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

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

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. Value functions in B2B relationships
Thomas Ritter, Professor, CBS

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
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
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
Relationship Value Estimation (ReVEal)
Payment
Volume
Quality
Safeguard
Innovation
Information
Access
Motivation
Ritter & Walter (2012)

8. 8
Relationship Value Portfolio
Payment
Volume
Quality
Safeguard
Innovation
Information
Access
Motivation
Ritter & Walter (2012)

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
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. Group discussion

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.

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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

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

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
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
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
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
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
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
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
Relationship value
(index)
Value
dimension 1
Value
Dimension 2
Value
Dimension N
Valuefactor1
Valuefactor2
ValuefactorN
Valuefactor1
Valuefactor2
ValuefactorN
Valuefactor1
Valuefactor2
ValuefactorN

23. 23
Total cost of ownership model
Ellram (1995)

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
Hogan (2001)

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
Hogan (2001)

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

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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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