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Value Focused Supply: Linking Supply to Competitive

Business Strategies

Research Team:

> Robert M. Monczka, Ph.D Director, Strategic Sourcing and

Supply Chain Strategy Research

CAPS Research

Distinguished Research Professor,

Supply Chain Management

W. P. Carey School of Business,

Arizona State University

> John D. Blascovich Vice President and Partner

A.T. Kearney, Inc.

> William J. Markham Fellow Emeritus

A.T. Kearney, Inc.

> Leslie M. Parker Principal

A.T. Kearney, Inc.

> Thomas H. Slaight Vice President and Partner

A.T. Kearney, Inc.

2010A Major Research Initiative of

CAPS Research and A.T. Kearney, Inc.

Value Focused SupplyLinking Supply to Competitive Business Strategies

A Major Research Initiative of CAPS Research and A.T. Kearney, Inc.

Research Team Leaders

Robert M. Monczka, Ph.D.Director, Strategic Sourcing and Supply Chain Strategy Research, CAPS Research

Distinguished Research Professor, Supply Chain ManagementW. P. Carey School of Business, Arizona State University

________

John D. BlascovichVice President and Partner

A.T. Kearney, Inc.

William J. MarkhamFellow Emeritus

A.T. Kearney, Inc.

Leslie M. ParkerPrincipal

A.T. Kearney, Inc.

Thomas H. SlaightVice President and Partner

A.T. Kearney, Inc.

CAPS Research

2010

Copyright © 2010 Institute for Supply Management™ and W. P. Carey School of Business at Arizona State University.

All rights reserved. Contents may not be reproduced in whole or in part without the express permission of CAPS Research.

CAPS Research and A.T. Kearney, Inc., would like to acknowledge and thank the 15companies that participated in this research. Although these companies asked toremain anonymous in this report due to the sensitive nature of their strategies, theygenerously and openly took part in the interviewing process and the subsequentparticipant conference to review the study’s preliminary results. Their experiencesand insights greatly added to the depth and breadth of the research.

We would also like to publicly acknowledge and thank the following members ofthe extended research team for their contributions:

• Steve Gozdecki, an independent writer, provided ongoing editorial guidanceand communications support for the study

• Debbie Maciejewski, CAPS Research, who provided scheduling andcoordination support with participating companies

• Kathleen A. Chester, ISM, for preparation of numerous draft reports andadministration with participating companies

ISBN 0-945968-82-5

2 Value Focused Supply: Linking Supply to Competitive Business Strategies

Acknowledgements

The mission of supply management organizations continues to evolve in response toeconomic conditions, technology advances, company strategies and supply marketopportunities. Prior to the 1950s, purchasing organizations were primarily chargedwith simply ensuring availability of supply. The decades that followed brought ever-increasing attention to obtaining reasonable prices in addition to ensuringavailability. The 1990s saw an explosion of “competitive sourcing” — first as ameans to apply company leverage to supply markets to obtain improved prices, andlater as a way to help drive down total cost of ownership.

Competitive sourcing remains a powerful tool for many categories of spend.However, market conditions require — and senior executives demand — thatsupply management organizations deliver more than just cost reduction goingforward. Finding ways to generate more value from supply markets and supplyrelationships is becoming supply management’s new mission.

In this report, CAPS Research and A.T. Kearney, Inc., explain how 15 leadingcompanies are already responding to this new mission. The research examines thestrategies, approaches and enablers that are in place at these companies andillustrates through case examples the successes they have had.

This research effort is the fourth in a series of joint efforts by CAPS Research andA.T. Kearney that explores executive issues in supply management. The previousstudies are:

• Succeeding in a Dynamic World: Supply Management in the Decade Ahead (2007)• Outsourcing Strategically for Sustainable Competitive Advantage (2005)• The Future of Purchasing and Supply: A Five- and Ten-Year Forecast (1998)

Copies of the studies are available from the CAPS Research Web site atwww.capsresearch.org. Select “Research” and then “Focus Studies.”

Forward

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Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Chapter 1: Why Value Focused Supply Is Important . . . . . . . . . . . . . . . . . . . . . . . 9

Research Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Research Objectives and Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Research Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Defining Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Defining Value Focused Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Chapter 2: Key Overall Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Overall Value Focused Supply Observations and Enablers . . . . . . . . . . . . . . . . 19

Chapter 3: Examples of Value Focused Supply Strategies. . . . . . . . . . . . . . . . . . . . 23Eliminate Value Leakage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Increase Current Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Create Tomorrow’s Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Stretch for Additional Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Chapter 4: A Framework for Implementing Value Focused Supply . . . . . . . . . . . . 29When Is a Value-Focused Strategy Needed? . . . . . . . . . . . . . . . . . . . . . . . . . . . 29High-Level Systematic Processes Required for VFS Strategies . . . . . . . . . . . . . . 29Understanding Customer, Supply Markets with Alignment and Linkage

between the Company’s Business, Product and Technology Strategy . . . . . . 30Determine Purchase Categories That Are Strategically Important to the

Company and Required Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Understanding Macro, Micro Details of the Strategic Purchase Categories . . . . 32Set Holistic Value-Focused Goals for the Category . . . . . . . . . . . . . . . . . . . . . . 33Evaluate and Select Strategic Supply Options . . . . . . . . . . . . . . . . . . . . . . . . . . 33Select and Implement VFS Levers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Chapter 5: Enabling Value Focused Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Executive Engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Value Chain Goal Alignment and Measurement . . . . . . . . . . . . . . . . . . . . . . . . 38Supply Market Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Collaboration Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Supplier Relationship Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Information and Analytical Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Organization and Human Resource Management . . . . . . . . . . . . . . . . . . . . . . . 43A Perspective on Enablers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Table of Contents


Chapter 6: Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46Transitioning to VFS from Traditional Sourcing . . . . . . . . . . . . . . . . . . . . . . . . 46Where Do We Start with Value Focused Supply? . . . . . . . . . . . . . . . . . . . . . . . 46The Role Played by Senior Management in VFS . . . . . . . . . . . . . . . . . . . . . . . . 47Promoting a Systematic Development of Value Focused Supply . . . . . . . . . . . . 48Supply Management Mission Statement for the Future. . . . . . . . . . . . . . . . . . . 49

Appendix A: Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Apollo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Bentham . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53Bigtru Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55Carco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57ComCo, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59Duraman Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61F&B, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63Globalgoods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Healthifoods, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67HiTech, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Meditrend. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Metropolitan, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73Pharmacare. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Powercon Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77Techco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Appendix B: Readiness Assessment Tool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81Appendix C: Interview Guides . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

5CAPS Research

Figure 1-1: Followers are catching up to leaders in terms of savings achieved across all spend categories . . . . . . . . . . . . 10

Figure 1-2: Overall, executive expectations of supply are increasing to deliver greater value beyond cost . . . . . . . . 11

Figure 1-3: Cost savings will not be enough in the turbulent, uncertain businessenvironment of the “new normal”. . 12

Figure 1-4: Going-in hypothesis: Successful companies systematically pursue value focused supply strategies. . . . 13

Figure 1-5: Participating companies represented numerous industries . . 14

Figure 1-6: Strategies for key purchases and suppliers require alignment with evolving company strategies . . . . . . 15

Figure 2-1: The more advanced strategies exhibited two themes . . . . . . . . . . . 18

Figure 2-2: Triggering events drove creation of VFS Strategies. . . . . . . . . . . . . . . . . 20

Figure 3-1: Value Focused Supply strategygoals are holistic . . . . . . . . . . . . . . . 24

Figure 4-1: When is a Value Focused Supply strategy needed? . . . . . . . . . . . . . . . 30

Figure 4-2: High-level process for Value FocusedSupply strategy development suggests key differences from traditional approaches . . . . . . . . . . 31

Figure 4-3: Determining purchase categories for Value Focused Supply strategies requires a screening process . . . . . . 32

Figure 4-4: VFS strategies require a wide range of data. . . . . . . . . . . . . . . . . . 33

Figure 4-5: Value Focused Supply requires in-depth supply value chain/network analysis and understanding of value creation . . . 34

Figure 4-6: Robust value-focused strategies require companies to think “out of the box” of traditional sourcingapproaches . . . . . . . . . . . . . . . . . . . 35

Figure 5-1: To develop and implement their strategies, participating companiesemployed seven types of enablers. . 37

Figure 5-2: Value mapping links customerneeds back through the value chain to supply options . . . . . . . . . 44

Figure 6-1: Value Focused Supply is different than traditional competitive sourcing, however both are important based on the category . . 47

Figure 6-2: Future leaders will systematicallylink supply to business strategy . . . 48

Figure 6-3: Top management supported many of the VFS categories . . . . . . . . . . . 49

Figure B-1: VFS readiness assessment . . . . . . . . 82

Figure B-2: VFS readiness assessment — Summary Scorecard . . . . . . . . . . . . 83

List of Figures


Value Focused Supply (VFS) strategies will provide thenext breakthrough opportunity for companies to createand capture value from their most strategic purchases.These VFS strategies go far beyond the price/costreduction of traditional competitive sourcing. Already,leading companies are clearly demonstrating the powerof this more comprehensive approach. Senior executiveswho lead their companies to be among the first tosystematically apply VFS across the supply network willhave opportunities to protect and create significantcompetitive advantages.

Looking back over the past 20 years, it is clear thatcompetitive sourcing created significant value forcompanies by driving hundreds of billions of dollars incollective cost savings directly to the bottom line.However, the widespread use of competitive sourcingtechniques and tools has eroded the major advantagethat it gave pioneers in the 1990s. A.T. Kearney’s 2008Assessment of Excellence in Procurement (AEP) globalresearch study found that the savings gap between“leader” and “follower” companies had shrunk in halfsince 2004. For many categories of spend, continuedattention to competitive sourcing will remain necessaryjust to keep up.

However, with tougher global competition in virtuallyevery market, merely saving money on externalexpenditures will not be enough to survive, let alonethrive, in the years to come. Companies must find andmine additional value from their supply relationships.The supply network needs to contribute holistically tothe company through innovation and growth, assetutilization, sustainability, risk management and overallcompetitiveness as well as cost.

In response to these new challenges for supplymanagement, CAPS Research and A.T. Kearney teamedup to conduct research with 15 leading companies to

discover how they are achieving overall valueimprovement for strategic purchases. In-depthinterviews were conducted with key individuals at thesecompanies to gain insights into selected value-focusedpurchase categories and overall company and supplystrategies.

Specifically, the research addressed the following VFSquestions:

• How are companies implementing VFS? Whatresults are being achieved?

• What strategic and operational approaches can bedeveloped to accelerate implementation of VFSwith suppliers and supply networks?

• What are the critical issues and inhibitors toimplementing VFS? How can they be overcome?

• What is the role of supply management indeveloping and implementing VFS?

At its core, Value Focused Supply is an approach forcreating and implementing longer term strategies forkey purchase categories and their suppliers that go farbeyond traditional sourcing. By linking supply tocompetitive business strategies, the goal is to increasethe attractiveness and competitiveness of the company’send products and services, thereby increasing value forboth customers and the company.

Value creation was found to result in revenueenhancements, cost reduction, asset optimization andachievement of intangibles. This value was achieved byeliminating value leakage, increasing current value,creating tomorrow’s value and stretching for addedvalue.

The companies studied employed a wide range ofstrategies to drive more value from supply. Examplesinclude:

Executive Summary

7CAPS Research

• A company that established a brand new valuechain to break an upstream monopoly. Itsalternative sources of supply let it slash lead timefor customer orders, resulting in major marketshare gains and dramatically increased revenueswhile blocking competitors from adopting asimilar strategy.

• A company that teamed with a strategic supplierto develop a new technology. Collaborativedevelopment brought its product to market wellahead of competing offerings, driving marketshare growth and revenue/profit increase for boththe company and its supplier.

• A company that leveraged its focused volumeswith selected suppliers to achieve equity rebatesas the selected suppliers grew and their marketvalue increased.

Across the 15 organizations, we found a number ofcritical enablers that were required to achieve VFS.These included executive engagement, value chain goalalignment and measurement, supply marketunderstanding, collaboration approaches, supplierrelationships, information/analytic capabilities, andorganization and human resources.

Based on our analysis across the participating companies,a few observations stand out.

First, VFS strategies are based on mapping customerneeds and what they most value, then aligning andapplying company and supplier resources to create valuefor customers. These strategies are frequently evaluatedin terms of meeting overall business unit and/or productline goals and financial return on investment.

Second, highly capable supply and other functionalpersonnel, including executives, were typically engagedin VFS strategy creation and deployment. Thecomplexity of these strategies required creative andtalented people who could influence other key decision-makers to commit resources and support the strategy.

Third, these VFS strategies require a holistic set ofmeasures and incentives to evaluate success that aresignificantly related to the success of the business versustraditional price improvement measures and typicalperformance expectations of supply.

Finally, the role of supply varied from strong leader toparticipant in VFS strategy development and execution.It was obvious that supply could not create and lead allefforts but should play an “appropriate” and influentialrole based on the situation.

The research also found a need to further developorganization and process approaches to accelerate ValueFocused Supply and further connect with stakeholdersand senior management. This can be done byestablishing stakeholder and supply executivecommittees to drive and guide VFS. We also believe thatValue Focused Supply will become an equal componentof company strategy along with marketing, finance,manufacturing and technology over the next five to 10years.

This research report provides the detail behind ourfindings and includes:

• Why Value Focused Supply is important• Key overall findings• Examples of Value Focused Supply strategies• A framework for implementing Value Focused

Supply• Enabling Value Focused Supply• Conclusion


Research Background

In the past two decades, companies, institutions andgovernments have saved hundreds of billions of dollarsby aggressively applying competitive sourcingtechniques to their spend base. By following disciplinedstep-by-step approaches, companies gained control overhow they spent the 50 percent, 60 percent or even 70percent of their revenue that flowed to suppliers.Advances in information technology allowed companies— many for the first time — to gain visibility into whatthey were spending, where and with which suppliers.

Greater scrutiny of specifications and usage patternshelped reduce wasted spend. Rigorous use of detailedrequests for information and requests for proposals gavecompanies unprecedented understanding of suppliercapabilities and supply market options, and allowed forfact-based examination of bids.

By combining spend across divisions and geographiesand concentrating spend with fewer suppliers,companies came to muster and apply leverage theynever realized they had. Standardized approaches tosourcing brought rigor and discipline to both fact-finding and analysis. Tools such as e-RFI/RFPs,electronic auctions and optimization models intensifiedcompetition, sped up the sourcing process andimproved decision-making.

Looking back over the past 20 years, it is clear thatcompetitive sourcing created significant value forcompanies by driving major cost savings directly to thebottom line. However, the widespread use of competitivesourcing techniques and tools has eroded the majoradvantage that it gave pioneers in the 1990s. A.T.Kearney’s 2008 Assessment of Excellence in Procurement(AEP) global research study found that the savings gapbetween “leader” and “follower” companies had shrunk

in half since 2004 (see Figure 1-1). For many categoriesof spend, continued attention to competitive sourcingwill remain necessary just to keep up.

However, value derived from sourcing cost savings willnot be enough in the coming years. Even before theeconomic crisis of 2007-2009, CEO expectations forsupply had expanded well beyond cost reduction toinclude innovation and growth, risk management, valuechain optimization and even sustainability (see Figure1-2).

Since the crisis, macroeconomic forces and competitiveconditions have created an even more turbulent anduncertain business environment (which some havedubbed the “new normal”) that is driving companiesinto uncharted waters (see Figure 1-3). Slower overallgrowth intensifies competition and leaves less room forerror. Restrained, less trusting customers are redefiningwhat they value, with rippling effects throughcompanies’ product and service portfolios. Increasedgovernment power is placing new regulations on howbusinesses will operate. Increased governmentborrowing for social programs and fiscal stimulusportends higher taxes, greater currency fluctuations,higher interest rates in the commercial sector and apossible return to inflationary times. Growingdemographic pressures are accelerating the shift inconsumer buying patterns as well as shrinking the sizeof the workforce in many developed countries whileexpanding the workforce in developing countries.Intensifying resource competition, particularly for foodand fuel, will constrain growth opportunities and drivecosts up. In combination, these forces will have a directimpact on how tomorrow’s value chains are structuredand how they operate.

In this environment, just saving money on externalexpenditures will not be enough to survive, let alone

Chapter 1: Why Value Focused SupplyIs Important

9CAPS Research

thrive, in the years to come. Companies must find andmine additional value from their supply relationships.The supply network needs to contribute holistically tothe company via innovation and growth, assetutilization, sustainability, risk management and overallcompetitiveness as well as cost.

This is especially true for those relatively few categoriesof spend in each organization’s portfolio that are toosensitive or strategic for traditional competitive sourcingapproaches. In these areas, the task instead will be touse the supply base as a resource to both supplementand complement the company’s resources and to usethis combined capability to improve overall companycompetitiveness by creating additional value forcustomers and shareholders.

These new, more advanced Value Focused Supplystrategies are the target of this research project. The aimis to understand how a holistic value approach differsfrom traditional competitive sourcing approaches. Theresearch examines the changes required to areas such ascompany and supply philosophy, value goals andmetrics, sourcing and supplier management approaches,

and internal and external teaming for the strategicpurchases of the company. It also examines the type anddegree of C-level executive involvement, understandingand support needed to ensure tighter linkage betweenbusiness strategy and supply, and deeper cross-functional collaboration.

When we began this research, we did not have a clearidea of the progress to date that leading companies hadmade with VFS approaches. Through the interviewingprocess, we were pleasantly surprised to learn thatseveral companies had creative and innovative advancedapproaches in place for certain key categories.

However, we also observed that the successes to dategenerally came in response to specific triggers or crisesrather than through a proactive, systematic approach todeliver more value across all key purchase categories.

Because VFS is still in its early stages, this researchaffords the opportunity for joint learning to improve theprocess and accelerate results.


Figure 1-1

Research Objectives and Approach

The research team identified four objectives for thisresearch effort:

• Establish how value is being created for strategicpurchases through Value Focused Supplystrategies

• Define, establish and communicate overallapproaches and capabilities that enabledevelopment of Value Focused Supply strategies

• Demonstrate application of Value Focused Supplystrategies through practical company caseexamples

• Enhance the understanding of C-level executivesabout how Value Focused Supply strategiescontribute to sustainable business andproduct/service competitive advantage

Because VFS as a strategy is still in its early stages, theresearch team adopted a case-based approach to theeffort. By comparing and contrasting how leadingcompanies were approaching VFS, we sought tounderstand what was working successfully today. We

also attempted to examine what opportunities existed toimprove how value was created for specific categorysituations and how companies could generalizetechniques and lessons across key categories.

As shown in Figure 1-4, there are two initial hypothesesfor the research. We hypothesized that companies thatare successful at VFS:

1. Follow a value-focused process for key categories— linking to current and future business andtechnology needs, establishing fact-based valuegoals for the category, and formulating,implementing and measuring strategies to achievethose goals

2. Invest in process enablement to conceive, identify,deliver and sustain value

The research began with a series of 30-minute telephoneinterviews with leading companies that had someexperience in VFS. This helped the team to confirminterest in the proposed research and frame thedimensions of VFS that would be covered in the research.

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Figure 1-2

Next came the development of the research strategy. Wewanted answers to these key research questions:

• How are companies implementing VFS? Whatresults are being achieved?

• What strategic and operational approaches can bedeveloped to accelerate implementation of VFSwith suppliers and supply networks?

• What are the critical issues and inhibitors toimplementing VFS? How can they be overcome?

• What is the role of supply management indeveloping and implementing VFS?

Our approach involved looking at VFS from both abottom-up and top-down perspective within a company.This was achieved by:

• Gaining an in-depth understanding of how acompany approached VFS for one of its strategiccategories (the “case study example”)

• Profiling how the company had extended VFSacross its portfolio of key categories (the“company narrative”) and the degree to which theapproach was formalized

Research Participants

The team identified about 25 companies as potentialparticipants in the research, based on a combination ofour first-hand knowledge of the company’s capabilitiesand secondary research. Each company was asked toparticipate in a pair of two-hour telephone interviews,one covering the specific case and the other looking atthe companywide approach.

Ultimately, 15 companies agreed to participate in theresearch, representing a wide variety of industriesincluding aerospace and defense, automotive (OEM andsupplier), consumer durables, consumer packagedgoods, engineering, procurement and construction(EPC), healthcare delivery, high-tech, industrial controlsystems, media and entertainment, pharmaceuticals andraw materials processing. Individual company revenuesranged from $4.5 billion to more than $100 billion,with combined revenues for the 15 companies exceeding$500 billion. Typically, these companies were among thetop three within their industries in terms of reputation.

Because of the sensitive nature of their strategies, thecompanies asked to remain anonymous in this report.


Figure 1-3

However, they have allowed us to publish their casestudies using disguised company names and somewhatdisguised details. Throughout the report and itsappendix, we will be referring to the companies by theirdisguised names, as listed in Figure 1-5. Appendix Acontains case study information for each company.

The primary source of data for our analysis was theinterviews and document review with key personsacross procurement/supply management who wereknowledgeable about VFS overall and were able todescribe a case example of VFS. Additional insightscame from review and discussion of the preliminaryfindings in a full-day conference with the studyparticipants in January 2010.

Defining Value

Before discussing Value Focused Supply in-depth, it isimportant to first define what value is and how it iscreated. In the paragraphs below we will examine valueas perceived by the consumer or end user and bycompanies selling to them.

The Consumer/End-User SideVolumes have been written on the topic of consumersand end-user value creation, and in this research we donot intend to plow new ground around this concept.However, it is useful to reiterate some of the basicprinciples.

In short, consumers and end users gauge the value theyreceive from a product or service in terms of the set ofbenefits they get from owning and using it compared tothe cost of owning or consuming it.

Benefits can be as concrete and measurable asfunctionality and performance (e.g., speed of anautomobile, throughput of a piece of equipment ornutritional value of a food item) or as ephemeral andsubjective as improved social status or self gratification(e.g., fashion items). They can be based on fulfilling analready known need, or on creating and then satisfyingan unknown need, similar to what Apple’s iTunes andiPod did by making digital music more available,affordable and portable.

Different segments of consumers or end users can placevery different weights on the various benefits. For

13CAPS Research

Figure 1-4

example, a high school or college student purchasing anotebook computer might emphasize styling and thelatest in multimedia capabilities at a low cost while asmall office/home office (SOHO) customer might placemore weight on reliability and service support at acompetitive cost.

These differences influence product design,functionality and cost, and in turn impact strategies foracquiring components such as cases, displays, diskdrives, motherboards and keyboards. Even within acategory, the notebook manufacturer may have adifferent strategy for supplying flashy designer-logoedcases in a rainbow of colors to the student market,versus supplying a simple yet rugged black case to itsSOHO market.

The Company SideUltimately, value to the consumer or end user translatesinto value to the company in the form of revenue. But

revenue growth is only one dimension of directfinancial value creation for a company. Also includedare cost improvement and asset productivity, as shownin Figure 1-6. The company’s supply managementorganization and its supply base can contribute value ineach area. (In Chapter 3, we also introduce the conceptof how a company can create value through“intangibles” such as customer loyalty, intellectualproperty, corporate reputation and sustainability.)

Value does not just accrue to the buying company; italso accrues to the supplier companies as well. Asillustrated by several examples in this report, suppliershave seen their share of business grow, have addedvolume due to higher “pull-through” of their productsand services, and improved their own cost base andcapabilities by collaborating with customers on ValueFocused Supply strategies.


Figure 1-5

Defining Value Focused Supply

At its core, Value Focused Supply is an approach forcreating and implementing longer term strategies forkey categories and their suppliers that go far beyondcompetitive sourcing. By linking supply to competitivebusiness strategies, the goal is to increase theattractiveness and competitiveness of the company’s endproducts and services, thereby increasing value for bothcustomers and the company.

Ideally, VFS starts with a deep understanding of whatcustomers (both consumers and end users) value, thenmaps that understanding backwards through thecompany’s part of the value chain and outward to thesupply base. This helps to isolate those categories thatare critical to driving value in the end markets. It alsoallows the company to focus on shaping and using thecapabilities of the supply base to complement andsupplement its own capabilities, and in turn createmore value for the customer and itself.

