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Workshop VALUE IN BUSINESS RELATIONSHIPS Identifying and measuring value in supplier relationships June 17th 2014

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

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Slides from the workshop Value in Business Relationships - Identifying and measuring value in supplier relationships, held at Copenhagen Business School on 17 June 2014.

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Page 1: VALUE IN BUSINESS RELATIONSHIPS - Identifying and measuring value in supplier relationships

Workshop

VALUE IN BUSINESS RELATIONSHIPS Identifying and measuring value in supplier relationships

June 17th 2014

Page 2: VALUE IN BUSINESS RELATIONSHIPS - Identifying and measuring value in supplier relationships

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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

Page 3: VALUE IN BUSINESS RELATIONSHIPS - Identifying and measuring value in supplier relationships

Value functions in B2B relationships Thomas Ritter, Professor, CBS

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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)

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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

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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)

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Relationship Value Estimation (ReVEal)

Payment

Volume

Quality

Safeguard

Innovation

Information

Access

Motivation

Ritter & Walter (2012)

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Relationship Value Portfolio

Payment

Volume

Quality

Safeguard

Innovation

Information

Access

Motivation

Ritter & Walter (2012)

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Four perspectives exist in every relationship

Ritter & Walter (2008)

Supplier Customer Relationship

Supplier perceives customer value

Supplier perceives own value Customer perceives supplier value

Customer perceives own value

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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)

Page 11: VALUE IN BUSINESS RELATIONSHIPS - Identifying and measuring value in supplier relationships

Group discussion

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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.

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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

Page 14: VALUE IN BUSINESS RELATIONSHIPS - Identifying and measuring value in supplier relationships

Measuring the value of supplier relationships Kim Sundtoft Hald, Associate Professor, CBS

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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?

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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)

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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)

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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

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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)

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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

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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

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Relationship value (index)

Value

dimension 1

Value

Dimension 2

Value

Dimension N

Va

lue f

acto

r 1

Va

lue f

acto

r 2

Va

lue f

acto

r N

Va

lue f

acto

r 1

Va

lue f

acto

r 2

Va

lue f

acto

r N

Valu

e f

acto

r 1

Va

lue f

acto

r 2

Va

lue f

acto

r N

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Total cost of ownership model

Ellram (1995)

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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

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Hogan (2001)

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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)

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Hogan (2001)

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• 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

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• 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

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