24 June 2010 | John W Henke Jr
A new era in automotive supplier working relations offers lessons for all, says John W Henke Jr
Each spring for the past eight years Tier 1 suppliers to the six major North American automotive original equipment manufacturers (OEMs) have shared with us their experiences of working with Chrysler, Ford, General Motors, Honda, Nissan and Toyota.
Every year the dynamics of supplier working relations in the industry evolves as profound shifts occur in how one or another OEM works with its suppliers, and how suppliers in turn respond. This year, however, the previous pattern of working relationships has changed significantly. The domestic OEMs (Chrysler, Ford, and General Motors), which have usually been associated with weak supplier relations, and the foreign domestic OEMs (Honda, Nissan, and Toyota), which are noted for strong supplier ties, are reversing direction.
It could be that the results of this year’s Annual North American OEM - Tier 1 Supplier Working Relations Study, conducted by Planning Perspectives, has ushered in a new era of supplier working relations in the automotive industry. As we shall discover, this dynamic, coupled with underlying individual OEM actions, provides important lessons for any company interested in improving and maintaining strong supplier relations.
This year 646 sales personnel from 510 Tier 1 production goods suppliers participated in the confidential study, providing data for nearly 2,500 buying situations (see box on page 31).
For the first time in the study’s eight-year history, a US carmaker – Ford – was ranked in the top three OEMs, along with, but well behind, Honda and Toyota, who held their respective first and second places for two years running (see graph).
Nissan continued slipping, dropping to fourth place, while General Motors (GM) – in fifth place – maintained its strong, steady improvement. Chrysler also improved somewhat, but is still in last place on the working relations index (WRI), the position it has held since 2008.
RESULTS SUMMARY
Overriding these results, a very different multi-year pattern of change became evident for the domestic OEMs vs. the foreign domestic OEMs. For each of the domestic OEMs supplier working relations are improving. Ford’s three-year upward improvement,
63 per cent since 2007, has improved working relations to the ‘adequate’ range for the first time. While GM continues in the ‘very poor/poor’ range, its supplier relations are improving at such a rate, 42 per cent in two years including 25 per cent since last year, that it is reasonable to anticipate that its WRI will be in the ‘adequate’ range next year. Chrysler’s WRI remains alone in the cellar but, this past year, for the first time in four years it has improved.
For the foreign domestic OEMs the WRI change is a different story. Notwithstanding Nissan’s slight improvement last year, Honda, Toyota, and Nissan continue their slow four-year downward trend of steadily worsening supplier relations. While continuing to have the best supplier working relations in the industry, both Honda and Toyota remain in the ‘adequate’ range for the second straight year, while Nissan has moved into the ‘very poor/poor’ range, below Ford and challenged by GM.
So what are the lessons of these overall results and their underlying characteristics?
QUICK SUPPLIER RESPONSE
When considering whether or not to apply the necessary resources to improve working relations with suppliers, a major question of any company
is how quickly will the results from the effort be realised? As indicated earlier, Ford achieved a 63 per cent increase in its WRI over a three-year period, while GM achieved a 42 per cent increase over the past two years. These results – which are similar to results clients in other industries have experienced – indicate suppliers are generally predisposed to work closely with their customers if they sense a movement toward stronger supplier working relations. Such vendor response, however, doesn’t just come about because activities to improve the supplier relations are in place. It matters how the customer applies these activities.
For example, in addition to ranking supplier relations on an overall basis, the study measures how suppliers rate working relations for the six major purchasing areas – chassis, interior, body-in-white (eg, sheet metal components) etc. What is significant is the WRI for each purchasing area varies considerably within each OEM.
Again this year, Chrysler’s body-in-white group had the lowest WRI ranking, 161, of any purchasing area of the six automakers. Although very poor, it was a dramatic improvement on last year when its body-in-white group was rated at 89 – by far the worst ranking of any purchasing area in the study’s history.
Chrysler’s best group, chassis, has a ranking of 201. At the other extreme, Toyota’s electrical and electronics purchasing area received the highest WRI of all purchasing areas, 367, with the same group at Honda close behind at 357.
An important aspect of these high and low ratings is the disparity between them because the difference indicates the degree to which activities to improve supplier relations are being consistently applied. GM is applying its improvement activities more consistently than Ford. The result is evidenced by GM’s 25 per cent single year WRI improvement. Ford’s 2010 improvement over 2009, although admirable, is only 14 per cent, which is less than Chrysler’s 15 per cent. Doing the right things consistently throughout an organisation results in suppliers responding quickly.
Why buyers matter
Recent multi-year improvement of supplier relations at Ford and GM, plus this year’s improvement at Chrysler, can be attributed to vice-presidents of purchasing each playing a leading role. Without this backing the activities needed to improve supplier relations would not have been implemented at any of the three carmakers.
But while VP leadership is vital, purchasing agents or buyers who work with supplier sales personnel on a day-to-day basis are critical to the success of any improvement programme. Without the wholehearted support of these individuals walking the talk of the VPs, vendors will not believe better supplier relations is an important endeavour.
