Supplier relationship management

Lessons from America

An annual survey of US automotive suppliers shows that Toyota remains in pole position for good working relations, but General Motors is no longer in last place

Autumn 2007

by John Henke

In this article, we will analyse the supplier working relations of Toyota and other automotive original equipment manufacturers (OEMs) to gain an insight into those relationships – ones that any organisation willing to commit the effort and resources can develop. In addition, we will examine how suppliers react to different characteristics and the business effects of strong supplier working relations. 

To accomplish this, we will draw on our seventh annual OEM-Tier 1 Supplier Working Relations Study , in which direct suppliers to North America’s six major automotive OEMs – Chrysler, Ford, General Motors, Honda, Nissan and Toyota – confidentially shared experiences of working with each customer. The 2007 study took place between mid-April and mid-May and involved 308 firms, including 58 of the top 100 North American suppliers.

Every industry has its unique idiosyncrasies, but the automotive industry is an ideal laboratory for studying supplier working relations for three main reasons. First, because of its size and pervasiveness in the economies of virtually every country, and the impact it has on our personal lives. Second, because the industry is widely regarded as one of the most mature in terms of the development and application of purchasing practices. And third, because supplier working relations across the automotive OEMs are exceedingly diverse.

To understand OEM-supplier working relations, we must first understand the working relations index (WRI). As our clients became more knowledgeable in 2001, they wanted more comparative information about supplier working relations, both within their firms and among competitors. After almost a year of research of companies across multiple industries, we developed the WRI to quantify these.

How working relations are scored

Based on a 500-point scale, the WRI consists of 16 variables that comprise five components ( see figure 1, below ). Each variable is appropriately weighted when calculating its component and each component is appropriately weighted when calculating the WRI. For example, the relationship component is the most heavily weighted as it is the most important of the components, with trust being the most heavily weighted of the two relationship variables.

The strength of the WRI is that it can be used to describe within a company the working relations for commodity groups, purchasing areas, divisions and geographic areas, as well as the overall company. It can also be used to compare and contrast supplier working relations across companies within the same industry and across industries. In addition, the WRI is applicable to manufacturing and service industries (the latter requiring a slight change of wording for some variables). This article will focus on the WRI at the overall company level.

We found three distinct sets of working relations and corresponding supplier actions. Suppliers that indicate they have a WRI of less then 250 feel their customer treats them in an opportunistic manner and, in turn, treat their customer similarly. Working relations such as these, which are characterised by little mutual trust, are categorised as “very poor to poor”.

When the WRI is 250 to 349, the working relations are “adequate”, with good mutual communication and mutual trust between customers and suppliers who support each other and where there are opportunities for suppliers to make a reasonable profit.

At 350 and above, the working relations environment is truly excellent. Suppliers who enjoy these “good to very good” relations, which have high values for almost all 16 WRI variables, strive to be operationally the best and undertake strategic activities such as investing and sharing new technology in anticipation of future business, even though these activities are not necessarily expected to result in an immediate return.

Most importantly, suppliers in the “good to very good” environment recognise that as long as they continue to strive to be the best at meeting customer needs, companies will not abandon them to secure short-term gains such as lower prices with another supplier, but will collaborate to meet or exceed what is in the marketplace. The supplier realises the business is theirs to lose.

The growing level of operational and strategic support that suppliers provide as working relations with a customer become stronger is a key factor in the customer’s success and competitive advantage. 

The questions we ask in our annual survey are answered on the basis of the specific goods the supplier provides. The goods are categorised into 14 commodity areas covering the six basic product groups that comprise a vehicle: body-in-white, chassis, electronics and electrical, exterior, interior and powertrain. The respondents (salespeople at each supplier responsible for OEM accounts) can answer the questions for up to six commodity area-OEM combinations. Each combination is known as a “buying situation” and in the 2007 study there were 1,371 of these in total. 

Six years of results

The OEM results of the 2002-2007 studies are shown in figure 2 ( below ). Several characteristics of the OEMs’ supplier working relations are evident. First, the foreign domestic OEMs (Toyota, Honda and Nissan) consistently have stronger supplier working relations than domestic OEMs (Chrysler, General Motors and Ford). Second, Toyota and Honda consistently have the strongest relationships, and Ford and General Motors consistently have the worst. 

Toyota and Honda have supplier working relations in the “good to very good” range because they create a working environment that is reasonably strong in all areas needed to have strong working relations ( see figure 3, below ). This is not the case with Ford and General Motors, where suppliers indicate that they experience conditions that are far less conducive. 

