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 Relationships Lab SuppliesMedical SuppliesFlexiblePackagingGasesPunchesand DyesDrinksPac
17、kagingOffice SuppliesSBS FoldingCartonsElectricalSuppliesRigid InjectionMolded PlasticProductsCorrugatedBoxesFreightFlex PackagingThermoformedPartsMotorsAutomotivePartsMolded PlasticBottlesPower EquipmentProductsRecycledPaperboardCartonsBrickGlassOils and LubesChemicalsDextroseCoalBicycle PartsAdhes
18、ivesResins47%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 VMRs13Value Managed RelationshipsAlthough the value managed relationship can be sop
19、histicated 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-inEtc.VMR Sample Agr
20、eementa.tr14Value Managed Relationships VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgendaa.tr15Value Managed RelationshipsPartnership Not Meeting ExpectationsPartnership Meeting ExpectationsPartnership Exceeding Expectations 0%20%40%60%80%100%Total Part
21、nershipsOver one half of existing partnerships do not meet 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
22、 and agreement on strategy and goalsStrategyAppropriate level 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
23、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 inherent ri
24、sksFocus on total value-chain,not input pricesuppliers selected 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 mana
25、gement 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 FactorsOrganization19Value Managed R
26、elationshipsA 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 selectionExtens
27、ive consensus buildingSystems and structures to perpetuate 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 strate
28、gy inappropriate for purchase categoryAn inappropriate strategy can prohibit a win/win relationship.Reasons for Partial SuccessStrategya.tr21Value Managed RelationshipsLimited senior management participationLittle cross-functional involvementOver-centralized decision making:Not participative/inclusi
29、veAd hoc structure set up to implement strategyPartial success 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
30、 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 SuccessProcessa.tr23Value Managed Relationships To achieve successful VMRs,there are several areas of potenti
31、al 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 inform
32、ationSufficient 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 no
33、VMR champions are empowered to actOrganizational barriers(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 variabilityImp
34、roved 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 Valu
35、eVolume/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 identification of
36、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 of Total Va
37、lue Created:25%50%25%Sources of Value(1 of 2)26Value Managed 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
38、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 incrementa
39、l profitVolume/scale economicsSources of Value(2 of 2)27Value Managed RelationshipsDisguised exampleClientPurchasesCurrentIncrementalClient Volume78%100%0%25%50%75%100%Weighted Average Plant Capacity UtilizationIncrease of 3.2 timesProfitFixed CostsVariableCostsIndustry CostStructureIncrementalClien
40、t 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 EconomiesExample28Value Managed RelationshipsCurrent ProductPrototype A*Prototype B*Prototype
41、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 EngineeringExample29Value Managed Relationships
42、 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 control costs.To packag
43、ing operationsOngoing Feedback to VendorSystems Costs Example30Value Managed RelationshipsSystem 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 SavingsExample31Value Manag
44、ed Relationships 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 has found that the v
45、alue 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 FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgenda33Value Managed Rel
46、ationshipsIdentify 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-addedAnalyze industry econo
47、mics 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 progress of savings and r
48、elationshipsVMR Process34Value Managed RelationshipsEXAMPLEIdentify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction OpportunitiesImplement VMR OpportunitiesTrack VMR SavingsVMR Process35Value Managed Relationship
49、sThis 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 cost improvementVolu
50、me discountSome system cost Product redesignMaterial substitutionModerate potentialHigh potentialMedium/low potentialPurchasing Category Priority36Value Managed RelationshipsBecause the VMR process is lengthy and time consuming,qualitative issues must also be evaluated in selecting where to implemen