The importance of the buyer to the speed with which change can occur and to the ultimate success of any programme is further substantiated by the reasons suppliers in this year’s study gave for the price concessions they provided manufacturers. In the automotive industry, there is a range of reasons why a supplier will give an OEM a price concession.
While the OEM threat of reduced business and/or fear of OEM retaliation has dropped as a reason for the domestic OEM suppliers in recent years, not all buyers are balancing improved supplier working relations with supplier price reductions.
If more purchasing agents at Chrysler, Ford, and GM had used positive approaches to convince suppliers to give a price reduction rather than using adversarial tactics, no doubt, each would have achieved an even greater improvement to their WRI score.
WHY COMPANIES SHOULD CARE
The real question behind the annual study and, for that matter, for any company interested in achieving strong supplier relations is – why should they care? The answer is simple. For many years, the study has shown that automakers with the best rankings, specifically Toyota and Honda, receive the greatest benefit from their suppliers in a variety of areas including lower costs, higher quality, increased price reduction concessions, and supplier innovation.
The results show that as the OEM 2010 WRI ranking increases supplier trust of the OEM goes up and the OEM becomes a more preferred customer. This has corresponding practical benefits for the manufacturer. For example, suppliers are more willing to share new technology with Honda and Toyota than with GM and Chrysler. In addition, vendors are more willing to invest in new technology for Honda, Toyota, and Ford than they are for Nissan, GM, and Chrysler. These data, as we have seen in every industry in which we have done similar studies, indicate that suppliers act toward their customers as they perceive their customers act toward them. It is for this reason that a company should be concerned about how its suppliers perceive them.
THE BIG PICTURE
Certainly the North American operations of Toyota and Honda understand what it takes to maintain strong supplier relations. Their respective cultures are grounded in the recognition that respect for the individual is the bedrock of working with others. Yet, in recent years, at least as it relates to working with suppliers, increasing competitive pressures of the marketplace, coupled with the disastrous impact of the economic downturn on the automotive industry, has caused both firms to lose direction.
Conversely, these same conditions have caused the domestic carmakers to realise the importance of suppliers to their future, which has resulted in each of them moving, to varying degrees, toward improving supplier relations.
The importance of suppliers to the future of any company cannot vary on the basis of the marketplace or economic conditions facing the firm. Companies must persevere in continually moving toward the desired end result, no matter what the situation. The benefits suppliers provide their customers of choice are too important to let any circumstance dissuade a company from the path that leads to stronger working relations with suppliers.
No prior year has been so profound in the shift of direction among the OEMs. Does this shift portend a new era of supplier relations in the North American automotive industry? It does, but not it the way that appears apparent. The domestic manufacturers, as a group, have come to the realisation that they need their suppliers to compete effectively in an increasingly competitive marketplace. The OEMs know they cannot continue to treat suppliers with impunity. To gain the multitude of benefits vendors can provide them, the domestic manufacturers know they must become a desired customer of, at least, their most important suppliers. The question is whether – as the market improves and domestic manufacturers begin to once again make money – they will stay the course. The answer is: only if they remember the big picture.
For the foreign domestics, particularly Honda and Toyota, these study results will, it is hoped, be a clarion call. If they continue to let marketplace challenges cause them to forget the big picture, their weakening supplier relations will result in them losing the edge in supplier benefits that they have been realising for years. For Nissan, now supplier relations have dropped into the ‘very poor/poor’ range, this alert particularly urgent.
Developing and maintaining strong supplier working relations is an arduous journey, during which a company must continually keep the goal in sight. The results of this year’s study provide some lessons for any company that is on or wishes to begin the journey.
WORKING RELATIONS INDEX
questions and answers
The Annual North American OEM - Tier 1 Supplier Working Relations Study is based on responses from the supplier sales person who has day-to-day commercial responsibility for working with the supplier’s OEM customer. This ensures the most knowledgeable informant is responding.
The Working Relations Index (WRI) is based on a 500-point scale, and is associated with specific company behaviours toward its suppliers and reciprocal behaviours by the suppliers toward the company. The WRI is comprised of five components - including supplier profit opportunity and company communication - and 16 variables within that. These variables make it clear that trusting co-operative supplier working relations are not based on “touchy-feely” emotional sentiment, but are the result of a network of inter-related activities. No single activity done well can create positive supplier working relations. However, a single activity done particularly poorly or not at all can negate the positive impact of all the other activities. A company must, therefore, focus on all of these primary drivers to achieve trusting, co-operative supplier working relations.
FOR MORE INFO SEE
☛ The customer’s dilemma, John W Henke Jr, CPO Agenda, Autumn 2008
☛ Increasing supplier-driven innovation, John W Henke Jr and Chun Zhang, Sloan Management Review, Winter 2010
☛ Refracted glory, John W Henke Jr, CPO Agenda, Autumn 2009.
☛ The lessons of Toyota’s recalls, John W Henke Jr, CPO Agenda, Spring 2010
☛ John W Henke Jr is president of Planning Perspectives, a consultancy specialising in SRM. He is also professor of marketing at Oakland University
