Toyota, Honda lead supplier-OEM relations index

It pays to play nice with your suppliers, something that GM seems to have had trouble with for a number of years, according to the 15^th annual North American Automotive – Tier 1 Supplier Working Relations Index Study that looks at automakers’ supplier relations and how they impact OEM profits. Results of this year’s study show Toyota and Honda clearly on top and continuing to distance themselves from Ford, Nissan, FCA and GM, who are headed in the opposite direction, said a release from Planning Perspectives Inc. (Birmingham, MI), the company conducting the annual study. This year 435 suppliers participated in the 2015 study.

Ford, General Motors, FCA US and Nissan collectively would have earned $2 billion more in operating profit last year had their supplier relations improved as much as Toyota’s and Honda’s did during the year. That’s one of the significant conclusions from the study, which is watched carefully in automakers’ boardrooms. Suppliers are more likely show their newest technologies and offer their best pricing to OEMs that treat them fairly, and that impacts OEMs' competitiveness and operating profit.

“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 study author John W. Henke, Jr., PhD, President and CEO of Planning Perspectives. “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, enable us to calculate the supplier's total economic contribution to the operating profit of each OEM.”

This year, Toyota and Honda improved their Working Relations Index (WRI) ranking a combined average 8.7% over last year’s levels, Henke noted. “Using our economic model, we know that if supplier relations at Ford, Nissan, FCA and GM also improved by 8.7%, they each would have realized significantly higher operating income—an estimated $2.02 billion collectively. At the low end, Nissan would have generated another $261 million and at the high end GM would have earned another $750 million,” said Henke.

Toyota’s and Honda’s continuing efforts to improve supplier relations have paid off handsomely as they are ranked one and two, respectively, for the fifth straight year, well ahead of the other four automakers. Toyota has been ranked in first place since the study’s inception in 2002, except for 2009 and 2010, when Honda captured first place.

Honda, with 11.8% improvement this year, nearly doubled Toyota’s improvement of 5.6%. If Honda keeps up the pace, it could take over first place from Toyota next year, noted the study’s summary. Honda is the most preferred customer of suppliers, but it is just slightly over Toyota, noted the summary.

One word can explain the difference in supplier relations between Toyota and Honda and the other four automakers, said Henke: “Commitment. 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.”

Henke also said that while supplier relations have many complexities, the issues involved are quite straightforward and the resulting OEM benefits are more than worth the effort to improve. “Over the years, we’ve seen that a certain core of foundational practices have to be in place before an OEM can improve its relational activities,” he said. “It is the relational activities that help OEMs improve their WRI score and receive increased supplier benefits that contribute to the OEM’s bottom line.”

Foundational activities fall into two categories. One relates to the business practices of the purchasing function. These include:

The other category involves the OEM’s buyers themselves and includes:

“Once an OEM has the foundational activities in place, then working on improving the relational activities, which drive the WRI, will have meaningful impact,” Henke said. “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.

“Toyota and Honda are executing the foundational activities very well and continue working to improve them while they also focus on improving their relational activities,” Henke added. “That’s why we see the growing gap between them and Ford, Nissan, GM and FCA, each of whom is struggling with the foundational activities.”

Given that OEMs spend 60 to 70% of their revenue with suppliers, and that developing good relations has been proven to improve the bottom line, one would think that OEMs at the bottom of the study would want to improve their supplier relationships. The study shows that suppliers with good working relations with an OEM provide their customer considerable benefits, including the willingness to invest in new technology to meet future OEM needs and openness to sharing new technology. They are also more willing to support the automaker beyond contractual terms, communicate more honestly and openly with the OEM, and, importantly, give greater price concessions to the OEM.

Most of us learned way back in grade school that playing well with others has its benefits. No one wanted to play with the playground bully, who often spent most of his recess time in the principal’s office. Henke reminds OEMs that their management must remember that programs such as cost reductions and contract changes “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.”