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Building a Relationship on the Basis of Value
Wim Plaizier – Vice President
10th EIPM Annual Purchasing ConferenceArchamps, December 2nd, 2005
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Copyright 2005, A.T. Kearney, Inc. All rights reserved. No part of this work may be reproduced in any form
without written permission from the copyright holder.
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Agenda
Introduction: the future of strategic sourcing
Value Based Sourcing (VBS): a new approach to supplier relationship management
Managing supplier relationships to maximise value
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Agenda
Introduction: the future of strategic sourcing
Value Based Sourcing (VBS): a new approach to supplier relationship management
Managing supplier relationships to maximise value
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Companies increasingly leverage their value chain with othersExample
Leveraged Value Chain ConfigurationTraditional Company Configuration
“Markets”
Leverage R&D
New product alliances
SalesSupply ChainManufacturingComponents
Sourcing
Markets
R&D
End Market driven business definition
Support func.
Components
Support func.
Supply Chain “Markets”
Supply chain pooling
SalesSupply Chain
R&D
Manufacturing
Sourcing
Leverage industrial base in other geographies
R&D
MarketsLeverage commercial base through broader
assortment
Improve competitiveness of existing business
through outsourcing (JV) Capability specific business definition
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This value chain reconfiguration represents a shift of paradigm for the procurement function: from cost reduction to value creation
Traditional Sourcing Value Delivery focused Sourcing
$ Revenues$ Revenues
Search for (exclusive) ways to further leveragemost crucial parts of value chain and for ways in which third parties can contribute to make them stronger
Company value chain
elements
Search for opportunities to optimise individual parts of value chain across business boundariesthrough outsourcing, pooling, reconfiguring, or leveraging them as a business in their own right (without putting the crucial parts at risk)
Reduce external spend and internal
process costsExternal
spend $ Suppliers
= External spend component of value chain part
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The focus is two-fold: creating value and delivering it in the most effective way possible
Two Main Ongoing Sourcing Developments
RegularSourcing
Benefit focus
Deliverymodel
Strategicbusiness
value
Spend reduction
Components, ingredients, products,
and services
“Functionality”Discrete
capabilities
(Partial) value chains
TCO reduction
Competitive value
Networks / ecosystems
Procurement
Total enterprise
Extended enterprise
Implications for required “involvement”
Shifting the benefit focus from spend reduction to value
contribution
Developing more holistic delivery models
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We stretch the envelope by developing different and new “business procurement” disciplines
Two Main Ongoing Sourcing Developments
Benefit focus
Deliverymodel
Spend reduction
Components, ingredients, products,
and services
“Functionality”Discrete
capabilities
(Partial) value chains
TCO reduction
Competitive value
Networks / ecosystems
Procurement
Total enterprise
Extended enterprise
Regularsourcing
Closed loop spend management
Valuechain leverage
strategiesValue based sourcing
Advancedsourcing
Strategicbusiness
value
= Focus of today
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The future is already here: CEOs expect more Value Creation contribution from their procurement professionals
Importance of Procurement in Company Efforts(Average Responses from 2004 CEO Survey)
Observations:Between the 1999 and 2004 studies, the percentage of procurement organizations with goals in value creation increased from 28% to 66%CEO’s see value capture from the supply market as the largest challenge their company faces in procurement
CEO’s priorities for procurement:
“Leveraging the creative talents of our suppliers”
“Integrating and making our value chain more effective”
“Create value through effective innovation with key suppliers”
Cost Reduction Efforts Delivering VlaueBeyond Cost
Past Current Future
1= Low
4= High
2,6
3,43,7
1,8
2,8
3,5
Sources: A.T. Kearney 2004 AEP study; A.T. Kearney 1999 AEP study
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Four key dimensions of value creation were identified with deep reaching implications for the Procurement function
CEO’s strategic goal for procurement: Value Creation link to supply market
Innovation
and Growth
Value C
hain
Optimiza
tion
Advanced
Cost Management
Risk M
anag
emen
t /
Supply Contin
uity
ValueCreation
New products and servicesProduct / service extensionsFeature innovations. . .
New ecosystemsGeographic expansionOff-shoring / Outsourcing. . .
Contingency plans and strategiesSecurity of supplyRisk management (currency, raw materials, catastrophe). . .
Supplier target pricingInnovation brokerageExpressive bidding. . .
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This represents a formidable change for Supplier Relationship Management
Traditional Sourcing
Focus on prices
Total Cost of Ownership
Process-driven sourcing approach
Seek comparability
Involvement in spec definition phase
CPO reports to Executive Committee
Procurement skills
Procurement is „independent“ and acts as a counter party
Value Based Sourcing
Focus on value
Total Contribution of Ownership
Strategic intent driven sourcing approach
Seek differentiation
Involvement in strategic decisions
CPO is Executive Committee member
Business skills
Procurement is aligned and intrinsically linked with business stakeholders
Caveat: there still is the need for traditional sourcing!
