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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 an
2、d success,Value Managed Relationships Objectives,3,a.tr,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 syst
3、em 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 suppliers
5、 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 be shared to provide mutual ongoing incentives to eliminate redundancies,A VMR,when appropriate,exceeds the v
6、alue of all other types of relationships.,How Does a VMR Work?,7,a.tr,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 volume(r
7、elative to total supplier sales),Value-added/engineered level,Product redesignMaterial substitution,Product redesignMaterial substitutionVolume discountSystem cost improvement,Moderate Potential,Volume discountSome system cost,No/Little opportunity(need to cluster),VMRs are most appropriate where hi
8、gh 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 intensity high:cap
9、acity utilization droppingconsolidation in progressmany new plants looking for volumehistorical 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,Increased pace of in
10、novation 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 reasons to collabora
11、te,A successful VMR will continue to create value as the relationship progresses.,Value Cycle,11,a.tr,VMRs create value for the buyer.,Higher quality and fewer rejectsSuperior servicePartner in joint system cost reductionInnovationTechnological expertisepackage performance improvementsspec consolida
12、tionproduct 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 itemslonger run lengths and fewer set-upshigher capacity uti
13、lizationlearning 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 have averaged 15%to 20%
14、cost savings.,Average Range,Bain Experience in VMRs,14,a.tr,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 savings within three yea
15、rsCost-based indexed pricing over time50/50 savings sharingPenalties and inspections built-inEtc.,VMR Sample Agreement,15,a.tr,VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey Takeaways,Agenda,16,Over one half of existing partnerships do not meet expectations.,This re
16、ality 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 and across organizat
17、ions,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 supplier partnerships
18、long-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 selected based on long-term total valueopportunities identified a
19、nd 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 and developmentImplementation
20、 driven at grass roots levelClear process championsFormalized structure and process to perpetuate partnership,Key Success FactorsOrganization,20,a.tr,A detailed process must be in place to maximize value and ensure ongoing opportunity identification.,Up front identification of opportunities and uniq
21、ue 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,a.tr,Scope of partnership limitednot win/win,Focus on price inst
22、ead of total valuesupplier selection based on pricefailure 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,a.tr,Partial success can be caused by sen
23、ior or line organizational inadequacies.,Reasons for Partial SuccessOrganization,23,a.tr,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 structures to perpet
24、uate 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 unqualifiedno“full potential”economics analysis has been developed for both
25、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 of understanding and
26、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),Watchouts,25,VMR ConceptVMR
27、Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey Takeaways,Agenda,26,Improved quality due to reduced variabilityImproved communicationsLonger commitments allow for longer run lengthsPurchasing economies,A strong VMR can capture the value inherent in vertical integration while allowi
28、ng the client to focus both capital and management resources on its primary business.,Example Sources of Value:,Primary Sources of Value,Volume/ScaleEconomies,Value Engineering and Quality Improvement,System CostReduction,Technology and capability sharing to create lowest cost,highest value productJ
29、oint determination of potential for:material substitutionreduction of material contentstandardization of materials,Joint identification of redundant/duplicate processes,e.g.quality controlorder processingtransportationengineeringmanagement functionsimproved inventory controlCross company logisticssh
30、aring 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 difficult to implement and require the most senior in
31、volvment.,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 examine current methods of interaction and begin t
32、o 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,Relevant Plant Capacity Utilization,Incremental Mar
33、gin 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.,*Protypes developed jointly with supplierDisguised exam
34、ple,Value EngineeringExample,30,Supplier,Customer,Joint QualityControl,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 quality control costs.,To packaging operations,Ongoing Feedba
35、ck 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 very early in the relationshipAdditional value engineering sa
36、vings 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 effect,Typical Timing,33,VMR ConceptVMR Key Success FactorsVMR
37、 Sources Of ValueBain VMR ProcessExampleKey Takeaways,Agenda,34,Identify VMR Opportunities,Understand Industry Cost Structure,Select VMR Candidates,Obtain Top Management Commitment,Identify Specific CostReduction Opportunities,Implement VMR Opportunities,Track VMR Savings,Select products for VMR bas
38、ed 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 hypotheses and quantify savings opportunities,Formalize relat
39、ionship 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 CostReduction Opportunities,Implement VMR Opportunities,Track VMR Savi
40、ngs,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/Engineered Level,Product redesignMaterial substitutionVolume discountSy
41、stem cost improvement,Volume discountSome system cost,Product redesignMaterial substitution,Moderate potential,High potential,Medium/low potential,Purchasing Category Priority,37,Because the VMR process is lengthy and time consuming,qualitative issues must also be evaluated in selecting where to imp
42、lement 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 of VMRBalance amount of cost savings with level of sensitivity associated wi
43、th product category,Purchasing Category Selection,38,Identify VMR Opportunities,Understand Industry Cost Structure,Select VMR Candidates,Obtain Top Management Commitment,Identify Specific CostReduction Opportunities,Implement VMR Opportunities,Track VMR Savings,VMR Process,39,Understanding the indus
44、try 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 drives this cost structure?,How fragmented is the industry?,What is the utiliz
45、ation of each player?,Understand Industry Structure,40,Identify VMR Opportunities,Understand Industry Cost Structure,Select VMR Candidates,Obtain Top Management Commitment,Identify Specific CostReduction Opportunities,Implement VMR Opportunities,Track VMR Savings,VMR Process,41,VMR partners must be
46、able to perform in the relationship and be a willing partner.,Potential for low cost positionStrong technology/qualityNew product development track recordAdequate financial resources,Long Term Winners,Capability and Willingness to Develop a Partnership,Important category for supplierClient important
47、 to supplierPartnerships with other suppliersScale to handle volumeParent company support,Ideal Partners,Supplier Prioritization,42,Initial analysis of the supplier must be conducted to determine potential for being a long-term winner and capability/willingness to develop a partnership.,Example Anal
48、yses:,Size and market shareStrategyProfitabilityCash flowQuality philosophy and implementationTechnology applicationImportance of clients business to supplier,Initial Supplier Evaluation,43,To further determine whether a specific supplier is a good VMR candidate,evaluate the vendor on a variety of c
49、riteria.,Quality of Service,Supplier Commitment,Magnitude of Cost Reduction Potential,Long-Term Leadership Potential,Product/delivery/systemsGeographic coverage,Dedication/dependenceInterest in VMR,Systems economicsFlexibility of approachCredibility of plan/resources,TechnologyScaleFinancial,Supplie
50、r Evaluation,44,Partnership Development Process,Identify VMR Opportunities,Understand Industry Cost Structure,Select VMR Candidates,Obtain Top Management Commitment,Identify Specific CostReduction Opportunities,Implement VMR Opportunities,Track VMR Savings,VMR Process,45,Implementation,Set up partne
