1、1Sheila DubinValue Managed RelationshipsDecember 2019Author: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 Relationships3 VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgendaValue Managed Relationships4 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 DefinitionValue Managed Relationships5“Partnership”True VMR Procurement StrategiesValue Managed Relat
4、ionshipSole 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 inte
5、gration 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 s
6、hould 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 Relationships7Fragmented supplier base, sporadic communicationSingle or small number of suppliers, frequent c
7、ommunicationIn-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 u
8、nit 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 of both
9、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 substitutionVolume
10、 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 purchaseH
11、igh 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 umbrella
12、sVMRs 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 capacity uti
13、lization 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 CycleValue Man
14、aged Relationships11VMRs 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, l
15、onger 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 term demandSha
16、ring 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 SuppliesFlexiblePackagingGasesPunchesand
17、 DyesDrinksPackagingOffice SuppliesSBS FoldingCartonsElectricalSuppliesRigid InjectionMolded PlasticProductsCorrugatedBoxesFreightFlex PackagingThermoformedPartsMotorsAutomotivePartsMolded PlasticBottlesPower EquipmentProductsRecycledPaperboardCartonsBrickGlassOils and LubesChemicalsDextroseCoalBicy
18、cle 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 Relationships14Although the value managed relatio
19、nship 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 inspections built-i
20、nEtc.VMR Sample AgreementValue Managed Relationships15 VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgendaValue Managed Relationships16Partnership Not Meeting ExpectationsPartnership Meeting ExpectationsPartnership Exceeding Expectations 0%20%40%60%80%100
21、%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 order to ensure VMR succes
22、s.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 relationships focused on tota
23、l 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 savingswilling to address
24、 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 organization is critical to succes
25、s.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 Success FactorsOrganizationVa
26、lue Managed Relationships20A 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 valueRigorous and fact-based supplier
27、selectionExtensive consensus buildingSystems and structures to perpetuate processKey Success FactorsProcessValue Managed Relationships21Scope of partnership limitednot win/winFocus on price instead of total valuesupplier selection based on pricefailure to consider total system as source of savingsCh
28、osen strategy inappropriate for purchase categoryAn inappropriate strategy can prohibit a win/win relationship.Reasons for Partial SuccessStrategyValue Managed Relationships22Limited senior management participationLittle cross-functional involvementOver-centralized decision making: Not participative
29、/inclusiveAd hoc structure set up to implement strategyPartial success can be caused by senior or line organizational inadequacies.Reasons for Partial SuccessOrganizationValue Managed Relationships23Lack of internal and external consensus buildingLack of relentless pursuitSupplier selection not rigo
30、rous 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 VMRs, there are several areas of potent
31、ial 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 ChallengesWatchoutsConcerns about sharing expense and product inf
32、ormationSufficient 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 realization agenda has been created and/or
33、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 Improved quality due to reduced variabili
34、tyImproved 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.Example Sources of Value:Primary Sources of
35、 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 contentstandardization of materialsJoint identificati
36、on of redundant/duplicate processes, e.g.quality controlorder processingtransportationengineeringmanagement functionsimproved inventory controlCross company logisticssharing of transportation and distribution operations (e.g., leveraged backhaul opportunities, shared delivery runs)Estimate Percent o
37、f 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 Management InvolvementAn open dialogue
38、 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 allows the buyer to negotiate for share of
39、 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 CostsVariableCostsIndustry CostStructureIncr
40、ementalClient 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 Relationships29Current ProductPrototype A*Prototy
41、pe 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 exampleValue EngineeringExampleValue Managed
42、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 redundancy and saved 40% of quality contr
43、ol 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 VMR example shown.Summary of Cost Savings
44、ExampleValue 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 more likely to come laterBain experience
45、 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 ValueBain VMR ProcessExampleKey TakeawaysAgen
46、daValue Managed Relationships34Identify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction OpportunitiesImplement VMR OpportunitiesTrack VMR SavingsSelect products for VMR based on purchasing volume and value-addedA
47、nalyze 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 relationship and implement opportunitiesTrack prog
48、ress of savings and relationshipsVMR ProcessValue Managed Relationships35EXAMPLEIdentify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction OpportunitiesImplement VMR OpportunitiesTrack VMR SavingsVMR ProcessValue M
49、anaged 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 redesignMaterial substitutionVolume discountSystem
50、 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 issues must also be evaluated in selec
