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1、Sheila DubinValue Managed RelationshipsDecember 1998Author:1Value Managed RelationshipsAfter 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 of
2、 Bains VMR process and successValue Managed Relationships Objectives2Value Managed Relationships VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgendaa.tr3Value Managed Relationships A Value Managed Relationship(VMR)is a full partnership between a customer
3、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 Definition4Value Managed Relationships“Partnership”True VMR Procurement StrategiesValue Managed Relatio
4、nshipSole SourceVertical IntegrationCompetitive BidShort-term Contract/SpotLong-term ContractA VMR is one procurement strategy to maximize cost savings and strategic value.What is a VMR?5Value Managed Relationships A Value Managed Relationship can exceed the value potential of both vertical integrat
5、ion 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 costsavings should
6、 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?6Value Managed RelationshipsFragmented supplier base,sporadic communicationSingle or small number of suppliers,frequent communicat
7、ionIn-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 lowest unit priceL
8、ong-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 of both traditional
9、 contracts as well as vertical integration.Strategic Purchasing Optionsa.tr7Value Managed Relationships High PotentialHighLowHighLowPurchasing volume(relative to total supplier sales)Value-added/engineered levelProduct redesignMaterial substitutionProduct redesignMaterial substitutionVolume discount
10、System 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?8Value Managed RelationshipsLarge dollar purchaseHigh level of
11、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 umbrellasVMRs are mos
12、t effective in large dollar,high value added products.In Which Categories Are VMRs Most Effective?9Value Managed RelationshipsConsolidate volume in long-term partnershipIncreased pace of innovation leads to strategic benefits for bothEnsures continued supply for buyer and capacity utilization for su
13、pplierCommitment 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 Cycle10Value Managed Relation
14、shipsVMRs 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 with larger,longer volume comm
15、itmentsCommitment to continuous improvement of the partnershipValue Of VMRsBuyera.tr11Value Managed RelationshipsVMRs create value for suppliers.Larger volumes in fewer itemslonger run lengths and fewer set-upshigher capacity utilizationlearning curve benefitsStable long term demandSharing in buyers
16、 strong commitment to future growthPartner in joint system cost reductionResources and stability to invest in technologyCommitment to continuous improvement of the partnershipValue Of VMRsSupplier12Value Managed RelationshipsVMRs have averaged 15%to 20%cost savings.Average RangeBain Experience in VM
17、Rs13Value Managed RelationshipsAlthough the value 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 o
18、ver time50/50 savings sharingPenalties and inspections built-inEtc.VMR Sample Agreementa.tr14Value Managed Relationships VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgendaa.tr15Value Managed RelationshipsOver one half of existing partnerships do not meet
19、 expectations.This reality increases the need to understand and focus on the key success factorsPartnerships Expectations16Value Managed RelationshipsStrategy,organization and process must be in place in order to ensure VMR success.Clarity of and agreement on strategy and goalsStrategyAppropriate le
20、vel of involvement in and across organizationsOrganizationDetailed and structured process for identifying and implementing opportunitiesProcessKey Success Factors17Value Managed RelationshipsLong term relationships focused on total value are critical strategic issues that must be clearly articulated
21、.VMRs pursued only where appropriateTrue supplier partnershipslong-term relationships with one or few suppliersrelationships at all organizational levelsextensive two-way information sharingsharing of all savingswilling to address inherent risksFocus on total value-chain,not input pricesuppliers sel
22、ected based on long-term total valueopportunities identified and captured across entire supply chainKey Success FactorsStrategy18Value Managed RelationshipsInvolvement and cooperation across the organization is critical to success.Senior management direct involvement and ongoing interest/supportCros
23、s-functional involvement in scheduling,logistics,design and developmentImplementation driven at grass roots levelClear process championsFormalized structure and process to perpetuate partnershipKey Success FactorsOrganization19Value Managed RelationshipsA detailed process must be in place to maximiz
24、e value and ensure ongoing opportunity identification.Up front identification of opportunities and unique value each partner offersDocumented existence of significant untapped systems cost valueRigorous and fact-based supplier selectionExtensive consensus buildingSystems and structures to perpetuate
25、 processKey Success FactorsProcessa.tr20Value Managed RelationshipsScope of partnership limitednot win/winFocus on price instead of total valuesupplier selection based on pricefailure to consider total system as source of savingsChosen strategy inappropriate for purchase categoryAn inappropriate str
26、ategy can prohibit a win/win relationship.Reasons for Partial SuccessStrategya.tr21Value Managed RelationshipsLimited senior management participationLittle cross-functional involvementOver-centralized decision making:Not participative/inclusiveAd hoc structure set up to implement strategyPartial suc
