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1After 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 successValue Managed Relationships Objectives2 VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgenda3 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 costs of doing business through collaborative sharing of information and resources.A VMR creates a win/win relationship.VMR Definition4“Partnership”True VMR Procurement StrategiesValue Managed RelationshipSole SourceVertical IntegrationCompetitive BidShort-term Contract/SpotLong-term ContractA VMR is one procurement strategy to maximize cost savings and strategic value.What is a VMR?5 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 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 redundanciesA VMR,when appropriate,exceeds the value of all other types of relationships.How Does a VMR Work?6Fragmented supplier base,sporadic communicationSingle or small number of suppliers,frequent communicationIn-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 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 traditional contracts as well as vertical integration.Strategic Purchasing Options7 High PotentialHighLowHighLowPurchasing volume(relative to total supplier sales)Value-added/engineered levelProduct redesignMaterial substitutionProduct redesignMaterial substitutionVolume 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?8Large 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 droppingconsolidation in progressmany new plants looking for volumehistorical industry price umbrellasVMRs are most effective in large dollar,high value added products.In Which Categories Are VMRs Most Effective?9Consolidate volume in long-term partnershipIncreased pace of innovation leads to strategic 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 continue to create value as the relationship progresses.Value Cycle10VMRs 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 commitmentsCommitment to continuous improvement of the partnershipValue Of VMRsBuyer11VMRs create value for suppliers.Larger volumes in fewer itemslonger run lengths and fewer set-upshigher capacity utilizationlearning 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 partnershipValue Of VMRsSupplier12 Lab SuppliesMedical SuppliesFlexiblePackagingGasesPunchesand DyesDrinksPackagingOffice SuppliesSBS FoldingCartonsElectricalSuppliesRigid InjectionMolded PlasticProductsCorrugatedBoxesFreightFlex PackagingThermoformedPartsMotorsAutomotivePartsMolded PlasticBottlesPower EquipmentProductsRecycledPaperboardCartonsBrickGlassOils and LubesChemicalsDextroseCoalBicycle 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 VMRs13Although 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 savings sharingPenalties and inspections built-inEtc.VMR Sample Agreement14 VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgenda15Partnership Not Meeting ExpectationsPartnership Meeting ExpectationsPartnership Exceeding Expectations 0%20%40%60%80%100%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 Expectations16Strategy,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 identifying and implementing opportunitiesProcessKey Success Factors17Long term relationships focused on total 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 inherent risksFocus on total value-chain,not input pricesuppliers selected based on long-term total valueopportunities identified and captured across entire supply chainKey Success FactorsStrategy18Involvement 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 championsFormalized structure and process to perpetuate partnershipKey Success FactorsOrganization19A 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 selectionExtensive consensus buildingSystems and structures to perpetuate processKey Success FactorsProcess20Scope of partnership limitednot win/winFocus on price instead of total valuesupplier selection based on pricefailure to consider total system as source of savingsChosen strategy inappropriate for purchase categoryAn inappropriate strategy can prohibit a win/win relationship.Reasons for Partial SuccessStrategy21Limited senior management participationLittle cross-functional involvementOver-centralized decision making:Not participative/inclusiveAd hoc structure set up to implement strategyPartial success can be caused by senior or line organizational inadequacies.Reasons for Partial SuccessOrganization22Lack of internal and external consensus buildingLack of relentless pursuitSupplier selection not rigorous 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 SuccessProcess23 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 partiesProcess ChallengesAssumptions are made by suppliers that VMRs are a one-time trickCommunication ChallengesWatchoutsConcerns about sharing expense and product informationSufficient 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 VMR champions are empowered to actOrganizational barriers(e.g.multi-divisional companies)Watchouts24 VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgenda25 Improved quality due to reduced variabilityImproved 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 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 identification 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 of Total Value Created:25%50%25%Sources of Value(1 of 2)26Value 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 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 incremental profitVolume/scale economicsSources of Value(2 of 2)27Disguised exampleClientPurchasesCurrentIncrementalClient Volume78%100%0%25%50%75%100%Weighted Average Plant Capacity UtilizationIncrease of 3.2 timesProfitFixed CostsVariableCostsIndustry CostStructureIncrementalClient 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 EconomiesExample28Current ProductPrototype A*Prototype 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 EngineeringExample29 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 packaging operationsOngoing Feedback to VendorSystems Costs Example30System 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 SavingsExample31 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 value from