1、Sheila Dubin,Value Managed Relationships,December 1998,Author:,2,After 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 Bains VMR process a
2、nd success,Value Managed Relationships Objectives,3,VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey Takeaways,Agenda,4,A Value Managed Relationship (VMR) is a full partnership between a customer and a supplier.Its goal is to maximize quality and minimize total system
3、 costs of doing business through collaborative sharing of information and resources.,A VMR creates a win/win relationship.,VMR Definition,5,“Partnership”,True VMR,Procurement Strategies,Value Managed Relationship,Sole Source,Vertical Integration,Competitive Bid,Short-term Contract / Spot,Long-term C
4、ontract,A VMR is one procurement strategy to maximize cost savings and strategic value.,What is a VMR?,6,A Value Managed Relationship can exceed the value potential of both vertical integration and traditionally negotiated “arms length“ transactions: a consolidation of purchases to one or few suppli
5、ers who are capable of maintaining long term competitive economics, high quality and efficient delivery participants must share single goal of achieving lowest industry systems cost savings should be shared to provide mutual ongoing incentives to eliminate redundancies,A VMR, when appropriate, excee
6、ds the value of all other types of relationships.,How Does a VMR Work?,7,Traditional “Arms Length“ Approach,Vertical Integration,VMR,VMRs can exceed the value of both traditional contracts as well as vertical integration.,Strategic Purchasing Options,8,High Potential,High,Low,High,Low,Purchasing vol
7、ume (relative to total supplier sales),Value-added / engineered level,Product redesign Material substitution,Product redesign Material substitution Volume discount System cost improvement,Moderate Potential,Volume discount Some system cost,No / Little opportunity (need to cluster),VMRs are most appr
8、opriate where high volume and significant value added occurs.,Medium/low potential,Where Are VMRs Appropriate?,9,Large dollar purchaseHigh level of value-added cost in productFragmentation across many divisions and suppliersClient represents significant part of industry outputIndustry competitive in
9、tensity high: capacity utilization dropping consolidation in progress many new plants looking for volume historical industry price umbrellas,VMRs are most effective in large dollar, high value added products.,In Which Categories Are VMRs Most Effective?,10,Consolidate volume in long-term partnership
10、,Increased pace of innovation leads to strategic benefits for both,Ensures continued supply for buyer and capacity utilization for supplier,Commitment and scale justifies joint investment in cost savings and R&D/technology,Joint efforts lead to system-wide benefits for both,Added value leads to more
11、 reasons to collaborate,A successful VMR will continue to create value as the relationship progresses.,Value Cycle,11,VMRs create value for the buyer.,Higher quality and fewer rejectsSuperior servicePartner in joint system cost reductionInnovationTechnological expertise package performance improveme
12、nts spec consolidation product redesign and materials substitutionPricing commensurate with larger, longer volume commitmentsCommitment to continuous improvement of the partnership,Value Of VMRsBuyer,12,VMRs create value for suppliers.,Larger volumes in fewer items longer run lengths and fewer set-u
13、ps higher capacity utilization learning curve benefitsStable long term demandSharing in buyers strong commitment to future growthPartner in joint system cost reductionResources and stability to invest in technologyCommitment to continuous improvement of the partnership,Value Of VMRsSupplier,13,VMRs
14、have averaged 15% to 20% cost savings.,Average Range,Bain Experience in VMRs,14,Although 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 s
15、avings within three yearsCost-based indexed pricing over time50/50 savings sharingPenalties and inspections built-inEtc.,VMR Sample Agreement,15,VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey Takeaways,Agenda,16,Over one half of existing partnerships do not meet exp
16、ectations.,This reality increases the need to understand and focus on the key success factors,Partnerships Expectations,17,Strategy, organization and process must be in place in order to ensure VMR success.,Clarity of and agreement on strategy and goals,Strategy,Appropriate level of involvement in a
17、nd across organizations,Organization,Detailed and structured process for identifying and implementing opportunities,Process,Key Success Factors,18,Long term relationships focused on total value are critical strategic issues that must be clearly articulated.,VMRs pursued only where appropriateTrue su
