1、Sheila DubinValue Managed RelationshipsDecember 1998Author: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 and suc
2、cessValue Managed Relationships ObjectivesVMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgendaa.trA Value Managed Relationship (VMR) is a full partnership between a customer and a supplier.Its goal is to maximize quality and minimize total system costs of
3、doing business through collaborative sharing of information and resources.A VMR creates a win/win relationship. VMR Definition“Partnership” True VMRProcurement StrategiesValue Managed RelationshipSole SourceVertical IntegrationCompetitive BidShort-term Contract / SpotLong-term ContractA VMR is one p
4、rocurement strategy to maximize cost savings and strategic value.What is a VMR?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 suppliers who are capable of mai
5、ntaining 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 redundanciesA VMR, when appropriate, exceeds the value of all other t
6、ypes of relationships.How Does a VMR Work?Fragmented supplier base, sporadic communicationSingle or small number of suppliers, frequent communicationIn-house supply, communication frequentTraditional “Arms Length“ Approach Vertical IntegrationInvestments based upon manufacturers needsPotential for c
7、ustomized investment in facilities/equipmentMay require investment in weak strategic businessAdversarial bid negotiations to obtain lowest unit priceLong-term commitment focused upon lowest total systems cost using value chain perspectivesFocus driven by internal incentives/ transfer pricesSeparate
8、product design Joint product design and cross functional participationJoint product design often at oddsVMRVMRs can exceed the value of both traditional contracts as well as vertical integration.Strategic Purchasing Optionsa.trHigh PotentialHighLowHigh LowPurchasing volume(relative to total supplier
9、 sales)Value-added / engineered level Product redesign Material substitution Product redesign Material substitution Volume discount System cost improvementModerate Potential Volume discount Some system costNo / Little opportunity (need to cluster)VMRs are most appropriate where high volume and signi
10、ficant value added occurs. Medium/low potentialWhere Are VMRs Appropriate?Large dollar purchaseHigh level of value-added cost in productFragmentation across many divisions and suppliersClient represents significant part of industry outputIndustry competitive intensity high: capacity utilization drop
11、ping consolidation in progress many new plants looking for volume historical industry price umbrellasVMRs are most effective in large dollar, high value added products.In Which Categories Are VMRs Most Effective?Consolidate volume in long-term partnershipIncreased pace of innovation leads to strateg
12、ic benefits for bothEnsures continued supply for buyer and capacity utilization 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 conti
13、nue to create value as the relationship progresses.Value CycleVMRs create value for the buyer. Higher quality and fewer rejectsSuperior servicePartner in joint system cost reductionInnovationTechnological expertise package performance improvements spec consolidation product redesign and materials su
14、bstitutionPricing commensurate with larger, longer volume commitmentsCommitment to continuous improvement of the partnershipValue Of VMRsBuyera.trVMRs create value for suppliers. Larger volumes in fewer items longer run lengths and fewer set-ups higher capacity utilization learning curve benefitsSta
15、ble 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 partnershipValue Of VMRsSupplierVMRs have averaged 15% to 20% cost savings.Average RangeBain Experi
16、ence in VMRsAlthough 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 over time50/50 sa
17、vings sharingPenalties and inspections built-inEtc.VMR Sample Agreementa.trVMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgendaa.trOver one half of existing partnerships do not meet expectations.This reality increases the need to understand and focus on th
18、e key success factorsPartnerships ExpectationsStrategy, organization and process must be in place in order to ensure VMR success.Clarity of and agreement on strategy and goalsStrategyAppropriate level of involvement in and across organizationsOrganizationDetailed and structured process for identifyi
19、ng and implementing opportunitiesProcessKey Success FactorsLong term relationships focused on total value are critical strategic issues that must be clearly articulated.VMRs pursued only where appropriateTrue supplier partnerships long-term relationships with one or few suppliers relationships at al
20、l 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 opportunities identified and captured across entire supply chainKey Success FactorsStrat
21、egyInvolvement and cooperation across the organization is critical to success.Senior management direct involvement and ongoing interest/supportCross-functional involvement in scheduling, logistics, design and developmentImplementation driven at “grass roots“ levelClear process “champions“Formalized
22、structure and process to perpetuate partnershipKey Success FactorsOrganizationA 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
23、systems cost valueRigorous and fact-based supplier selectionExtensive consensus buildingSystems and structures to perpetuate processKey Success FactorsProcessa.trScope of partnership limited not win/winFocus on price instead of total value supplier selection based on price failure to consider total
24、system as source of savingsChosen strategy inappropriate for purchase categoryAn inappropriate strategy can prohibit a win/win relationship.Reasons for Partial SuccessStrategya.trLimited senior management participationLittle cross-functional involvement“Over-centralized“ decision making: Not partici
25、pative/inclusiveAd hoc structure set up to implement strategyPartial success can be caused by senior or line organizational inadequacies.Reasons for Partial SuccessOrganizationa.trLack of internal and external consensus buildingLack of “relentless pursuit“Supplier selection not rigorous and fact-bas
26、edTechnical opportunities not identified up frontLack of systems and structures to perpetuate the processAn incomplete process can also cause limited success.Reasons for Partial SuccessProcessa.trTo achieve successful VMRs, there are several areas of potential obstacles to watch out for.Benefits are
27、 vague and unqualified no “full potential” economics analysis has been developed for both partiesProcess Challenges Assumptions are made by suppliers that VMRs are a one-time trickCommunication ChallengesWatchouts Concerns about sharing expense and product informationSufficient communication of the
28、benefits of change throughout both organizations There is a lack of understanding and commitment to changing the way business is doneBenefits of the VMR are split in a lop-sided mannerSKU proliferation No ongoing value realization agenda has been created and/or no VMR champions are empowered to actO
29、rganizational barriers (e.g. multi-divisional companies)WatchoutsVMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgenda Improved quality due to reduced variability Improved communications Longer commitments allow for longer run lengths Purchasing economiesA
30、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 Improvement System CostReduction Tech
31、nology and capability sharing to create lowest 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 transportatio
32、n engineering management functions improved inventory 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)Value engineering and
33、 systems cost reduction are most difficult to implement and require the most senior involvment.Source of Value MethodologyDifficulty of ImplementationSenior Management Involvement An open dialogue regarding product design begins to optimize design/cost trade-offs Value engineering and quality improv
34、ement Buyer and supplier jointly examine 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 economicsSources of Value (2 of 2)Disguised exampleIncrease of 3.2
35、times6% Profit ImprovementRelevant Plant Capacity Utilization Incremental Margin ImpactIncreasing a suppliers utilization by 22% had a 6% profit impact.Volume/Scale EconomiesExampleNew DesignsIndexed QualityIndexed CostValue engineering identified three new product options that increased quality and
36、 reduced cost.*Protypes developed jointly with supplierDisguised exampleValue EngineeringExampleBefore VMR(5 Quality Control FTEs)After VMR(3 Quality Control FTEs)Supplier Customer Joint QualityControl CustomerDirect 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 Example