Our research found that VFS is as much a mindset as anapproach. To be sure, it is often built on rigorous datacollection and analysis to understand the value thatdifferent customers and segments place on various

attributes of the company’s end products. In turn, thesevalue drivers are translated into supply-siderequirements. However, it also depends on creativityand imagination to identify and consider any and alllevers to create or unlock value from the supply base,and an organization committed to and capable ofmaking it happen.

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Figure 1-6

A number of key findings across all 15 participatingcompanies provide insights to other companiescompeting through Value Focused Supply (VFS) andoverall supply excellence. These findings are presentedbelow and discussion follows.

1. Value was either “protected” or “created” by VFSstrategies for strategic purchases.

2. All participating companies knew which supplycategories were most strategic to their businessbased on annual spend value, technology access,criticality of supply, etc. — but fewer companieshad a clear line of sight between their supplystrategies and the direct impact of these strategieson the end customer, sales, market share andprofitability.

3. The more advanced value-focused strategiesexhibited two themes — a sharp focus on valuealignment and a holistic view of value creation.

4. Major triggering events outside of supply werefrequently the drivers of VFS strategydevelopment.

5. Value-focused goals and resulting strategies wereas varied as the participating companies, thecategories and individual situations.

6. While the value-focused strategies used traditionalapproaches to protect and create value, some alsowent beyond to create significant innovative andfuture value.

1. Value Was Either Protected or CreatedVFS strategies that protected value were typically craftedin response to situations requiring fixes to majorproblems impacting performance to customers and/or tounfavorable supplier relationships that limited joint valuecreation. For example, Powercon, a manufacturer ofindustrial control systems, had to correct a key supplier’son-time delivery problem that was leading to an increasein Powercon’s inventories, production inefficiencies and

late shipments to customers. At ComCo, a manufacturerof power systems, supplier relationships had to bedramatically improved so that suppliers’ valuecontribution to product design could be protected.

Other participants were found to be creating current orfuture value. Pharmacare, a pharmaceuticalmanufacturer, created current value by changing theway prices were established for external legal services,thereby significantly reducing costs. Duraman, whichmanufactures consumer durables, created future valueby jointly implementing multiple supply strategies withengineering to reduce product complexity and enhancesupplier collaboration by applying nontraditionalapproaches, thereby improving customer value throughbetter products at lower cost.

2. Strategic Purchases Were Identified at AllCompanies, but Fewer Companies Had ClearLine of Sight between End-CustomerRequirements and Their Supply StrategiesDuring the interviews, we were not surprised to learnthat all participating companies could easily identifytheir strategic purchase categories. Size of spend, keytechnologies, impact on end-product quality andpotential for an adverse customer impact all factoredinto the equation. While the more advanced strategiesamong the 15 cases demonstrated a strong and directline of sight from what customers valued most in thecompany’s end products back to the types of value thesekey categories needed to deliver, most of the others didnot. Going beyond the categories in the company caseexamples, the links were not as strong.

Looking ahead, we believe that companies can benefitfrom tighter links between the customer’s or end-user’sview of value and how resources are deployed andaligned, both internally and as reflected in the strategiesfor key purchase categories.

Chapter 2: Key Overall Findings


3. More Advanced Strategies Exhibited TwoThemesFigure 2-1 illustrates two themes that were associatedwith more advanced Value Focused Supply strategies.

There was a very sharp focus on value alignment fromthe ultimate end user of the product/service backthrough the participating company and to multiple tiersof suppliers. Some companies had a clear understandingof what the end customer valued and would pay for(e.g., type of packaging, variety of product offerings andtechnology such as speed, size, weight) and woulddevelop VFS strategies around these needs. Thisincluded providing information to suppliers aboutspecific requirements to meet needs, such as aestheticsof packaging required from suppliers to establish anindustry standard or new technology required to offsetincreasing costs and reduce weight of the product.

Understanding/shaping customer needs, typicallyinitiated by demand-side functions such as marketingand sales, and clearly communicating these needs tosuppliers was critical to successful value alignment.With an understanding of what customers valued, theappropriate supply, technical, operations, financial andother resources could be marshaled to focus on thecorrect value-creating work. For example, the productmix at Carco, an automotive manufacturer, hadsignificantly increased due to marketing’s strategy topursue specific market niches. The company’s supplyand technical groups were able to work with multipletooling suppliers and their tier-one parts providers tomodify specific mold materials, their life cycles andcosts. This changed tooling suppliers from commodityproviders to value-creating suppliers, positively affectingproduct manufacturability, design, quality and flexibility.Collaborative practices within the supply network werealso enhanced.

Study participants took a holistic view of value creationacross their value chains/networks. The holisticelements shown in Figure 2-1 were evident from boththe overall interviews and the case studies. A broad-based set of philosophies, business approaches andcross-functional collaboration was used to supportinformation gathering, analysis and decisions. Executiveengagement, broad value-based goals and innovativesupply strategy development were also in play. Theseholistic company perspectives and enabling conditionswent far beyond the traditional goal of meeting year-over-year price improvement objectives.

4. Major Triggering Events from Outside ofSupply Were Frequently the Drivers ofDevelopment of Value Focused SupplyStrategies

Across the 15 companies, a variety of triggering eventswere found to be key drivers for development of theVFS strategies. These events, which were widelydispersed across industries, included:

• Significant material price increases and/or lack ofor constrained availability

• Customer service failures (e.g., delivery or quality)• Shifting of external customer requirements and/or

company marketing strategy• Critical support for new product development

and introduction• A leadership mandate requiring and supporting

enhanced business unit and productcompetitiveness

Although these triggering events drove VFS strategies,these strategies appear to be more reactive toproblematic situations rather than proactive toopportunities. A proactive supply approach can beestablished by asking the question:

“How can current and future financial returns be increasedfor the business unit through development of value-focusedstrategies that enable companies to provide greater value to

customers than competitors can?”

5-6. Value-Focused Goals and ResultingStrategies Were Varied, but Some Value-Focused Strategies Far Exceeded TraditionalApproachesThe case examples provide a wide variety of situationswith varying value-focused goals, weightings and supplystrategies. Goals included revenue, cost, asset andintangible performance objectives. Examples of goals tobe achieved through VFS strategies included:

• Increasing revenues• Creating an industry standard• Improving customer service• Reducing price/cost• Enhancing value chain integration• Reducing total cost of ownership• Improving asset utilization• Tailoring assets to markets• Creating competitive barriers• Creating and leveraging intellectual capital

Although these example goal areas may not be uniqueto supply executives, they are broader in scope anddepth than typical annual price reduction focused goals.The most advanced VFS strategies, however, providedthe greatest insights into VFS strategy creation andinnovation. These strategies can be grouped into fivebroad categories:

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1. Creating alternative supply options, supply chainsand networks

2. Rationalizing internal use to reduce demand,eliminate non-value-adding product/servicecharacteristics and improve customer value

3. Creating value-adding technology through tightlycoupled research and development collaborationwith suppliers

4. Improving cross-functional, cross-enterprise andsupplier capabilities and processes, includingintegrating operations with suppliers

5. Generating revenue directly through supplystrategies

Examples of strategies that went beyond traditional onesare briefly discussed below. The 15 case examples inAppendix A provide more detailed information.

A number of study participants created alternativesupply options as part of their VFS strategies.Metropolitan, a raw materials processor, performedbackward integration into its own operations and alsoused market intelligence to reshape index-pricingpractices within the supplier marketplace. Engineering,procurement and construction company Benthamdeveloped brand new sources of supply for critical rawmaterials and fabrication and was able to block

competitors from the new supply chain by committingto the capacity. Healthifoods, a consumer packagedgoods manufacturer, created a completely new networkof equipment supply sources in low-cost countries thatbrought with it insights and market intelligence aboutwhat local consumers valued in their food and beverageproducts. Healthifoods used this growth marketinformation to capture market share and increasecompetitive cost pressures on current suppliers inhigher cost geographies.

Rationalizing demand and non-value-adding productcharacteristic strategies also provided customer valueand improved performance. A number of companieswere reducing or rationalizing their productspecifications and determining whether their productswere over-specified compared to industry standards. Forexample, consumer packaged goods company F&Brationalized its specifications based on extensivecustomer surveys to pinpoint those aspects that theultimate customer found truly valuable and worth aprice premium. Duraman undertook an extensiveworldwide effort in which purchasing, engineering andbusiness unit leaders collaborated to reduce productcomplexity and better align material specifications tocustomer needs.


Figure 2-1

Tightly coupled R&D collaboration with suppliers tocreate new technologies that would increase marketshare and profitability were also considered to be value-creating strategies. These types of strategies areorganizationally and technically complex and requiresignificant investments. Automotive supplier Bigtru co-developed a proprietary super alloy with a key supplier.The resulting technology development enhancedproduct performance in a severe physical environmentand provided greater value to customers, improving thecompany’s market position. At HiTech, a manufacturerof high-tech equipment, a new product that was co-developed with a supplier enabled the company tobring a new technology to market earlier than thecompetition for a specific market segment, resulting inincreased market share and profitability.

Supply strategies that focused on enhancing processes,capabilities and integration across functions, enterprisesand at suppliers also went beyond the norm to createvalue. For example, F&B worked with suppliers toimprove intercompany processes to bring newproduction lines into operation faster than they typicallyhad in the past. At Techco, a high-tech company, thesupply strategy was to rationalize the supply base for aproduct line critical to business success and thencollaborate with the reduced number of suppliers onboth process improvements and supplier capabilitydevelopment. The efforts resulted in technology, speed,cost and quality improvements.

Powercon had a major problem with an importantsupplier’s on-time delivery performance that wasimpacting customers and asset utilization. It deployedSix Sigma expertise to analyze all aspects of thesupplier’s capabilities, processes and cross-enterprisecommunications/processes. Subsequently, changes weremade to inventory decision rules, communication ofrequirements and customer performance metrics at thesupplier, resulting in an increase in on-time deliveryperformance from less than 50 percent to more than 95percent.

Two examples provide insight into how supplystrategies led to increased company revenues. Atconsumer products company Globalgoods, supplymanagement observed that suppliers were gainingsignificant value (e.g., sales revenue, profits and value ofthe company) from conducting business with thecompany. Globalgoods understandably wanted toparticipate in this value creation, so it determinedwhich spend categories gave suppliers the potential tobenefit from its volume and “reputational lift.” Supplymanagement then determined which suppliers in thosespend categories had an ownership structure —typically private equity or simple proprietorships —

that would make them suitable for value sharing. Afterworking with the legal and finance departments, thecompany developed value-capturing mechanisms thathave allowed it to achieve “equity-value rebates”through work with two of its suppliers, with additionalefforts being explored.

In the second case, Bentham found that soaringindustry global demand for end products created theneed for a significant increase in conversion capacity inits end-user markets. However, there was an upstreamcapacity bottleneck and a monopoly for a specializedpiece of equipment that stretched lead times to increaseconversion capacity out to three years. In response,supply designed a new supply chain that it successfully“sold” to executive management. This new supply chainincluded specialty steel suppliers and fabricators thatwere necessary to produce the very large and expensivepiece of specialized equipment at the heart of theendeavor.

Using its new supply chain, Bentham was able to reducelead times for the equipment by 50 percent, allowing itsultimate customers to increase their production andcapture returns on their investment months earlier. Thecompany also became the clear market leader, wonmultiple contracts with increased revenues and was ableto sell steel plate to fabricators.

Figure 2-2 summarizes the specific triggering eventsand resulting VFS strategies across all 15 companies inthe research study. The companies are listed by theirpseudonyms and shown with their industry, thestrategic purchase, triggering event(s) and resulting VFSstrategies. The figure can be used:

• As a snapshot depicting triggering events and VFSsupply strategies among the research participants

• As a guide to refer to the case studies in AppendixA, which portray the full situation and results

• To help other companies identify situationssimilar to their own, and potential VFS strategiesthat might apply

Overall Value Focused Supply Observations andEnablers

Based on our analysis across the participatingcompanies, a few observations stand out.

VFS strategies are based on an understanding ofcustomer needs and what they most value so that allappropriate functions can work with supplymanagement to apply resources to customer value

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Figure 2-2

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creation. These strategies are frequently evaluated interms of meeting overall business unit and/or productline goals and financial return on investment.

Additionally, highly talented supply and otherfunctional personnel, including executives, weretypically engaged in VFS strategy creation anddeployment. The complexity of these strategies requiredcreative, talented people who could influence other keydecision-makers to commit resources and support thestrategy.

These VFS strategies also require a holistic set ofmeasures to evaluate success that are significantlyrelated to the success of the business versus traditionalprice improvement measures and typical performanceexpectations of supply.

Finally, the role of supply management varied fromstrong leader to participant in VFS strategy developmentand execution. It was obvious that supply could notcreate and lead all efforts, but should play an“appropriate” and influential role based on the situation.

These and other enablers are discussed further inChapter 5.


Perhaps the best way to illustrate the breadth, depthand impact of VFS strategies is to examine the widevariety of examples found in this research. We foundthat companies created value in four increasinglysophisticated ways — eliminate value leakage, increasecurrent value, create tomorrow’s value, stretch for addedvalue — as illustrated in Figure 3-1.

In this chapter, we discuss each level of sophisticationand dimension of value. Short examples from theresearch help illustrate the points. The case studies inAppendix A provide additional detail on the cases.

Eliminate Value Leakage

The first level of value that VFS can provide is to ensurethat the company is not losing value from a keycategory. On the revenue side, this means protectingrevenue by focusing on the quality of the goods orservices being bought within the category as well as thestability of supply, for example availability, lead timeduration and predictability.

Powercon found that it had to eliminate value leakagefrom a key category — poor delivery performance by asole supplier for a segment of the category caused thecompany to delay shipments, which in turn affectedcustomer service levels and created unsatisfiedcustomers. A focused effort to work directly with thesupplier corrected the problem. Customer loyaltyimproved due to improved order reliability and thecompany gained increased flexibility in manufacturing,allowing it to respond more quickly to customer orderchanges.

Value leakage from cost often results from non-competitive unit costs or ineffective demand andconsumption management. Traditional actions

associated with competitive sourcing, such as reducingthe number of suppliers, leveraging companywidevolumes and soliciting new bids, help to ensure that thecompany receives pricing (unit cost) that is competitivein the market. Rationalizing specifications andcontrolling consumption also helps to eliminateunnecessary expenditures.

Several of the participating companies anchored theirVFS approach by first reducing the number of suppliersfor their key categories, both to increase leverage withthem and to better focus their own categorymanagement resources. Once the supply base wasrationalized, they chose to use competitive bidding toreduce unit cost for the more commodity-like portionsof a key category. For more advanced or proprietaryitems in the category, they focused on helping suppliersreduce their own costs and then pass savings back tothe company.

At pharmaceuticals manufacturer Pharmacare, legalservices were traditionally purchased by the legaldepartment due to the perceived technical complexityof the subject (protecting intellectual property anddefending against lawsuits) and the potential to exposethe company to risk. However, an internal assessmentand external benchmarking by the supply organizationfound that the company lagged far behind itscompetitors in the use of best practices. By directlysourcing ancillary legal services that had previouslybeen billed through law firms, adopting performance-based fee arrangements and negotiating alternativebilling methods that pay firms by the task rather thanthe hour, Pharmacare was able to achieve cost savingsranging between 20 percent and 40 percent.

Another source of value leakage is working capital.Negotiating appropriate payment terms with suppliers— and then taking advantage of them — helps keep

Chapter 3: Examples of Value FocusedSupply Strategies

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cash on the books. Working with suppliers that providequality parts and assemblies with reliable delivery helpsto minimize rework, inventories of rejected items, safetystock inventories of usable items and work-in-progressinventories of products that use the items.

Powercon found that poor delivery performance notonly affected the revenue side but also caused spill-overproblems: production inefficiencies due to reschedulingaround the shortages, increased inventory levels tobuffer against shortages, and increased costs to trackand expedite shipments from the supplier. By fixing thedelivery problem, the company also found that itneeded less inventory throughout its operations.Reducing inventory investments and costs allowed forbetter pricing to customers.

Finally, there are ways that value can leak from theintangible assets of the business. The reputation of acompany can be severely damaged by supplier actions,especially around key supply categories. Recent safetyrecalls include contaminated or intentionally mislabeledfood ingredients that caused illnesses and deaths, aswell as poorly designed or defectively made consumerelectronic components that posed electrical or firehazards. When child labor scandals surface, theresulting media firestorm causes major embarrassment

to manufacturers and retailers at a minimum, and canresult in long-term damage to a brand. Use ofuncertified or counterfeit parts can also lead toembarrassing media coverage as well as lawsuits. Eachof these circumstances can arise as a result of improperscreening, selection and management of suppliers.

Increase Current Value

From a Value Focused Supply perspective, actions toprevent value leakage are largely defensive. While thistype of defensive stance is important, it does notactually create value. Instead, as participant companieshave demonstrated, value creation begins by adding torevenue, attacking costs broadly rather than on a unit-price basis, making better use of fixed assets as well asworking capital and improving the company’s image inthe eyes of customers. A key difference betweenpreventing value leakage and creating value is that thoseactions to achieve the former are more prescriptive andgenerally applicable across the entire spend base. Thelatter calls for actions that are more dependent on thespecific category situation and often require specializedknowledge and skills as well as a higher degree ofinsight and creativity.


Figure 3-1

Increasing market share or improving pricing onexisting products and services can increase revenue andcurrent value. By creating an alternative source ofsupply for a severely constrained component, Benthamcaptured the lion’s share of the market from itscompetitors, while also commanding premium pricing.Healthifoods was able to enhance market share inemerging markets by using supplier market intelligenceto develop products that fit local customer tastes.

Several participating companies emphasize reducedtotal cost of ownership as a gauge of the value that theyobtain from key categories. They actively support andwork with suppliers to streamline operations and cutwaste.

Techco reduced costs for a key category by more than10 percent while also improving on-time delivery andquality. Early supplier involvement in the design ofcustom components has improved manufacturabilityand lowered its costs. By implementing a commontesting architecture with suppliers and locating testingequipment on-site at suppliers, both testing time andquality of testing were improved. Additionally, yieldsincreased by 20 percent.

In the case of ComCo, a more collaborative workingrelationship style with its chosen suppliers has allowedit to put engineers on-site at suppliers to help themimprove processes (e.g., lean and quality). Conductingworkshops with suppliers to identify cost reductionopportunities has also proven successful; a recent effortresulted in a 15 percent drop in costs. ComCo alsosponsored best practice sharing among 50 keysuppliers, including site visits among non-competingsuppliers to showcase manufacturing practices. Thecompany also makes third-party manufacturing researchcenters available to suppliers to improve manufacturingprocesses and conducts cross-functional workshopswith suppliers to share strategies and agree uponactions to improve performance.

In some cases, companies have increased current valueby making better use of their global network of fixedassets. At Metropolitan, collaboration betweenprocurement and manufacturing led to rationalization ofspecifications for a key commodity across the company’smanufacturing facilities. By deploying a globaloptimization model to balance specification changecosts, freight and storage costs, and material pricing,Metropolitan achieved operating flexibility andimproved asset productivity, along with better pricingfor the commodity.

From the standpoint of intangibles, rather than justprotecting the corporate reputation from supply-side

threats, some companies have actually enhanced theirreputations (and those of suppliers) as a byproduct ofVFS. Bigtru received a prestigious automotive supplierindustry award for co-developing a new alloy for a keypart with one of its key suppliers. The company earnedthe award for innovations in new products or servicesthat have a significant market impact and act as “gamechangers” in the automotive industry.

Create Tomorrow’s Value

In addition to creating value based on today’s set ofproducts and services, a company can also use VFS torecast both how it and its suppliers create value in thefuture. This includes actions like leveraging supplierknowledge and insights to identify consumer and end-user marketplace needs to help create unique value forthose markets. It also includes taking advantage of thesupply base’s technology capabilities to gain competitiveadvantage in new product, service design and lead time.

Several participating companies found ways to gain newrevenues by working with suppliers of key categories todevelop and introduce new products and services andenter new markets. By developing a new alloy with itssupplier, Bigtru was able to introduce a new form ofengine part that provided comparable performance at afar lower cost for today’s autos. It gained market sharefrom the new part, and the new alloy positioned thepart for significant future growth as the auto industry’sengine technology evolved. Additionally, the companygained a strategic lead-time advantage over itscompetitors by as much as three years.

HiTech was developing a new higher performance endproduct. It enlisted a key category supplier to co-develop a brand new component that could match theperformance and design needs of the end product.Close integration in the design and development workhelped the company bring the end product to market afull year ahead of competition. The company’s marketshare rose from 30 percent to 50 percent in the productcategory, while the supplier gained as well, seeing itsmarket share in the product category grow to 60percent.

Similar to the VHS/Betamax face-off in the early days ofhome video recording, the media and entertainmentindustry recently saw the emergence of two newcompeting technologies with the likelihood that onlyone would gain mass acceptance and become theindustry standard. Beyond just meeting design and costgoals, Apollo, a media and entertainment company,created packaging that helped unify the adoption of aconsistent look and feel for a new entertainment

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product across a number of companies that usedApollo’s chosen technology standard. This in turnhelped promote the acceptance of the new technologyamong both consumers and retailers. In the end,technology used by Apollo won out in the marketplace,generating significant additional sales for Apollo.

There are several ways to create value for tomorrow interms of cost. Improving the value-to-cost ratio bytechniques such as value engineering (for new designs)and value analysis (for existing ones) helps companiesstrip out unnecessary cost and get more “bang for thebuck” from purchased goods and services. Optimizingvalue chain cost includes rooting out waste at any stageof value-add, as well as reassigning work along thechain to improve overall efficiency.

ComCo is in the design phase of its next generation ofpower systems. Energy consumption and emissions,along with total operating cost to customers, will be keyselling points. For a crucial component, early supplierinvolvement in design helped to eliminate an entiresection, avoiding both material and labor costs for thecomponent.

F&B combined several approaches to create a value-focused strategy for a key commodity. It simplifiedproduct specifications and found ways to reduce use ofa key ingredient. It also assigned volumes to suppliersbased on its fit with each supplier’s “sweet spot” ofcapabilities, which allowed suppliers in some cases toexit business that did not fit well, helping them becomemore efficient. It also developed in-house capabilities toprocess/manufacture some ingredients to increase itsknowledge of the processes in use by suppliers. Overallsavings from the effort totaled 12 percent. Much of thesavings was plowed back into advertising, generating asignificant sales lift; the subsequent pull-through ofingredient sales benefited the supplier partners as well.

Duraman has a strategic goal to be the low-costproducer by fully leveraging its scale. Its VFS approachfor raw materials was integrated into the broadercorporate effort, which included componentarchitecture management (component standardizationand governance rules that would reduce the complexityof the products it manufactured), raw materialsstandardization (to reduce costs early in the valuechain) and raw material value management (to unearthsupplier and material alternatives that could reducedesign complexity and to develop sourcing strategiesaligned with the complexity reduction strategies). Costsavings ranged from 5 percent to 20 percent, andinventories were reduced by 15 percent.

Companies can create value for the future by workingwith suppliers to rationalize/optimize the asset structureacross the value chain. For example, this can by doneby eliminating duplicate assets, outsourcing orinsourcing assets to achieve scale or cost advantages,and repositioning assets geographically to match marketneeds or to mitigate risk. The strategies employed byMetropolitan and Techco addressed these themes.

Another way to create future value is to tailor assets tomeet the specific needs of growing markets andproducts. From a VFS perspective, this value can becreated from those capital equipment categories that acompany buys itself, as well as from rethinking the assetstructure that supports the other key categories it buysand uses.

Healthifoods was projecting rapid growth in emerginggeographic markets. It needed a supply strategy for itscapital equipment that would support both a dramaticrate of growth and the unique requirements of itsdeveloping markets, which were trending towardincreased product diversity, coupled with lower volumesof sales on individual products. It was alreadyexpanding its use of developing-country supply marketsfor capital equipment as a way to reduce costs inmature markets, so it piggybacked on this effort andworked with those same suppliers to design and makeequipment suited for the local market. The companywas able to cut the time needed to introduce a newproduct in a new location by almost 25 percent.Further, the company found that the local suppliersprovided knowledge of local consumer preferences thathelped it to improve product formulations and guidesourcing for raw materials best suited for thoseformulations.