27、cess can be caused by senior or line organizational inadequacies.Reasons for Partial SuccessOrganizationa.tr22Value Managed RelationshipsLack of internal and external consensus buildingLack of relentless pursuitSupplier selection not rigorous and fact-basedTechnical opportunities not identified up f
28、rontLack of systems and structures to perpetuate the processAn incomplete process can also cause limited success.Reasons for Partial SuccessProcessa.tr23Value Managed Relationships To achieve successful VMRs,there are several areas of potential obstacles to watch out for.Benefits are vague and unqua
29、lifiedno“full potential”economics analysis has been developed for both partiesProcess ChallengesAssumptions are made by suppliers that VMRs are a one-time trickCommunication ChallengesWatchoutsConcerns about sharing expense and product informationSufficient communication of the benefits of change th
30、roughout 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 realization agenda has been created and/or no VMR champions are empowered to actOrganizational barriers(
31、e.g.multi-divisional companies)Watchouts24Value Managed Relationships VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgenda25Value Managed Relationships Improved quality due to reduced variabilityImproved communicationsLonger commitments allow for longer ru
32、n 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.Example Sources of Value:Primary Sources of ValueVolume/ScaleEconomiesValue Engineering and Quality Improv
33、ement System CostReductionTechnology and capability sharing to create lowest cost,highest value productJoint determination of potential for:material substitutionreduction of material contentstandardization of materialsJoint identification of redundant/duplicate processes,e.g.quality controlorder pro
34、cessingtransportationengineeringmanagement functionsimproved inventory controlCross company logisticssharing of transportation and distribution operations(e.g.,leveraged backhaul opportunities,shared delivery runs)Estimate Percent of Total Value Created:25%50%25%Sources of Value(1 of 2)26Value Manag
35、ed RelationshipsValue engineering and systems cost reduction are most difficult to implement and require the most senior involvment.Source of ValueMethodologyDifficulty of ImplementationSenior Management InvolvementAn open dialogue regarding product design begins to optimize design/cost trade-offsVa
36、lue engineering and quality improvementBuyer and supplier jointly examine current methods of interaction and begin to eliminate redundanciesSystems cost reductionConsolidation of suppliers allows the buyer to negotiate for share of incremental profitVolume/scale economicsSources of Value(2 of 2)27Va
37、lue Managed RelationshipsDisguised exampleIncrease of 3.2 times6%Profit ImprovementRelevant Plant Capacity UtilizationIncremental Margin ImpactIncreasing a suppliers utilization by 22%had a 6%profit impact.Volume/Scale EconomiesExample28Value Managed RelationshipsNew DesignsIndexed QualityIndexed Co
38、stValue engineering identified three new product options that increased quality and reduced cost.*Protypes developed jointly with supplierDisguised exampleValue EngineeringExample29Value Managed Relationships Before VMR(5 Quality Control FTEs)After VMR(3 Quality Control FTEs)SupplierCustomerJoint Qu
39、alityControlCustomerDirect to packaging operations=QC inspection personnelIn this example of systems cost VMR,the supplier and Bain client eliminated redundancy and saved 40%of quality control costs.To packaging operationsOngoing Feedback to VendorSystems Costs Example30Value Managed RelationshipsOv
40、erall,this client achieved a 19%cost reduction through the VMR example shown.Summary of Cost SavingsExample31Value Managed Relationships Volume/price savings and some level of value engineering/quality benefits are realized very early in the relationshipAdditional value engineering savings and syste
41、m cost reductions are more 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 Timing32Value Managed Relationships VMR ConceptVMR Key Success Facto
42、rsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgenda33Value Managed RelationshipsIdentify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction OpportunitiesImplement VMR OpportunitiesTrack VMR SavingsSelec
43、t products for VMR based 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 opportuniti
44、esFormalize relationship and implement opportunitiesTrack progress of savings and relationshipsVMR Process34Value Managed RelationshipsEXAMPLEIdentify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction Opportunities
45、Implement VMR OpportunitiesTrack VMR SavingsVMR Process35Value Managed RelationshipsThis 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 L
46、evelProduct redesignMaterial substitutionVolume discountSystem cost improvementVolume discountSome system cost Product redesignMaterial substitutionModerate potentialHigh potentialMedium/low potentialPurchasing Category Priority36Value Managed RelationshipsBecause the VMR process is lengthy and time
47、 consuming,qualitative 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
48、 of VMRBalance amount of cost savings with level of sensitivity associated with product categoryPurchasing Category Selection37Value Managed RelationshipsIdentify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction O
49、pportunitiesImplement VMR OpportunitiesTrack VMR SavingsVMR Process38Value Managed RelationshipsUnderstanding the industry structure validates opportunities that were identified in the first VMR process step.Industry Cost Structure and DriversIndustry Competitive StructureIndustry Capacity Utilizati
50、onHow suitable is this 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