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Agenda
Introduction: the future of strategic sourcing
Value Based Sourcing (VBS): a new approach to supplier relationship management
Managing supplier relationships to maximise value
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VBS represents a fundamental change which requires a new approach to supplier relationship management
Xxx Xxx
Value Based Sourcing ResultProcess Landscape
Optimal Supplier
Portfolio at Best Total
Cost of Ownership
Full Capitalizationof Suppliers‘Capabilities to Maximize
Value
Increased Supplier
Performance
Strategic procurement
Supplier relationship management
Process interface to strategic product planning and further cross-functional partners mandatory
Supplier VBS capabilities
Value definition Value delivery (idea pipeline management)
Define Value
DriversMap
CapabilitiesSelect
capabilities to be leveraged
Define Supplymarket Scope
Generate Value DecideStructure
the relationship
Imple-ment
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Example: collaboration in product innovations delivers valueExample
HELLA Innovations in BMW CarsHella proposed and developed exclusively for/with BMW new light rings in front lights enabled by new flexible optical fibers technology
• Access to new technologies
• Brand equity• Reduced time
to market
New design options for BMW to
distinguish from competitors
• Innovation driven by supplier realized with car manufacturer
• Joint development of both parties in teams/workshops
• Contracting ensures exclusivity rights for manufacturer
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By defining competitive strategy around key capabilities, a company can identify the requirements for the rest of its value chain and clearly articulate how suppliers can contribute to meeting these requirements
- More innovation ideas to choose from so that more, fast to implement ideas, can be pursued
- More innovation ideas to chose from so that the total innovation effort can be focused on more promising ideas
- Optimisation of bringing ideas to production (ramp up)
- Delegation of development to suppliers (concurrent development)
- Tapping into specific pockets of supplier knowledge not available to company itself
- Optimisation of launch process by tapping into relevant complementary capabilitiesRelative contribution to business value
Example
Level of capability
performance
Laggard
Potential world class
CrucialNecessary Beneficial
Capability mapping$
Real growth question
(competitivestrategy)
Xenon headlights first developed as more functional lighting source with better performance and longer life expectancy
Brand equity
(Emotion)Car
Functionality
$
$Optimisation
ChallengeCost reduction challenge
Lighting unit manufacturing &
development
Assembly
Real value of new Xenon head lights proved to be the creation of high-end differentiation: recognizably different and expensive
Potential Supplier Contributions (for example):
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Starting point for value definition can be an assessment of where a company’s Value Based Sourcing challenges lie
Current Status of VBS1 2 3 4
Scope of VBS • Focus on product and process-related cost-drivers• Except for software all strategically relevant suppliers involved
Definition of strategy
• Suppliers’ capabilities beyond current role are not mapped• Value drivers are limited to TCO• Certain use of partnership models with suppliers (life-cycle
management)
Sustainability of VBS • No continuous employment along the product life-cycle• VBS is externally not visible as part of the procurement strategy
Commitment of management
• Strong support within procurement for collaborative processes• Effective interaction with R&D in innovation phase
Motivation of suppliers • No explicit benefit sharing• Motivation results solely from the chance to win the contract
Differentiation based on strategy
• Segmentation of suppliers from standard to brand differentiatingcomponents and respective involvement in R&D
Relationship restructuring • Long-term partnership for several critical components• No involvement of suppliers in defining specifications
Standardized internal collaboration process
• No systematic/transparent process to capture and evaluate singleideas
Platform to exchange innovation issues
• No institutionalized platform for an ongoing exchange of industry-related topics
Best Practice
Over
allEm
ploy
men
t in
inno
vatio
n
Client Example
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Value delivery can be ensured with a proven systematic approach
Overview
Generate Value Decide Implement
• Capturing of ideas from suppliers (and internal sources)
• Initial screening and validation of ideas
• Prioritization of ideas
• Estimation of impact of idea on relevant KPI (material cost, development time, …)
• Evaluation of net cash-flow and implementation costs
• Discussion of ideas in cross-functional review teams
• Rating of ideas• Final approval by
steering board
• Activities in relevant departments
• Controlling of progress and deviations from plan
• Status reporting
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Pilots in three divisions of a Telco equipment manufacturer were set up to systematically leverage a number of capabilities
Client Example
Scope and Objective of Pilots
Mobile devices(2 key components)
