Workshop
VALUE IN BUSINESS RELATIONSHIPS
Identifying and measuring value in supplier relationships
June 17th 2014
2
Program
13:30 Sign in and snack
14:00 Welcome and introduction by Thomas Ritter, Professor, Department of Strategic Mana...
Value functions in B2B relationships
Thomas Ritter, Professor, CBS
4
Understanding value is the key for understanding
exchange
Value = the cornerstone of business market management
(Anderso...
5
There are many views on value
Cost of ownership
Purchasing costs
Product value
Relationship value
Network value
Time
Val...
6
Both, purchasing and network functions create
value for a buyer
Purchasing functions:
•Payment
•Volume
•Quality
•Safegua...
7
Relationship Value Estimation (ReVEal)
Payment
Volume
Quality
Safeguard
Innovation
Information
Access
Motivation
Ritter ...
8
Relationship Value Portfolio
Payment
Volume
Quality
Safeguard
Innovation
Information
Access
Motivation
Ritter & Walter (...
9
Four perspectives exist in every relationship
Ritter & Walter (2008)
Supplier CustomerRelationship
Supplier perceives cu...
10
An example of a value constellation
Payment
Volume
Quality
Safeguard
Innovation
Information
Access
Motivation
Innovatio...
Group discussion
12
GROUP WORK: SUPPLIER RELATIONSHIP VALUE ANALYSIS
Payment
Volume
Quality
Safeguard
Innovation
Information
Access
Motivat...
13
1. How do you assess the value of your supplier relationships?
2. What are the challenges in your current assessment?
3...
Measuring the value of supplier
relationships
Kim Sundtoft Hald, Associate Professor, CBS
15
1. We have an implicit understanding of what a valuable supplier is.
Expressions of value are mainly verbal.
2. Relatio...
16
4. We have non-financial measures that quantify the individual value
dimensions.
5. We score the individual value dimen...
17
Value as comparison of benefits and Sacrifices
Perceived Benefits
Perceived Cost
Perceived Value Ration (PVR) =
When (P...
18
Value as comparison over time or across the Supply network
Outcomes given
comparison level (CL)
(Obtained Value) > = < ...
19
Supplier
A B C
Cost of defect prevention
Qualifying visits 250 250 250
Laboratory tests 200 200 200
Specification revis...
20
Relationship
Value
Relationship
Benefits
Relationship
Costs
Core
Benefits
Sourcing
Benefits
Operations
Benefits
Direct
...
21
Core Benefits Direct Costs
Product quality • Product performance
• Product reliability
• Product consistency
Direct pro...
22
Relationship value
(index)
Value
dimension 1
Value
Dimension 2
Value
Dimension N
Valuefactor1
Valuefactor2
ValuefactorN...
23
Total cost of ownership model
Ellram (1995)
24
Expected relationship value (ERV)
Identification of
Value Centers
Assessment of
Uncertainties
Modeling the
Relationship...
25
Hogan (2001)
26
Variable Units Distribution function Assumption
COSTS
Management time Hours Log-Normal
5%-tile placed at 10% below expe...
27
Hogan (2001)
28
• Return on relationships (ROR) is the long-term net financial outcome
caused by the establishment and maintenance of i...
29
• What would be the best outcome of a research project on
supplier value assessment?
• Your firms involvement in the re...
