The Importance of Relations

Several years ago, back when people were talking “teams” and “partnerships” and the like, I was listening to an OEM executive making a high-level presentation at the Management Briefing Seminars in Traverse City. I happened to be standing alongside an executive from a supplier company.

The OEM executive was holding forth about how it is essential that they work with their “best partners,” about how it necessitated treating them fairly, not adversarially. And the supplier executive muttered to me that while the top-level people at the car companies say the right things, they don’t spend enough time saying them to the right people: those who have the direct interface with the supplier community, the people in OEM purchasing.

Years have passed but not much has changed. That’s the sense that I got recently while talking with John Henke, president of Planning Perspectives ( Henke had just tabulated the results for the North American Automotive OEM-Supplier Working Relations Index—the 16th Planning Perspectives has conducted.

The study looks at how suppliers perceive Ford, GM, FCA, Nissan, Toyota and Honda. Results were calculated based on responses from 647 sales people from 492 Tier 1 suppliers. The buying situations that these people were part of, 1,998 in all, represent 63 percent of the six OEMs’ annual buy.

Henke says, plainly: “Unquestionably, there is a direct correlation between relations and profitability.”

Meaning: OEMs with better supplier relations will make more money for a variety of reasons, not the least of which are that their suppliers are more likely to put their best people on the OEM program and bring the best technology. Because the supplier knows that it is being treated fairly and is likely to keep the business, there is a greater likelihood that it will make piece-price concessions and bring other non-price benefits to its OEM customer. Henke calculates “Supplier contribution to OEM operating profit (EBIT) per vehicle.”  The difference is measured by thousands of dollars.

What isn’t surprising about the 16th study—because it has been this way for more than a decade—is that the Working Relations Index (WRI) has Toyota and Honda on top. (Toyota has led with the exceptions of 2009 and 2010.) Why are Camry, Corolla, Accord and Civic so well received? Maybe the WRI explains it.

The WRI has three categories based on a numeric scale. From 350 to 500 it is “Good—Very Good.” From 250 to 350 it is “Adequate.”  The bottom rung, from 100 to 250, is “Very Poor—Poor.”  Know that the highest score tabulated belongs to Toyota, which hit 415 in 2005 and 2007. Also know that GM hit 114 back in 2005, the nadir of the results.

For this study, both Toyota and Honda are in the “Adequate” category, with 332 and 323 points, respectively. They haven’t been in the “Good—Very Good” portion of the chart since 2008. That said, while there are but nine points separating first and second, there are 56 points separating second and third, as Ford is at 267 points. Ford, Henke points out, has been pretty much staying where it has been for the past several years, not doing much in the way of improvement (in 2010 it was at 264). While it is certainly better to maintain position rather than slide backwards, isn’t continuous improvement somewhat essential?

General Motors is making some upward momentum, going from 224 to 250, and while that is certainly laudable, there is still a fairly large delta between it and the top two. It is hard to overstate the importance of suppliers to OEMs, and as the industry is making its way boldly into the electrified, connected spaces of autonomy and mobility, the skill sets that suppliers can bring are critical.

Meanwhile, Nissan dropped 19 points to come in fifth at 225 points, just three points better than FCA, which is sixth out of six. In 2015 it tied for last with GM, both at 224. In 2008 Chrysler (it was just “Chrysler” then) was down at 161, but it showed marked improvement through 2013, when it hit its peak, 250. Things aren’t looking up.

Which brings me back to the supplier executive’s observation at the start of this. Data Henke worked with show that while suppliers think the purchasing vice presidents at FCA are working to build relationships, the people on the front lines, the buyers, aren’t.

Think about that for a minute.

There’s an old saying: “What gets measured gets done.”  So the question that has to be asked is what are the metrics that the buyers are being measured by? Are they measures that would lead to collaborative working relationships with suppliers, or are they such that if there isn’t an annual price drop of rather major proportions, said buyer is going to get his or her rear-end handed to them?

And who sets the standards?

Gary Vasilash invented this magazine in 1996 and wrote a column for its predecessor publication starting in 1987.  Chances are, if you’re reading this, you know him by now, possibly for a long, long time.