•• Improve timeImprove time--toto--market performance (top line)market performance (top line)•• Investigate coInvestigate co--branding opportunities (top line)branding opportunities (top line)•• Specification right sizing to industry standards (bottom line)Specification right sizing to industry standards (bottom line)
Networks(Mechatronics)
•• Value Chain reconfiguration (bottom line)Value Chain reconfiguration (bottom line)•• DesignDesign--toto--Cost (bottom line)Cost (bottom line)
Customer premise equipment
(Man-machine-interface)
•• Voice of the Customer / feature improvements (top line)Voice of the Customer / feature improvements (top line)•• Device customization (top line)Device customization (top line)•• Functional block design (bottom line)Functional block design (bottom line)
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In the area of mechatronics, we have identified value opportunies for 20% of scope
Client Example
Results in Mechatronics (enclosures)Value
contribution of scope
Value chain configuration
•• Reallocation of design, supply chain, make Reallocation of design, supply chain, make and sourcing responsibilities in the value and sourcing responsibilities in the value chainchain
•• A contract manufacturer to take over A contract manufacturer to take over selected low cost country sourcingselected low cost country sourcing
•• Optimization of tradeOptimization of trade--offs between supply offs between supply chain and sourcingchain and sourcing
•• Packaging and lot size optimizationPackaging and lot size optimization
12%
Design-to-cost
•• Functional block optimization and Functional block optimization and greenfieldgreenfield redesignredesign
•• Material substitutionMaterial substitution•• Spec right sizing (steel surface)Spec right sizing (steel surface)•• Internal component designInternal component design
8%
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VBS can also be applied in a quite narrow sense to help broker innovation to find ways out of captive relationships
The Solution: Innovation brokerageLeverage of innovation brokers (Innovation think tanks)
• Solution essentially geared towards getting out of the patent situation
• Current partner had too much bargaining leverage
• Consultant role: process facilitator, workshop preparation, evaluation
• Innovation brokers: fixed fee participation plus success fee
The Results:20 alternative concepts developedNegotiation leverage with incumbent supplierOption pursued for insourcing
The Problem: Patent protected solution, supplier dependency
Client Example
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Agenda
Introduction: the future of strategic sourcing
Value Based Sourcing (VBS): a new approach to supplier relationship management
Managing supplier relationships to maximise value
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Supplier relationship management is driven by the ideas brought forward by the suppliers, screened and implemented according to a thorough process
Process Overview
Idea capturing Idea evaluation Idea implementation
• Supplier idea input• Initial feasibility check and
prioritization
• Discussion in cross-functional teams
• Workshops for further detailing (if required)
• Decision and rating by the different functions
• Approval by review board
• Set-up of implementation plan• Implementation of activities• Tracking of progress• Structure of supplier relationship
Prioritizedimprovement ideas
Ideas approved for implementation
Ideas implementedAnd value realized
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After an idea is generated, its feasibility is assessed
Idea capturing Idea evaluation Idea implementation
Initial feasibilitycheck and prioritizationSupplier idea input
• VBS team• Supplier
• Clarify intent and scope of idea• Perform preliminary cross-functional analysis of idea feasibility• Filter idea through benefits/ease of implementation-matrix• Queue idea for evaluation process
• Collect minimum data per idea• Enter idea into web-based vbs-tool
• Idea information template• Business case sheet
• Idea information template• Business case sheet
Feasible ? Yes
NoFeedback
to supplier
Responsible
Steps
Format
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A standard template is used by all suppliers to hand in their proposals
Idea capturing template
Parts/components subject to proposal
Proposed solution (ideally pictures are attached to describe the proposal
Qualitative description of value impact
Basic assumptions
Value impact• Material price reduction• Other cost impact• Lead-time reduction• …
Implementation activities at suppliers and related costs
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The ideas are approved by a Review Board after the business case and implementation plan are developed
Idea capturing Idea evaluation Idea implementation
Responsible
Steps
Format
Idea approved ? Yes
NoFeedback
to supplier Workshops for further detailing
Discussion in cross-functional teams
Decision on ideas by different functions
Approval by Review Board
• VBS team• Representatives from
relevant internal functions
• VBS team • Relevant internal functions (PG, Sales, Finance, …)
• Managers from different functions
• Present ideas in regular cross-functional meetings
• Discuss feasibility, value potential and implementation issues
• Note un-clarified issues
• Prepare workshops for issues to be verified or detailed
• Carry-out workshops together with supplier and relevant internal functions