One important, albeit intangible, way to create futurevalue is by ensuring that supply strategies support thecompany’s sustainability goals. Green innovation fornew products and services, strategies for gaining long-term access to sustainable sources of materials, andprograms to ensure and cascade regulatory compliancealong the value chain all play a part. ComCo is workingclosely with its component suppliers to create the next-generation high-efficiency power systems in demand byits customers. It will use less energy, resulting in areduced carbon footprint and lower total cost ofoperations. At Healthifoods, new capital equipmentpurchases take into account full life-cycle costs,including sustainability considerations like energy andwater use.


Stretch for Additional Value

As the previous examples illustrate, our research foundseveral examples of how companies are using bothtraditional and innovative approaches to increase valuefrom key categories. We also found that a few studyparticipants stretched the bounds of conventionalcategory management and found entirely new ways tocreate, shape and use supply markets to generate valueand competitive advantage.

Stretching for revenue sometimes means completelyreshaping the supply market to unlock barriers torevenue. It can also include finding creative ways toleverage the company’s value to the supplier and to turnthat into a source of revenue.

Bentham was missing out on a boom time in a majorcustomer market. Growing demand for its customers’end products plus rising prices for raw materials leftcustomers clamoring for new plants and equipment thatcould process a cheaper but less pure grade of rawmaterial. A bottleneck for a key component used in rawmaterials processing created by a near-monopolisticsupplier and three-year backlogs were making itdifficult to compete for future business.

Unprecedented market demand had created a windowof opportunity for Bentham to make a bold move. Thecompany decided that its best chance was to bypass thetraditional supply market for the component and todevelop a new captive source that it would be able tocontrol. It found alternative sources for steel andfabrication and built a supply chain that delivered thecomponents in half the time. The company used theavailability of the component from this new source ofsupply as a point of differentiation in its sales efforts.Faster construction of facilities with this componentmeant that customers could generate revenue soonerand free funds that would otherwise be tied up inconstruction. As a result, the company successfully wona series of contracts and generated substantialincremental revenues and profits. Eventually, however,the window of opportunity closed as demand in thecustomers’ own markets slumped and orders for newplants and equipment dried up.

Globalgoods was already well down the path tocreating more value from its key categories and supplyrelationships. Sourcing, supplier consolidation andsupply chain integration were helping to keep costs inline. New product innovations from external sourceswere driving additional revenues. Yet the companybelieved that there was more value to be had. Itrecognized that there were several smaller suppliers in

its base for which the company represented a valuableand sizable source of business. A number of thesesuppliers were owned by private equity firms or publiccompanies that could potentially look to spin off thebusinesses. The company is in the early stages ofscreening and negotiating with the owners of thesesmall businesses to monetize what Globalgoods’ basebusiness means to the value of the small firms.Already, agreements are in place with two suppliers toprovide Globalgoods with additional revenue, in theform of equity value rebates, based on the supplier’smarket capitalization and the level of business it doeswith the company. Negotiations are under way withtwo other small suppliers to issue warrants toGlobalgoods that could be exercised when the supplieris sold or spun off.

With respect to cost, one avenue toward additionalvalue is to use the supply markets to support thestrategic reshaping of the company. This could includecreating a more flexible cost structure to increaseresponsiveness to changing market conditions at a lowercost and supporting major geographic sales expansionoutside of traditional markets. It might also includerestructuring relationships, more closely integratingwithin the value chain and sharing risk in different ways.

Carco’s product strategy greatly increased the variety ofparts needed from tier-one suppliers, in turn increasingthe number of different tools required to make them. Inthe automotive industry, toolmaking is often considereda commodity. Carco “broke the mold” by closelyintegrating itself with material suppliers, toolmakers andfirst-tier suppliers for the benefit of all parties. Bychanging tool designs to accommodate modelvariations, switching to aluminum alloy tooling forselected parts and improving toolmakers’ capabilities,Carco dramatically cut tooling costs and lead times aswell as tier-one-supplier processing times. The toolingcompanies became more competitive as theytransformed from commodity businesses to value-addedcontributors to Carco’s value chain.

At Meditrend, a healthcare provider, increasedintegration of the entire healthcare delivery system isviewed as a way to deliver better patient outcomes at farlower costs. The company is in the early stages ofholistically modeling its medical processes andprocedures. Specific equipment and products used inthe procedures are being evaluated, along with factorssuch as time and cost to perform a procedure andpatient recovery and longer term health outlooks. Thecompany believes that the findings from the modelingwill help it standardize products used and gain addedleverage with suppliers. In the future, Meditrend

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envisions performance-based supplier contracting tiedto how a supplier’s products affect outcomes and costs.The ability to provide better outcomes at lower costsshould also help it drive revenues as healthcaremanagement in the United States comes under greaterscrutiny.

Eliminating unneeded assets along the value chain is yetanother way of creating value. Techco was able toeliminate testing processes and equipment at itsmanufacturing locations after it made suppliers fullyaccountable for final testing, cutting out duplicateassets. By reducing product complexity, Duramanreduced the number of product SKUs and inventory inthe supply chain

Lastly, a company can obtain additional intangible valueby including ways to block competition in its supplystrategy for critical categories. Bentham did more thanjust set up a successful alternative supply chain for thekey component. It also negotiated capacityarrangements with the only practical alternatives forsteel supply, which effectively blocked competitors fromsetting up competing supply chains. Bigtru, which co-developed a new alloy, has patent protection over it,further delaying the market entry for its competitors’alloys.

Observations

As the examples above indicate, value can take ondifferent forms according to the company situation, thecategory involved and the supply market opportunitiesor limitations. For some, value comes from a broadsupply market value strategy aimed at influencing oreven reshaping whole supply markets. In other cases, itinvolves value-focused sourcing strategies aimed atextracting available value from the market, ranging frombetter pricing to gaining equity stakes in suppliers inexchange for the value the company generates for thesupplier. In other cases, it involves strategies centeredon collaborating with specific suppliers of key categoriesto unlock even more value.

Additionally, individual value-focused categorystrategies are often multidimensional in terms of thevalue that they generate. Several examples drive the topline and the bottom line simultaneously, and some evenhave spin-off benefits related to assets or intangibles.

Finally, a clear pattern emerged. The more sophisticateda VFS approach, the stronger the linkage requiredamong the company, business unit and product linestrategies and the underlying category strategies. Inturn, this means that the category strategies are more

directly linked with what the consumer or end-uservalues as well.


The examples in Chapter 3 illustrate a wide range ofVFS strategies in place at the companies studied. Forother companies interested in pursuing VFS, twoquestions need to be addressed by executive leaders andsupply management. First, when is a value-focusedstrategy needed to maximize overall competitivebenefits? Second, what approaches and/or processes arerequired to develop and implement these strategies? Theanswers to those questions are examined in this chapter.

When Is a Value-Focused Strategy Needed?

Value Focused Supply strategies are required to developsolutions to problems (protect value) and to create valueby taking advantage of current and future opportunitiesto improve the competitive position of the business andproduct line(s). Figure 4-1 illustrates problems andopportunities.

Value protection is most typically required when acompany is encountering major problems (for example“unintended acceleration at Toyota) and/or competitorsare changing the nature of competition throughimprovements that customers value, such as increasedflexibility or service. Companies will therefore have toreact to these problems or changes and improvestrategic supply performance, which will affect the endcustomer. Many value protection strategies are reactivebut can be built upon proactively.

Bigtru applied VFS strategies to develop a new superalloy in reaction to market conditions and rapidlyincreasing raw material prices. As a result of the successof this “reactive” VFS initiative, the company began aproactive effort following VFS approaches to develop anext-generation component to increase engine power..

F&B applied VFS strategies to some ingredients inreaction to a companywide need for marginenhancement. As a result, VFS is now being applied toadditional purchases, with a focus on proactivelyachieving supplier innovation.

Techco applied VFS strategies to rationalize its supplybase for advanced electronics purchases to improvequality as well as delivery performance andpredictability. As an outgrowth of this initial effort,Techco is now developing VFS strategies with a smallernumber of suppliers to bring them into the productdesign process earlier to achieve more effective designsand innovation — all at a lower cost.

In contrast, the creation of value requires that thecompany proactively and creatively identify conditionsand opportunities present in the business and supplynetwork that, through innovative VFS strategies, enablethe company to establish a superior competitiveposition in the end-customer marketplace and/or asuperior financial position. Examples of this sort ofvalue creation include the joint development of a newtechnology with a supplier for a subsystem or offeringan automobile that enables broader sync applicationsthan competitors.

In Chapter 3, the Powercon, Techco and ComCoexamples point to cases in which companies had todevelop VFS strategies to protect value, while Apollo,Bentham and Globalgoods provide excellent examplesof the creation of value.

High-Level Systematic Processes Required forVFS Strategies

Figure 4-2 presents the processes required to developand implement VFS strategies. Key points of

Chapter 4: A Framework forImplementing Value Focused Supply

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differentiation from traditional sourcing approaches thatillustrate VFS are also shown.

The processes or approaches shown in Figure 4-2identify systematic and detailed approaches required tosucceed at VFS. In addition, those critical approacheshighlighted with an asterisk (*) suggest the majordifferences that exist between competitive sourcing andVFS. These approaches place increased emphasis ondata/information collection and analysis, increased andlaser-like focus on those strategic purchases that trulyimpact business success, holistic value goals and metricsbeyond price/cost, creative supply strategydevelopment, and companywide/supplier teaming forboth strategy development and implementation.

Understanding Customer, Supply Markets withAlignment and Linkage between the Company’sBusiness, Product and Technology Strategy

Implementing VFS requires a deep understanding ofwhat customers — both consumers and end users —value, then maps that understanding backwardsthrough the company’s part of the value chain andoutward to the supply base. This helps to isolate thosecategories that are critical to driving value in the end

markets. It also allows the company to focus on shapingand using the capabilities of the supply base tocomplement and supplement its own, and in turn createmore value for the customer and itself.

Ultimately, value to the consumer translates into valueto the company in the form of revenue. But VFSincludes more than just a focus on boosting thecompany’s top line. In fact, it seeks to create or, in somecases, protect value along four dimensions — revenue,cost, assets and intangibles — ultimately producingprofitable long-term growth.

Deep understanding of customer and supplier markets,and how the industry and the company competecurrently and in the future is also necessary. Thisunderstanding is required for the company to align andlink its business, product and technology strategies. It isalso necessary so that the company and supplymanagement can correctly establish which purchases arestrategic to the customer and how value can be created.

Specifically, the company must establish current andfuture competitive conditions in both the customer andsupply markets, and potential rates of change in both.Included is the segmentation of customer markets byclass of customer and geographies to identify valuedifferences.


Figure 4-1

Bentham’s marketing department was asked to developfuture forecasts for a particular type of highlyspecialized equipment used in the industry. Based ondetailed forecasts by customers and replacement cycles,it became obvious to Bentham’s supply managementdepartment that a significant bottleneck would result inlengthening lead times, with possible loss of revenue tocustomers. Therefore, the new and innovative VFSstrategy was developed to reduce equipment lead timesand capture market share.

Linkages and communication among those responsiblefor business, products, technologies and supplierstrategies also must be established so that a consensuscan be developed about what customers value and theenabling strategies needed.

F&B’s VFS ingredient strategies were driven by the needto improve margins. Executives, supply, manufacturing,finance and marketing worked in tandem to identifywhat customers truly valued, then developed the supplyand manufacturing strategies to achieve required marginincreases.

Typically these two points are not fully developed fortraditional sourcing, which has a primary focus onprice/cost.

Determine Purchase Categories That AreStrategically Important to the Company andRequired Value

VFS requires that companies establish those purchasesthat are strategic and have the most impact on theirfinancial and market performance. A two-stagescreening process is required, as shown in Figure 4-3.The first stage establishes which purchase categories aretruly strategic to the business based on their impact onproduct sales, return on investment, profitability and/orsignificant problem resolution. The second stage in thescreening process enables a more granular approach todetermining, for those categories that passed throughthe initial screen, which purchase categories have thepotential to generate the greatest value from a VFS effortand which have the highest likelihood of beingimplemented.

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Figure 4-2

Detailed analysis is required to fully determine to whichpurchase categories VFS should be applied. Thisscreening, depth of analysis required and direct linkageof the strategic category to customer demand andrequirements go far beyond traditional sourcing.

Understanding Macro, Micro Details of theStrategic Purchase Categories

To apply VFS, two categories of data are required. Thefirst is the data required to establish whether a purchasecategory is truly strategic and impacts business. Thesecond set of data required for those purchases that aremost suited to VFS strategies will now be reviewed.Both are highly interrelated and could be developedsomewhat concurrently.

The data/information and analyses required to createinnovative value-focused strategies should includeanalyses of customer purchase requirements,industry/supply markets and suppliers. Examples of thetypes of data required are shown in Figure 4-4.

Based upon the data collected, a number of approachesshould be used in strategy formulation, including:

• Determining the impact on customer needs• Understanding purchase patterns• Mapping the value chain and rationalizing work

and bottlenecks• Modeling costs, cost drivers and the value chain,

with improvement levers identified• Analyzing cost-to-outcome considerations for the

category and strategic suppliers• Performing segmentation analyses that support

VFS strategy variations for the purchase• Determining total cost of ownership• Undertaking risk/reward analyses• Benchmarking competitor supply strategies• Examining revenue generating opportunities

Analytic approaches such as these are described furtherin Chapter 5, which focuses on enablers.The differences between traditional sourcing and VFSare centered upon the depth and breadth of datagathering, its cross-functionality and the analysesconducted. VFS requires much more of each. Figure 4-5illustrates macro value chain network analysis/mapping.


Figure 4-3

Carco provides an excellent example of an automotiveOEM working collaboratively with the supply networkto create value. By working closely with tier-onecomponent suppliers, toolmakers and materialsuppliers, the company was able to unlock value fromthe tooling category by developing tooling that hadcommon characteristics across products that could alsobe quickly tailored for a specific end product. Carcohad established supply network and value stream mapsshowing the quality, technology, delivery and cost-driverrelationships between the company and its suppliers’business processes and technologies, and howefficiencies could be improved.

Set Holistic Value-Focused Goals for theCategory

Value goals are far more holistic under VFS than intraditional price-/cost-focused sourcing. Figure 3-1 inthe previous chapter illustrated the broad range of goalscovered by VFS. Overall, these goals must be alignedand linked to how the end product creates value for theultimate customer. Weightings for these goals also must

be established to reflect the importance, or lack thereof,of certain attributes. For example, at F&B it wasdetermined that the customer did not value multipleshapes of an edible product. The number of shapes wasreduced by 75 percent, with positive impact on productmargins.

Even though price/cost will continue to be ofsignificance, its weighting in VFS strategy developmentfor strategic purchases can vary broadly and will be farlower than 100 percent. Packaging innovation and newtechnology at Apollo and HiTech, respectively, were theprimary factors considered in developing value-focusedstrategies, not price.

Evaluate and Select Strategic Supply Options

Critical to the success of VFS, based on analysis ofbroad and deep supply- and customer-focused data, isthe need to create innovative supply strategies for theVFS purchase category. Doing so requires going beyondtraditional sourcing strategies of volume concentration,re-sourcing based on competitive bids, aggressivenegotiation and low-cost country sourcing.

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Figure 4-4

VFS strategies require companies to think broadly andmarshal all resources necessary to creatively developand implement longer-term strategies. Figure 4-6highlights how VFS strategies require “thinking outsideof the box” by fully evaluating and then changing theway the supply market operates and/or changing marketdynamics, as well as changing what is purchased andthe way in which the company works with suppliers.

Metropolitan, Bentham and Pharmacare each foundways to change the rules about how supply marketsoperated, creating significant value for their companies.Duraman, F&B, Apollo, Bigtru, HiTech and Meditrendredefined what they were purchasing, bringing ingreater value from their expenditures. VFS strategies atHealthifoods, Globalgoods, Carco, ComCo, Powerconand Techco illustrated how a different approach towardworking with suppliers could unlock and, in manycases, create new sources of value.

Select and Implement VFS Levers

Implementing VFS strategies requires recognition thatthe VFS levers shown in Figure 4-6 also could be pulled(i.e., strategy options selected) for some traditionalsourcing approaches. However, the company needs torecognize that inappropriately applying complex andvalue-focused strategies may not result in appropriatereturns for non-VFS purchases or be too difficult toimplement because of required resources and executivesupport.

Effective VFS strategies require appropriateidentification of strategic purchases for VFS and thencreation of holistic value-focused goals and appropriatestrategies for implementation. It is important that theseVFS strategies be cross-functional and frequently cross-enterprise, with the support of C-level executives forsuccessful implementation and results.


Figure 4-5

Developing VFS strategies requires creativity in strategydevelopment and systematic VFS approaches andprocesses. In addition, the research with the 15companies identified a consistent set of VFS enablersrequired for success, which is discussed in Chapter 5.

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Figure 4-6

In Chapter 2, we explain how the more advanced VFSstrategies followed two themes:

• There was a sharp focus on value alignment,beginning with a deep understanding of valuefrom the consumer or end-user perspective. Thatunderstanding was carried back through the valuechain and outward to the supply base, formingthe template for aligning resources to delivervalue.

• There was also a holistic view of value creation,both in terms of the potential sources of value andthe actions needed to secure it.

Underpinning these two themes are seven enablers, asshown in Figure 5-1.

As the examples in Chapter 3 illustrate, the strategiesused to protect or create value through supply differgreatly across the 15 companies studied. Even thoughthe specific strategies were tailor-made to fit eachcompany’s business strategy and market conditions,there were common elements that enabled companies toconceive, develop and implement the VFS strategies.Those enablers are explored in this chapter.

While individual companies used these enablers indifferent ways and to different degrees, several commoncharacteristics of successful VFS implementationemerged. The research also identified areas whereimprovement is needed to further embed and extendVFS in an organization.

Executive Engagement

Value Focused Supply is a fundamentally differentapproach than traditional supply management. Itrequires that the company as a whole works together to

find and leverage supplier capabilities and marketplaceopportunities that will create value. Developing andimplementing VFS strategies require knowledge,cooperation and resource commitments that go farbeyond the supply organization. By its nature it is cross-functional, and requires deep linkages into the businessunit strategies for product/service and marketdevelopment. Executive engagement across theorganization is a must.

Executive LeadershipThroughout the interview process, companies pointedto the requirement for top-level executive leadership toensure that VFS strategies are developed, funded andbroadly supported across functions and enterprises toachieve business unit objectives. How this occurredtook multiple forms.

Bentham’s success in developing an alternative supplychain for a specialized component depended on strongexecutive engagement throughout the process. Cross-functional discussions revealed the spike in demand forthe end product and the supply constraint for thecomponent that was driving long lead times. Thesediscussions also brought out the value creation potentialfor customers by making their plants operational sixmonths earlier if Bentham could develop an alternativesource. Ultimately the supply strategy came to beviewed as a business strategy by Bentham’s seniorexecutives.

Bigtru’s executive leadership team has significantlyincreased its attention to supply management in the pastseveral years. Prompted by a keener understanding of thecriticality of key categories to the company’s end productsand the risks of limited supply options, the executiveteam funded and organized cross-functional teams topursue VFS. Duraman’s VFS program came about as thedirect result of a senior executive’s mandate to become

Chapter 5: Enabling Value FocusedSupply


the cost leader. At Metropolitan, the VFS program hadthe direct sponsorship of the CEO and executive team,and the support of the CEO to take on risk.

Recognition of and Commitment to CreateValue through SupplyA thorough understanding of the business strategy andvalue drivers is the basis for linking supply tocompetitive business strategy. For those key purchasecategories that would best benefit from VFS, identifyingand gaining agreement on the category’s strategicimportance and value creation potential is the startingpoint. Top-level executive management must be just asattuned to creating value from supply as it is towarddelivering value to customers — indeed, they are twosides of the same coin.

Minus top-level recognition and commitment, supply-related value creation opportunities may be stymied. Inseveral cases in this study, supply was unable to gainsignificant results on its own until corporatewideinitiatives created the platforms/channels to gain

visibility and resources, and to enable collaborationwith others.

Over several years at F&B, supply managementidentified a portfolio of improvement projects thatcould be implemented relatively quickly. But theseprojects were on hold, requiring business unit buy-inand cross-functional teaming for which the companywas not yet ready. When a corporate-wide mandate formargin improvement finally opened the floodgates,supply was ready to meet the challenge.

Cross-Functional Understanding of ValueOpportunities in SupplyEach leader of company functions — finance for controland financial assets, human resources for people assets,marketing for brand assets, engineering for technicalassets and manufacturing for productive assets — musthave a basic awareness of the source and use of strategicvalue for existing or future spend categories that affectthe corporate assets for which they are responsible.

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Figure 5-1

At Duraman, the cost leadership mandate led to cross-functional teaming between engineering andprocurement based on a “common agenda" for the twogroups. It required collaboration across lines of businesson components and commodities common to multiplebusiness units.

At Healthifoods, cross-functional planning gaveprocurement visibility into the company’s three-to-five-year market penetration/growth and related capitalexpenditure plans, allowing it to develop a matchingequipment sourcing plan.

When it decided to cut its supplier list for a keycategory by more than 80 percent and focus thebusiness on a few key suppliers, Techco depended onstrong sponsorship by engineering, technology, qualityand supply chain executives to set direction and helpenforce policy. To boost acceptance by the engineeringcommunity, the program was managed as a joint supplychain, engineering and operations effort.

Business Unit Ownership for ResultsTo shift the conversation to multiple dimensions ofvalue, the business unit must lead a coalition of partiessuch as procurement, marketing and operations thathave historically had separate interests. Sometimes thisrequires addressing (or preemptively heading off) cross-business unit or cross-geographic conflicts whenmultiple units are involved. For example, the supplymanagement organization at HiTech had to develop anintegrated strategy for working with a small set ofsuppliers in a common supply market while balancingthe unique needs of each business unit’s end market,which ranged from low-cost, reliable components to thelatest in advanced technology.

Governance ProcessRelated to all of the elements above is the need for agovernance process to guide the efforts and resolveconflicts in the short term. At F&B, a governanceprocess to establish and monitor VFS opportunities wasled by the divisions, which established what customersvalued by product line. The divisions worked withsupply, manufacturing, logistics, technology and othersto determine which purchase categories were mostlikely to produce higher margin returns based onpossible efficiencies in the way in which value wasprovided to customers. This portfolio of high-opportunity projects was monitored for progress andresults, and if projects were falling short of expectationsthey were redirected to higher probability/paybackefforts.

Similarly, governance processes are required to embedimprovements in the long term. Duraman continues to

work on its governance process to ensure thatcomplexity does not creep back into its productdesigns.

Another important part of the governance process is toensure that the needed resources are available to pursueVFS strategies. Several companies in the research foundthat dedicated resources had to be added to create andexecute VFS strategies for key purchase categories.

Value Chain Goal Alignment and Measurement

Holistic supply value metrics need to align withcustomer, business unit and supplier competitiveobjectives and strategic plans. Moving forward, the keychallenges will be to develop and agree upon thesenontraditional metrics and create the means for datacollection and validation.

Developing Value-Based MetricsIn general, the participating companies have well-established metrics for traditional dimensions of supplyvalue, such as purchase cost, inbound quality and on-time delivery. Several extend cost measurement toinclude total cost of ownership, bridging intomanufacturing, distribution and even after-sales service.

However, these measures do not begin to cover the rangeof factors that make up value in the eyes of consumersor end users. As Chapter 1 describes, they perceivevalue in terms of benefits to cost, with benefits rangingfrom the relatively easy-to-measure functionality andperformance to far more subjective ones based onpersonal preferences and needs. To complicate the taskeven more, different segments of consumers or end userscan place very different weights on the various benefits.

Developing useful metrics to measure value from supplymeans having a clear line of sight into what theconsumer or end user values, then converting thoseinsights into metrics to gauge supply contributions tovalue creation. (See “Value Chain Mapping” later in thischapter for further discussion of that topic.) Forexample, the consumer packaged goods companies inthe study are connecting consumer desires for healthier,lower calorie foods back through their productdevelopment processes and into the supply base. Withthe needs of its end users in mind, ComCo is designingits next-generation power generation equipment to beboth green and less costly to own and operate.

VFS strategies often enter uncharted territory from ametrics standpoint. Two participant companies weighedin on the same challenge: Traditional measurementsystems make no provision for counting and rewarding


company-supplier efforts to design out costs upfront.Instead, the behavior they encourage is for the companyto later change the design and then claim the costsavings. Similarly, few companies have developedmetrics that measure the impact of supply strategies onincreased sales or on product and service innovation —and even then, these tend to be ad-hoc or project-basedmeasures outside the formal accounting systems.