30
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VALUE IN BUSINESS RELATIONSHIPS - Identifying and measuring value in supplier relationships

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VALUE IN BUSINESS RELATIONSHIPS - Identifying and measuring value in supplier relationships

  1. 1. Workshop VALUE IN BUSINESS RELATIONSHIPS Identifying and measuring value in supplier relationships June 17th 2014
  2. 2. 2 Program 13:30 Sign in and snack 14:00 Welcome and introduction by Thomas Ritter, Professor, Department of Strategic Management and Globalization, CBS; Kim Sundtoft Hald, Associate Professor, Department of Operations Management, CBS and Michael Andersen, Associate Professor, Department of Accounting and Auditing, CBS. 14:15 Value functions in B2B relationships by Thomas Ritter, Professor, CBS. 14:45 Coffee break and networking 15:00 Group discussion 16:15 Measuring the value of supplier relationships, by Kim Sundtoft Hald, Associate Professor, CBS 16:45 Wrap up 17:00 Departure
  3. 3. Value functions in B2B relationships Thomas Ritter, Professor, CBS
  4. 4. 4 Understanding value is the key for understanding exchange Value = the cornerstone of business market management (Anderson and Narus, 1999) Value creation = the essential purpose for a relationship (Anderson, 1995; Grönroos, 1997; Wilson, 1995) Value = a trade-off between benefits and sacrifices (Sinha and DeSarbo, 1998; Ulaga, 1999; Woodruff, 1997)
  5. 5. 5 There are many views on value Cost of ownership Purchasing costs Product value Relationship value Network value Time Value = - price - production costs + sales price premium + extras+ other relationships
  6. 6. 6 Both, purchasing and network functions create value for a buyer Purchasing functions: •Payment •Volume •Quality •Safeguard Network functions: •Innovation •Information •Access •Motivation Walter et al. (2004)
  7. 7. 7 Relationship Value Estimation (ReVEal) Payment Volume Quality Safeguard Innovation Information Access Motivation Ritter & Walter (2012)
  8. 8. 8 Relationship Value Portfolio Payment Volume Quality Safeguard Innovation Information Access Motivation Ritter & Walter (2012)
  9. 9. 9 Four perspectives exist in every relationship Ritter & Walter (2008) Supplier CustomerRelationship Supplier perceives customer value Supplier perceives own value Customer perceives supplier value Customer perceives own value
  10. 10. 10 An example of a value constellation Payment Volume Quality Safeguard Innovation Information Access Motivation Innovation Motivation Payment Volume Quality Safeguard Supplier value (own evaluation) Supplier value (customer evaluation) Customer value (supplier evaluation) Customer value (own evaluation)
  11. 11. Group discussion
  12. 12. 12 GROUP WORK: SUPPLIER RELATIONSHIP VALUE ANALYSIS Payment Volume Quality Safeguard Innovation Information Access Motivation Write examples of your “best in category” suppliers (benchmarks) in the boxes. Choose one supplier and draw its current contribution. Draw the wanted contribution.
  13. 13. 13 1. How do you assess the value of your supplier relationships? 2. What are the challenges in your current assessment? 3. What initiatives in supplier assessment do you currently run – or plan in the near future? 4. What would be the best outcome of a research project on supplier value assessment? Questions to discuss in the group
  14. 14. Measuring the value of supplier relationships Kim Sundtoft Hald, Associate Professor, CBS
  15. 15. 15 1. We have an implicit understanding of what a valuable supplier is. Expressions of value are mainly verbal. 2. Relationship-strategies exist that explain what value in the component category is. Expressions of value are mainly textual. 3. We have a list of value dimensions. The list is communicated inside the firm? The list is communicated to suppliers? Level of formalization in your practices?
