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Sheila DubinValue Managed RelationshipsDecember 2019Author:1Sheila DubinValue Managed RelaValue 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 Bains VMR process and successValue Managed Relationships Objectives2After completing this module,Value Managed Relationships VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgendaa.tr3 VMR ConceptAgendaa.tr3Value Managed Relationships 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 A Value Managed Relationship Value Managed Relationships“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“Partnership”True VMR ProcureValue Managed Relationships 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?6 A Value Managed Relationship Value Managed RelationshipsFragmented 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 Optionsa.tr7Fragmented supplier base,sporValue Managed Relationships 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?8 High PotentialHighLowHighLowPValue Managed RelationshipsLarge 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?9Large dollar purchaseVMRs are Value Managed RelationshipsConsolidate 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 Cycle10Increased pace of innovation lValue Managed RelationshipsVMRs 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 VMRsBuyera.tr11VMRs create value for the buyeValue 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 strong commitment to future growthPartner in joint system cost reductionResources and stability to invest in technologyCommitment to continuous improvement of the partnershipValue Of VMRsSupplier12VMRs create value for supplierValue Managed RelationshipsVMRs have averaged 15%to 20%cost savings.Average RangeBain Experience in VMRs13VMRs have averaged 15%to 20%Value Managed RelationshipsAlthough 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 Agreementa.tr14Although the value managed relValue Managed Relationships VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgendaa.tr15 VMR ConceptAgendaa.tr15Value Managed RelationshipsOver one half of existing partnerships do not meet expectations.This reality increases the need to understand and focus on the key success factorsPartnerships Expectations16Over one half of existing partValue Managed RelationshipsStrategy,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 Factors17Strategy,organization and proValue Managed RelationshipsLong 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 FactorsStrategy18Long term relationships focuseValue Managed RelationshipsInvolvement 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 FactorsOrganization19Involvement and cooperation acValue Managed RelationshipsA 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 FactorsProcessa.tr20A detailed process must be in Value 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 strategy inappropriate for purchase categoryAn inappropriate strategy can prohibit a win/win relationship.Reasons for Partial SuccessStrategya.tr21Scope of partnership limitedFoValue Managed RelationshipsLimited 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 SuccessOrganizationa.tr22Limited senior management partValue Managed RelationshipsLack 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 SuccessProcessa.tr23Lack of internal and external Value Managed Relationships 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 To achieve successful VMRs,tValue Managed Relationships VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgenda25 VMR ConceptAgenda25Value Managed Relationships 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)26 Improved quality due to reduValue 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 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)27Value engineering and systems Value Managed RelationshipsDisguised exampleIncrease of 3.2 times6%Profit ImprovementRelevant Plant Capacity UtilizationIncremental Margin ImpactIncreasing a suppliers utilization by 22%had a 6%profit impact.Volume/Scale EconomiesExample28Disguised exampleIncrease of 3Value Managed RelationshipsNew DesignsIndexed QualityIndexed CostValue engineering identified three new product options that increased quality and reduced cost.*Protypes developed jointly with supplierDisguised exampleValue EngineeringExample29New DesignsIndexed QualityIndeValue Managed Relationships 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 Example30 Before VMRAfter VMRSupplierCuValue Managed RelationshipsOverall,this client achieved a 19%cost reduction through the VMR example shown.Summary of Cost SavingsExample31Overall,this client achieved Value Managed Relationships Volume/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 Volume/price savings and someValue Managed Relationships VMR ConceptVMR Key Success FactorsVMR Sources Of ValueBain VMR ProcessExampleKey TakeawaysAgenda33 VMR ConceptAgenda33Value Managed RelationshipsIdentify 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 Process34Identify VMR OpportunitiesUndeValue Managed RelationshipsEXAMPLEIdentify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction OpportunitiesImplement VMR OpportunitiesTrack VMR SavingsVMR Process35EXAMPLEIdentify VMR OpportunitValue Managed RelationshipsThis 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 Priority36This matrix will help you prioValue Managed RelationshipsBecause 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 Selection37Because the VMR process is lenValue Managed RelationshipsIdentify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction OpportunitiesImplement VMR OpportunitiesTrack VMR SavingsVMR Process38Identify VMR OpportunitiesUndeValue Managed RelationshipsUnderstanding 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 Structure39Understanding the industry strValue Managed RelationshipsIdentify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction OpportunitiesImplement VMR OpportunitiesTrack VMR SavingsVMR Process40Identify VMR OpportunitiesUndeValue Managed RelationshipsVMR 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 Prioritization41VMR partners must be able to pValue Managed RelationshipsInitial 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 Evaluation42Initial analysis of the suppliValue Managed Relationships 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 Evaluation43 To further determine whether Value Managed RelationshipsPartnership Development ProcessIdentify VMR OpportunitiesUnderstand Industry Cost StructureSelect VMR CandidatesObtain Top Management CommitmentIdentify Specific CostReduction OpportunitiesImplement VMR OpportunitiesTrack VMR SavingsVMR Process44Partnership Development ProcesValue Managed RelationshipsImplementationSet 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 Process45ImplementationSet up partnershValue Managed Relationships 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 Alternatives46 Number of Suppliers:OligopolyValue Managed RelationshipsPeopleIs 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
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