What is particularly apparent when comparing the OEMs’ WRI components in figure 3 is that Toyota and Honda, which have created essentially the same working environment for their suppliers, are perceived to: provide a reasonable amount of help to reduce costs and improve quality (OEM help); provide suppliers with a reasonable opportunity to make a profit (supplier profit opportunity); allow suppliers to do the best job without hindrance (OEM hindrance). The most important point is the very high level of communication that suppliers say exists between themselves and Toyota and Honda (OEM communication) and their highly rated relationship component. Nissan has a similar, but somewhat lower, pattern. The domestic OEMs show no similar pattern. They lag behind the foreign domestic OEMs, particularly Toyota and Honda, in all areas.

The consistency of Toyota and Honda supplier relations is driven by the fundamental belief that respect for the individual is of paramount importance and should be adhered to in all relations, whether those with an employee, a customer or a supplier. While such a belief is more common in Japanese companies, it is not prevalent in all of them. Nor is it limited to Japanese companies. During the 1990s, Chrysler’s then vice-president of purchasing, Tom Stallkamp, with other company executives, instilled in employees the philosophy that treating suppliers with respect was important. The result was supplier working relations to rival those of Toyota and Honda.

Unfortunately, the change of management that followed the merger with Daimler in early 2000 prompted a more adversarial approach with suppliers in the belief that this was in the Chrysler Group’s best interests. That is why Chrysler’s relations were so weak in 2002, the first year of our research. (We will have to wait until next year’s survey to determine the effect of the recent purchase of a majority stake by private equity group Cerberus Capital Management, and the appointment of Robert Nardelli, the cost-driven former GE and Home Depot executive, as Chrysler’s chairman and CEO.)

These results demonstrate the importance of creating positive conditions in each of the component areas associated with the WRI. In fact, comparing Nissan with Toyota and Honda demonstrates how being just slightly better in each area can take an OEM from having “adequate” to “good to very good” supplier working relations. The breadth of the areas that contribute to strong supplier working relations also require a company to do well in all areas associated with the variables of the WRI. Being particularly strong in one or even a few of the areas will not result in strong relationships, while doing poorly in a few areas, or even one area, can prevent a firm from having such relations.

Behind the headlines

Despite the favourable headline findings, however, not all of Toyota and Honda’s supplier relationships are as strong as their overall WRI suggests. Conversely, General Motors and Ford do not only have very poor supplier working relations. As can be seen in figure 4 ( see below ), the overall WRI of each OEM is comprised of suppliers from all three categories. While most Toyota and Honda suppliers indicate that they have “good to very good” relations, 14 per cent report that they have “very poor to poor” relations with each OEM. On the other hand, 8 per cent of General Motors’ suppliers and 7 per cent of Ford’s suppliers indicate that they have “good to very good” relations.

In fact, close inspection of the WRIs over the past few years highlights two important characteristics of Toyota, Honda and GM’s supplier working relations. First, Honda and Toyota relations have been essentially flat for the last four years, suggesting that their relations may have reached an upper limit. Two possible reasons may account for the lack of improvement, a condition inconsistent with the kaizen philosophy of continuous improvement. First, the resources that each company has allocated to working with suppliers may have reached the practical limit of their capabilities, indicating more resources are needed to increase improvement. And second, the approach that each OEM has taken to date may no longer be appropriate given the characteristics of the current supply base. In either case, the study results suggest change is needed if Toyota and Honda hope to continue to improve relationships.

The second WRI characteristic involves General Motors. The combination of GM’s rapid improvement between 2005 and 2007, coupled with Ford’s slight decline this year, means that for the first time since 1992 – when we first began studying North American automotive OEM-supplier working relations – Ford, rather than General Motors, has the worst supplier working relations.

This shift in the fortunes of General Motors and Ford was not random. In late 2005, GM’s CPO, Bo Andersson, announced a programme to improve relations with the company’s largest suppliers ( see interview with Andersson ). As figure 5 shows ( below ), in 2005, five months before the announcement of the new programme, GM’s relations with its largest suppliers were the worst among all of its suppliers, with a WRI of 87. But in 2006, about six months after the announcement, the WRI had increased from 87 to 143, suggesting some improvement in relations with its largest suppliers. One year later, in 2007, the improvement is more dramatic, with the WRI up to 247, indicating that the programme is working.

The vice-president of marketing at one of North America’s largest suppliers, an important supplier to GM, told us: “Two years ago I wouldn’t have believed that this could take place. General Motors has done a 180-degree turnaround in its approach with us, from being distrustful and mean-spirited to treating us with a reasonable amount of respect. We are still tentative about the change, but we certainly trust them more today than two years ago and we are giving them far more than we would have even thought about two years ago.”

This comment is typical of what several large GM suppliers told us. The change in the company’s attitude towards its largest suppliers has resulted in a reciprocal change in its largest suppliers’ attitudes towards GM. This dramatic two-year improvement demonstrates how a concerted effort can change even deplorable supplier relations in a relatively short time. The challenge now for General Motors is how to sustain the internal environment that led to the improvement.