  16. 16. 16 4. We have non-financial measures that quantify the individual value dimensions. 5. We score the individual value dimensions on a uniform scale and translate them into a single measure of supplier value. 6. We calculate the total amount of value obtained from our supplier relationships in monetary terms. Level of formalization in your practices? (Continued)
  17. 17. 17 Value as comparison of benefits and Sacrifices Perceived Benefits Perceived Cost Perceived Value Ration (PVR) = When (PVR > 1) there is a perceived payoff from the supplier relationship and thus an incentive to engage in it Perceived Value Subtraction (PVS) = Perceived Benefits Perceived Cost - When (PVS > 0) there is a perceived payoff from the supplier relationship and thus an incentive to engage in it With inspiration from Ulaga and Eggert (2005)
  18. 18. 18 Value as comparison over time or across the Supply network Outcomes given comparison level (CL) (Obtained Value) > = < (Expected value (CL)) ? Comparing over Time Based on Anderson & Narus (1984, 1990) Comparison Level for alternatives (CLALT) (Obtained Value) > = < (Alternative value (CLALT) ? Comparing across the Supply Network
  19. 19. 19 Supplier A B C Cost of defect prevention Qualifying visits 250 250 250 Laboratory tests 200 200 200 Specification revision 300 - - Cost of defect detection Incoming inspection 600 600 600 Processing inspection reports 1,200 1,200 1,200 Cost of defect correction Manufacturing losses 1,590 150 200 Handling and packing rejects 1,500 280 600 Cost of complaints and lost sales 13,200 - 2,043 Total 18,840 2,680 5,093 Total purchase price 63,820 67,947 84,896 Ratio of additional costs (%) 29.5 3.9 5.9 Comparison of a Customer's product quality costs of buying from three suppliers Example from Ford (1985)
  20. 20. 20 Relationship Value Relationship Benefits Relationship Costs Core Benefits Sourcing Benefits Operations Benefits Direct Costs Acquisition Costs Operations Costs Ulaga and Eggert (2006) Dimensions of value creation opportunity
  21. 21. 21 Core Benefits Direct Costs Product quality • Product performance • Product reliability • Product consistency Direct product costs • “Fair” pricing • Annual price decreases • Cost reduction programs Delivery performance • On-time delivery • Delivery flexibility • Accuracy of delivery Adapted from Ulaga (2003) & Ulaga and Eggert (2006) Previous example: (CLALT - Cost obtained ) = (5,093-2,680) = 2,413 = Relative value surplus obtained from supplier B
  22. 22. 22 Relationship value (index) Value dimension 1 Value Dimension 2 Value Dimension N Valuefactor1 Valuefactor2 ValuefactorN Valuefactor1 Valuefactor2 ValuefactorN Valuefactor1 Valuefactor2 ValuefactorN
  23. 23. 23 Total cost of ownership model Ellram (1995)
  24. 24. 24 Expected relationship value (ERV) Identification of Value Centers Assessment of Uncertainties Modeling the Relationship Analyzing Key Variables Expected Relationship Value Stage 1 Stage 2 Stage 3 Stage 4 • The perceived net worth of the tangible benefits to be derived over the life of the relationship Hogan (2001) A Methodology for Assessing ERV
  25. 25. 25 Hogan (2001)
  26. 26. 26 Variable Units Distribution function Assumption COSTS Management time Hours Log-Normal 5%-tile placed at 10% below expected value 95%-tile placed at 50% above expected value Engineering time Hours Log-Normal 5%-tile placed at 10% below expected value 95%-tile placed at 50% above expected value Administrative time Hours Log-Normal 5% placed at 10% below expected value 95%-tile placed at 10% above expected value Out of stock (JIT) Dollars Custom 95% prob. of 0-12 hours of out of stock per year 5% prob. of 24–96 hours of out of stock per year REVENUES Price reductions % of sales Triangular Min. value = 0%; Max value of 1.2%; Most likely value = .7% Process efficiencies % of sales Normal 5%-tile placed at 0% improvement Materials savings % of sales Normal 5%-tile placed at 0% improvement 95%-tile placed at 1.8% Correlation with material savings = .60 Reduced Inventory costs Dollars Triangular Min. value = 2%; Max value of 5.0%; Most likely value = 4.0% Reduced inventory slack % of Sales Log-Normal Mean = .8%, 95%-tile = 1.2% INVESTMENTS IT for JIT Dollars Normal 5%-tile = $120,000; 95%-tile = 80,000 Hogan (2001)
  27. 27. 27 Hogan (2001)
  28. 28. 28 • Return on relationships (ROR) is the long-term net financial outcome caused by the establishment and maintenance of individual customer/supplier relationships (Gummesson, 2004). • The customer value audit (CVA) is a managerial tool for measuring industrial customer´s perceptions of value (Ulaga & Chacour, 2001). • Supplier Profitability Analysis (SPA). Can we adopt elements from Customer Profitability Analysis (e.g. Bellis-Jones, 1989). • The role of Enterprise Resource Planning system (ERP). Can data be extracted that better enables us to calculate Supplier Relationship Value? Potential interesting concepts
  29. 29. 29 • What would be the best outcome of a research project on supplier value assessment? • Your firms involvement in the research project? Next steps in the project
  30. 30. 30
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