It’s no secret that developing tight relationships with your suppliers will garner major benefits including better pricing, higher quality parts, and access to the latest innovations and savings opportunities. Nowhere is this more apparent than in the automotive industry, where some of the largest automotive OEMs have lost their way, while others are reaping the benefits of improved supplier relations.
In the world of buyer and supplier relationships, automotive makers are collectively leaving billions of dollars on the table by not improving their supplier relations, according to the latest research from Planning Perspectives Inc. (PPI). A key finding of the study indicates that Ford, General Motors, FCA US and Nissan collectively could have earned $2 billion more in operating profit last year if their supplier relations improved as much as Toyota's and Honda's supplier partnerships.
PPI’s 15th annual North American Automotive - Tier 1 Supplier Working Relations Index Study looks at the automakers' supplier relations and how they impact OEM profits. This year the results are based on 435 suppliers and clearly indicate that Toyota and Honda are outpacing Ford, Nissan, FCA and GM. The results of the survey show that an OEM's supplier relations rating correlates to the benefits that a supplier chooses to give an OEM, which all impact an OEM’s competitiveness and operating profit, according to the study. Benefits cited include which OEM is the first to see a supplier's newest technology, along with best pricing and working with a supplier's best personnel for support.
"Last year we unveiled an economic model that proves a direct cause-effect relationship between an automotive OEM's supplier relations and the OEM's operating profit," said the study's author, John W. Henke, Jr., Ph.D., president and CEO of Planning Perspectives, Inc., Birmingham, Mich., in a statement. "For the first time ever, it allowed us to put a dollar value on suppliers' non-price benefits – those valuable actions and practices, which along with supplier price concessions make a substantial contribution to an OEM's competitiveness.”
“The economic model enables us to determine the economic value of the non-price benefits and the supplier price concessions, which in turn enables us to calculate the supplier total economic contribution to the operating profit of each OEM,” he continued.
Here the top 2015 findings. Thanks to improved supplier relations, both Toyota and Honda are ranked one and two, respectively, for the fifth straight year, well ahead of the other four automakers – FCA, Ford, GM and Nissan. With an 11.8 percent improvement this year, Honda is the most preferred customer of suppliers just slightly ahead of Toyota, which experienced a 5.6 percent improvement this year.
Ford regained its third place ranking over Nissan, but the study indicates it was because Ford only declined by two percent compared to Nissan’s 10.6 percent. This year, Nissan is the least preferred customer of the six OEMs, according to the report. For the second year in a row, FCA's and GM's rankings have dropped and both are tied for last place, with more than 100 points behind the leaders Toyota and Honda.
The question is what did Toyota and Honda do better than the other four automakers? PPI attributes the difference to supplier relations. Henke stated: “The two top-ranked automakers take supplier relations very seriously and actively work at it throughout their respective organizations, but particularly within their purchasing organizations. This includes the vice president of purchasing down to the buyers who work with the suppliers on a daily basis. They are executing the basics better than the other four automakers. He said that while supplier relations has many complexities, the issues involved are quite straightforward and the resulting OEM benefits are more than worth the effort to improve.”
Henke explained that there are certain core or foundational practices that need to be in place in order for an OEM to improve “relationship activities,” which help OEMs get more supplier benefits that contribute to their bottom lines. These activities fall into two categories: business practices of purchasing function (does the OEM have fair and equitable financial practices, is the supplier treated fairly and as a valued supplier, are contracts honored, is the head of purchasing working to improve relations, is the supplier's intellectual property valued and protected, etc.), and the OEM's buyers (do they have the required knowledge for their job, are they trustworthy, do they work to resolve issues quickly and effectively, are they open and honest when communicating with suppliers, plus about 30 other criteria.)
"Once an OEM has the foundational activities in place, then working on improving the relational activities – which drive the Working Relations Index [WRI] – will have meaningful impact,” stated Henke. “These activities involve the nature of the relationship – whether it's adversarial or collaborative – and include the degree of open and honest OEM communication, how much help the OEM provides the supplier to reduce cost and improve quality, how much the OEM hinders the supplier in doing its best job, and finally, the long-term profit opportunities the supplier perceives are available from working with the OEM.”
The study indicates that automakers should be working hard to improve their supplier relationships particularly since OEMs spend about 60 to 70 percent of their revenue with suppliers that play an increasing role in the success of their program by sharing new innovations.
Here is a list of supplier benefits from the study that OEMs can garner with good working relationships with their suppliers.
- Are more willing to invest in new technology to meet future OEM needs, and are more willing to share new technology with the OEM
- Are more willing to support the automaker beyond contractual terms
- Communicate more openly and honestly with the OEM
- And importantly, give greater price concessions to the OEM
In comparison, automakers with poor supplier partnerships will receive smaller price concessions and need to work even harder to get them, and they have less experiences supplier personnel supporting them.
This year’s study shows that Toyota's WRI improved by 5.6 percent to 336 -- its highest level in five years, just ahead of Honda at 330, which experienced the biggest improvement of all six OEMs at 11.8 percent. The key reasons: The VPs of purchasing and the buyers at both companies are the highest rated in building trusting relationships. They also split the top rankings in Purchasing Area WRIs with each holding three of six. Both OEMs reward high-performing suppliers with new or additional business more than other OEMs, according to the report.
In contrast, Ford’s Purchasing VP is tied for last place with FCA in building trusting relations, according to the survey, while Ford’s buyers ranked third. The study also reveals that “Nissan has become the least desirable OEM to work with” and “Nissan buyers have become quite adversarial in seeking price reductions, and the number of suppliers who say the threat of losing the business if they didn't comply rose to 29 percent from 17 percent.”
Similarly, the study finds that GM buyers are becoming more adversarial when seeking supplier price reductions, and the threat of losing business has increased to 27 percent from 18 percent as the most important reason that suppliers give for giving a price concession. Thus, supplier trust of GM buyers is at its lowest in three years and at the lowest of all six OEMs, according to the report. Nearly the same situation is at FCA with its purchasing VP tied with Ford’s VP in last place for building trusting relations, while FCA’s buyers are last in virtually all measured areas.
As a result, the percent of buying situations with poor relations are high – FCA at 54 percent and GM at 58 percent. GM and FCA were found to be the least preferred OEMs to do business with.
Henke believes there are at least three reasons for the issues at FCA, Ford, GM and Nissan.“First, their supplier relations programs are not focused on a sufficient number of the foundational or relational activities that can make a difference in supplier relations. Second, the buyers and engineers responsible for implementing the necessary improvements are simply not capable of doing so, or more likely are not sufficiently motivated do so. And third, when internal mandates come down to reduce cost, buyers are simply reverting back to their old adversarial ways of getting the reductions, because for them building collaborative supplier relations is of little importance.”
"OEM buyers and management have to remember that cost reductions, contract changes, and other similar programs do not of themselves result in poor supplier relations; it's the manner in which these programs are administered that causes poor relations with suppliers," Henke continued.
The study also covered German automakers with manufacturing operations in North America – BMW, Mercedes-Benz, and Volkswagen. But there was only sufficient data to report on BMW and VW. BMW's supplier relations improved this year, reaching a WRI of 346 and leads Toyota in the overall supplier relations ranking of the automotive manufacturers. VW’s supplier relations WRI also improved moving from 181 to 220 this year, but lags all OEMs in supplier relations rankings.
The study indicates a correlation between an OEM’s bottom line and success to their supplier relationships and how their purchasing teams work with their supplier partners. By improving relationships with suppliers, OEMs should be able to lower their costs, get access to the latest technologies, and improve their quality. The proof is in the numbers.