AfterVMR
(3
Quality
Control
FTEs)
SupplierCustomerJointQualityControlCustomerDirecttopackagingoperations=
QC
inspection
personnelandBain
clienteliminated
redundancy
and
saved40%of
quality
controlcosts.Value
Managed
RelationshipsIn
this
example
ofsystems
cost
VMR,the
suSpyplsietremsCosts—ExampleTopackagingoperationsOngoing
Feedbackto
Vendor30Value
Managed
RelationshipsSummaryofCostSavings—Example31Overall,thisclientachieveda19%costreductionthroughtheVMRexampleshown.Value
Managed
RelationshipsBainexperiencehasfoundthatthevaluefromVMRisdevelopedoverseveralyears.YearsintoVMRVolume/pricesavingsandsomelevelofvalueengineering/qualitybenefitsarerealizedveryearlyintherelationshipAdditionalvalueengineeringsavingsandsystemcostreductio
nsaremorelikelytocomelater
32ValueengineeringandqualityimprovementSystemcostreductionVolume/priceeffectTypicalTimingValue
Managed
Relationships33VMRConceptVMRKeySuccessFactorsVMRSourcesOfValueBainVMRProcessExampleKeyTakeawaysAgendaValue
Managed
RelationshipsIdentifyVMROpportunitiesUnderstandIndustryCostStructureSelectVMRCandidatesObtainTopManagementCommitmentIdentifySpecificCostReductionOpportunitiesImplementVMROpportunitiesTrackVMRSavingsVMRProcessSelectproductsforVMRbasedonpurchasingvolumeandvalue-added34AnalyzeindustryeconomicstodevelopsavingshypothesesAnalyzesupplierstoselectbestVMRcandidatesEnsureseniormanagementofclientandsupplierarefullycommittedConductanalysistoprovehypothesesandquantifysavingsopportunitiesFormalizerelationshipandimplementopportunitiesTrackprogressofsavingsandrelationshipsValue
Managed
Relationships
EXAMPLEIdentifyVMROpportunities35UnderstandIndustryCostStructureSelectVMRCandidatesObtainTopManagementCommitmentIdentifySpecificCostReductionOpportunitiesImplementVMROpportunitiesTrackVMRSavingsVMRProcessValue
Managed
RelationshipsThismatrixwillhelpyouprioritizewhichopportunitiesaremostappropriateforaVMR.ProductredesignMaterial
substitutionMedium/low
potentialProductredesignMaterialsubstitutionVolumediscountSystemcostimprovementHigh
potentialNo/LittleOpportunity(needtocluster)VolumediscountSome
system
costModerate
potentialHighLowLowHighPurchasingVolume(RelativetoTotalSupplierSales)Value-Added/EngineeredLevelPurchasing
Category
Priority36Value
Managed
RelationshipsPurchasing
Category
SelectionBecausethe
VMR
process
is
lengthyand
time
consuming,
qualitativeissues
must
alsobe
evaluated
in
selecting
where
toimplement
a
VMR.37Suppliers
andclientorganizationsmust
bewilling
towork
closelytogethercommitmanagement
time
and
effortprioritize
success
ofVMRTop
managementof
supplier
and
client
musthave
authority
tocover
full
scopeof
VMRBalanceamountof
cost
savings
withlevelofsensitivityassociated
with
product
categoryValue
Managed
RelationshipsIdentify
VMR
Opportunities38Understand
IndustryCost
StructureSelectVMR
CandidatesObtainTopManagementCommitmentIdentify
Specific
CostReduction
OpportunitiesImplementVMROpportunitiesTrack
VMRSavingsVMRProcessValue
Managed
RelationshipsUnderstandingthe
industry
structure
validates
opportunitiesthat
wereidentified
inthe
first
VMRprocess
step.Industry
Cost
Structureand
DriversIndustry
CompetitiveStructureIndustry
CapacityUtilizationHow
suitabl?e
is
thismarketand
itscompetitive
dynamicsfor
aVMR?How
importantis
theclientas
acustomerin
thisindustry?ExampleQuestions:Who
are
the
keyplayers?What
is
the
industrycapacityutilization?coststructurWhat
is
the
coststructure
of
theindustry?What
drivestWhhaitstype
of
costHowfOrnawhgatmfacetorns
dtoekdeyipslayers
compete?theindustryWhat
istheuWhtaitlidzrivaestuitoiliznatioon?feachplayer?savings
opportunitiesmight
exist?e?Understand
Industry
Structure39Value
Managed
RelationshipsIdentify
VMR
OpportunitiesUnderstand
IndustryCost
StructureSelectVMR
CandidatesObtainTopManagementCommitmentIdentify
Specific
CostReduction
OpportunitiesImplementVMROpportunitiesTrack
VMRSavingsVMRProcess40Value
Managed
RelationshipsVMR
partners
must
beable
toperform
intherelationshipandbea
willingpartner.Potentialfor
lowcostpositionStrongtechnology/qualityNewproductdevelopmenttrackrecordAdequatefinancialresourcesLong
TermWinnersCapability
andWillingnesstoDevelopaPartnershipImportantcategoryforsupplierClientimportant
tosupplierPartnershipswithothersuppliersScaletohandlevolumeIdealPartnersSupplierPrioritization41Value
Managed
RelationshipsInitial
analysis
of
thesuppliermust
beconductedtodeterminepotential
forbeinga
long-termwinnerand
capability/willingnesstodevelopa
partnership.Example
Analyses:
•
Size
