Measuring the Value of SuppliersAssociate Professor, Ph.D., Kim Sundtoft Hald

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Agenda

Time (approximate) Theme

14:00-14:30 Welcome

14:30-15:30 Value Drivers in Supplier Relationships (Workshop 1)

15:30-15:45 Coffe Break

15:45-16:45 Value Measurement (Workshop 2)

16:45-17:00 Wrap up

Value Drivers in Supplier Relationships

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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)

Ritter (2014)

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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

Ritter (2014)

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Value is central in the value chain

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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

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Value: (Benefits – Costs)

Perceived Value (PV) =Perceived

Benefits

Perceived

Costs-

When (PV > 0) there is a perceived payoff from the supplier relationship

and thus an incentive to engage in it

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Relationship Benefits

• Product Quality

• Delivery Performance

• Service Support

• Personal Interaction

• Supplier Know-how

• Time-to-Market

Relationship Costs

• Direct product costs

• Process costs

Value Drivers in Supplier Relationships

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Relationship Value

Relationship Benefits

Relationship Costs

CoreBenefits

SourcingBenefits

OperationsBenefits

DirectCosts

AcquisitionCosts

OperationsCosts

Ulaga and Eggert (2006)

Drivers of value creation opportunity

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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

Value measurement

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Importance

Ease of measuring

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6

67 5

5

4

3

2

1

4 3 2 1

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• The perceived net worth of the tangible benefits to be derived

over the life of the relationship (Hogan, 2001).

• ERV = A monetary value (and its distribution).

• Estimating the size and uncertainty attached to the benefits and

costs that drive relationship value.

• Using Monte-Carlos analysis to understand the statistical

distribution of the value that can be derived from the relationship.

Expected Relationship Value (ERV)

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Hogan (2001)

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Hogan (2001)

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Monte-Carlo analysis using Excel

Purchasing Volume 70.000.000

SUPPLIER RELATIONSHIP ADMINISTRATION DKK per. Hour RISK Year 1 Year 2 Year 3

Management time 455 50% 120 120 120

Administrative time 140 50% 200 200 200

COST REDUCTION PROGRAM DKK per. Hour RISK Year 1 Year 2 Year 3

Engineering time 263 50% 150 150 150

Price Reductions (% af Purchasing volume) 50% 0,70% 0,70% 0,70%

EARLY SUPPLIER INVOLVEMENT PROGRAM DKK per. Hour RISK Year 1 Year 2 Year 3

Engineering time 263 20% 2.000 2.000

Process Efficiency (% af Purchasing volume) 70% 0,90% 0,90%

Material Reductions (% af Purchasing volume) 70% 0,90% 0,90%

JUST IN TIME PROGRAM DKK per. Hour RISK Year 1 Year 2 Year 3

Engineering time 263 20% 1.000 500

Administrative time 140 20% 150 150

IT Investments 40% 525.000

Reduced inventory slack (% af Purchasing volume) 70% 0,80% 0,80%

Wrap up

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• Value Drivers in Supplier Relationships.

• What are they in your firm? Your sourcing operation?

• Qualitative assessment (comparing).

• Expected Relationship Value (ERV)

• Make an influence Diagram.

• Assessment of benefits/costs

• Assessment of uncertainties.

• Monte-Carlos analysis (using Excel or other more advance software)

Summary

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• Multiple applications of the ERV-model in case firms

• How does ERV work in advanced settings?

• What are the obstacles using this approach?

• Access and accuracy of data available in the firm?

• Survey on the practices of value assessment in supplier relationships

• How do firms measure supplier value?

• How advanced are the methods of assessment?

• When are the methods more advanced?

Next steps in the project

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Kim Sundtoft Hald,

Associate Professor, Ph.D.

Copenhagen Business School, Department of Operations Management

Solbjerg Plads 3, 2000 Frederiksberg, Denmark

Mobile: +45 23 72 23 03

E-mail: ksh.om@cbs.dk

Contact Details