• Issue rating on the idea• Estimate implementation
time, investment and resources
• Validate business case and sharing procedure (Finance)
• Prepare Review Board Meeting
• Consolidate all ideas processed by internal functions
• Carry out Review Board Session
• Idea information template
• Business case sheet
• Additional workshop material
• Standard idea review sheets, implementation plan
• Board presentation
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Following the approval by the Review Board, ideas are implemented to realize the value
Idea capturing Idea evaluation Idea implementation
Responsible
Steps
Format
Valuerealized? Yes
NoFeedback
to supplier
Implementationof activities
Set-up ofimplementation plan Tracking of progress
• VBS team • Supplier• Internal functions
• VBS team
• Set-up a meaningful and comprehensive implementation plan based on activities in all functions
• Enter plan into the VBS-tool
• Implement necessary activities in responsible departments
• Check implementation progress at milestones
• Prepare progress reports for Review Board
• Implementation plan • – • Implementation plan• Status reports
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A degree of implementation (DI) framework allows for systematic follow-up on the implementation of ideas (tracking tool)
Client Example
Degree Of Implementation ConceptIdeaTarget Implementation
Objective defined Starting points quantified analytically
Action fully elaborated
Actionsubstantivelyimplemented
1
• Idea described on an action sheet / in a database
• Potential quantified• Action responsible
nominated• Due date fixed
for DI 3
• Action sheet created with all its contents:— Detailed action plan
drawn up (milestones and due dates)
— Detailed evaluationof the potential i.e. – Negotiations Con-
cluded / Binding Offer Available
– Headcount Name List Available
— Signatures of action and business responsible
— Due date fixed for DI 4 and DI 5
• Implementationprerequisites met(action plan executedin full) e.g.— Purchasing
Effectiveness I.E. Material Ordered
— Headcount Reduction Legally Implemented
• Level and start ofimpact on profitrevised
• Potential included in planning
• Action is implemented with impact on profite.g.— Cheaper material is
used and sales booked— One monthly closing
with headcount disappeared from pay-roll
• Impact on profit can be traced in the accounting system
EBIT effectiveness
• Objective defined:— Derived from
benchmarking— Adopted from
business plan— Defined by
customers — Derived from
income transition
2 3 4 5Degreesof imple-mentation(DI)
Prere-quisitesfor DI
DI 1 DI 2 DI 3 DI 4 DI 5
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Contractual partnerships with suppliers can be structured in several forms with a different degree of collaboration
Structural incentives: Contract Types
Purchase agreement (FPA) Performance-based Revenue Sharing
Partnership (RSP) Joint venture
Suppliercompensation
Agreedprices * quantity
Pay-per-use, Pay-for-performance Revenue share Profit share
Goods or services delivery, service levels, one-time investment, certain liabilities and
share of business risk
Goods or services delivery, service levels / assets /
strategic and financial plan
Goods or services delivery, service levels, one-time investments or asset & resource transfer
Supplier commitment
Goods or servicesdelivery
Exclusiveagreement or contract over extended period of
time
Exclusiveagreement or contract over extended period of
time / OutsourcingPrinciple Jointly owned
companyLimitedcontract
Level of collaboration
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Sharing the net value impact of an idea with the supplier becomes the main goal of an incentive program
Incentives
Qualitative rewardFuture sharing
based on struc-turalincentives
Benefits shared as part of joint goals
Incrementalbenefits Cash-bonus
No benefit sharing, but
benefits improve standing of
supplier
SupplierSuppliercompencompen--
sationsation
Supplier can expect benefits
based on structural agreements
Benefits used to meet existing
targets jointly with suppliers
Share of incremental
benefits over life-time
Share of benefit paid as cash at
realization
ProProBenefits accrued
over lifetime at both sites, transparent
to supplier
Efficient and direct handling of benefits,
transparent to supplier
No cash outflow, ICM gets the full
benefitBenefits contribute directly to targets
No clear quantified goals upfront required
ConConDirect cash-
outflow before realizing the
benefits
Suppliers might not be motivated (lack of
transparency, no direct benefit)
Prerequisites are existing targets, less
collaborative approach (more push than pull)
Need for accurate tracking, discussion over mine-vs.-yours
ideas
Depends on trust in relationship, need for complex negotiations
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The Value Based Sourcing concept has to be embedded into the existing process framework
Client Example
Process
Definition Commerciali-zation
Productphase-outRealization
Design-to-cost Workshops
Value Based Sourcing
Innovationscouting
Procurement analysis/strategy/realization
1
23
Supplier Management (selection, evaluation, …)
4
5
Evaluationof new product
concepts
Product program planning
Product development
Marketing conceptInterfaces need to be defined
Building a Relationship on the Basis of Value
Wim Plaizier – Vice President
10th EIPM Annual Purchasing ConferenceArchamps, December 2nd, 2005