VMR is developed over several years.Years into VMRValue engineering and quality improvementSystem cost reductionVolume/price effectTypical Timing32 VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgenda33Identify 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 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 progress of savings and relationshipsVMR Process34EXAMPLEIdentify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction OpportunitiesImplement VMR OpportunitiesTrack VMR SavingsVMR Process35This 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 improvementVolume discountSome system cost Product redesignMaterial substitutionModerate potentialHigh potentialMedium/low potentialPurchasing Category Priority36Because the VMR process is lengthy and time consuming,qualitative issues must also be evaluated in selecting where to implement 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 with product categoryPurchasing Category Selection37Identify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction OpportunitiesImplement VMR OpportunitiesTrack VMR SavingsVMR Process38Understanding the industry structure validates opportunities that were identified in the first VMR process step.Industry Cost Structure and DriversIndustry Competitive StructureIndustry Capacity UtilizationHow suitable is this market and its competitive dynamics for a VMR?How important is the client as a customer in this industry?What is the cost structure of the industry?ExampleQuestions:Who are the key players?What is the industry capacity utilization?What drives this cost structure?How fragmented is the industry?What is the utilization of each player?What type of cost savings opportunities might exist?On what factors do key players compete?What drives utilization?Understand Industry Structure39Identify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction OpportunitiesImplement VMR OpportunitiesTrack VMR SavingsVMR Process40VMR partners must be able to perform in the relationship and be a willing partner.Potential for low cost positionStrong technology/qualityNew product development track recordAdequate financial resourcesLong Term WinnersCapability and Willingness to Develop a PartnershipImportant category for supplierClient important to supplierPartnerships with other suppliersScale to handle volumeParent company supportIdeal PartnersSupplier Prioritization41Initial analysis of the supplier must be conducted to determine potential for being a 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 supplierInitial Supplier Evaluation42 To further determine whether a specific supplier is a good VMR candidate,evaluate the vendor on a variety of criteria.Quality of ServiceSupplier CommitmentMagnitude of Cost Reduction PotentialLong-Term Leadership PotentialProduct/delivery/systemsGeographic coverageDedication/dependenceInterest in VMRSystems economicsFlexibility of approachCredibility of plan/resourcesTechnologyScaleFinancialSupplier Evaluation43Partnership Development ProcessIdentify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction OpportunitiesImplement VMR OpportunitiesTrack VMR SavingsVMR Process44ImplementationSet up partnership management structure and rolloutNegotiationsShare aggregate responsesSupplier Proposals AnalysisReceive responsesInitial Contact with SuppliersDescribe proposed relationshipSelection of supplier(s)Comparative analysisElicit suppliers attitudes on a partnership with the clientTrain staff to manage process,expand to other areasIdentification of BDP and system cost reduction targetsFollow-up with plant tours,quality checks,etc.Hand over category strategy and volume expectationsThe optimal partnership development process is explicit and clearly articulated.Partnership Development Process45 Number of Suppliers:OligopolyGiant(s)and ManyFragmentedSole SourceGiant(s)and Few15-3015-302-52-51Supplier Concentration:80%to 6-8 suppliersRest with 10-20 suppliers80%to 1 or 2 suppliersRest with 15-30 suppliersEvenly among suppliers80%to 1 or 2 suppliersRest with 1-4 suppliers100%to 1 supplierLong term competitive bidsShort term competitive bidsVMRLong term competitive bidsShort term competitive bidsVMRLong term competitive bidsShort term competitive bidsVMRLong term competitive bidsShort term competitive bidsVMRLong term competitive bidsPotential Relationship Options:A range of supplier configuration options,should be evaluated.Supplier Configuration Alternatives46PeopleIs senior management committed to making this work?Have all organizational,cultural,and skill changes been addressedAre the incentives appropriate to ensure employee commitment?Operational ExecutionWhat is the governance structure?How is progress monitored?How will roadblocks be resolved?Is there open sharing of required information?Can all the information systems changes be identified and specifiedHow will switch disruptions be minimized?Partner SelectionWhat is the optimal number of suppliers?Do we really understand suppliers current and future cost position?Has the supplier screen included non-cost parameters?Has the supplier made a realistic commitment?Is the supplier committed to delivering on the agreement?ValueIs this the right input to target for a VMR?industry track recordproportion of buyer cost structureDoes the benefit outweigh the risks?switching costsbuyer leverageWhere is the value?Stages 1,2 and 3short vs.long-termIs the value realizable?potential hurdles and roadblocksEach of these issues should be considered in evaluating a VMR.Checklist for Successful Execution47Identify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction OpportunitiesImplement VMR OpportunitiesTrack VMR SavingsVMR Process48A meaningful tracking mechanism must be put in place across multiple variables to ensure ongoing results.Savingsproduct costsystems costRelationship statusTimingof savingsmilestone achievementsIndustrychanges in industry dynamicsintroduction of new technology,etc.Tracking49 VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgenda50Client is large conglomerate producing 15 major product linesCurrent relationship with suppliers is traditional and somewhat adversar
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