18、pplier partnerships long-term relationships with one or few suppliers relationships at all organizational levels extensive two-way information sharing sharing of all savings willing to address inherent risksFocus on total value-chain, not input price suppliers selected based on long-term total value
19、 opportunities identified and captured across entire supply chain,Key Success FactorsStrategy,19,Involvement and cooperation across the organization is critical to success.,Senior management direct involvement and ongoing interest/supportCross-functional involvement in scheduling, logistics, design
20、and developmentImplementation driven at “grass roots“ levelClear process “champions“Formalized structure and process to perpetuate partnership,Key Success FactorsOrganization,20,A detailed process must be in place to maximize value and ensure ongoing opportunity identification.,Up front identificati
21、on 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 process,Key Success FactorsProcess,21,Scope of partnership limited not win
22、/win,Focus on price instead of total value supplier selection based on price failure to consider total system as source of savings,Chosen strategy inappropriate for purchase category,An inappropriate strategy can prohibit a win/win relationship.,Reasons for Partial SuccessStrategy,22,Partial success
23、 can be caused by senior or line organizational inadequacies.,Reasons for Partial SuccessOrganization,23,Lack of internal and external consensus building,Lack of “relentless pursuit“,Supplier selection not rigorous and fact-based,Technical opportunities not identified up front,Lack of systems and st
24、ructures to perpetuate the process,An incomplete process can also cause limited success.,Reasons for Partial SuccessProcess,24,To achieve successful VMRs, there are several areas of potential obstacles to watch out for.,Benefits are vague and unqualified no “full potential” economics analysis has be
25、en developed for both parties,Process Challenges,Assumptions are made by suppliers that VMRs are a one-time trick,Communication Challenges,Watchouts,Concerns about sharing expense and product information,Sufficient communication of the benefits of change throughout both organizations,There is a lack
26、 of understanding and commitment to changing the way business is done,Benefits of the VMR are split in a lop-sided manner,SKU proliferation,No ongoing value realization agenda has been created and/or no VMR champions are empowered to act,Organizational barriers (e.g. multi-divisional companies),Watc
27、houts,25,VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey Takeaways,Agenda,26,Improved quality due to reduced variability Improved communications Longer commitments allow for longer run lengths Purchasing economies,A strong VMR can capture the value inherent in vertic
28、al integration while allowing the client to focus both capital and management resources on its primary business.,Example Sources of Value:,Primary Sources of Value,Volume/Scale Economies,Value Engineering and Quality Improvement,System Cost Reduction,Technology and capability sharing to create lowes
29、t cost, highest value product Joint determination of potential for: material substitution reduction of material content standardization of materials,Joint identification of redundant/duplicate processes, e.g. quality control order processing transportation engineering management functions improved i
30、nventory control Cross company logistics sharing 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),27,Value engineering and systems cost reduction are most diffic
31、ult to implement and require the most senior involvment.,Source of Value,Methodology,Difficulty of Implementation,Senior Management Involvement,An open dialogue regarding product design begins to optimize design/cost trade-offs,Value engineering and quality improvement,Buyer and supplier jointly exa
32、mine current methods of interaction and begin to eliminate redundancies,Systems cost reduction,Consolidation of suppliers allows the buyer to negotiate for share of incremental profit,Volume/scale economics,Sources of Value (2 of 2),28,Disguised example,Increase of 3.2 times,6% Profit Improvement,Re
33、levant Plant Capacity Utilization,Incremental Margin Impact,Increasing a suppliers utilization by 22% had a 6% profit impact.,Volume/Scale EconomiesExample,29,New Designs,Indexed Quality,Indexed Cost,Value engineering identified three new product options that increased quality and reduced cost.,*Pro
34、types developed jointly with supplier Disguised example,Value EngineeringExample,30,Supplier,Customer,Joint Quality Control,Customer,Direct to packaging operations,= QC inspection personnel,In this example of systems cost VMR, the supplier and Bain client eliminated redundancy and saved 40% of quali