As VFS strategies become more robust and far-reaching,companies will be tested even further as they seek todesign and gain agreement on value measures. Considerthe challenges of developing metrics that supportMeditrend’s VFS strategy to shift from a total-cost-of-ownership viewpoint for procurement to a holisticpatient outcome view for the entire healthcare deliverysystem.

Establishing Joint Goals across Business Unitsand FunctionsJoint objective setting and joint accountability forresults between supply and the affected functions andbetween supply and the business units played a centralrole in successful implementation of VFS strategies. Thisinvolved ensuring that short and longer term valuegoals were linked to business strategy and financialmetrics and that functional strategies and goals alignedwith overall business plans. To help prioritize andreinforce performance expectations, it also includedintegrating value creation metrics into the evaluationand reward process for business and functional units,and for individuals.

Goal alignment throughout ComCo is a core element ofthe company’s three-year transformation program forsupply. It has put in place processes that integratefunctional strategies and goals with the top-down“overall business development plan,” in which customerrequirements flow into the business strategy, which inturn flows to functional strategies. VFS strategies gobefore a cross-unit, cross-functional strategy board forbuy-in and sign-off. Cross-functional teams fromprocurement, manufacturing, manufacturingengineering, quality and development share goals andaccountability for project results.

At Duraman, cross-functional alignment played a keyrole in the success of the VFS strategy. The jointengineering-procurement team had accountability forgovernance of raw materials specifications globally; allteam members shared the same objectives forstandardization, cost reduction, project implementationand governance.

Aligning Goals along the Value ChainMany of the studied companies’ VFS strategies relied on

supplier capabilities to complement and supplement thecompany’s own resources. Although the suppliers, asseparate businesses, had their own strategies andmotivations, the companies in our research found waysto align suppliers’ goals with their own to benefit bothparties. Common metrics between companies in thesupply chain helped to enhance the VFS focus.

Powercon found that an important suppliermisunderstood its performance requirements due tomisaligned performance metrics. Harmonizing metricsbetween Powercon and the supplier allowed clearcommunications expectations, which led to agreementon goals and formed the basis for stemming major valueleakage.

Carco’s VFS approach to tooling required goal alignmentamong three parties: the toolmakers, parts suppliers andCarco itself. The company and its part suppliers wantedlocal tooling sources that were competitive on cost,quality and delivery, and also wanted to maintain a localpool of toolmaking know-how. The tool shops hadcomplementary goals — become globally competitivewhile maintaining local operations, gain know-howabout improving operations from Carco and suppliers,and stabilize business levels by becoming preferredsuppliers for future business.

Certifying Performance and ResultsSeveral of the participating companies pointed to theimportance of having independent validation (outsideprocurement) of the performance and results of theirVFS strategies. This was due to the cross-functionalnature of the efforts and the need to develop and usenontraditional measures, along with the desire tocounter skepticism. For example, at ComCo the financedepartment takes the lead in measuring value, as it alsodoes at Globalgoods (in the latter case, finance alsohelps ensure that value does not “leak” from thesupplier’s books before the company is able to captureit). At Techco, supply management proactively engagesfinance to audit and verify benefits, adding credibility tothe process.

Supply Market Understanding

Deep supply and demand market understanding, bothupstream and downstream, is required to developbreakthrough VFS strategies. This includes understandingsupply market structure, economics, supplier capabilities(including determination of technology leadership),capacity bottlenecks and the most effective places toposition work within the value chain. It also includesunderstanding the day-to-day dynamics of the markets,including supply-demand balance and pricing.

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Gaining Deep Market InsightsUnderstanding the supply market is a basic step intraditional sourcing. But for the VFS study participants,gaining a much deeper understanding of market trendsboth on the end product side and the input sidesometimes uncovered strategic threats or opportunities,providing the impetus for bold strategic moves.

Bentham extensively researched the upstream supplychain to understand supply-demand balance and chokepoints. It coupled this with detailed research intosubstitute sources of supply for key value-add steps.These were then crafted together into an alternativesupply chain that helped Bentham overpower itscompetition.

Globalgoods recognized that owners or investors in itssmaller suppliers were realizing significant economicvalue due to their relationship with the company. Bydeveloping an in-depth understanding of selectedsuppliers’ capabilities, ownership structure andeconomics, as well as the industry structure and howthe supplier creates value, Globalgoods determined thatthere were opportunities for it to share in theseeconomic benefits.

Understanding Day-to-Day DynamicsEspecially in commodity or commodity-like markets,up-to-date market information is critical for some VFSstrategies. At Metropolitan, having an accurateunderstanding of the current supply-demand balancesand pricing proved vital to its strategy of leveragingregional arbitrage opportunities against its globalfootprint. It increased market intelligence from being inthe local markets “every day,” while improvedtransparency and accuracy of pricing came fromworking with market surveyors to improve the accuracyof published price indexes.

Collaboration Approaches

Collaboration and information transparency amongcustomers, functions and suppliers at all stages in thevalue chain/network is required to maximize innovativeVFS strategy creation and implementation. Establishingjoint accountability and rewards for results helps pavethe way.

Internal CollaborationRepeatedly, internal collaboration proved to be a keyingredient in creating value from supply. Sometimes thistook the form of collaboration across business units andgeographies, but often it included cross-functionalcollaboration as well. As one participant put it, “Valuegets dammed-up behind functional walls and you need

funding and resourcing to break down the barriers.” Formany participants, cross-functional collaboration waskey to rationalizing specifications and reducing totalcost of ownership.

Key processes for which integration proved importantincluded strategic planning, innovation and newproduct development, geographic market expansionand capital project management, along with the moretraditional manufacturing and supply chain linkages.Not surprisingly, cross-functional collaboration mostoften occurred between procurement and productdevelopment, engineering or manufacturing.

At Apollo, the new package design would not have beenpossible without creative services and procurementjointly working with the supplier. The former broughtconsumer product design expertise, while the latterensured both the commercial viability and themanufacturability of the design. Duraman married itsengineering-driven complexity reduction effort withprocurement’s ability to search for alternatives and alignmaterial sourcing strategies with complexity reductionefforts, yielding a payoff bigger than either effort couldproduce on its own. For Metropolitan, closecooperation and involvement of procurement, plantmanagement, technical teams and the business unitshelped the company optimize its sourcing andmanufacturing strategies.

However, there were also examples of collaborationwith other functions that unlocked value as well.Healthifoods integrated procurement into both thegeographic market expansion process and the capitalproject management process. The result was equipmentdesigned and locally manufactured specifically fordeveloping markets, with the add-on benefit of creatingan alternative supply base for its mature markets. Byworking cross-functionally, procurement, legal andfinance at Globalgoods found innovative ways to tapinto the value the company created for suppliers. AtPharmacare, supply management and legal teamed upto change the way the company buys legal services.

Collaboration and Process Integration along theValue ChainIn addition to internal collaboration, there were manyexamples from the research that pointed to theimportance of collaboration along the entire valuechain. Having strategic alignment/shared vision withsuppliers was a critical first step, building upon thefoundation of value chain goal alignment. From thisjumping-off point, collaboration took on many forms.For some companies, the approach involved two-waysharing of strategies, plans, technology and otherroadmaps with suppliers as a basis for longer term


product planning. Others worked directly withsuppliers to improve company-supplier processes, forexample early supplier involvement in design,streamlining product testing and logistics, or to sharpenthe capabilities of the supplier’s own operations. AtTechco, the willingness of both the company andsuppliers to share technology roadmaps contributed toinnovation and lower cost. The development of acommon test architecture and the placement of testequipment at supplier locations also cut costs and time.

Carco collaborated with three tiers of suppliers —aluminum suppliers, toolmakers and partsmanufacturers — to jointly reshape its supply chain forinjection-molded parts. In addition, it shared itsexpertise with toolmakers, teaching them processefficiency, lean manufacturing, benchmarking anddesign-manufacturing integration.

ComCo melded internal and value chain collaborationto improve both product design and manufacturing.Cross-functional teams included the procurement,manufacturing, manufacturing engineering, quality anddevelopment functions. It encouraged manufacturingbest practice sharing across suppliers and made itsmanufacturing research centers available to suppliers tohelp them improve manufacturing all along the valuechain.

Healthifoods brought equipment, ingredient andpackaging suppliers together to jointly improve itsoverall manufacturing processes. Bigtru integrated itsown design engineers with the supplier’s. These newjoint technical teams worked on-site at the supplier’sfacility to co-develop the new alloy.

Supplier Relationship Characteristics

Developing and maintaining strong relationships withsuppliers of critical categories was vital to several of theVFS strategies studied. Positive supplier workingrelationships, based on trust, fairness, informationtransparency, capabilities and cultural alignment,increased the likelihood of gaining supplier value andbuilding longer term and most favored customerpositions. The companies we studied found thatstrategic suppliers would work collaboratively with theircustomers to jointly protect and create new value fromtheir supply relationships, with the expectation thatthey would be rewarded for their efforts.

Three main characteristics of the company-supplierrelationships — cultural match, valuing the incumbent,and trust and openness — led to successfulimplementation of VFS strategies.

Cultural fit played an important role in several of therelationships. For some, this meant that they shared acommitment to design and engineering excellence. Forothers, it was based on a shared vision ofconsumer/end-user needs and how to meet them. Stillothers looked for compatible management styles.

HiTech had several potential suppliers for its newcomponent. Supplier selection for development of thenew component was largely based on technicalcapabilities, coupled with a cultural fit between thecompany and the supplier based ontechnological/engineering excellence.

Building on existing supplier relationships thatdemonstrated how the company valued the incumbentsupplier was often the foundation of VFS. Cultural fitwas, of course, part of the equation, but this was alsobecause the company already had a deep understandingof the quality, size and geographic fit of the supplier’scapabilities with its needs. In several cases, participantsinvested in strengthening the capabilities of currentsuppliers rather than finding new ones. In this way theyhelped to ensure high quality and reliability from thesupplier as a basis for further value creation.

Most of the relationships were based on a core of trustand cooperation between company and supplier, as thetwo parties shared information openly. They agreed toand worked to ensure joint accountability for results.They exhibited fairness by negotiating price based oncurrent supplier cost and future improvements, sharingupside potential with suppliers and protectingintellectual property rights for both parties.

Apollo’s relationship with its packaging supplierillustrates a strong level of trust and cooperationbetween company and supplier. Neither party wascertain that the packaging design would be adopted asthe standard for the new format, yet each trusted theother to act fairly if the design was chosen. Intellectualproperty attorneys shaped a fair agreement thatprotected both parties’ rights. Once the design waschosen, price was negotiated based on an accurateunderstanding of costs and the two companies carriedout joint efforts to reduce costs. Apollo also encouragedthe supplier to license the design to others and get anadditional revenue stream in return.

At Bigtru, the company selected an incumbent supplierto develop the new alloy based in part on its strongtechnical and engineering capabilities. But the closenessof its working relationships, coupled with a sharedstrategic vision of the importance of costcompetitiveness, cinched the relationship. Their jointefforts paid off with leading-edge technology and

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valuable intellectual property shared by bothcompanies. Unfortunately, Bigtru’s awareness of thesupplier’s financial situation did not match itsknowledge of the supplier’s technical capabilities, as thesupplier was driven into Chapter 11 bankruptcyproceedings by an industry downturn.

F&B’s approach toward its key suppliers helped tofoster VFS strategies in several ways. For example, inone important category the company evaluated eightincumbent suppliers and chose to partner with three —essentially sole-sourcing each of three main types ofproduct in the category. In addition to gaining business,these suppliers were in some cases allowed to opt-out ofbusiness with F&B that did not match the supplier’scapabilities. Pricing is cost-based, with biannualcontracts for guaranteed price in exchange forguaranteed volumes. F&B shares its consumer insights,enabling suppliers to better formulate ingredients tomatch consumer needs. Due to F&B’s strategy ofreinvesting procurement savings in marketing, thesuppliers shared in F&B’s revenue growth via additionalsales to the company.

For years, Carco had a reputation as a leader inmanaging supplier relationships. Its emphasis onhelping suppliers improve their own competitivenesslaid the groundwork for its innovative approach totooling. Rather than treating toolmakers as a commoditybusiness, it helped those companies transformthemselves into value-added contributors. Further, itcontinually looks for ways to share benefits with itssupply base, as shown by its willingness to let supplierskeep the savings from using the new tooling for the lifeof the model.

ComCo faced a bit of a challenge when it began toengage suppliers regarding its VFS strategy. Past actionshad created the perception among suppliers thatComCo had treated them unfairly. While still a work inprogress, the company has made great strides byfocusing on ongoing relationship management with keysuppliers through the personal efforts of a new supplyexecutive team. ComCo has become far more open withits suppliers, sharing elements of its category strategies.Value improvement workshops with suppliers areuncovering new opportunities that sat untapped underits former supplier management approach. At the sametime, ComCo is expecting new behaviors from itssuppliers. To participate in new product developmentgoing forward, suppliers are required to provide costtransparency to ComCo.

Multiple Touch PointsThe companies studied frequently mentioned the needfor multiple touch points between their organizations

and those of suppliers to deliver added value from therelationship. In several cases, product engineers anddesigners worked side-by-side with their suppliercounterparts to design in features for new products orto design out waste in existing ones. Working together,manufacturing engineers and quality expertsstreamlined shared processes using Six Sigma and leanmanufacturing techniques. Top management-to-topmanagement communications helped to ensure strategicalignment and build an environment of trust. In oneexample, top-to-top direct communications were theonly way to break through the supplier’s internalbureaucracy and get issues resolved.

Information and Analytical Capabilities

Earlier in this chapter, we discussed the importance ofunderstanding the supply market in detail as a means toidentify and capitalize on value creation opportunities.While this is important, gaining this understanding isonly half the battle. Equally important is developing theinformation and analytical capabilities to understandpurchase patterns in order to evaluate supply optionsand engage with suppliers on value creationopportunities.

Deep information and analysis based on comprehensiveresearch about purchase spend patterns, price/costdrivers, total cost of ownership, risks, value maps andsupplier technology roadmaps throughout the valuenetwork is required for effective VFS strategies. Toanalyze the complex trade-offs, cost-, operational- andrisk-modeling capabilities are needed.

Understanding Purchase PatternsMost companies studied have spend visibility andanalysis tools in place. While these provide the basicsneeded to support the traditional sourcing strategies(e.g., supplier consolidation and price negotiations),they often lack the depth of detail to support moreadvanced VFS strategies. To support its complexityreduction efforts, Duraman found that it was necessaryto develop information systems that provided designengineers with visibility into existing designs andcomponent and materials specifications. This datahelped guide product design and raw material choicesthat would add value rather than unnecessarycomplexity.

Pharmacare was able to peer through the historicallyopaque billing processes that external law firms used byanalyzing the details of its e-billing system for legalservices. Each invoice contained task-level detail tied tolegal industry standard task codes that showed hoursand costs. This detailed level of granularity allowed


Pharmacare to move away from time-based paymenttoward fixed fees for routine legal tasks.

Mapping the Value ChainValue chain analysis starts at a company’s end productsand services and works backward through the chain toidentify where value is added or leaked. While few ofthe companies studied spoke of a formal value mappingprocess, many exhibited behaviors that indicated aninformal approach was in place.

Figure 5-2 provides an example of a value map, whichbegins by segmenting the consumer/end-user markets,then understanding what each segment values in termsof benefits (key selling factors), costs (price point) andtrade-offs. For example, HiTech knew that varioussegments had different needs and wants for its endproducts and also knew how much the componentscontributed to these needs and wants. Benthamrecognized the value that early delivery of its specializedequipment would bring to end users.

The next step is to trace back the specific value-addsteps both internally and back through to suppliers,looking at technologies employed, costs, capacities,geographic locations and other factors in order toevaluate capabilities internally and externally to deliverthe needed benefits/costs. A company can then examineboth competitive and value-based alternatives in thesupply market to increase the value to the consumer/end user, reduce the cost of delivering it — or both.

While the companies studied were able to conduct thisvalue mapping informally on a situation-by-situationbasis, the research team believes that companies thatapply VFS analysis and strategies to their portfolio ofkey categories can benefit from a more formal approachto value mapping.

Analyzing and Modeling OptionsSeveral companies, including Carco, Apollo, F&B andComCo, have developed cost models that help them tounderstand suppliers’ costs and predict how they willbehave if conditions change. In addition to their use innegotiations, these models also point companies andtheir suppliers toward cost savings opportunities.

Other companies have developed broader models thatlook at systemwide impacts of changes to supply andother inputs. Metropolitan developed a standard totalcost model to uniformly evaluate the cost impacts ofchanging specifications across its manufacturing sites. Itcoupled this with a systemwide optimization model tofind the best configuration of sources and production tobalance materials, production and logistics costs acrossthe enterprise.

Although still in early development, Meditrend’sanalytical model that relates a surgical patient’s long-termoutcome to the costs of the surgical team composition,techniques and medical supplies employed could helplead to breakthroughs in patient care.

Exchanging Information along the Value ChainMany of the companies interviewed regularly exchangesupply chain-related information such as forecasts,inventory levels, orders and shipments with theirsuppliers. This information exchange protects value bystripping out unneeded cost and unproductive assets.Some participants also use information exchange as ameans to create value by helping to integrate designefforts on new products.

Several participating companies rely on a two-wayexchange of technology roadmaps with suppliers. Thishelps each anticipate the future developments andinvestments of the other and also helps point outdivergences while they can still be reconciled. AtTechco, suppliers have direct access to an electroniclibrary of drawings and specifications. This has helpedcut Techco’s cycle time for bidding on new projects,improved accuracy and reduced errors when winningdesigns went into production. Carco encourages the useof standardized tool design software along the valuechain.

Organization and Human Resource Management

A supply organization capable of holistic value creationrequires an organizational structure that fosters cross-functional and cross-organization teaming. Further, itrequires highly skilled, talented people with significantanalytical and creative capabilities.

Globally Coordinated Category ManagementCenter-led organizations seem to be a key ingredient forsuccess in VFS efforts, as this model provides globalintegration internally as well as a unified face and globalreach into the markets. At several of the companiesstudied, key categories were globally coordinated acrossgeographies and business units. In some cases, therewas a global category leader responsible andaccountable for the category across the enterprise. Inother cases, regional leads had responsibility butoperated as a networked team.

At HiTech, the supply management organization is builton the concept of centralized buying for categories usedacross business units. Global management of thesecategories allows for coordination of the strategy acrossbusiness units. For Healthifoods, global centers of

43CAPS Research

excellence manage all supply chain aspects for keycategories, including sourcing.

Skills beyond Traditional SourcingThe skills required for VFS represent something of astep change from those needed for traditional sourcing.One supply executive we interviewed put it this way:“Skilled sourcers (like those so coveted in organizationscirca the late 1990s through the mid-2000s) may lackthe skills needed to manage an integrated category andsupplier relationship strategy like a business.”

Following are four areas in which skills need to bemarkedly advanced in VFS efforts:

1. Technical expertise in the category. For severaltypes of categories — especially those of a highlytechnical nature — having an in-house technicalexpert to provide deep technical understanding ismandatory. This person need not be a part ofsupply management. At F&B, technical expertisewas resident within procurement for a keycategory covered by the case study. At HiTech,R&D took the lead in managing the developmentof the new component by suppliers while the

procurement organization managed thecomponent’s supply once it had matured into acommodity item.

2. Research and analytical skills. VFS research skillsinclude thoroughly understanding supply marketstructure and dynamics (including several tiersback), evaluating in-depth supplier capabilitiesand finances, estimating value chain costs basedon cost drivers, and gauging present and futuredemand, both for the company and the market intotal. Analytical skills include financial and costanalysis, modeling, use of optimization tools, andidentifying and evaluating risks.

3. “Soft-side” skills. Because cross-functional andcross-company actions are often at the core ofVFS strategies, soft-side skills are critical tosuccessful implementation. These include changemanagement skills like those needed to fostercollaboration (e.g., two-way communications,persuasion, cultural sensitivity, empathy andconflict resolution), to innovate and create, and tolead diverse teams. Cultural sensitivity includesdealing with different societies around the world


Figure 5-2

as well as other companies that may have differentmanagement styles. Although not strictly a soft-side skill, foreign language skills are often a pluswhen working globally. Healthifoods underscoredthe need to develop the right skill sets andlanguage skills in its procurement organization tosupport the company’s globalization strategy.Related to this was the need for strong changemanagement skills to overcome biases, forexample internal “phobia” related to usingsuppliers from developing countries.

4. Program and project management skills. Severalcompanies interviewed referred to the need forstrong project and program management skills tokeep resources focused and on schedule whenimplementing VFS strategies. This skill set marriesthe soft-side ones mentioned earlier with skillssuch as project planning, delegation, problemsolving, and budget and schedule management.

Future ConsiderationsIn a few instances, companies pointed toward anemerging problem they had experienced retainingpeople with the skills needed for VFS. In one case, thecompany had a managerial career path that rotatedindividuals through various departments as they movedup in the organization. While this practice helped itstop talent build knowledge of multiple functions anddevelop a wider network of contacts, it worked againstthe retention of individual performers such as thosewith deep supply market industry expertise. In another,retaining people with experience in developing marketsbecame a challenge as other companies lured themaway with greater rewards or opportunities. These twocases point out the need for companies to rethink howthey keep skilled resources onboard to support VFSstrategies.

Finally, if VFS is going to become an important part ofthe overall mission of supply management, the adoptionof a new mindset throughout the organization will berequired. This will begin with all members of thepurchasing organization, from CPO to beginning buyer,increasing their awareness of the source and use ofstrategic value for each existing or future key spendcategory.

A Perspective on Enablers

The examples of and observations about enablersdescribed in this chapter are quite consistent with otherstudies conducted by CAPS Research and A.T. Kearney.Each of the seven enablers is a building block on thepath to excellence in supply management. Together,

they form the foundation for developing andimplementing VFS strategies.

The variety of company stories represented in this studydemonstrates that VFS is a journey rather than adestination. Few companies had all of the right enablersfully in place at the outset of their VFS efforts. Whilesome companies studied built their VFS successes on along history of supply management excellence, othersnote that the root of their successes in VFS grew out ofrelatively recent work.

Metropolitan traces the origins of its success back to atransformation effort in procurement that began in2005, when it adopted a center-led organization model.In addition to getting better visibility and control overspend, the new structure allowed best practice sharing,improved talent and greater flexibility to deployresources against value opportunities. In 2009, whenthe company faced a severe margin squeeze, it formedeight strategic commodity management teams with co-leadership by the business units and procurement, andjoint accountability for objectives and results.

ComCo is still in the midst of procurementtransformation, but already has seen early successes byusing its structure of global commodity leaders(category executives) to develop and implement thecommodity strategies across seven different supplychain units. Work still needs to be done to win back thetrust of some of its suppliers, to strengthen cross-functional teaming and to work in a more coordinatedway across regions.

Examining the enablers demonstrates that successfulimplementation of VFS requires more than justtransformation of supply management. A clear lessonfor those companies aspiring to increase value fromsupply is the need for strategic, process andorganizational alignment across the whole company tofind and deliver more value from the supply side of thebusiness.

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Supply management has been steadily transitioning overthe course of decades. A function that initially focusedon supply continuity advanced to take on competitivecost management and is now examining ways to addstrategic value. As seen in this research, this transition isoccurring more quickly in some companies than others,has a different emphasis — protecting or creating newvalue — for some categories, and is connected tostakeholder and senior management in different ways.In Chapter 3 (Examples of Value Focused SupplyStrategies), Chapter 4 (A Framework for ImplementingValue Focused Supply), and Chapter 5 (Enabling ValueFocused Supply), we have outlined what must be doneto develop and execute Value Focused Supply strategies.

Transitioning to VFS from Traditional Sourcing

The future competitive environment will require thatcompanies carefully evaluate when and how to applyVFS. Figure 6-1 illustrates that VFS strategies will mostlikely be employed for those purchases that presentmajor opportunities for value creation in suppliermarketplaces that pose significant constraints, such aslimited capacity, technology hurdles or significantcapital requirements.

