The results of the North American Automotive – Tier 1 Suppler Working Relations Index Study, the 15th of its kind, reveals just how crucial it is for auto makers to manage and foster their supplier relations. The benefits of a good supplier relationship, the research shows, span far beyond simply saving money, and hold implications for B2B industries outside of the auto market.
The results of the research, released Monday (May 18), revealed billions in missed dollars over the last year attributed to a failure on the part of auto companies to improve their relationships with original equipment manufacturers (OEMs). According to researchers, General Motors, Ford, Nissan and FCA missed out on a combined $2 billion because they did not strengthen their supplier relationships as much as rival Toyota and Honda did.
While Toyota and Honda were found to have boosted their supplier relationship scores by an average of 8.7 percent. Had competitors done the same, researchers found, they could have seen significant rises in operating income. General Motors had the most to gain from supplier relationship improvement, reports said. Unfortunately, the research found, 58 percent of suppliers report a negative experience when working with GM.
This marks the fifth year in a row that Toyota and Honda have come out on top over their rival OEMs (original equipment manufacturers) in improving supplier relationships. Since this research began in 2002, Toyota has continuously placed first except for two years in which Honda took the lead.
But the latest study found that Honda outpaced Toyota’s supplier relationship improvement, boosting its score by 11.8 percent (compared with Toyota’s 5.6 percent increase). Researchers said that if Honda continues at this pace, it will once again overcome Toyota as the leading auto company to foster supplier relations.
Declines in supplier relationship scores led to Ford placing third, overcoming Nissan, which dropped by 10.6 percent and saw the greatest fall in supplier relationship score – a stark contrast from last year, when the company achieved the greatest overall improvement.
It’s Not Just About Saving Money
The study found more than $2 billion in missed profits, with General Motors alone missing out on up to $750 million last year because it had not improved its OEM relationship scores. These findings are based on an economic model developed last year which, according to the study’s author John W. Henke, Jr. Ph.D., “proves a direct cause-effect relationship between an automotive OEM’s supplier relations and the OEM’s operating profit.” Put simply, a stronger relationship with suppliers means larger profits for a carmaker.
Henke, Jr., who is president and CEO of Planning Perspectives, explained that last year’s discover of this economic model let researchers quantify these relationships. “For the first time ever,” he said, “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.”
But these non-price benefits shouldn’t be ignored. Not only can carmakers boost their profits by improving relationships with suppliers, but doing so also means that OEMs gain premier access to their suppliers’ newest technologies and innovations, high-quality staff and support, and exclusive discounts – all of which combine and lead to greater profits for an auto company.
While suppliers will go out of their way to meet an OEM’s needs, a poor relationship, experts found, leads to car companies working with less experienced supplier personnel, decreased access to new technologies and smaller price concessions.
A No-Brainer, But How Is It Done?
It may seem obvious that improving corporate relationships with suppliers will yield a positive result in both finances and operations. Less obvious is how that improved relationship is achieved.
Henke, Jr., who has been researching the impact of supplier relationships with their buyers in an array of industries for the last 25 years, found certain patterns among OEMs’ actions with their suppliers that lead to a tangible boost in supplier relationship scores. According to the expert, it’s all about commitment. Honda and Toyota reported work actively and continually to strengthen their supplier relationships, especially within their purchasing departments from the head of procurement down to the buyers that interact daily with suppliers.
There are two key elements to boosting this relationship, Henke, Jr. said. The first relates to business practices within procurement – ensuring that an auto company practices fair finances and treats the supplier as a valued customer. The second involves the actual buyers, and making sure they have the expertise to effectively to their job. These efforts will lead to the benefits of improved supplier relationships, wither in the auto-making industry or elsewhere.
“Once an OEM has the foundational activities in place, then working on improving the relational activities – which drive the Working Relations Index – will have a meaningful impact,” Henke, Jr. said.