Grading the OEMs: How Do You Feel About a C?

The headlines in Detroit are undoubtedly going to proclaim this morning: “Ford Soars and Toyota Stumbles in Annual Supplier Survey GM Shows Marked Improvement” Or something along those lines.

The headlines in Detroit are undoubtedly going to proclaim this morning:

“Ford Soars and Toyota Stumbles in Annual Supplier Survey

GM Shows Marked Improvement”

Or something along those lines. Planning Perspectives has released its 10th annual North American OEM-Supplier Working Relations Study, which looks at how the supply base—including 37 of the top 50 North American suppliers, 61 of the top 100, and 80 of the top 150, accounting for 61% of the OEMs’ annual buy—think and feel about GM, Ford, Chrysler, Toyota, Honda, and Nissan. John W. Henke, Jr., president of Planning Perspectives, calculates a “Working Relations Index (WRI).” This is based on 17 variables and is organized into five categories related to how the OEM treats the supplier. A higher number is better than a lower.

So, to go back to the headline, Ford has one from 4th place in 2009 to third place in 2010, passing Nissan. Ford’s WRI score improved from 232 to 264. Toyota, the perennial leader, dropped into second place last year, behind Honda. This year, while it has held on to second place has lost nine points. More about that in a moment. Meanwhile, GM has made a yeoman’s stride. Although it remains in fifth place, it picked up 45 points, going from 183 in 2009 to 228 in 2010.

What’s more, according to the study, in the 2007 to 2010 timeframe, Ford’s performance in the study has improved 63%, GM’s has improved by 31%, and Toyota’s has fallen by 20.5%.

Yet they ought not to be busting out the bubbly in Dearborn and Detroit quite yet because those numbers don’t tell the whole story.

M

The 2010 WRI score for Toyota is 330. Honda’s is 340. So between Honda’s number and Ford’s there is a delta of 76 points. Chrysler, which has pretty much been plugging along in the lower strata for the past few years (although it should be noted that during the first few years of this decade, GM’s performance was bottom of the barrel), has a 2010 WRI score of 187 points. So between Ford’s number and Chrysler’s there is a delta of 77 points.

Which essentially says that Ford is solidly in the middle of the pack.

So how much should you celebrate a C?

What’s more, the behavior of the domestic Big Two toward suppliers compared with that of the foreign domestic Big Two is, John Henke pointed out to me, not exemplary. It seems that when it comes to price reductions, threats of reduced business or other forms of retaliation rank comparatively high: 29% of suppliers indicate that GM use the stick and 21% say Ford does. By contrast, 14% say Honda does, and just 8% indicate that this is Toyota’s approach. Again, GM and Ford show great improvement here, as back in 2007 the numbers for the companies were 52% and 47%, respectively.

Why does it matter how suppliers are treated? Henke explained that an important benefit of good treatment is a willingness to invest in new technology for an OEM and to share new technology for an OEM. There is a nearly direct correlation in the WRI rankings and the metrics for those two items. So on a five-point scale, again with a higher number being better, Honda gets 3.86 for the willingness to invest and 3.24 for the willingness to share, while Ford is at 3.43 and 2.75.

The study looks at the six major purchasing areas within an OEM (chassis, body-in-white, electrical & electronics, powertrain, interior, and exterior), and has a WRI score for each. The highest-rated purchasing group within Ford is body-in-white at 289 and the lowest-rated is interior at 240. By comparison, the highest-rated purchasing group within Toyota is electrical & electronics is 367 and the lowest rated is a tie between body-in-white and powertrain, both at 322.

Which means that the lowest rated at Toyota (322) is higher than the highest-rated at Ford (289).

The domestic Big Two have a right to be proud of their accomplishments. And the foreign domestic Big Two ought to be doing some serious soul searching. (In both 2005 and 2007 Toyota’s WRI was 415, which made it, at that time, the company with the best supplier relationships in any industry that Planning Perspectives studies.)

But Henke warned, “The greatest threat to the domestics becoming successful is hubris.” What’s more, he warned, “If Toyota and Honda turn it around, they can do it much faster.”

Momentum is one thing. Culture is another. Ford and GM have one. Toyota and Honda have the other. Ford and GM need to build their culture. Toyota and Honda need to reinvigorate theirs. None of this is easy, nor is it simple. If that wasn’t the case, then the auto industry would be like Lake Woebegon.