Nonetheless, traditional sourcing is and will continue tobe important. Price/cost improvement will remain thedominant focus for traditional sourcing. It will tend tobe applied to protect value in supply markets in whichthere are competitive alternatives and for which thereare constraints around supplier selection and switching.Finally, there will be a transition of selected purchasecategories from traditional sourcing to VFS as suppliermarketplaces become more complex or as morepotential to meet strategic needs emerge.

Where Do We Start with Value Focused Supply?

In this research, many of our examples show VFSapplied as a result of “trigger points” — specificcategory issues or even crises — that required attentionto protect or create value. Enablers were developed onan “as needed” basis to overcome the crisis or respondto the trigger. VFS strategies were not regularly appliedon an ongoing basis, as illustrated on the left side ofFigure 6-2.

For the future, leading companies will need tosystematically develop supply strategies and theirenablers to meet the strategic needs of today and for thefuture. In order to identify, predict and respond to thoseneeds, an ongoing organization should be developed toguide the company to compete through VFS, asdepicted on the right side of Figure 6-2. As an initialstep, a supply stakeholder committee that is influencedbut not led by supply management may be formed. Thisstakeholder group will provide insight and resources tomeet the needs for individual VFS initiatives.

Longer term, an ongoing organization tasked toorchestrate the development and implementation of thecompany’s portfolio of VFS strategies might be thesupply executive committee. The committee,comparable to a marketing or finance executivecommittee, could be led by a senior executive andsupported by other functional executives, includingsupply management.

Applying VFS systematically requires a fundamentalshift in the way that many stakeholders approachsupplier relationships. Rather than stakeholders viewingindividual suppliers as their own responsibility, withsupply management responsible for identifying qualifiedalternatives and competitive pricing, the supply base

Chapter 6: Conclusion


must instead be viewed as a corporate resource aimed atmeeting the company’s strategic needs much in thesame way that marketing, financial or technologyresources are identified and deployed.

To determine whether an individual organization hasthe capability and is ready to take on VFS, we havedeveloped the VFS Readiness Assessment Tool inAppendix B, which measures whether the VFS enablersdescribed in Chapter 5 are sufficiently in place.

A natural question given this ambitious objective wouldbe: “Where should I start? Is this a push or a pulleffort?” Undertaking this type of mission requires asensitive balance between demonstrating the capabilitiesto fulfill it, and with promoting the request to create therole from a trusting senior management team. Makingsenior management aware of the value of such a missionwithout seeming self-serving becomes the challenge.

The Role Played by Senior Management in VFS

What do the companies in our research tell us about theinvolvement of senior management and senior

executives in other functional departments? As shownin Figure 6-3, in some instances senior managementsponsored the VFS projects and program and organizedthe multidisciplinary group in which supplymanagement played a key role. In other cases, relatedfunctional departments — finance, engineering, legal,manufacturing or product development — played apartner role with supply management to promote VFS.In only a few of the research cases did the supplymanagement function drive the VFS idea by itself.

At Duraman, F&B, Healthifoods, Metropolitan andPharmacare, top management sponsored broad-ranginginitiatives focused on capturing value that includedsupply management as a key contributor or element tothe process. Multifunctional, multiunit teams wereestablished to spearhead the approaches. In addition,specific supply categories were addressed bymultifunctional teams to protect or create value.

For three other companies — Bentham, Bigtru andCarco — top management recognized the threat oropportunity posed by a specific supply category andthen sponsored and resourced multidisciplinary teamsto seek VFS opportunities. At Bentham, systemic

47CAPS Research

Figure 6-1

barriers were overcome to open up a promisingrevenue-producing opportunity. Bigtru harnessed a teamto create an alternative material that overcame barriersthat would have made the company uncompetitive ifleft unchecked. Carco’s top management supported therestructuring of a supply network that was not set up todo what was needed to support a new strategicdirection sought by the company.

At other companies, functional support was obtained bysupply management to protect or create Value FocusedSupply. At Apollo, collaboration between packagingdesign, marketing and suppliers enabled theestablishment of an industry standard for a new productpackage. A new executive at ComCo embraced a cross-functional approach. At Globalgoods, finance and legalwere the key contributors that worked with supplymanagement to develop an innovative way to share invalue capture with suppliers.

In all of these instances, trigger points drove thedevelopment of either a broad-based program driven bythreats and opportunities outside of supplymanagement or an opportunity for a few functions tocollaborate with supply management to address VFS.We did not see a well-established, systematic approach

to VFS of the sort portrayed on the right side of Figure6-2. What would be required to set up such a program?The steps to promoting a systematic approach to VFSare examined in the following paragraphs.

Promoting a Systematic Development of ValueFocused Supply

Demonstrating the link between strategic value to thecompany and supply opportunities/options becomes themain hurdle to establishing an ongoing program forVFS. Some of the steps to initiate awareness andunderstanding of VFS might include the following:

• Publish a “Supply — State of Play” document forsenior executives annually. This document shouldreport on the baseline strategy for each VFScategory and report any shifts in their strategicrole, competitive position, technology vectors,pricing or supplier marketplace.

• Hold a “value mapping” workshop with keyexecutives once every six months to capture,confirm and update links between strategy andsupply of key value elements. Create new versions


Figure 6-2

of the value map due to new products, markets orother major shifts, such as technologyleapfrogging.

• Hold a value mapping workshop with a keysupplier(s) every six months, gradually invitingother executives to the workshop to engage themin a more comprehensive and complete valuemap.

• Prepare a strength/weaknesses/opportunities/threats (SWOT) dashboard for VFS categories andupdate it on a quarterly or biennial basis. Engagerepresentatives from a continually widening set ofstakeholders as input for the SWOT dashboard.

• Prepare a “five-forces” analysis for VFS categories— provide continuous access to the executiveteam and update as needed.

As indicated earlier, building the linkage betweencompany strategy and supply will initially be organizedthrough a supply stakeholder committee. Activity willculminate in the establishment of a supply executivecommittee that will protect and create value throughfocused supply strategies. The supply executivecommittee will track and safeguard the VFS categoriesand create new value from the innovative use of new

VFS strategies. Committee members will be drawn fromthe top levels of operating unit management; thecommittee will be led by operating executives andsupported by all other functional executives, includingsupply management.

This transition will not be completed easily. Supplymanagement executives must be able to create andshare this vision with others in their organization,profession and value chain. As an example, we havecreated a “Supply Management Mission Statement forthe Future.” While that future may arrive as soon as2015 for some advanced companies, it might be a saferbet for 2020 for many companies given the traditionalresistance to supply participation in strategic issues. Forlaggards, it may not come before 2025.

Supply Management Mission Statement for theFuture

What would a mission statement look like for a supplymanagement organization in a company that has beenable to establish a supply executive committee as a

49CAPS Research

Figure 6-3

systematic organization to address VFS? We believe thatsuch a mission statement would include the breadth ofvision and understanding of the key value componentsand capabilities needed to be a key player in VFSendeavors.

Following is a mission statement that could beadopted ...

“Our mission is to create or enable the supply needed tomeet our company’s strategic goals. This includes but isnot limited to the following objectives:

\ • Mission — Lead a powerful global force,mobilizing scale and innovation to support ourcompany’s strategic objectives, instead of justrelying on individual efforts to meet cost reductiontargets

• Mission — Be the go-to people for knowledge ofthe source and use of strategic value for eachexisting or future spend category at our company

• Mission — Be the leader, influencer or participantin the creation of leading-edge, innovative value-focused strategies for strategic purchases

• Mission — Be the trusted provider of knowledge aswell as the implications of strategic risk for eachexisting or future spend category at our company

• Mission — Be the accomplished team recognizedas playing a key role in our company’s success, andas a great place to build a career, instead of a set ofdisparate units with pockets of strength

• Mission — Be the collaborative and informationconnection between our customers, other companyfunctions and our suppliers to map value creationand implementation, instead of just a contributorto the efforts of others

By fulfilling this mission, supply will become a keyresource to meet our company’s strategic objectives, alongwith other elements such as financial resources, humantalent, technological assets and market strength.”

Can your company become a leader in VFS? As asupply management executive, can your supplymanagement organization become known for VFSwithin your company and its supplier community? As asupply management professional, can you lead thedevelopment of your own skills and capabilities for thatkind of a reputation?

Our research has shown that several of the elements forVFS are already there at many of the companies studied.In selected areas at a few leading companies, supplymanagement executives have been able to identify trulystrategic categories, build the enablers and obtain theresources needed to protect and create value from

supply and through suppliers. Moving forward, it willbe a challenge to spread the VFS strategy knowledgemore broadly, understand the strategic needs moreclearly, and promote stakeholder and executiveparticipation more widely. But for many it will becomethe defining moment of their careers in supplymanagement, and an outstanding contribution to thecompetitive success of their companies.

Overall, leading companies will increasingly viewstrategic suppliers as extensions of their organizationsand tap into supplier resources and capabilities tojointly protect and create value. Companies that lead inthe implementation of VFS have the opportunity toachieve breakthroughs in value creation as executive-level resources are creatively applied across functions toVFS for strategic purchases.


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A P P E N D I X A

Executive Summary

Packaging design for mass-merchandised products canpose many challenges because there is always a strongneed to balance aesthetic considerations against cost.Developing the packaging for a brand new product withan eye toward making it the industry standard is evenmore challenging, especially when working on theendeavor with a supplier that has its own motivations.

Apollo, an international entertainment company, facedthis challenge by partnering procurement with creativeservices to jointly work with a supplier to achievedesign and cost goals. Additionally, Apollo created apackage that helped unify the adoption of a consistentlook and feel for a new entertainment product thatpromoted the acceptance of a new technology.

Background

With the launch of a new entertainment platformlooming, Apollo was working in concert with theplatform developer and several other entertainment andmedia companies to explore options for packaging itsnew products. Because this new technology platformwould be competing against both a previous generationcontent delivery system and another new technologyplatform, there was a strong need to differentiate thenew offerings through attractive packaging. At the sametime, the development of a single, readily identifiablepackage design — an iconic package design — thatcould serve as the industry standard would becompetitively advantageous to all.

While Apollo had packaging design expertise in-house,its capability was geared more toward visual design thanthe creation of a mass-producible inexpensive package.For that, a supplier’s expertise would be required.Apollo’s procurement function would serve as a partnerto the creative design team while also bringing a strongpractical perspective to considerations like cost,manufacturing and distribution.

The goal was to design an appealing yet affordablepackage that combined aesthetic and practicalconsiderations. This design would then be compared tocompeting offerings from other media and packagingcompanies to potentially determine a universalpackaging design in advance of the consumer-focusedlaunch of the new entertainment platform andsupporting media.

Approach

While the end goal for the packaging developmentproject was clear, the path to it was fraught withchallenges. Questions around who would pay todevelop the physical prototypes and which companywould own the intellectual property — as well as howenforceable IP rights would be — were part of thechallenge. Uncertainty around the timing of the releaseof the new media device and its supporting software, aswell as the initial sales quantities that would berequired, introduced additional complexity.

Apollo’s creative department and a frequent supplierpartner developed the first-pass concept for the packagedesign. At this point, Apollo procurement department

Apollo

Appendix A:Case Studies


A P P E N D I XAjoined in the effort to work on some of the morepractical aspects of the design and how to source afinished product derived from it. Confident in thepartnering supplier’s ability to mass produce the package,Apollo entered into directed negotiations with it.

While both parties had skin in the game, the supplierhad the more significant risk/reward considerations.Beyond the sheer resource time it had already put intothe project, it would be required to invest in toolingand raw materials simply to put forward the design forindustrywide consideration. The supplier shared its costbasis with the company, giving it significanttransparency into the process that would prove usefulfor sourcing. While trust was the initial ingredient thatmade the partnership work during the concept phase,the supplier’s prospects brightened significantly whenthe co-developed design was chosen “best in show” at amarket research event attended by all of the majorplayers that were developing and supporting the newentertainment platform.

The supplier then had to make some decisions aroundhow it would meet market demand — it could attemptto be the sole supplier of the new package (andencourage knockoffs) or license the right tomanufacture to other suppliers, which would providean additional revenue stream beyond what it couldmake by manufacturing the product. Apollo favored thelatter arrangement, as it would allow it to source frommultiple suppliers to create price competition andensure adequate supply.

The supplier ultimately opted to license the design toother manufacturers to provide additional capacity aswell as produce the distinctive packaging itself. Theexistence of alternate suppliers meant that Apollo hadthe opportunity to keep its partner suppliercompetitive.

Results

From Apollo’s perspective the project was a resoundingsuccess. Looked at solely in business terms, it achievedits goal by delivering the packaging at the desired pricewithout incurring any material R&D costs. It also drovesubstantial top-line revenue after the technologyplatform launched through sales of the new media.

From an industry standard it was an even greatersuccess, as the consistent size, shape and look of thepackaging supported and even added to the perceivedvalue of the new media format. Cost targets were metfor all participants, as the design licensing created acompetitive supplier market with the capacity to

support product growth. Even retailers benefitedbecause the standard packaging helped them to co-merchandise the media and the platform.

Looking Ahead

While acknowledging that a similar project of thismagnitude is unlikely to be embarked upon in theforeseeable future, Apollo learned some valuable lessonsthat will help it in future package design efforts.Intellectual property protection is one area for which ithas a better sense, as suppliers quickly came to imitatethe successful design in an attempt to circumventlicensing costs. Apollo also has an increasedappreciation for the need to lay out a strategy upfront— not to stifle thought evolution, but to ensure anefficient development process.

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A P P E N D I X A

Executive Summary

For companies in the process industries, time truly ismoney. Any shutdown of a plant that is designed tooperate around the clock means the facility operates inthe red while idle. Conversely, anything that can bedone to bring increased capacity or new capabilitiesonline ahead of schedule increases revenues.

Bentham, a leading engineering, procurement andconstruction (EPC) company, developed a new source ofhighly specialized equipment that broke a monopolisticsituation in its supply chain that had forced Bentham’sprocess industry customers to accept very lengthy leadtimes to add new processing capacity. Doing so allowedBentham to win billions of dollars in new business bypositioning access to this new supply as the lead-in toselling projects that would be brought online morequickly than before.

Background

Oil refineries require a set of specialized equipment toconduct a pre-refining process for a necessary grade ofraw material. Due to Bentham’s broad client base andknowledge of the oil and gas industry, the company’sleadership recognized that a significant number ofrefineries were approaching the end of useful life forthis equipment.

Although replacement of the specialized equipment wasnecessary at regular intervals during the operational lifeof a facility, the low frequency of such replacements,when combined with the limited number of refineriesworldwide, resulted in a stable supply base with longlead times for the equipment. Bentham’s analysisshowed that the regular replacement cycles for severalrefineries were about to coincide, creating a period ofincreased demand for which the only responseavailable, based on the current supply market, would beincreased lead times. When combined with additionaldemand expected from new builds and facilityexpansions, it became clear that creating a solution toovercome the equipment shortage would give Benthama competitive advantage.

Approach

Bentham studied the supply chain to see what had to beovercome to reduce the long lead times necessary toservice these potential customers; increasing the speedwith which new units could be brought online wouldoffer a significant value proposition. The procurementteam found the bottleneck — the specialized equipmentthat had an extremely long lead time in the supplychain.

Unfortunately for Bentham and its potential clients, asingle Asian supplier had a virtual monopoly on thishighly specialized capital equipment — it had the post-welding processing capability and access to neededmetals supply. The barriers to entry for potentialalternate suppliers seemed insurmountable.

Yet this seeming crisis afforded substantial opportunityif it could be overcome, and Bentham set out to do so.Although North America was a frequent target marketfor this sort of facility expansion project, capabilitiesneeded for this type of specialized equipment no longerexisted.

Bentham then looked overseas, where it found severalEuropean mills and fabricators that appeared promising.After an extensive technical review, it was concludedthat both the materials and craftsmanship in thoseEuropean companies were as good as those of theincumbent Asian supplier. By providing a new source inplace of the Asian supplier, Bentham estimated that itcould cut the three-year lead times for delivery in halfand bring new refineries online half a year ahead of itscompetitors. After developing a sound business case,procurement gained executive buy-in and the go-aheaddecision was made. In fact, procurement supported atrial sales call at the first potential customer todemonstrate the strength of its new value proposition.

Bentham then developed and implemented its newEuropean supply chain, playing a nontraditional role bybuying steel plate from mills and supplying it to thefabricators, negotiating deals that allowed it to lock upthe plate supply in Europe to successfully block othersfrom copying its strategy. Sewing up the supply alsoprovided an additional revenue stream, as it sold theplate to the fabricators.

Bentham


A P P E N D I XAResults

While Bentham had traditionally pursued business likeany other EPC company, it opted to offer the newsource of equipment to win new business, with therequirement that buyers then employ the company forthe EPC services associated with the equipmentinstallation. Selling activities for this new solution werecentralized around an executive team in order to betterdefine the offering. Procurement regularly met with thisselling team to monitor production needs.

Over an 18-month period, the company won all sevenpursuits that used this new sales strategy — allconcluded without going through the full request forproposal (RFP) process.

A three-pronged approach was used to prove theviability of the new supply source to skepticalcustomers. A detailed information package was madeavailable that explained how the supply chain wouldwork and how the suppliers had been qualified. Asecond source of verification was provided by aninternal expert with a reputation as an industry expertwho could explain the process to potential customers.Those customers who wanted to view the fabricatorsfirst-hand were taken on site visits.

Because the sales strategy proved to be so successful,some “scrambling” was required in order to get thesupply chain operational. But the implementationproceeded smoothly, and the expectations arounddelivery time and quality were met.

The strategy ultimately proved to be unsustainable dueto external market forces. As demand for the refineries’finished products dropped, so too did their need to addthe new capacity that Bentham and its competitors wereoffering. Nonetheless, the impressive winning streak thecompany embarked upon generated substantialrevenues and profits, as well as showing that a sharpprocurement organization that understood its supplymarket was a good resource for new business ideas.

Looking Ahead

Having demonstrated its ability to succeed throughnontraditional strategies and to grow the top line,Bentham’s procurement group continues to explore newopportunities while maintaining relations with theEuropean suppliers in the event the market forces shiftagain to increase the desirability of refinery expansion.

In addition, other business units at Bentham seek toengage the procurement organization in situationswhere supply market knowledge might help improvetheir competitive position.

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Executive Summary

Companies regularly develop new products as well asvariants of existing products. Much less common is thepractice of developing with suppliers brand new“ingredients” for use in an existing product that isdesigned to perform as well as, if not better than, theraw material that is being replaced.

One company that manufactures auto and truckcomponents and systems did just that in order tobypass the cost and supply challenges of a fairlycommon metal that was a part of a steel alloy it usedextensively. The company worked with a supplier todevelop a new alloy and achieved significant costsavings. However, it also ran into some obstacles,pointing out the importance of knowing as much aspossible about a supplier’s capabilities, as well as itsfinancial situation, when forming a partnership.

Background

Bigtru Co., a diversified global manufacturer ofautomotive components and systems, was looking toimprove cost structure and position itself for anemerging market opportunity for its end products byworking closely with the supply base. With materialpurchases representing approximately half of its coststructure, the company needed to find new ways toincrease the value of this spend.

This need was made more urgent by rapid priceincreases for the stainless steel that it uses to make a keyclass of engine parts that represents more than $500million in business annually. The market for this parthas grown in tandem with the increased demand formotor vehicles in emerging markets and a changingmarket in its traditional customer base, which requiressmaller parts as well as parts that can operate undermore demanding conditions.

Two different grades of steel are commonly used tomake this engine part. While a lower end alloy is usedwhere possible, there is an increasing demand for partsmade from a “super alloy” stainless steel. Stainless steelparts using the super alloy have traditionally been usedin diesel engines and in applications related to theexhaust system, as both present extremely corrosivesituations. Engines powered by newer fuels such as

ethanol also require this extra protection againstcorrosion.

Bigtru Co. wanted to reduce its dependence on thestainless steel formulation it was using, which wouldrequire it to find a substitute. Price volatility was a keydriver behind this decision, along with domesticscarcity and high tariffs on imports. After exploringpotential substitutes in the marketplace, the companydecided the best course would be to develop a newalloy that would meet or exceed the higher gradestainless steel’s strength and ability to resist wear andcorrosion. The company expected to reduce its need fora certain ferromagnetic element used in the super alloyby 30 percent to 50 percent if this project succeeded.

Approach

The company began the new alloy development processby considering which of its current strategic supplierscould best serve as a partner for co-development. Overthe course of half a year, a cross-functional sourcingcouncil that included engineering and procurement aswell as operational leads screened a number of suppliersas part of the company’s six-level phase gate process fornew product development.

The supplier chosen to partner on the project was onewith which the company had a close workingrelationship and strategic alignment. It also had strongtechnical and engineering capabilities. To help ensurethat the new alloy would stay cost competitive once itwas brought to market, the agreement stipulated thatBigtru could move its business to a new supplier if itscost goals could not be met.

A joint company-supplier team worked at the supplier’sfacilities for two years to develop the new alloy, withmany formulations tested before the team arrived at thefinal product. The supplier had significant skin in thegame, as it had invested capital into the process with noguarantee of success. Joint patents were awarded for thenew alloy, which the company believes put it three yearsahead of its chief competitor.

Additional work had to be performed before parts madefrom the new alloy could be brought to market. Prior toselling parts, Bigtru Co. had to obtain buy-in from theOEMs that it sells to — a challenging process since

Bigtru Co.


A P P E N D I XAmany of them single-source this particular part for givenplatforms. The supplier had to modify its manufacturingprocesses in order to accommodate the newformulation. After a two-and-a-half-year developmentprocess, Bigtru achieved full production using the newalloy for the high-end version of the key automotivepart — half the time traditionally required to introducea new alloy.

Results

In the early running, the company and supplier appearto have enjoyed a sizable success with the jointdevelopment endeavor. Quantitatively, the company hasalready reduced its use of the ferromagnetic element byabout 57 percent for targeted applications, resulting inmillions of dollars in savings. Qualitatively, success wasdemonstrated when Bigtru won a significant innovationaward for the project from one of the automotiveindustry trade publications.

The company cited its strong relationship with thesupplier coming into the project as a significant factorin its success. The integrated team working together on-site and the willingness to commit to a multiyearinvestment were also key components.

The ongoing restructuring of the U.S. steel industryposes some challenges, as manufacturers of the steelused in this automotive part are exiting the business. Atthe same time, demand for the part made from the newalloy is increasing in several foreign markets, which hasresulted in the company seeking out potential localsuppliers in those markets to produce the alloy underlicense from the supplier.

Most challenging is the fact that the economicdownturn of 2007-2009 drove the supplier intoChapter 11 bankruptcy proceedings. This will likelyrequire Bigtru to find and work with a new supplier,which will need to make changes to its manufacturingprocesses in order to produce the alloy.

Looking ahead

As the company searches for new suppliers of the alloy,it will leverage lessons learned in the joint developmentprocess. The candidates’ financial health will beparamount in the selection process; z-scores alone willnot suffice in predicting whether the supplier is likely togo bankrupt. Financial data, even from privately heldcompanies, will be carefully scrutinized. As with theselection of the initial supplier, site visits will also beimportant, as the potential supplier’s process capabilities

will be emphasized in the candidate evaluation process.

The company’s new understanding of processes such asmelt technology will help it to target suppliers with theright capabilities. Capacity and productivity will beimportant in order to produce the new alloy quickly.

A similar joint development process will be put to useas the company begins to develop a variant of anothercurrent piece of engine technology.

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Executive Summary

Companies that undertake supplier development effortstend to do so with the intent of being the chiefbeneficiary of this resource investment. But in somecases, helping a supplier become more competitive canbring significant and sustainable benefits for all of thecompanies involved.

One global automotive company that transitioned fromoffering a handful of models to a fuller portfolio ofvehicles found that its costs per vehicle were increasingas models became more segmented with lower volumesfor unique parts and tooling. It identified tooling as oneaddressable spend area that had rapidly increased in itsNorth American operations, where it had come torepresent nearly one-sixth of the cost for some models.

Committed to its strategy of sourcing locally, Carco, Inc.began working with its tier-one suppliers and thetoolmakers that supplied them in order to find ways toimprove the cost basis and other key considerationsaround tooling. The ultimate goal to help the toolingcompanies become globally competitive suppliers to thecompany’s value chain.