35、ty control costs.,To packaging operations,Ongoing Feedback to Vendor,Systems Costs Example,31,Overall, this client achieved a 19% cost reduction through the VMR example shown.,Summary of Cost SavingsExample,32,Volume/price savings and some level of value engineering/ quality benefits are realized ve
36、ry early in the relationship Additional value engineering savings and system cost reductions are more likely to come later,Bain experience has found that the value from VMR is developed over several years.,Years into VMR,Value engineering and quality improvement,System cost reduction,Volume/price ef
37、fect,Typical Timing,33,VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey Takeaways,Agenda,34,Identify VMR Opportunities,Understand Industry Cost Structure,Select VMR Candidates,Obtain Top Management Commitment,Identify Specific Cost Reduction Opportunities,Implement VM
38、R Opportunities,Track VMR Savings,Select products for VMR based on purchasing volume and value-added,Analyze industry economics to develop savings hypotheses,Analyze suppliers to select best VMR candidates,Ensure senior management of client and supplier are fully committed,Conduct analysis to prove
39、hypotheses and quantify savings opportunities,Formalize relationship and implement opportunities,Track progress of savings and relationships,VMR Process,35,Identify VMR Opportunities,Understand Industry Cost Structure,Select VMR Candidates,Obtain Top Management Commitment,Identify Specific Cost Redu
40、ction Opportunities,Implement VMR Opportunities,Track VMR Savings,VMR Process,36,This matrix will help you prioritize which opportunities are most appropriate for a VMR.,No/Little Opportunity (need to cluster),High,Low,Low,High,Purchasing Volume (Relative to Total Supplier Sales),Value-Added/Enginee
41、red Level,Product redesign Material substitution Volume discount System cost improvement,Volume discount Some system cost,Product redesign Material substitution,Moderate potential,High potential,Medium/low potential,Purchasing Category Priority,37,Because the VMR process is lengthy and time consumin
42、g, qualitative issues must also be evaluated in selecting where to implement a VMR.,Suppliers and client organizations must be willing to work closely together commit management time and effort prioritize success of VMRTop management of supplier and client must have authority to cover full scope of
43、VMRBalance amount of cost savings with level of sensitivity associated with product category,Purchasing Category Selection,38,Identify VMR Opportunities,Understand Industry Cost Structure,Select VMR Candidates,Obtain Top Management Commitment,Identify Specific Cost Reduction Opportunities,Implement
44、VMR Opportunities,Track VMR Savings,VMR Process,39,Understanding the industry structure validates opportunities that were identified in the first VMR process step.,How suitable is this market and its competitive dynamics for a VMR? How important is the client as a customer in this industry?,What dri
45、ves this cost structure?,How fragmented is the industry?,What is the utilization of each player?,Understand Industry Structure,40,Identify VMR Opportunities,Understand Industry Cost Structure,Select VMR Candidates,Obtain Top Management Commitment,Identify Specific Cost Reduction Opportunities,Implem
46、ent VMR Opportunities,Track VMR Savings,VMR Process,41,VMR partners must be able to perform in the relationship and be a willing partner.,Potential for low cost position Strong technology/quality New product development track record Adequate financial resources,Long Term Winners,Capability and Willi
47、ngness to Develop a Partnership,Important category for supplier Client important to supplier Partnerships with other suppliers Scale to handle volume Parent company support,Ideal Partners,Supplier Prioritization,42,Initial analysis of the supplier must be conducted to determine potential for being a
48、 long-term winner and capability/willingness to develop a partnership.,Example Analyses:,Size and market shareStrategyProfitabilityCash flowQuality philosophy and implementationTechnology applicationImportance of clients business to supplier,Initial Supplier Evaluation,43,To further determine whethe
49、r a specific supplier is a good VMR candidate, evaluate the vendor on a variety of criteria.,Quality of Service,Supplier Commitment,Magnitude of Cost Reduction Potential,Long-Term Leadership Potential,Product/delivery/systems Geographic coverage,Dedication/dependence Interest in VMR,Systems economics Flexibility of approach Credibility of plan/resources,Technology Scale Financial,
