SheilaDubin ValueManagedRelationships December1998 Author Aftercompletingthismodule youwillbeableto UnderstandVMRconceptandapplicationArticulatetypesofcostsavingsopportunitiescreatedbyVMRsUsetheBainframeworktoconductaVMRRefertorealexamplesofBain sVMRprocessandsuccess ValueManagedRelationshipsObjectives VMRConceptVMRKeySuccessFactorsVMRSourcesOfValueBainVMRProcessExampleKeyTakeaways Agenda AValueManagedRelationship VMR isafullpartnershipbetweenacustomerandasupplier Itsgoalistomaximizequalityandminimizetotalsystemcostsofdoingbusinessthroughcollaborativesharingofinformationandresources AVMRcreatesawin winrelationship VMRDefinition Partnership TrueVMR ProcurementStrategies ValueManagedRelationship SoleSource VerticalIntegration CompetitiveBid Short termContract Spot Long termContract AVMRisoneprocurementstrategytomaximizecostsavingsandstrategicvalue WhatisaVMR AValueManagedRelationshipcanexceedthevaluepotentialofbothverticalintegrationandtraditionallynegotiated arm slength transactions aconsolidationofpurchasestooneorfewsupplierswhoarecapableofmaintaininglongtermcompetitiveeconomics highqualityandefficientdeliveryparticipantsmustsharesinglegoalofachievinglowestindustrysystemscostsavingsshouldbesharedtoprovidemutualongoingincentivestoeliminateredundancies AVMR whenappropriate exceedsthevalueofallothertypesofrelationships HowDoesaVMRWork Traditional ArmsLength Approach VerticalIntegration VMR VMRscanexceedthevalueofbothtraditionalcontractsaswellasverticalintegration StrategicPurchasingOptions HighPotential High Low High Low Purchasingvolume relativetototalsuppliersales Value added engineeredlevel ProductredesignMaterialsubstitution ProductredesignMaterialsubstitutionVolumediscountSystemcostimprovement ModeratePotential VolumediscountSomesystemcost No Littleopportunity needtocluster VMRsaremostappropriatewherehighvolumeandsignificantvalueaddedoccurs Medium lowpotential WhereAreVMRsAppropriate LargedollarpurchaseHighlevelofvalue addedcostinproductFragmentationacrossmanydivisionsandsuppliersClientrepresentssignificantpartofindustryoutputIndustrycompetitiveintensityhigh capacityutilizationdroppingconsolidationinprogressmanynewplantslookingforvolumehistoricalindustrypriceumbrellas VMRsaremosteffectiveinlargedollar highvalueaddedproducts InWhichCategoriesAreVMRsMostEffective Consolidatevolumeinlong termpartnership Increasedpaceofinnovationleadstostrategicbenefitsforboth Ensurescontinuedsupplyforbuyerandcapacityutilizationforsupplier CommitmentandscalejustifiesjointinvestmentincostsavingsandR D technology Jointeffortsleadtosystem widebenefitsforboth Addedvalueleadstomorereasonstocollaborate AsuccessfulVMRwillcontinuetocreatevalueastherelationshipprogresses ValueCycle VMRscreatevalueforthebuyer HigherqualityandfewerrejectsSuperiorservicePartnerinjointsystemcostreductionInnovationTechnologicalexpertisepackageperformanceimprovementsspecconsolidationproductredesignandmaterialssubstitutionPricingcommensuratewithlarger longervolumecommitmentsCommitmenttocontinuousimprovementofthepartnership ValueOfVMRs Buyer VMRscreatevalueforsuppliers Largervolumesinfeweritemslongerrunlengthsandfewerset upshighercapacityutilizationlearningcurvebenefitsStablelongtermdemandSharinginbuyer sstrongcommitmenttofuturegrowthPartnerinjointsystemcostreductionResourcesandstabilitytoinvestintechnologyCommitmenttocontinuousimprovementofthepartnership ValueOfVMRs Supplier VMRshaveaveraged15 to20 costsavings AverageRange BainExperienceinVMRs Althoughthevaluemanagedrelationshipcanbesophisticatedandcomplex theresultsarequantifiableandsimple 100 ofvolumewithonesupplierforthreeyearsUpfrontpricereductionof7 Guaranteed9 8 recurrentsavingswithinthreeyearsCost basedindexedpricingovertime50 50savingssharingPenaltiesandinspectionsbuilt inEtc VMRSampleAgreement VMRConceptVMRKeySuccessFactorsVMRSourcesOfValueBainVMRProcessExampleKeyTakeaways Agenda Overonehalfofexistingpartnershipsdonotmeetexpectations Thisrealityincreasestheneedtounderstandandfocusonthekeysuccessfactors PartnershipsExpectations Strategy organizationandprocessmustbeinplaceinordertoensureVMRsuccess Clarityofandagreementonstrategyandgoals Strategy Appropriatelevelofinvolvementinandacrossorganizations Organization Detailedandstructuredprocessforidentifyingandimplementingopportunities Process KeySuccessFactors Longtermrelationshipsfocusedontotalvaluearecriticalstrategicissuesthatmustbeclearlyarticulated VMRspursuedonlywhereappropriateTruesupplierpartnershipslong termrelationshipswithoneorfewsuppliersrelationshipsatallorganizationallevelsextensivetwo wayinformationsharingsharingofallsavingswillingtoaddressinherentrisksFocusontotalvalue chain notinputpricesuppliersselectedbasedonlong termtotalvalueopportunitiesidentifiedandcapturedacrossentiresupplychain KeySuccessFactors Strategy Involvementandcooperationacrosstheorganizationiscriticaltosuccess Seniormanagementdirectinvolvementandongoinginterest supportCross functionalinvolvementinscheduling logistics designanddevelopmentImplementationdrivenat grassroots l