Background

The North American division of this global automotivecompany had shifted its product mix over time fromseveral high-production models to a broader productline with more models and more frequent productfreshenings. With fewer of each model being sold, itstooling costs were rapidly rising in terms of the cost pervehicle built. Additionally, Carco’s benchmarkingindicated that tooling costs in North America werehigher than in other parts of the world. Where toolinghad represented around 2 percent of the cost toproduce a high-volume model, some current modelswere running as high as 15 percent.

While the automaker was committed to its preferredpractice of sourcing locally, it had a clear need to reduceits North American tooling costs. Doing so wouldrequire it to reach beyond its tier-one suppliers to workwith those suppliers that performed tooling forcomponent parts manufacturers. While tooling wasviewed by some as a commodity business, the companysaw this skill as a value-added facet of its business andwanted to develop a supply base of toolmakers with

specialized, retained knowledge that would be able tobuild upon previous learnings.

The company’s overall strategy for tooling called forimprovements to its quality, cost and deliverycompetitiveness, along with the establishment of aglobally competitive tool sourcing strategy that balancedcosts and risks. The strategy also included an initiativeto jointly engage in R&D with its North Americansuppliers and the toolmakers that supplied them.

Approach

The company’s strategy centered around thedevelopment of long-term relationships with toolingshops and tier-one suppliers that would create value forall three players by reducing costs for the company andthe tier one suppliers, and providing a consistent baseof business for the toolmakers. The latter area requiredsome deliberate calibrating, as the company did notwant to provide more than one-third of any giventoolmaker’s business in order to encourage them towork with other companies and not become solelydependent on any single customer.

The company and its tier-one suppliers stood to gainlocal tool sources that were competitive in terms ofquality, cost and delivery while managing risk andmaintaining localized know-how. The tool shops wouldbenefit by becoming globally competitive, receiving thebenefit of the automaker and suppliers’ knowledge, andgaining a consistent level of business that wouldencourage them to make the proper investments byremoving some of the uncertainty that typically plaguedthese small businesses. Most of the tool shops hadannual revenues of less than $20 million.

Carco, Inc. examined the many factors that drove thecost of tooling and concluded that simulation, standardsand design were the most readily addressable aspects, asthey were at the front end of the process and wouldultimately have the biggest impact on assembly timeand cost. To address them, the company set upimprovement streams around technology and businessprocess innovation. The former encompassed conceptssuch as the use of standardized tool design software,tool design that could accommodate variations of toolsfor different automobile models (a practice theautomaker refers to as the “same but different”approach), forming simulations, shop floor

Carco, Inc.


A P P E N D I XAprogramming, faster cutting speed and tools, andimproved knowledge of ultra-high-strength steel.Business process innovation encompassed processefficiency, lean manufacturing, benchmarking anddesign-manufacturing integration.

By using the “same but different” approach, tool shopsdeveloped and maintained engineering know-how andimproved their quality, cost and delivery abilities. Inone striking example, the time needed to develop a toolfor a “same but different” part was cut in half comparedto the initial tool for the base part. This allows theautomaker to wait until later in the developmentprocess to release designs to tooling, reducing designchanges’ cost impact on tooling. Rework costs due todesign changes also were significantly lowered.

While the automaker did not grant direct financialsupport to the toolmakers, such as for softwarepurchases, it did provide opportunities for them towork with business partners to help with thetransformation process, which was designed to makethe tooling companies more competitive for all of theircustomers. Training was provided on overall equipmenteffectiveness and other aspects of the tool shop businessto improve the tool shops’ business models andmanagement, and push them to develop a culture ofcontinuous improvement.

Improving the Process for Injection-MoldedPartsIn one area, injection-molded parts, the strategy led toinvestigating ultimately a shift away from steel toolingcould be made. Steel tooling results in long-lasting toolsfor high-volume models — but at a higher cost thanaluminum alloy tooling. The automaker saw clearbenefits to aluminum tooling. Toolmakers would beable to perform faster machining and have shorter leadtimes. Molders would have shorter processing times andreduced part distortion due to aluminum’s superior heatdissipation. The automaker saw an opportunity to meetits quality goals while reducing its investment intooling. However, the durability of the aluminumtooling in a high-volume production condition was themost significant unknown.

The company began with a pilot in which it workedwith a pair of its plastic injection-molding suppliers toevaluate build efficiencies and process cycle-timeimprovement. Assuming most of the expense itself,Carco closely monitored tool maintenance to hedgeagainst durability concerns, employed a third-partytester to validate the quality of the alloy and undertooka study of the alloy’s texture capabilities and repairmethods. Having concluded that the aluminum tooling

was sufficient for low-volume models, the companythen examined its durability and projected, and whetherconfirmed, that it would also hold up to high-volumework.

Results

By working collaboratively with materials suppliers, tier-one suppliers and toolmakers, the automotive companyunlocked substantial value from the tooling category.While it incurred some expenses in select work streams,it executed the project using existing resources from thesupply management group.

The initiative to adopt aluminum molds for injection-molded parts brought major benefits. For one low-volume part, tool manufacturing lead times droppedfrom 17 weeks to 13 weeks. For other low-volumeparts, tooling costs were reduced anywhere from 6percent to 12 percent, and processing cycle timesbetween 15 percent and 30 percent. For one particularhigh-volume part, the lead time was reduced from 23weeks to 20 weeks, processing cycle time was cut by 21percent and tool cost savings of 8 percent wereachieved. Overall, the shift from steel to aluminum alloytools brought savings through machining efficiency,reduced cycle time and improved throughput due toimproved thermal conductivity, a reduction in thenumber of molds and injection machines needed, andreduced machine tonnage due to the lower injectionand clamp pressure needed when working with thealuminum tool.

Just as importantly, the automaker helped the toolingcompanies transform themselves from a commoditybusiness to a value-added contributor, which will bringstability as well as the potential for continuousimprovement and innovation-related contributions overtime.

Looking Ahead

The automaker continues to look for ways to extractincreased value from the tooling category, and isencouraging its tier-one suppliers to craft a strategy forit that will include other potential alternate materialsand sourcing locations.

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Executive Summary

The move from traditional cost-focused methods ofcategory management to a value-focused approach canbring many challenges for both the buyer and suppliers.Developing trust is just the first step in a long processtoward transparency. Companies that are able to workwith their strategic suppliers as if they are an extensionof the company can realize powerful results.

ComCo, Inc., a global manufacturer of power systems,has started working toward this desired end state,developing new techniques of value-focused categorymanagement that it plans to apply to the products itdesigns and manufactures. By using cross-functionalteams and carefully evaluating suppliers to find best fits,the company is learning new lessons almost daily as itundertakes the journey.

Background

The technology-driven global manufacturer of powersystems has begun a multiyear effort to redefine supplymanagement. Globally, it is shifting its make-versus-buymix to 70 percent buy and 30 percent make. As part ofthis endeavor, it is examining ways to standardizedesign for components that are manufactured bothinternally and externally.

This new supply management philosophy led to thereorganization of the company’s procurement structure.The organization introduced a new category executiverole that works across all of its supply chain units(SCUs), which each have responsibility for one of themain product sections.

These SCUs were tasked with bringing new approachesto supply management, with a goal of developingintegrated value-focused strategies by the end of 2009.The new quest for value beyond sourcing andcontracting is consistent with the needs of a companythat develops products with long lead times.

The company has begun to apply value-focusedcategory management to all categories. One of thesesubcategories that has a heavy engineering orientation ismade both internally and externally while the otherthree less-engineered part types are primarily purchasedfrom the outside. Cross-functional teams that includerepresentatives from the procurement, manufacturing,

manufacturing engineering, quality and developmentfunctions have begun work on this category. While theglobal commodity leader owns the strategy, all teammembers will be evaluated based on progressimplementing the strategies. Finance will track the keymetrics, including cost, quality and delivery.

Approach

The move away from its traditional category approachto value-focused category management has required thecompany to make a significant philosophical step-change. New attention is being paid to implementationand ongoing relationship management. Suppliers arebeing asked to add value — low prices and on-timedeliveries are no longer the only important componentsof the relationship. The drive is on to achieve costtransparency in the supply base, which requires closerelationships and trust. Taken to its logical end, value-focused category management could do away with pricenegotiations entirely through early supplier engagementand cost transparency.

While suppliers are not involved in the development ofcommodity strategies, they have been engaged regardinghow business will be done under the new strategy.Cross-functional workshops have been used to shareselect elements of the strategy with suppliers in order tobegin talks on work streams that will help align themwith the strategy. These detailed discussions establishperformance indicators and performance improvementneeds as well as outline the path by which suppliers canbecome strategic suppliers to the business.

Some suppliers were hesitant to share information oncosts for reasons ranging from confidentiality concernsto backlash against the company for past treatment.Only those that share this information are beingconsidered for participation in the new productdevelopment program.

As it gathered information, ComCo, Inc. held regularmeetings with its global purchasing executives andglobal category executives to review suppliers’ fit withthe company’s total-cost-of-acquisition program. Thesediscussions proved fruitful. For instance, it wasdiscovered that one global supplier that was selling tothe company at a relatively low volume could add valuefor current and future parts through a combination ofdesign change and volume cost reductions.

ComCo, Inc.


A P P E N D I XANumerous virtual and face-to-face value improvementworkshops were held with suppliers over the course ofseveral months to review both the technical (design andcost) and commercial (flexibility, quality, deliver andfinancial health) aspects of the supplier. Potentialcomponent costs were reviewed, yielding results such asthe possibility of a redesign that could eliminate anentire section of a part in order to save material andlabor costs.

In order to promote manufacturing best practices, thecompany established a best practice sharing forum thatgathers multiple suppliers — including competitors insome cases. The manufacturing research centers are alsoa means to improve manufacturing processes along thevalue chain.

Results

With the effort ongoing, the key results to date centeron the lessons the company has learned in working onits initial value-focused category management strategy.The effort undertaken thus far confirms that a culturalshift will be required within the company in order forthis new way of working to take hold. While cross-functional teaming will be important, the company isalso improving its ability to work across geographies inorder to drive consistent approaches and achieveconsistent results. Communications are proving crucial,not just to suppliers but within and across teams andgeographies.

Looking Ahead

While work continues, the new integrated value-focused commodity strategies — including tasks,responsibilities and timing — were submitted forapproval in Q4 2009. Expectations are that speed-to-market and OEM requirements will be achieved orexceeded for total cost/value to customers.

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Executive Summary

While companies are finding success with manyprocurement strategies, driving deep results and addingvalue through these efforts typically requires theinvolvement of multiple stakeholders within theorganization. It is rarely enough to simply assemblecross-functional teams on an initiative-specific basis.Achieving results and driving continuous improvementrequires the active involvement of a range of parties,often on a global basis.

Duraman, Co., a global diversified consumer durablegoods manufacturer, was struggling to control inputcosts. In an effort to fix that problem, it created anorganization design that incorporated complementaryfunctional resources to manage the complexity of itsproducts and to source according to new specifications.It also decided to go deeper into its supply base whensourcing raw materials themselves, instead ofconcentrating on the components that it had morecommonly sourced. Doing so allowed Duraman toachieve new depths of savings without sacrificingquality or the very features that customers valued.

Background

Duraman faced significant competition, requiring it toplace a new emphasis on cost leadership. While thecompany had traditionally focused on component costsin its sourcing efforts, executive leadership realized thatit would have to deepen its efforts by unlocking newvalue from the raw material purchases used across manyinternal manufacturing processes and purchasedcomponents.

A new emphasis on complexity management was calledfor in order to rationalize specifications and enableaggregation of spend across the corporation. This workwould require a new consideration around whatproduct aspects the customer actually saw and valued.An engineering-driven component complexitymanagement (CCM) team was assembled to focus onreducing design complexity across product lines andgeographies, included rationalizing and simplifying therange of components and materials bought from theoutside. This new, global way of working was expectedto achieve a far wider and deeper reach than thecompany’s previous attempts at complexity

management, which had been done project-by-projectbased on geography.

To help drive the raw materials sourcing effort, thecompany formed a value-focused raw material (VFRM)team. The goal of the new team was to provide a bridgebetween the CCM efforts and the supply markets byunearthing supplier/material alternatives that could helpreduce product design complexity and to developsourcing strategies based on and in support of thecomplexity reduction strategies.

To succeed in its raw material sourcing efforts, thecompany’s CCM and VFRM teams would have tocombine their efforts on a centralized, ongoing basis toimprove the manner in which the company purchasedthe many raw materials required to manufacture itsproducts.

Approach

The company determined that it required additionalresources to identify and evaluate value-creatingopportunities, which was initially done on a pilot basis.One early success was the determination that some steelparts were being made with a finer finish than wasnecessary and could be substituted with a lower costfinish. It was found that the steel parts were importantto product functionality but not visible to the customer.Based on such findings, the company decided to lookfor other specification change opportunities that couldbe extended across entire product lines.

The CCM team’s focus included improving collaborationbetween purchasing and product engineering,accelerating component consolidation, driving thedevelopment and implementation of global designguidelines, assuring adherence to rules to reduce rawmaterial complexity, enhancing sourcing strategies thatbuilt on complexity reduction, identifying opportunitiesfor material or component substitution, and enhancingproduct reuse and visibility.

Key activities for the VFRM team included identifyingand selecting the best materials, sourcing globally,driving continuous cost and quality improvement,integrating raw material technology roadmaps withsuppliers, leading the identification of new materialtechnologies from the supply base and selecting keyglobal suppliers with which to partner. The joint team

Duraman, Co.


A P P E N D I XAof engineering and procurement resources was alsogiven accountability for governance of raw materialspecifications globally. All team members shared thesame objectives for standardization, cost reduction,project implementation and governance.

The teams worked their way through more than adozen different raw materials during the project. TheCCM team looked across all plants and productsglobally to determine what grades and types of aspecific raw material was being used, what it was beingused for and to develop an overview of the supply base.The VFRM team then developed the sourcing strategyfor each raw material.

The project teams also leveraged the supply base,including collaboration between suppliers, to createnew value. On one major product conversion effort, thecompany assembled a multicompany team that includeda key raw material provider, an adhesives supplier andan equipment manufacturer in order to develop anoptimum solution for making its product. This upfronteffort and evaluation of risks and trade-offs wasexpected to drive millions of dollars in annual savings.

The teams also developed governance rules that focusedon aspects such as what specific conditions couldtrigger the creation of new part numbers, howspecifications were to be tracked and guidelines around“preferred” materials. These rules were intended toguide product design and raw material choices toprovide long-term competitive value.

A scorecard was developed to measure the annualizedcost reduction and cash flow for projects. This jointmeasurement also enabled those projects that did notappear fruitful to be abandoned and resourcesredeployed to other materials. The total valuecontribution of specifications and suppliers was alsomeasured, including functionality, conversion cost andmaterial price variance.

Results

The cross-functional, multiteam approach that thisconsumer durable goods manufacturer employed in itsraw material category improvement efforts drovesignificant results in a number of areas. Cost savings byspecific commodity ranged between 5 percent and 20percent, while the complexity reduction and globalpurchasing approach allowed it to reduce inventories bymore than 15 percent, freeing up additional capital.Standardization of materials will continue to drive

benefits to indirect and administrative costs as fewermaterials and SKUs need to be managed at multiplelocations and by engineering, procurement andmaterials groups. The value of direct cost savingsdelivered in the first 12 months was more than 10 timesthe investment made in resources.

More importantly, the company believes that it hasimproved the quality of its products even as it reducedthe costs to produce them, allowing it to better matchcompetitors’ pricing without sacrificing thosecharacteristics and features that its customers value.

Looking Ahead

The company intends to continue its efforts around rawmaterial sourcing, including increased raw materialcoverage and further implementation of complexityreduction through governance rules early in the productdesign and development process. By focusing effortsearly, improved functionality, cost reduction andincreased value across the supply chain to the ultimatecustomer can be achieved. In the process, it willcontinue to eliminate functional silos while increasingglobal coverage across all product lines andstrengthening global sourcing strategies.

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Executive Summary

While every company undertakes cost reduction effortsat some point, what is done with the savings varies. Acareful balance should be struck between rewardingshareholders and investing back into the business.

Is it possible to “have your cake and eat it too?” F&B,Inc., a worldwide consumer packaged goods company,is attempting to do so by investing savings from itscompanywide global cost reduction program inincreased marketing spend geared at growing the topline. The company’s goal is to save more, advertisemore, sell more and profit more.

Having had success around efforts that targeted aspectslike packaging and ingredient variation, the companyturned its focus to lowering the cost of the commoditiesused to make its products. By simplifying productspecifications, looking for ways to use less of a keyingredient and employing breakthrough technologiesand new supplier partnerships, F&B has begun toachieve significant savings in commodity areas that hadonce appeared to be at the whim and mercy of themarkets.

Background

F&B undertook an ambitious program to reduce coststhrough improved purchasing methods and to reinvestthe savings into marketing in order to grow the top line.As with many major consumer-focused brands, thecompany considers marketing to be its corecompetency; any additional resources it can apply topromotions in order to increase sales are highly coveted.

Each of the company’s divisions has a three-year savingsgoal that is being met through actions like strategicsourcing, improved warehousing/logistics andcomplexity reduction. A year into the program, thecompany began to examine ways to optimize itsingredients spend. One key category of ingredients usedby three divisions that represented as much as $300million in annual spend was chosen as a pilot area. Itwas chosen because of its size as well as the steadyincreases in the price of the specific commodities withinthis category.

While the potential rewards were great, so also were therisks. While earlier work in this cost-reduction projectremoved complexity from packaging, ingredientchanges could potentially change the very tastes thatconsumers had grown to value. Though the categoryunder consideration would appear to be functional andrelatively low in complexity, it had actually becomehighly fragmented due to the wide range ofspecifications that had crept into various productformulations over the years. It was imperative that thecompany learn to unlock what the customer valuedbefore altering any formulations.

Undaunted, an experienced cross-functional categoryteam set to work on a three-phase plan to simplifyproduct specifications, use less, and employbreakthrough technologies to reduce cost and customerdeliver value in this key category of ingredients.

Approach

The initial work was internally focused, as thecompany’s R&D function devised ways to changeproduct specifications and use less of this key ingredienttype — in some cases in an attempt to make productshealthier, and in others to reduce the variants that thecompany would have to buy.

While the overall category represented around $300million in spend, just more than one-tenth of thisamount is actually addressable at the supplier level.That is because the vast majority of the costs come fromthe raw animal, vegetable and chemical ingredients soldon exchanges that serve as input to this category. Thereal opportunities were in reducing the suppliers’supply chain costs.

Key to engaging suppliers was building theirunderstanding that this was not the traditional type ofzero-sum sourcing model in which any savings thecompany achieved would come at the expense of thesupplier. If the company could increase sales it wouldhave to increase its buys, so while margins might belowered, the suppliers would receive increased volumeas the company sold more product.

The company focused on eight specific suppliers fromwhich it purchased the three main types of product inthis category. One-day conferences were held with each

F&B, Inc.


A P P E N D I XAof the suppliers in order to help develop theirunderstanding of the program and F&B’s strategic goals.The new ingredient specifications were also outlined forthe suppliers to help give them a sense of what types ofchanges they would need to make. Cost modeling wasperformed for each formulation to help determine whatthe cost structure would have to look like to achieve thecompany’s target prices and which supplier had the bestcost structure by product.

A segmenting exercise was then held so that thecompany could determine which one specific suppliercould meet its needs in each of the three product types— at which point the term “partner” was introduced, asthe company would essentially be sole sourcing for eachof the three. The three selected suppliers were eager totake on the additional business from the company, andin some cases this allowed them to exit less desirablebusinesses in order to concentrate on their newpartnerships. R&D supported collaborativecompany/supplier efforts to improve manufacturingefficiencies and reduce costs.

These partnerships have allowed for a shift fromquarterly to biannual contracts that guarantee thecompany a price in exchange for guaranteed volumes.Price formulas are cost based, which has stabilized costcomponents on the manufacturing side. The suppliersalso leave some capacity open in the event that F&B’sbusiness increases.

Also critical to creating value was understanding whatthe customer valued and then optimizing the valuechain from ingredients through manufacturing efficiencyand capital utilization. For one product, the companydetermined specific product attributes most valued byconsumers, allowing the company to reduce costs inattributes that the consumer did not care about whileimproving attributes the customer valued most.

The company has also begun to process or manufacturesome of the ingredients in-house in order to reducehandling and packaging costs and waste. This also givesthe company first-hand knowledge of processingtechnologies and costs that help it better understand thesupply market.

Results

In most direct terms, the company has achieved morethan 12 percent in savings from addressable suppliermanufacturing costs.

But the results of this project have actually extendedbeyond the company and its partners. Resourceallocation and supply chain optimization caused a shiftin the entire industry around this key ingredientcategory, creating new efficiencies for the industry andthe companies that depend on it.

Looking Ahead

While the company has enjoyed significant results todate, its goal is an additional cost reduction of 10percent from this ingredient category over the next fiveyears. One way it expects to cut costs further is byunlocking innovation from its new partners. As thesupplier relationships have been enhanced with targetedbusiness, suppliers are willing to enter into longer termtechnology projects.

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Executive Summary

For fledgling suppliers, adding a large, strong consumerpackaged goods (CPG) company with a well-knownbrand provides a kind of reputational lift to thecustomer base. Why shouldn’t the highly regarded CPGbuyer benefit from the use of its reputation by the newsupplier?

Globalgoods, a leading consumer packaged goodscompany, has experimented with capturing additionalvalue from suppliers that benefit from its reputationallift. Globalgoods has entered into several arrangementsin which it agrees to increase its buys from selectedsuppliers with the understanding that doing so shouldincrease the supplier’s asset value as a business.

Background

Globalgoods was determined to find new ways togenerate value from its supplier relationships. Strategicsourcing, supply base consolidation and suppliercollaboration were just a few of the techniques that thecompany had successfully implemented in recent yearsto improve both its top and bottom lines.

Despite the value that Globalgoods derived fromsuperior pricing and service from its suppliers, it wasperplexed when it saw additional value accruing tosupplier owners or investors from the reputational lift itprovided — additional value that seemed to resultdirectly from having Globalgoods as a prime customer.After considering a number of avenues, the decision wasmade to pursue new deals with suppliers that wouldultimately result in the suppliers making directpayments back to Globalgoods through several differenttypes of arrangements in exchange for increased value.

Approach

First, Globalgoods had to determine which suppliers inwhich spend categories had the potential to benefitfrom obtaining it as a lead customer. Then it had todetermine if a financial arrangement could be createdwhere any increase in market capitalization could bemonetized for return to Globalgoods. Working throughits existing global strategy for key purchases — inwhich categories are “owned” by a procurement leader

who negotiates deals in tandem with strategicrelationship managers — the company set aboutanalyzing potential opportunities, which were led byprocurement with the close cooperation of legal andfinance.

This analysis included a number of factors. Supplymarket fragmentation and supplier ownership structurewere deemed particularly important. To identifycandidates for these new types of deals, an analysis wasconducted of a supplier’s capabilities, ownership andeconomics, as well as the supply industry structure andthe manner in which the supplier creates shareholdervalue. Globalgoods targets fragmented supply marketsin which there are specific suppliers that it wants to domore business with that might be open to sharingmarket capitalization increases in exchange foradditional volume.

Globalgoods had to determine what supplier ownershiptypes would simplify the capture of value created by therelationship. Private equity and potential IPO of closelyheld companies were particularly attractive. Suppliersthat are owned by private equity firms that could belooking to take the supplier public may be especiallyinterested, as may publicly traded suppliers that arelooking to spin off a part of the business as a separatecompany. If a supplier touts Globalgoods as one of itskey customers, it sends a clear signal to the initialpublic offering (IPO) markets that the supplier has astable business base.

Globalgoods market value capture program began twoyears ago, but is still in its early stages, witharrangements in place with two suppliers andnegotiations under way with two others. The first twoinvolve “equity value rebates” on purchases, while thedeals currently being negotiated would involve thecompany receiving income by exercising warrants basedon the supplier’s achievement of market capitalizationincreases.

Equity Value RebatesFor the two agreements that are in place betweenGlobalgoods and a supplier, the equity value rebatesthat Globalgoods receives are based on a combination ofthe supplier’s market capitalization and the volume ofbusiness it does with the company. The financial modelsused to develop the rebate formulas are based onpublicly available financial data.

