Poor supplier relations have cost automakers billions of dollars in annual profits in past years, while improving current relationships could add $58 to $152 per vehicle to an OE’s bottom line, says Planning Perspectives.
The first-of-its-kind study, which is derived from the Birmingham, MI-based consultancy’s annual survey on OE-Supplier relations, concludes there is a measurable cause and effect between an automaker’s profitability and how well it gets along with its supply base.
Planning Perspectives says a 10% improvement in its supplier Working Relations Index would add $400 million to General Motors’ bottom line today. A similar gain would boost profits $327 million at Ford, $308 million at Chrysler, $99 million at Toyota, $150 million at Honda and $97 million at Nissan.
The company says if Chrysler’s WRI was as high in 2000-2012 as it is today, it would have booked $1,052 more in profit per unit, equaling $2 billion annually or $24 billion over the decade during which it went through several turbulent ownership changes and posted some of the poorest supplier-relations scores in the industry.
“While Chrysler is a dramatic example because of its history of extreme volatility in supplier relations under various owners during the past 20 years, all of the major automakers could be making hundreds of millions dollars more annually if they focused more on improving their supplier relations,” Planning Perspectives President and CEO John Henke says in a statement.
The study uses ratings from the automaker-supplier relations survey, plus unpublished information provided by respondents on such things as OE price-cutting requirements, to calculate the impact of good relations on the bottom line.
It also factors in the impact of non-price-related benefits of good relations – such as suppliers sharing newer technology and providing better customer support – to OE profits. Planning Perspectives says these soft benefits can have a four- to five-time greater impact than price cuts on the bottom line.
“If the automakers – especially the U.S. automakers – really want to improve their profitability over the long term, they need to re-prioritize their efforts,” Henke says. “While adversarial tactics, such as beating up suppliers for lower prices, work in the short term, they don’t offer nearly the benefit in the long term that improving supplier relations does.
“Our study shows that if the OEMs focused their energy on improving their working relations with their suppliers – working with them as trusted partners for the long haul – the OEMs would realize much greater profit improvement than any adversarial efforts may generate. Toyota and Honda are proof of this.”
Planning Perspectives says 51% of an automaker’s profit per vehicle can be attributed to its relationship with suppliers, with price concessions accounting for as little as 5% of the total supplier profit contribution when relations are particularly good.
"The results clearly show that the OEM interested in improving its profitability should definitely look to its suppliers, not to squeeze them for lower prices, but to work toward achieving better relations with them, and by working to develop and then maintain sustainable long-term positive relations with them,” Henke says.