andmarketshareStrategyProfitabilityCashflowQuality
philosophyand
implementationTechnology
applicationImportance
of
client’s
business
to
supplierInitial
Supplier
Evaluation42Value
Managed
RelationshipsTofurther
determinewhether
aspecificsupplierisagoodVMRcandidate,
evaluate
thevendoronavariety
of
criteria.Quality
of
ServiceSupplierCommitmentMagnitudeofCostReductionPotentialLong-TermLeadershipPotentialProduct/delivery/systemsGeographic
coverageDedication/dependenceInterestinVMRSystems
economicsFlexibilityofapproachCredibilityofplan/resourcesTechnologyScaleFinancialSupplierEvaluation43Value
Managed
RelationshipsPartnershipDevelopmentProcess44IdentifyVMROpportunitiesUnderstand
IndustryCost
StructureSelectVMR
CandidatesObtainTopManagementCommitmentIdentifySpecificCostReductionOpportunitiesImplementVMROpportunitiesTrackVMRSavingsVMRProcessValue
Managed
RelationshipsPartnershipDevelopmentProcessImplementationNegotiationsShareaggregaterespSupplierProposalsAnalysisReceiveresponsesInitialContactwithSuppliersDescribeproposedrelSetuppartnershipmanagementstructurea•nTdraroinllsotuatfftomanageprocess,expandtootherareas•oSneslecstionofsupplier(s)IdentificationofBDPandsystemcostreductiontargetsComparativeanalysisFollow-upwithplanttours,qualitychecks,etc.45•aEtliiocnitsuipppliers'attitude•sHoannadpoavretnrcaertesghioprwysi
thrtahteecgliyeannt
dvolumeexpectationsTheoptimalpartnershipdevelopmentprocessisexplicitandclearlyarticulated.Value
Managed
RelationshipsSupplierConfiguration
AlternativesNumberofSuppliers:OligopolyGiant(s)andManyFragmentedSoleSourceGiant(s)andFew15-3015-302-52-51SupplierConce
•
100%to1ntration:
supplier~80%to6-8suppliersRestwith10-20suppliers~80%to1or2suppliersRestwith15-30suppliersEvenlyamongsuppliers~80%to1or2suppliersRestwith
1-4suppliersLongtermcompetitivebidsShort
termcompetitivebidsVMRLongtermcompetitivebidsShort
termcompetitivebidsVMRLongtermcompetitivebidsShort
termcompetitivebidsVMRLongtermcompetitivebidsShort
termcompetitivebidsVMRLongtermcompetitivebidsPotentialRelationshipOptions:A
rangeof
supplierconfiguration
options,
should
beevaluated.46Value
Managed
RelationshipsChecklist
for
SuccessfulExecutionPeopleIsseniormanagementcommitted
tomakingthis
work?Haveallorganizational,cultural,
and
skillchangesbeenaddressedAretheincentivesappropriate
toensureemployeecommitment?OperationalExecutionWhatisthegovernancestructure?Howis
progressmonitored?How
willroadblocks
beresolved?Is
thereopen
sharingofrequired
information?Canalltheinformationsystemschangesbe
identifiedand
specifiedHowwillswitchdisruptionsbe
minimized?PartnerSelectionWhatistheoptimalnumberofsuppliers?Do
wereallyunderstandsupplier'scurrent
and
future
costposition?Hasthesupplierscreenincludednon-cost
parameters?Hasthesuppliermadearealistic
commitment?Is
thesuppliercommittedtodeliveringon
theagreement?ValueIs
thistheright
inputtotarget
foraVMR?industrytrack
recordproportion
ofbuyercoststructureDoesthebenefitoutweighthe
risks?switching
costsbuyer
leverageWhere
isthevalue?Stages
1,2and3short
vs.
long-termIs
thevaluerealizable?potential
hurdles
androadblocksEachofthese
issuesshouldbe
considered
inevaluatinga
VMR.47Value
Managed
RelationshipsIdentifyVMROpportunities48Understand
IndustryCostStructureSelect
VMR
CandidatesObtain
Top
ManagementCommitmentIdentifySpecific
CostReduction
OpportunitiesImplement
VMROpportunitiesTrack
VMRSavingsVMRProcessValue
Managed
Relationships49A
meaningful
trackingmechanism
must
be
put
in
place
acrossmultiple
variables
to
ensure
ongoing
results.SavingsproductcostsystemscostRelationship
statusTimingofsavingsmilestone
achievementsIndustrychangesin
industry
dynamicsintroduction
of
new
technology,
etc.TrackingValue
Managed
Relationships50
a.trVMRConceptVMR
KeySuccess
FactorsVMR
Sources
OfValueBain
VMR
ProcessExampleKey
TakeawaysAgendaValue
Managed
Relationships51Clientis
large
conglomerateproducing
15majorproductlinesCurrentrelationshipwith
suppliersis
traditionaland
somewhatadversarial
at
timesAll
data
and
vendorshave
beendisguised,howeverthis
is
an
actual
Bain
clientandcaseProductA
is
calledwidgetsthroughouttheexample–
widgetSKUs
are
called
red,blue
and
greenContext:VMRExampleValue
Managed
Relationships
EXAMPLE
52Identify
VMR
OpportunitiesUnderstand
IndustryCost
StructureSelectVMR
CandidatesObtainTopManagementCommitmentIdentify
Specific
CostReduction
OpportunitiesImplementVMROpportunitiesTrack
VMRSavingsVMRProcessUpon
evaluation
of
ABC's
product
purchases,Product
A
isthe
most
attractiveVMR
opportunity.