Globalgoods


A P P E N D I XAThe range of rebates differs depending on whether theincremental volume represents organic growth (~10percent rebate) or an acquisition or capital investment(~20 percent). For example, if the volume of businessbeing conducted allows the supplier to penetrate a newgeographic market, then Globalgoods receives a largershare of the benefits. Globalgoods will make volumecommitments in cases where the supplier must make acapital investment. Rebates are paid based on annualperformance and booked in terms of the cost of goodssold (COGS).

Warrant-Based AgreementsFor the two more recent deals currently being pursued,Globalgoods and privately owned suppliers are trying tomonetize benefits that would be achieved by exercisingwarrants when the supplier is sold or spun off. In theevent that no IPO occurs, then the owners of thesupplier would issue shares to Globalgoods, whichwould then sell them to recoup the value.

One of the deals that Globalgoods is discussing alsoinvolves joint development of a new molecule that thesupplier would then manufacture using its own assets.This will likely require an additional variation in thevalue capture agreement.

Results

Because this is a pioneering strategy, the main results forGlobalgoods have been financial based on the first twoagreements where suppliers pay equity valueagreements.

There have been a number of lessons learned thatGlobalgoods intends to leverage in future pursuits. Ithas learned that it needs the right combination ofsupply market, supplier and people in order to succeedon a deal. Finance and legal must work closely withprocurement on these deals from the start — with thefull support of these functions as well as the executivesuite. Finance will be challenged to keep track of thevolumes and financials and to verify that the supplierdoes not allow value to “leak.” Finance must drivethrough to ensure continuing market capitalization.Legal may have concerns that an arm’s-lengthrelationship is maintained with the supplier in order tosteer clear of challenges from potentially injured parties,such as insider-trading accusations or appearances ofimpropriety.

To build support for this program within theprocurement function, the concept of increasing volumepurchased from a single supplier must be consistent

with the overall category strategy. Cost, quality,innovation and other key criteria remain the mostimportant factors for the category; the added value froman agreement should enhance rather than be the solesource of value in the relationship.

Looking Ahead

Globalgoods continues to examine its supply base forsupply markets and potential partners for this new sortof business arrangement. Categories with acceleratedgrowth plans are potential sources for additionalapplication — where increased spend is anticipated, agood candidate might be found. Additionally, potentialsuppliers will be easier to deal with if they have aconcentrated ownership structure to simplify buy-in.Nonetheless, the market value capture program hasattractive expansion benefits for Globalgoods as well asother companies with a reputation from which suppliersmight benefit.

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Executive Summary

Healthifoods, Inc., a global food and beveragemanufacturer, faced strategic challenges for its productsand its markets. Previously, Healthifoods’ productstrength was its ability to create mega brands in thedeveloped world using developed world materials andproduction techniques, and then export those productsto developing world markets. Traditionally,Healthifoods’ markets were predominantly in thedeveloped economies with the developing worldplaying an incremental role. More recently, Healthifoodshas focused on responding to emerging growth marketsin developing economies with a more diverse set ofproducts meeting local taste and customs.

Healthifoods’ procurement organization played a keyrole in extending this strategy by shifting from itstraditional European capital equipment suppliers tolocal market suppliers to support its entry andexpansion efforts in the markets where it anticipatedgrowth. The procurement organization then used thesenew supply relationships to source for its manufacturinglocations worldwide.

In doing so, the company was able to increase itsprobability for success in the new market penetrationand global sourcing efforts, using suppliers’ knowledgeof the local markets for ingredients and customerpreferences while driving substantial cost reduction forequipment in all of its markets.

Background

Healthifoods forecasted significant growth in somedeveloping economies and comparatively flat sales in itsexisting (better developed) markets. While it hadhistorically earned the vast majority of its profits inNorth America, over the next several years Healthifoodsprojects a more even split in sales and profits betweenNorth America and the rest of the world.

Rather than depending or concentrating on capitalequipment supply markets from Europe and NorthAmerica, serving customers in new growth marketswould require plants filled with an array of capitalequipment that the company would source in or nearthe local market. If it could succeed in finding qualitysupply to support its market penetration strategy, thecompany could leverage suppliers in these growthcountries to support global sourcing.

In these new growth markets, Healthifoods’ productmix was becoming more fragmented, either with newlyintroduced products appealing to local customs andtastes, or with once-dominant brands introducing asteady flow of variants to meet customer demands forvariety. With an annual spend exceeding $1 billion,capital equipment represented a significant spend areafor this company — success in shifting capitalexpenditures to lower cost growth markets could bringsubstantial benefits in terms of costs, and with supportfor product and growth strategies.

Approach

As the company began to explore sourcingopportunities in growth-oriented markets, it becameclear just how much supplier consolidation had takenplace over the previous half decade in the capitalequipment industry. The number of suppliersworldwide capable of manufacturing the types ofproduction equipment that the company used haddropped by more than 75 percent. Suppliers in thelower cost growth target countries were fairly evenlysplit between local and multinational corporations.

In one key developing market, the company hadsufficient demand to undertake sourcing as well assupplier development. While many suppliers in maturemarkets were already moving manufacturing to low-costcountries, Healthifoods’ leverage was sufficient to hastenthese moves.

As local suppliers developed as a feasible alternative, thecompany was able to obtain lower prices fromtraditional equipment suppliers. By conductingcompetitive sourcing efforts, the company was also ableto use low-cost country sources to meet some of itsneed for capital equipment in mature markets that wereundergoing a product demand shift that required newproduction capabilities.

To ease its market entry efforts, the company workedwith local suppliers to obtain added value around itsnew customer base as well as the local supply market.Consumer preferences for product formulation (e.g.,degrees of sweetness, texture, etc.) and thecharacteristics of locally sourced raw materials, in termsof processing and how best to use them in formulatingend products, were some of the key inputs obtainedthrough suppliers’ experience serving other companies.

Healthifoods, Inc.


A P P E N D I XAIn tandem with global sourcing, the company alsoundertook collaborative efforts with suppliers toimprove the capital equipment category. In severalinstances it acted as an integrator to bring supplierstogether to improve a manufacturing process. It alsodeveloped contractual agreements with strategicsuppliers to get a first look at their breakthroughs,which helped it to create new concepts for products.

Results

The local supply bases developed to meet the company’sneeds, allowing it to purchase equipment at a price inline with the local markets’ economies. Using growthmarket sourcing for capital equipment, Healthifoods hasalready built 30 percent of its needs in Asia and LatinAmerica. In China, Healthifoods can source 90 percentof its equipment needs, up from 30 percent. Similarly,in India the company has localized 50 percent of itsneeds despite increased challenges in transportationinfrastructure and regulation. In addition, the companyachieved significant cost reductions for capitalequipment baselined against previous suppliers. Equallyimportant, Healthifoods has agreements with strategicsuppliers that grant it a first look at new ideas, and haslinked its plans between production and marketing-related equipment. The quality of its globally sourcedequipment was very high, in some cases setting newquality standards.

Significant flexibility was also added to the company’ssourcing network. Cycle time necessary to bring up amanufacturing line for a new product was cut in half inmany instances. With suppliers in or near the marketsin which the company produces and sells products, itcan shift sources to take advantage of currencyfluctuations.

Finally, Healthifoods procurement demonstrated that itplays a significant role in implementing the company’sproduct and market strategy through this innovativeapproach to capital equipment sourcing.

Looking Ahead

Healthifoods’ global sourcing experience has instilled adeep understanding that such work needs to bemanaged as an ongoing program rather than a series ofevents. Procurement was the only function that couldlook across all of the company’s global needs for capitalequipment to fully leverage overall spend.

Global capital expenditures sourcing fed into thedevelopment of a global centers of excellence structureto manage all supply chain aspects, including sourcing,for key supply categories. Although Healthifoods offersdifferent brands with different product characteristics indifferent markets, it is coordinating them globally.Healthifoods’ procurement will continue to play animportant role in the company’s strategy for productand market development worldwide.

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Executive Summary

To the layman who opens a piece of high-tech equipmentand takes a peek inside, the circuit boards, silicon, metaland wires can seem as complex as an automobile. Butunlike a car or truck, most computer equipment isassembled from a mere handful of components — a factthat makes each part absolutely crucial. Yet mostcompanies go to market under the assumption that thewhole of the product is greater than the sum of the partscontained within and look to compete on price, ease ofuse and other nontechnical aspects or features.

Those that do look for competitive differentiationthrough specific components can achieve startlingresults, as one global high-tech manufacturer did whenit found a way to generate value within a singlecategory. Based on an understanding of what itsdifferent customer segments valued, HiTech, Inc.,developed a strategy to address each of them. Itsucceeded by getting to market well ahead of thecompetition with a technologically advanced design thatoffered a better total-cost-of-ownership proposition forits enterprise customers. This allowed it to increase bothits own and a key supplier’s market share whileobtaining a premium price. Well-defined cost-reductiontargets and standardized design allowed HiTech to serveother customer segments.

Background

HiTech, a global high-tech manufacturer that employs ahybrid centralized/decentralized procurement model,made the decision to centralize buying for thosecommodity categories that it purchases for use acrossmultiple business units.

One key high-tech component that goes into many ofthe company’s products represents more than $3 billionin annual spend for more than 60 million units. Thiscategory is used in three distinct product lines in two ofits business units, one aimed at both consumers andbusiness and another that mainly sells to businesses.

As it does for other key commodities, the companyemploys a supplier scorecard that looks at five keyfactors around the supplier’s ability to deliver within acategory: technology, quality, supply, cost and additionalbusiness factors such as processes and sustainability. Forthis particular component family, each end-product linehas different needs for technology, quality (reliability)and cost. Overall, weightings for each category may be

different based on customer needs, which help definevalue from the customer view. Cost is very critical forthe consumer-destined products, while technology andquality are key for enterprise end products. While thereare six main suppliers for the category globally, not allare able to compete in each segment.

Because of the varying requirements the high-techmanufacturer has within this component category, itemploys a multidimensional strategy for managing it.

Approach

HiTech has recently enjoyed success using two differentapproaches within this area of spend. For its line ofproducts aimed at both consumers and business users,it has employed a somewhat traditional sourcingapproach. But where it saw an opportunity to achievegenuine differentiation that could lead to competitiveadvantage, it jointly developed a new component for amajor end-product line.

Traditional sourcingFor the two end-product lines that are aimed at bothconsumers and business users, the component underdiscussion is treated as a commodity item. Thecompany has little involvement in the design of thecomponents. Instead, it expects suppliers to developand own the technology roadmap for their products inthis category. In these instances, procurement takes onthe lead role in working with suppliers while R&Dplays a supporting role. Monitoring technologyadvances in these components is a key task for thecompany’s procurement organization, as newdevelopments can affect the design of its own endproducts; for example, the size of the componentrestricts the size and weight of the end product.

Within these two end-product lines, there are differentcomponent requirements (two basic size formats) andmanufacturing strategies for the lines. Suppliers mustmanage two separate types of supply chains — one thatserves a single manufacturing hub in Asia for one end-product line, and another that serves multiplemanufacturing sites globally for the other line.

For those products with geographically dispersedmanufacturing sites, suppliers have to invest in localfacilities to provide inventory and delivery. As a result,when manufacturing sites are brought online thecompany single-sources for each region to allow thesupplier to invest and make a return until the volume

HiTech, Inc.


A P P E N D I XAbecomes sizable enough to bring another supplieronline.

The company also makes quarterly share splits amongsuppliers based on performance against “cost of quality”metrics. The metrics are calculated based on costs offactory and field failure attributable to the component.

Developing a new component for major end-product line in the enterprise product line familyFor its enterprise business line, the high-techmanufacturer made the strategic decision to use a newdesign for part of its product line. The new designrequired a different type of data interface and physicalformat for the component in this category.

The company teamed with a key supplier to design anddevelop a new version of the component. This newdesign, which used an advanced data interface and wasphysically smaller and more suited to the end product,would offer a total-cost-of-ownership advantage throughreduced energy needs and storage space, among otherconsiderations. The R&D function took the lead role inworking with the component supplier — instead ofprocurement leading the effort, as it does with manyrelationships — in large part due to the technical issuesinvolved.

HiTech chose to collaborate on the design with thisparticular supplier because it had first-hand familiaritywith its technological leadership — including its abilityto work with the new data interface and its strongtechnical and engineering capabilities — and because ofthe excellent working relationship between thecompanies. Other suppliers were considered, but thecompany determined that the one it chose offered thebest technical, cultural and strategic fit. In addition, theother suppliers were behind in technology developmentfor the component.

The two companies’ development teams worked closelytogether to design the component and determine how itwould work with the new end-product design. Becausethe development costs were borne by the supplier inanticipation of significant market share growth, thesupplier was especially eager to get to market in atimely manner. Development time was ultimately about50 percent longer than planned due to delays related toanother key component of the end product, but thesuccessful launch of the end product yielded a full yearof lead time advantage in the marketplace versuscompetitors.

Despite the close relationship that the two companiesenjoyed, the supplier has not earned as much marketshare in the other two lines of business, presumably

because the potential return on investment is not asattractive as what it achieved with the enterprisecomponent.

While shifting to the new component technology forthis new end product, the company consideredrationalizing the supplier base of older technologycomponents for this product line family. It could havedropped one of the suppliers completely, but becausethis supplier was a technology leader and a key sourceof components for another product line, the companyopted to keep it active. While it resulted in a lost costsavings opportunity in the short term, the companydetermined that it was more important to keep thesupplier viable in the longer term to avoid changing thedynamics of the supply base and achieving longer termbenefits due to competition.

Results

The early introduction of the new technology-basedcomponent for a major end-product line in theenterprise product line family helped the high-techmanufacturer boost its market share in this productsegment from 30 percent to 50 percent. Similarly, thesupplier increased its market share in enterpriseequipment to more than 60 percent.

During the initial roll-out, the supplier acted as the solesource for the key component at a mutually agreeableprice. Now that the technology is maturing, thecompany is considering migrating business to one of theother three manufacturers that could supply thecomponent. This move is being considered in order toachieve cost advantages now that the advantage aroundtechnology has eroded.

Looking Ahead

Longer term, the company expects to migrate its twoproduct lines that are aimed at both consumers andbusinesses to components that operate at higher speeds.Currently, one product line’s component operates at amuch higher speed than the other. Standardizing thehigher speed will reduce the supplier’s manufacturingcosts, simplify the company’s component SKUs andallow it to use smaller format components in one of theproduct lines. Several challenges remain, however.While there are technology constraints to overcome, thelarger obstacle comes from suppliers that are reluctantto support such a move due to fears that their marginswill be pressured should this shift happen, as theycurrently receive a premium for the higher speedcomponent.

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Executive Summary

Meditrend, a major integrated healthcare deliveryprovider, has been seeking a way to engage its suppliercommunity, medical staff and patients in a processwideimprovement in the cost-effectiveness of medical care. Ithas focused on using its unique, systemwide perspectiveto analyze particular services from results back throughpatients, medical procedures, supplied materials andequipment.

As part of that quest, Meditrend arranged to partnerwith a university class to analyze the interactionbetween medicine and economics for hip and kneereplacements and revisions. The university team hopedto establish an analytical tool that could be used byphysicians and administrators to evaluate the differencesbetween procedures, physicians, patients and suppliers.

The team created an analytical model for the intra-operative period, which extends from the time thepatient is wheeled into the operating room for surgeryuntil the time the patient is transferred to the post-anesthesia care unit. The model’s implementation willbe used to demonstrate variations for that subset of thetotal joint replacement process pathway to variousparticipants.

Background

Like most companies in the healthcare field, Meditrend,a major integrated healthcare delivery provider withmillions of members and more than 10,000 physicians,has been working to combat rising costs. WhileMeditrend has successfully executed cost-controlmeasures through strategic sourcing and specificationefforts in recent years, its analyses have traditionallyfocused on a total cost of ownership that did notaccount fully for how products and consumables wereactually used in the operating room.

Drawing inspiration from Toyota Motors’ productionsystem, Meditrend is taking a holistic look at medicalprocesses and procedures in order to identify andultimately drive out waste. With the goal of providingquality, affordable healthcare, the long-term goal is toanalyze both practices and outcomes in order todevelop standard protocols that will bring about thebest outcome for the patient undergoing specificprocedures.

Included in these protocols, which are focused first andforemost on patient outcomes, will be the specificequipment and products to be used in performing theprocedure. This will allow for the achievement of costsavings through consolidated spend on specific,standardized items that deliver the clinical resultsdesired. In addition to spending more with fewersuppliers, there may also be an opportunity to move toperformance-based supplier contracting based on how asupplier’s products affect the outcome and costequation.

A significant area of interest for Meditrend is theevaluation of product performance in light of the time ittakes to perform a given procedure, as well as thesuccess in terms experienced by the patient. Manymanufacturers claim unique advantages both in terms oftime to perform as well as success realized from a givenprocedure. The study is allowing doctors to evaluateproducts, equipment and protocols in terms of cost toprocure, the length of time and associated costs toperform a procedure, and then relate those factors topatient outcome.

While Meditrend knows that doctors have preferences— some are based on experience with specific pieces ofequipment that they normally employ, others due to thereputation of products from competing medicalequipment and drug companies — the study is aimedat reconciling evidence-based medicine with evidence-based procurement and establishing a new valueequation based on comparative effectiveness.

Approach

A team that includes representatives from the medicalstaff, the patient quality care and delivery excellenceunit, and procurement worked with a university class todevelop a model to analyze the effectiveness of theapproaches taken by medical staff for orthopedicprocedures. This specific procedure has been selectedbecause it is thought that the model developed can thenbe applied or adapted to a range of different surgeries.

The project team worked with anonymous patient data.Eighteen different factors spanning cycle times, costs,adherence to standard procedures and certain aspects ofpatient outcomes were analyzed. The model producedcomparative data with respect to the products anddevices employed in the procedure, compared thesurgical protocols that were followed, contrasted the

Meditrend


A P P E N D I XAquality procedures employed, analyzed the humancapital engaged in the procedure and determined howto minimize turnover time.

While the cost of purchased products are a keyconsideration for the company, it recognizes and acceptsthat the costs of purchased products could conceivablyincrease should the more costly items reduce the totalcost of ownership around the procedure throughsuperior outcomes.

Results

The university team reported on the results of itsanalysis of the intra-operative segment of the overallprocess at one of Meditrend’s major facilities. It createda model that was scalable (more surgeons and processescan be added), extendable (its structure can be modifiedand extended to other procedures) and dynamic (inputcosts can be changed or tested). The cost modelprovides physicians with detailed visibility into the costof their procedures and allows benchmarking and bestpractices sharing. The model allows Meditrend to viewcost breakdown by doctor or procedure, has drill-downcapability to view inventory cost, labor cost andmaterial cost, and can facilitate side-by-side comparisonand variation analysis. Applying the university team’sapproach to the rest of the facilities in the Meditrendnetwork would conceivably save $210 million annually,without considering applications to other medicalprocedures.

Looking Ahead

Meditrend will continue to create holistic models forprocess cost-effectiveness. It plans on continuing toraise the awareness of results-oriented analysis withinthe medical community to drive change and reducecosts. It also will use the results of this and continuingwork to direct supplier behavior.

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Executive Summary

Volatility in raw material costs can place significantpressure on a company’s business, especially whenselling prices are largely fixed by an independentcommodity exchange.

Metropolitan, Inc., a global manufacturing company, hasbeen able to successfully navigate this difficultenvironment and differentiate itself from its competitionin several direct material categories by designing anddeploying detailed commodity strategies to address theunique challenges the business faced within eachcommodity. The strategy work done within oneparticular commodity category (input x) was especiallynoteworthy because this category has significantinfluence on profitability. Left unchecked, pricingvolatility within this commodity could squeeze marginsto an unsustainable level.

Background

As a world leader in the production of intermediate,primary and finished products, Metropolitantraditionally allowed its business units significantpurchasing autonomy. In 2005, however, it adopted anew center-led procurement model that greatlyincreased the company’s global perspective and leverage.As a direct result of the maturation of the center-ledprocurement model, the company was able to form anddeploy eight dedicated cross-functional teams at thebeginning of 2009 specifically designed to sustainablyreduce spend across the corporation. The CEO and theExecutive Council directly sponsored this effort, and itmade procurement leaders and business leaders jointlyaccountable for delivering on aggressive spendreduction targets.

The market for input x is dominated by two types ofsuppliers — integrated suppliers that produce andrefine the primary feedstock to produce and market theend product and merchant suppliers that purchase andprocess the primary feedstock to manufacture the endproduct. In the last five years, the merchant market hasrapidly consolidated and now only two dominant globalplayers remain in this segment. The number ofintegrated producers of input x has also been reducedover this same time period as several feedstock sourceshave been permanently closed or partially curtailed foreconomic reasons. Deteriorating feedstock quality has

also tightened this supply market over time, and thisstructural change has shifted more power to producers.

Supply/demand for input x was globally tight. Multiyearcontracts were traditionally negotiated across theindustry and pricing was typically set on a semesterbasis and was often tied to a published commodityindex. Due to a lack of liquidity and inherent markettransparency, the index would lag and inaccuratelyreflect actual changes in the market. Moreover,producers had disproportionate influence over theindex reporting process and, as such, the timing andmagnitude of price trends could be easily manipulated.

Individual Metropolitan plants had considerableautonomy to set specification limits for input x,resulting in a proliferation of unique specificationsacross the manufacturing portfolio. Input x hadsignificant leverage on total cost of goods produced andplants were very sensitive to quality parameters,although the cost of quality was not well understood.Plant managers were largely focused on process control.Specification changes were considered a sacred cow.

Metropolitan set out to improve the situation by shiftingpower away from the supply base, improving portfolioflexibility and increasing market transparency.

Approach

The company’s input x cost improvement strategyfocused on the following key initiatives:

• Rationalizing specifications for input x across theportfolio and changing the paradigm for how andwhere specification decisions are evaluated andmade

• Designing and deploying a standard total costmodel for the enterprise to uniformly evaluate thetotal cost impact of changing multiplespecification parameters

• Designing and deploying a system optimizationmodel to optimize specification change costs,freight and storage costs, and material pricingacross the enterprise

• Upgrading market intelligence gathering andanalysis capabilities on a global basis

Metropolitan, Inc.


A P P E N D I XA• Exploiting the company’s global footprint, supply

chain expertise and market intelligence capabilityto efficiently leverage regional arbitrageopportunities around the world

• Eliminating the use of index pricing and focusingon informed bilateral negotiations with individualsuppliers

• Communicating openly and proactively withindependent market surveyors to driveMetropolitan’s agenda in the marketplace andbalance the influence that input x producers hadtypically wielded over the publication of priceindexes

• Backwardly integrating into strategic parts of theinput x supply chain to reduce market risk andimprove market transparency

The successful implementation of this strategic plan waslargely enabled through the direct sponsorship of theCEO and executive team, strong cross-functionalownership/collaboration between procurement andbusiness leadership, and the deep involvement of theplant operations and corporate technology teams. Byachieving greater insight into the total cost of supply onan enterprise basis, including the cost of quality, andusing this analysis to modify its business risk profile,Metropolitan has uniquely positioned itself versus thecompetition to minimize the absolute cost of input x aswell as the volatility.

Results

The implementation of the company’s input x costimprovement strategy was timely. It helped the businessto weather the impact of rising raw material costs andrapidly falling sales prices at the outset of the globalfinancial crisis as well as driving continuousimprovement in cash management metrics throughout2009. Metropolitan also credits the cross-functionalnature of the improvement effort and direct sponsorshipby executive management as an integral part of itsongoing success in this area. Where the business wasonce primarily concerned with the quality of inputs inorder to avoid process upsets at the plants, now plantmanagement and other supporting functions havegained an increased sensitivity and awareness to thetotal cost of supply. The flexibility achieved across thecompany’s network of manufacturing facilities haspressured suppliers to be more competitive around bothprice and quality, as suppliers now know that they canand will be swapped out.

This strengthened market position has givenMetropolitan a new platform from which to developbalanced, long-term relationships with select suppliers.

Looking Ahead

A consistent strategic framework is being employedacross other direct material categories with similarresults. The new cross-functionally collaborative cultureat Metropolitan continues to deepen and evolve acrossthe enterprise, making significant spend reductionparadigm shifts more achievable and sustainable.

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Executive Summary

While there are many common sourcing practices foraddressing areas of direct spend, it is believed thatindirect service spend offers relatively little potential forsourcing opportunities. Too many companies havedemonstrated limited interest for sourcing areas likehuman resources, marketing and especially legalservices.

