building a relationship on the basis of value wim plaizier ... · building a relationship on the...

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

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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





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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




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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




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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


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


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


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

building a relationship on the basis of value wim plaizier ... · building a relationship on the...

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