At the same time in 2005, Ford also announced a programme similar to that of General Motors. In 2006, there was evidence that the Ford programme was working because its largest suppliers indicated a considerable improvement in relations and its WRI improved from 164 to 208. However, Ford did not sustain its programme, but rather reverted to its old adversarial ways of working with its suppliers. This year its WRI fell to 153 – lower than before the programme started.

As one large supplier to Ford told us: “We don’t know what Ford is doing now. The programme that Brown [Tony Brown, Ford’s vice-president of purchasing] announced was great. But it is not being executed by his buyers. We are taking a very cautious approach to what we do with them, which is not good for Ford given the precarious position they’re in.”

This outcome indicates the importance of having performance metrics in place to drive the appropriate behaviours of customer personnel, particularly buyers and engineers, towards building strong supplier working relations – something Ford admitted it had not done adequately.

Further substantiation of Toyota’s relations remaining constant is apparent in figure 5. Supplier working relations on the basis of sales to Toyota have remained statistically the same across each of its three sales groups between 2005 and 2007. The data also shows that Toyota does not treat all of its suppliers in the same way. In fact, the smallest 20 per cent on the basis of sales have “adequate” relations (ie, a WRI  figure of between 250 and 349), which statistically is significantly lower than the relations Toyota has with its medium-sized and largest suppliers, with which it has “good to very good” relations (a WRI of 350 or greater). Whether by design or happenstance, Toyota discriminates as to how it works with its suppliers. 

The data in figures 4 and 5 indicates the importance and value of having an understanding of your company’s overall supplier working relations. The data also shows that substantial differences across a company’s supply base are the norm. Evaluating results over the last 15 years has taught us that every company – no matter how good or bad its overall score may be – has relations that traverse the full range of the WRI scale. It is where the preponderance of the relations lie that is the most important factor, because this is what
determines the overall benefits that a company will realise. 

The business effects of strong relations

Deriving genuine competitive advantage requires buying organisations to take the lead in developing strong relationships with key suppliers and to demonstrate a long-term commitment. For example, Toyota and Honda will remain with their suppliers until they are unable or unwilling to provide goods on a long-term basis, allowing for a much more collaborative approach.

When a company engages in building strong relations, it naturally takes a long-term perspective towards its suppliers. This perspective brings both short-term and long-term benefits to the company and its supply base.

These benefits, which we and other academics have substantiated, cover a vast array of activities. They include:

1. Lower costs

·         Lower transaction costs (reduced costs of distrust).

·         Reduced piece price.

·         Lower total cost of doing business.

·         Lower product development costs (suppliers increase investment).

2.    Higher quality

3.    Improved scheduling/forecasts

4. Improved product development

·         Greater supplier sharing of innovation/ new technology.

·         New products to market faster.

·         Greater end-user satisfaction.

5. Greater supplier support/value

·         Suppliers allocate best resources and expend greater efforts.

·         Suppliers provide greater support beyond contractual obligations.

·         Suppliers are more willing to invest for future opportunities with customer.

·         Greater likelihood of suppliers sharing their cost data.

Ultimately, the accumulation of these benefits translates into greater profits for both the customer and its suppliers.

To fully appreciate how supplier relations are related to the benefits that are realised by the customer, consider the suppliers’ willingness to share new technology without the assurance of a purchase order ( see figure 6, below ). As the working relations of General Motors’ biggest suppliers improved each year, so did the suppliers’ willingness to share new technology. Even Toyota suppliers share their new technology in a manner consistent with the working relations they are experiencing. On the other hand, suppliers that have experienced uneven working relations with Ford take an uneven approach to sharing new technology with that company.

Having moved from head of purchasing at Chrysler to president, Tom Stallkamp is well placed to assess the true impact of WRIs. In his book SCORE! , he attributes the fact that Chrysler had the largest profit per vehicle of all North American OEMs in the mid-1990s to the quality of its supplier relationships at the time. More recently, our preliminary research has shown that as the WRI of an OEM increases, the cost of goods for the OEM decreases. We have also found that when an OEM asks for, or expects, a price reduction for the goods being supplied, a supplier will give a greater price reduction to the customer with which it has the strongest relationship.

The message is clear: the business benefits of having strong supplier working relations are too powerful for any company, whether in the automotive industry or any other sector, to ignore.

Further reading

Thomas T. Stallkamp, SCORE!: A Better Way to Do Busine$$. Moving from Conflict to Collaboration (Wharton School Publishing, 2005) 

John Henke ( henke@ppi1.com ) is president of consultancy Planning Perspectives in Birmingham, Michigan, and professor of marketing at Oakland University in Rochester, Michigan