For companies with sizable indirect spend, newapproaches are a must. Pharmacare, which relies heavilyon law firms to define and protect its intellectualproperty and defend against lawsuits, identified severalnew approaches that have collectively yieldedsubstantial cost reduction. Pharmacare achieved notableresults by:

• Direct sourcing ancillary legal services that hadpreviously been billed through law firms

• Adopting performance-based fee arrangements• Negotiating alternative billing methods that pay

firms by the task rather than the hour

Background

Legal services represents a major spend category forpharmaceutical companies due to the need to protectintellectual property worldwide and the potentialexposure to lawsuits. Pharmacare has hundreds ofpeople in its in-house legal department and obtainsadditional services from more than 300 external lawfirms around the world. The large number of firms isdriven primarily by the need to use country-based firmsto file and maintain patents and trademarks around theglobe, and the need to have national coordinatingcounsel and regional representation at the localjurisdiction level because of mass tort litigation in theUnited States. Legal spend is substantial (severalhundred million dollars annually) and is clearly astrategic category due to its centrality as well as thepotential risk to the business if legal services are nothandled correctly.

At Pharmacare, the legal department traditionallypurchased legal services. The company viewed legalservices as a highly technical and complex area with thepotential to expose the company to significant risk —and thus best managed by those that practice law. Yetdecisions the legal department was making about whichfirms to use were typically made on an informal or ad

hoc basis, frequently based on personal relationshipsrather than a thoughtful selection methodology.

Several years previously, Pharmacare had undertaken aninternal audit that unearthed some sub-standardpractices around the purchasing of legal services.Without having procurement involved in the process,there had been no systematic approach to sourcing withminimal coverage by sourcing plans. Savings were notbeing measured and there was limited compliance withpreferred supplier lists. Supplier diversity targets wereunmet, and verbal commitments were often usedinstead of clear engagement letters.

Because of its recent successes in other indirect categorymanagement, Pharmacare’s General Counsel agreed to atwo-step assessment of the legal department’s spend byprocurement. First, an internal assessment wasconducted by procurement, which uncovered sourcingpractices previously used by the legal department. Theassessment also examined how those practices andtechniques compared to other sourcing practices usedthroughout Pharmacare. It included interviews with 25Pharmacare attorneys from several groups across severalgeographies and ended with a findings andrecommendations presentation to the Pharmacare legalmanagement team. Then a benchmarking effort with 30other companies, including competitors, was conductedto understand the strategies and practices that othercompanies were using. The benchmarking studyconcluded that the company was lagging behind itscompetitors, especially around cost transparency andoffshoring of legal services. Procurement began to workon improving the value being received by Pharmacare’slegal services in the United States and the UnitedKingdom.

Approach

Across Pharmacare, a corporate mandate was issued toall of the central functions, including the legaldepartment, to significantly reduce operating costs overa three-year period and deliver true cost savings to thecompany. This focus encompassed both internaloperating headcount and expenses along with third-party supplier spending A well-planned program waslaunched that included several work streams thatapplied direct sourcing of ancillary legal services, theadoption of performance-based fee arrangements and amovement away from the hourly billing system.

Pharmacare


A P P E N D I XAHistorically, external law firms purchase ancillary legalservices such as research, medical records collection,court reporting and disposition services, and discoverydocumentation and review on behalf of their clientsfrom specialty companies at an additional markup.Pharmacare realized that it could use its pooledspending to make those ancillary legal service purchasesitself and obtain superior rates.

A more challenging area was the implementation ofperformance-based fee arrangements with external lawfirms. The company worked with firms to develop anestimate of their annual fees based on the anticipatedworkload, then came to an agreement that the firmswould receive an amount equal to that fee if their actualbillings came within a certain amount above or belowthe fixed amount. If billings fell outside of this range,then the savings or overrun would be shared by the twoparties. These partnering law firms could also receivebonuses if a suit was settled quickly or a potential masstort case avoided.

Perhaps most notably, the company was recently able tomove away from paying law firms according to thetraditional billable hour plan in favor of an alternativebilling arrangement that pays a flat, prenegotiated feefor specific legal services. The impetus for this actionstemmed from an e-billing system championed by theAmerican Bar Association that established standardcodes for legal activities and allowed a firm’s clients totrack hours and costs associated with various services toa high degree of granularity.

Armed with this newly deepened insight, the companybegan to develop units of measure for legal workbeyond simple hours. For example, it shifted the priceit would pay for a witness deposition from hours to acost-per-deposition model based on the historical costsit had paid for this service. The company hasimplemented this type of flat pay-for-service billingarrangement for approximately half of its total legalspend, including its 15 top law firms, and is alsosourcing under this approach through its RFP process.

Results

Each year of this effort, Pharmacare has achievedincreased savings while maintaining high-quality legalservices. While the first three years yielded cost savingsin the area of $7 million annually, the implementationof alternative billing arrangements is projected to savean additional $50 million for the other legalengagements for which alternative billing has been putin place. Savings are being measured and agreed to by

both the legal department and purchasing to ensure thatthe company continues to receive high value legalservices at lower costs.

Looking Ahead

Moving forward, Pharmacare expects to deepen its legalservices spend efforts. While it is currently employingalternative billing arrangements for about half of itslegal spend, it hopes to grow that to cover 80 percent,accommodating different business practices employedelsewhere in the world. Intellectual property servicesappear to be impenetrable at this time, although sometrademark work is already being performed underalternative billing.

The sourcing of ancillary legal services is expected tocontinue for several years. Pharmacare also may reducethe number of firms it uses as national coordinatingcounsel in order to increase leverage. Litigationdiscovery work is currently moving from a billable hourmodel to a per-page measure, although in the longerrun Pharmacare expects that technology will be able toreduce the number of documents that people mustreview.

77CAPS Research

A P P E N D I X A

Executive Summary

Long lead times tend to be expected and even acceptedwhen sourcing globally. But there are instances in whichsuppliers demonstrate a chronic inability to providesatisfactory delivery performance. In such cases, thepurchasing company typically has options ranging fromconstant complaining to termination of the relationshipin favor of a new supplier.

Powercon Co., a global manufacturer of power, controland information solutions for manufacturing, wassuffering from poor supplier delivery performance, butit opted to work with the supplier to determine the rootcauses of the problem. While it found that some of theissues stemmed from subpar processes, the companyalso learned that the supplier was largely unaware that aproblem existed. By building an understanding of theexpectation gap and suggesting ways to overcome themyriad pain points, the company was able to correctthe problems, and improve its own economics andability to serve customers.

Background

Powercon used a certain class of circuit board assemblyacross six of its manufacturing locations. While it hadan in-house board production capability, it relied on anAsia-based preferred supplier to supplement this limitedinternal manufacturing during periods of growth.

Because it spent approximately $70 million annually onabout 300 part numbers that it did not buy from anyother source, the company considered this supplier tobe a preferred supplier. But with the supplier onlyachieving 50 percent on-time delivery performance andaveraging 40 days late on those orders that were notarriving on time, the company did not in turn feel like apreferred customer.

The company undertook an examination of alternatesuppliers but ultimately opted against the switch. Amajor factor for continuing the relationship wasPowercon’s diverse mix of circuit boards and itsrelatively low volume, which made it something of anunappealing account for large manufacturers. Thecompany also realized that the switching costs —quantitatively and qualitatively — would also be higherthan it wanted to pay.

The late orders brought about a host of problems for thecompany, which did not want to delay its ownshipments and face customer service level issues due toa supplier’s problem. The late orders were also limitingthe company’s ability to optimize its manufacturingoperations, forcing it to keep excess inventory on handto act as a buffer against these late shipments andcosting it additional time and resources to follow up onshipment status.

The situation was clear — the company had tocommunicate the severity of this problem to thesupplier and work with it to improve deliveryperformance or face the painful prospect of switchingsuppliers.

Approach

Although the company had made the supplier aware ofits delivery performance problems when completing thesupplier’s customer satisfaction surveys, the suppliertook no proactive action to remedy the situation.Similarly, direct complaints to middle management werenot bringing about improvement.

In early 2007, the company undertook a formal effort toexplore improvement options by assembling a cross-functional team that included an expert in lean, SixSigma, and quality and manufacturing functions. Thegoal was to receive improved on-time deliveryperformance in order to increase the company’sflexibility and reduce inventory and lead times in itsown deliveries to customers.

The company dispatched a lean, Six Sigma expert tospend three weeks at the supplier’s plant in Asia inMarch 2007 to identify potential improvements. Theexpert examined setup, changeover, equipment,planning parameters, minimum order quantities,inventory and transit. Key findings included the factthat the supplier had reduced its on-hand inventoriesand was only shipping once per week. To help set thecourse for improvement, the expert suggested someoperational changes intended to increase on-timedelivery performance to 98 percent, including newsafety stock rules, increased levels of on-hand inventory,twice-weekly shipments, adjusted minimum orderquantity rules and increased supplier-managedinventory levels at the supplier’s own componentsuppliers.

Powercon Co.


A P P E N D I XAIn order to increase the supplier’s buy-in to the expert’srecommendations, the company communicated itsdissatisfaction to all levels of the supplier, includingsenior management. The company clarified itsexpectations around improvement and established newmethods for reporting progress, including monthlymetric charts and weekly calls with the supplier’sgeneral manager.

In the course of its work, Powercon realized that therewas a disconnect around performance between its ownexpectations and the supplier’s. The supplier wasaccustomed to working for companies that ordered inhigher volumes and in a more predictable fashion, andfound itself challenged to meet the comparatively broadmix of lower volume items that the company needed.The supplier was also using metrics for on-time deliverythat measured performance against forecasts rather thanthe company’s actual orders. The result was thesupplier’s own on-time delivery numbers were muchbetter than the company’s measure of the supplier’sperformance. While the company does not believe thatthere was any deliberate intent to mislead, it suspectsthat the supplier’s employees were being rewardedbased on performance against their own self-developedmeasures rather than the satisfaction levels that werereported by customers.

Results

A year and a half after the company embarked upon thesupplier improvement program, it achieved its goals.Deliveries have proven to be on-time 98 percent of thetime, allowing the company to reduce its own customerlead time and on-hand inventory.

The company has also learned how to achieve resultswith other suppliers. With the company’sencouragement, a supplier of a different type of circuitboard improved its on-time delivery rate from 85percent to nearly 95 percent in the course of a year —allowing the company to reduce its lead times andinventory for this second type of board.

Both the company and its suppliers benefit from thisimproved way of operating. The company improves itsown customer loyalty due to the improved orderreliability. It also maintains flexibility in its ownmanufacturing, allowing it to better respond to orderchanges. Eliminating safety stock reduces the amount ithas to invest in inventory, freeing up capital that can beemployed in a variety of ways, including better pricingfor its own customers.

Suppliers also achieve value from going through thisprocess. Powercon may opt to shift additional volumeto these preferred suppliers. As preferred suppliers, theymay also be able to share in the benefits of joint costreduction through changes to the product line. Thosethat embrace the opportunities presented by a fuller SixSigma effort can also achieve additional benefits.

Looking Ahead

The company continues to drive toward additionalimprovements with the circuit board manufacturerunder discussion, including expectations of an annual 5percent improvement in productivity and price.

While initial efforts focused on suppliers of severaltypes of circuit boards, the company is working withsuppliers in other sourcing categories as well. Whileeach will have to consider whether the cost of theadditional inventory it will have to maintain is worthkeeping the company as a customer, there are also ahost of benefits to be attained by receiving preferredsupplier status.

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A P P E N D I X A

Executive Summary

While merger-and-acquisition activity can quickly growa company, it can also lead to a highly fragmentedsupply base as acquired companies’ suppliers join thecorporate mix. Under such conditions, it will almostcertainly prove difficult to achieve value from suppliers.

One leading high-tech company with a history ofgrowth through acquisitions came to this realization andundertook a cross-functional approach to reduce thesupply base for key categories. In one crucial area ofspend, reducing the majority of suppliers made itpossible to develop strategic relationships with theremaining supply base. This reduction made newcollaborative efforts possible, enabling the company toachieve a host of quantitative and qualitative value-focused benefits.

Background

Techco, Inc., a leading high-tech company that hassteadily grown through acquisitions, found that it hadalso acquired many suppliers, creating a highlyfragmented supply base. The company determined thatit needed to revamp its sourcing and supply approachto improve performance, as approximately 60 percent ofits product costs were supply chain related.Improvements in supplier capabilities, innovation,performance and competitiveness would be critical toits future success.

Management knew that it had a number of supply baseareas to improve in order to evolve from its current stateto the desired future state. It needed to improvesupplier quality, delivery performance and predictability.It required increased innovation from the supply base,coupled with shared investments. It needed suppliers tobecome more cost competitive, both in terms of pricingand total cost of ownership.

An executive steering team was established to develop acategory strategy optimization (CSO) approach. Theteam began by identifying those categories that weremost critical to the success of the business.

For one crucial category of components used in anumber of the company’s products, custom electronicassemblies (CEAs), the company had 45 differentsuppliers for a $100 million spend. Rationalizing the

supply base would allow it to pool its spend anddevelop the type of strategic relationships that couldadd the value it was seeking. To increase supplier valuecontributions, a multistep, multidisciplinary processwas developed and implemented.

Approach

In addition to devising the CSO approach, the steeringteam worked with other procurement, supply chain andtechnology leaders as well as Six Sigma analysts todevelop a collaborative process that would help torationalize the supply base in order to increase thestrategic value of each supplier.

The CSO process began with a decision model and toolsthat were used to rank suppliers, factoring in the needsof different regions and business units. Points ofemphasis during this ranking included suppliercapacity, and whether eliminating a certain supplierwould place the company in a sole source or otheruncompetitive supply situation. Once ranked, thesteering team developed exit strategies for thosesuppliers that would be omitted from the portfoliomoving forward. It then developed the commoditystrategy and execution plan for working with the mostcapable suppliers, including long-term pricingagreements and consideration of opportunities ingrowth supply markets. Detailed supplier surveys,engineer-to-engineer interviews and on-site visitsverified supplier capabilities. The CSO processultimately narrowed the field of 45 CEA suppliers downto eight — six external and two internal — preferredsuppliers.

The company then set to work with its suppliers on anumber of improvement and collaborative efforts viacollaboration agreements that aligned both parties’ goalsand created a framework for working together.Technology roadmaps, improvement plans andstrategies for test equipment, supply continuity,inventory management and relationship managementwere among the aspects included in these agreements. Anumber of metrics were employed to measurecompliance, with quality and delivery strong points ofemphasis. Quarterly business reviews were establishedto help drive and reinforce the relationships.

Using Six Sigma, a common test architecture wasestablished in order to make functional tests a

Techco, Inc.


A P P E N D I XAconsistent part of the working relationship by locatingcompany testing equipment at supplier sites. Suppliersbegan to contribute throughout the product designprocess, to the betterment of CEA testing,manufacturing and procurement, and to the projectbidding process.

To maximize cost savings, the company and itssuppliers pooled their spend for common parts andbegan to share common parts across components andproducts. Techco made its material requirementsplanning schedule available to its preferred suppliers,along with an electronic library of drawings andspecifications.

Results

The cross-functional CEA category managementimprovement effort yielded a host of quantifiable andqualitative benefits for the company.

Granting suppliers access to the e-library helped tospeed up the bidding process, as revisions weredelivered instantaneously and errors were significantlyreduced — resulting in a 33 percent reduction in cycletime. Time to test and test quality improved, with yieldsincreased by some 20 percent. This improvementreduced the need to return and resend product, cuttingdown on transportation costs.

Overall cost improvements in the CEA category haveapproached 20 percent. An increase in on-time deliveryrates and quality also helped the company get productto market more quickly.

Looking Ahead

Techno expects that its initial successes will help itbring suppliers into the product design process earlierin order to help it deliver more effective designs at alower cost, enhancing its competitive position.

Suppliers have proven to be more responsive to thecompany’s needs, both due to the increased volume ofbusiness they are receiving and the company’s diligentefforts in choosing the most capable CEA suppliers aspartners. This responsiveness in turn allows thecompany to provide better service to its own customers.

Looking to the future, the company is exploring thefeasibility of employing the CSO process throughout thebusiness.

81CAPS Research

A P P E N D I X B

As emphasized throughout this report, Value FocusedSupply is a fundamentally different approach towardmanaging a company’s most critical purchase categories.Among other things, it requires different types of goals,behaviors, information and analyses, relationships,organizational approaches and talent/skills thanconventional sourcing approaches. As the research hasillustrated, even advanced companies are stilldeveloping their capabilities to fully leverage the powerof VFS.

To help companies gauge how prepared they are tosuccessfully develop and implement VFS strategies, weoffer this readiness assessment tool. For each of theseven enablers discussed in Chapter 5, Figure B-1provides short descriptions of the ideal conditions forVFS success based on the companies studied in thisresearch, while Figure B-2 provides a summaryscorecard.

Instead of assessing the company situation as a whole,we suggest that the tool be used to evaluate VFSreadiness for specific key purchase categories.Individuals completing the assessment for a categoryshould rate how well each description in Figure B-1matches their view of the actual situation using a simplescale of 1 to 4, where 4 indicates strong agreement, 3agreement, 2 disagreement, and 1 strong disagreementwith the description.

In terms of gathering data, a few suggestions include:

• Gather responses from a broad cross-section ofthe category’s stakeholders and other relevant VFSparticipants; for example, leadership in thebusiness units, supply management, marketing,finance and other applicable functions.

• Provide an overview of the principles behind VFSto the survey participants. More than likely, VFSwill be a new concept.

• Provide a profile of the proposed VFS category tothe survey participants. The “Supply — State ofPlay” document and SWOT dashboard mentionedin Chapter 6, coupled with the topics listed inFigure 4-4 on page 33 suggest areas that mightbelong in the profile. This context may providehelpful background to help them respond.

• When analyzing responses across individuals, werecommend calculating the average points bydimension as well as the ranges of scores.

• Use the survey as a starting point to evaluate thecompany’s readiness for VFS. Its primary value isas a discussion starter within an organization toidentify and address existing or potentialroadblocks based on those dimensions thatreceive low scores.

• Address differences of opinion. If one enabler hasa wide range of scores, we recommend discussingthose differences in perspective. In someinstances, survey respondents may have differentinterpretations of the question. However, in otherinstances, true disagreement may exist and thediscussions may point toward actions needed toshore up low-scoring areas.

Appendix B:Readiness Assessment Tool


A P P E N D I XBFigure B-1

83CAPS Research

A P P E N D I X BFigure B-2


A P P E N D I XC

The following pages include the two interview guides the study team used during the research.

Achieving Value Focused SupplyA Major Research Initiative of CAPS Research and A.T. Kearney Inc.

Interview Guide #1: Case Example

Selecting the category

1) Please describe the strategic purchase category we will be discussing in this interview and why you decidedto pursue VFS for it.

2) Who was involved in the decision to pursue VFS for this category?

Establishing value creation objectives for the category

3) What value-focused goals related to VFS do you have in place for the category?4) What specific metrics are you using to track the results of the strategy?5) How are the results verified and validated?6) Who is accountable for results?7) What results have you achieved to date?

Developing and implementing the category strategy

8) What is included in the strategy for the category?9) What approach did you follow to develop the strategy?10) Did you follow any accelerated change management approach to develop and implement the strategy, and if

so what was it?

Appendix C:Interview Guides

85CAPS Research

A P P E N D I X CEvaluating, measuring and rewarding success

11) How successful has VFS strategy implementation been in creating value?12) How satisfied are you with the quality of the strategy that was developed?13) What changes have you or your suppliers had to make to the strategy or the tactics to successfully

implement them and to what extent were these not planned for?14) What factors if any are constraining/limiting higher performance and how?15) To what extent are the processes and the lessons learned from this experience being captured and shared for

use with other categories?16) When you look back on the effort to develop and implement a value-based strategy for this category, how

did your company’s culture and management style help or hinder the approaches you took?17) What was the most successful part of the strategy? What was the biggest surprise or unexpected finding?

What was your biggest disappointment about the effort? What was your biggest learning about what to dodifferently next time?

18) Would you be willing to allow the research team to contact a key supplier for this category to obtain thesupplier’s perspective on the VFS process and results?


A P P E N D I XCAchieving Value Focused Supply

A Major Research Initiative of CAPS Research and A.T. Kearney Inc.

Interview Guide #2: General VFS process

Defining value creation opportunities from supply and suppliers

1) To what extent are the company’s business strategy and general market conditions redefining/reshaping therole of supply in delivering value?

2) How does your company decide which categories to focus on strategically? What factors are considered?(taking into account both spend levels and other ways purchasing/supply and suppliers could contributeadditional value to overall business goals)

3) What are the 3-4 key (i.e.; most strategic categories) that you manage? What specifically makes thosecategories “key”?

4) What kinds of value are senior executives expecting supply to deliver from these categories and whatmetrics do they use to evaluate success? Which are the top five sources of value in importance (rank orderand weights)?

5) What type of mandate does procurement have for identifying and proposing opportunities for more valuefrom the supply base?

6) What is your company’s philosophy towards the role that suppliers should play in delivering value for keycategories?

Developing and implementing strategies for value creation

7) Referring to the model on the following page, how does your approach to VFS strategy developmentcompare with it? Which parts did you do (please elaborate on how)? Were there any of these that youexplicitly decided not to include in your process? Why? Were there other steps that are not on the list?

8) How and at what points in the process is executive management (non-supply) involved in the development,review and enhancement of category strategies for strategic items?

87CAPS Research

A P P E N D I X CEnabling Value Focused Supply

9) What actions have you taken relative to organizational or HR capabilities, culture or behavior, managementprocesses and knowledge/IT management to better enable this process?

10) What still needs to be improved in your company’s current category strategy development processes tomake a more significant contribution to the overall competitive success of your company? How willing isyour company to invest to do so (people, time, travel, budget)?

CAPS Research was established in November 1986 as the result of an affiliation agreement between the W. P. CareySchool of Business at Arizona State University and the Institute for Supply ManagementTM. It is located at theArizona State University Research Park, 2055 East Centennial Circle, P.O. Box 22160, Tempe, Arizona 85285-2160,telephone 480-752-2277.

The Mission Statement: CAPS Research, working in partnership with its global network of executives and academics,is dedicated to the discovery and dissemination of strategic supply management knowledge and best practices.

Research published includes more than 85 focus studies on purchasing and supply management topics, as well asbenchmarking reports on purchasing and supply management performance in 20-plus industries.

CAPS Research, affiliated with two 501(c)(3) educational organizations, is funded solely by contributions fromorganizations and individuals who want to make a difference in the state of purchasing and supply chainmanagement knowledge. Policy guidance is provided by the Board of Trustees, consisting of:

Christine Breves, C.P.M., Alcoa, Inc.Kevin Brown, Dell Inc.Susan Brownell, U.S. Postal ServicePhillip L. Carter, D.B.A., CAPS ResearchTimothy W. Coats, General Mills, Inc.Harold E. Fearon, Ph.D., C.P.M., CAPS Research (retired)Timothy R. Fiore, CPSM, C.P.M., Terex CorporationBeverly Gaskin, Rolls-Royce CorporationJohn S. Gundersen, CPSM, Emerson PlantWeb SolutionsBradley J. Holcomb, Dean FoodsCecil R. House, Southern California Edison CompanyThomas K. Linton, LG Electronics Inc.Leo Lonergan, Chevron CorporationMary McDaniel, FedEx ExpressFarryn Melton, C.P.M., Amgen, Inc.Vince Messimer, Royal Dutch Shell plc.Robert Mittelstaedt, Jr., W. P. Carey School of Business at Arizona State UniversityRobert Monczka, Ph.D., C.P.M., CAPS Research/ASUPaul Novak, CPSM, C.P.M., Institute for Supply ManagementDan Rooker, IBMJames A. Scotti, Fluor Corporation, Chair, CAPS ResearchMichael E. Slomke, C.P.M., HoneywellJames A. Ward, Eli Lilly and CompanyKeith P. Weber, 3M CompanyJeffrey M. Wood, Schneider Electric North America

CAPS Research


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P.O. Box 22160

Tempe, AZ 85285-2160

Telephone 480-752-2277

www.capsresearch.org

www.capsknowledge.org

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by the W. P. Carey School of Business at Arizona State University

and the Institute for Supply Management™

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