EXAMPLE
Value
Managed
RelationshipsABC
Company
Purchasing
Category
PriorityABCPurchasedProducts53Value
Managed
RelationshipsPurchasing
Category
SelectionProductExecutiveCommitmentProductcategory
A
has
the
most
supplier
and
client
support.CorporateWillingnesstoProductChangeRankingSupplierCommitmentSupplierCooperationProductCategory1Product
A
(Widgets)2Product
DEXAMPLE3Product
B4Product
C54Value
Managed
RelationshipsEXAMPLEIdentify
VMR
Opportunities55Understand
IndustryCost
StructureSelectVMR
CandidatesObtainTopManagementCommitmentIdentify
Specific
CostReduction
OpportunitiesImplementVMROpportunitiesTrack
VMRSavingsVMRProcessValue
Managed
RelationshipsMarketTrendsMarketOverview$1.5B
custom
widgetmarket7%
industry
growth
rateHighlyfragmented
marketlargest15
vendorscomprise60%Suppliers
tendtowardsmaterials
specializationsecondary
materialsoften
outsourcedCustomer/SupplierRelationshipsIndustry-wide,closeretailer-supplier
partnershipsarenot
commonHowever,
all
supplierssurveyed
have
hadsome
partnershipexperienceexamplesinclude:volumedrivenpricediscountsjoint
R&D/productdesigneliminationofduplicateprocessesSupplier
trendsconsolidationmovement
to
one-stopshopsprovision
ofadditional
servicesCustomer
trendsstrongpricefocusshort-term
contractcommitmentsmovement
to
multi-material
fixturesSupplier
EconomicsVariable
costsrepresent66%of
total
suppliercostsRaw
materialscostsrepresent
40%
oftotalsupplier’s
costsCustomsuppliersachieve
5%EBITmargins
on
average,butsignificant
rangesexistsSuppliers
surveyedreinvest5%
ofannualrevenuesOpportunity
exists
foroperationalimprovementoperations
arenothighly
automatednot
fullyleveragingmaterialspurchasingacrossdivisions
or
customers
EXAMPLE
56WidgetIndustry
OverviewValue
Managed
RelationshipsThe
custom
widget
market
ishighlyfragmented
withthe
top
15
suppliers
comprising
approximately
60%of
the
$1.5B
totalmarket.
EXAMPLE
57U.S.
Widget
MarketValue
Managed
RelationshipsThe
custom
widget
market
isfurtherfragmented
bycolor.
EXAMPLE
58U.S.
Custom
Widget
Market
byColorValue
Managed
Relationships
EXAMPLE
59Identify
VMR
OpportunitiesUnderstand
IndustryCost
StructureSelectVMR
CandidatesObtainTopManagementCommitmentIdentify
Specific
CostReduction
OpportunitiesImplementVMROpportunitiesTrack
VMRSavingsVMRProcessValue
Managed
Relationships1997AnnualRevenues:BusinessStrategyFocus:Primary
Color:CustomerConcentration(Percent
of
Salesto
TopFiveCustomers):AverageCapacity
•
70%Utilization:80%75%60%50%Experience
with
•
YesClient:NoNoLimitedYesWidgetmanufacturers
differ
significantlyin
termsofsize
and
capabilities.DVolumeRed,blue60%$60MBCustomizationBlueN/A$80MAOne-stopshoppingBlue40%$100MCOne-stopshoppingRed,blue33%$75MELow
costwidgetsRed42%$50M
EXAMPLE
60Supplier
ProfilesValue
Managed
RelationshipsMost
playersin
the
custom
widget
industrytendtospecialize
in
red
orblue,many
often
outsourcethesecondary
color.
EXAMPLE
61Supplier
MaterialsFocusValue
Managed
RelationshipsEBITG&ACOGS38%
24%7%12%10% 4%
5%Rent&UtilitiesWhilemanufacturers’
size
andproduct
focus
impact
their
costs,
preliminary
estimatesindicate
that
variablecostsaccount
for67%
of
average
widget
suppliers’
costs,
with
materialscomprisingaround
40%of
total
cost.Supplier
Cost
Structure(Average
Custom
Supplier)Estimatedvariablecostapprox.=
67%
of
cost
total
EXAMPLE
62Supplier
Economics:
CostStructure
DetailMost
major
fixturemanu
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