August 4, 2014 at 1:00 am

Study: Tight ties to auto suppliers profitable

Study finds gains of up to $400M for better relationships

Good communication between automakers and suppliers can be worth hundreds of millions of dollars, a new study says.

The research uses data from the annual Automotive OEM-Supplier Relations Study from Planning Perspectives Inc., which scores the top three domestic and foreign carmakers for relationships with the companies from which they purchase tires, seats and other parts.

The study released Monday found that automakers could make from $98 million to $400 million more per year if they increased their supplier relations score 10 percent. That means having better relationships with suppliers by communicating, trusting and working with them to reduce costs.

“It doesn’t matter what the relation is — with your boss, friend, girlfriend — if there’s good communication, you can get through all kinds of problems,” John W. Henke Jr., president and CEO of Birmingham-based Planning Perspectives, said in an interview. “OEMs (original equipment manufacturers) are headed by people — heads of purchasing — who are absolutely convinced the best thing to do is have better supplier relations, and they’re working their tails off to do that.”

According to Henke’s most recent supplier relations study, Detroit’s Big Three continue to trail their Japanese counterparts. Toyota Motor Corp. boasts the best supplier relations score, followed by Honda Motor Co., Nissan Motor Co., Ford Motor Co., Chrysler Group LLC and General Motors Co. The scores are determined after interviewing hundreds of suppliers on 16 areas related to communication, help and other factors.

Scores for GM, Ford and Chrysler have risen since the recession, when they made a point of improving relations by revamping their purchasing leadership.

Factoring in GM’s supplier relations score, Henke’s new study concluded the Detroit automaker could save about $400 million in operating income per year if it increases its score 10 percent. That means a savings of $152 per vehicle, just by improving communication methods.

“We clearly realize that suppliers are essential to GM’s efforts to provide customers with the best products and overall experience in the industry,” Grace Lieblein, GM’s vice president, global purchasing and supply chain, said in a statement. “Supplier relationships are a core value for our team and we are committed to continuously improving them.”

Ford could gain the next-highest amount of money, about $327 million per year, or $130 per vehicle, the study says.

“Given that over 70 percent of value of a vehicle is externally purchased, it is not surprising that suppliers play a key role in the profitability of an OEM,” Ford said in a statement. “With this in mind, our supplier partners have always been a key component of our One Ford plan, which includes profitable growth for all."

Henke said Chrysler could earn about $307 million more per year by increasing its score by 10 percent. That translates to a savings of $151 per vehicle.

Scott Kunselman, Chrysler’s senior vice president for purchasing and supplier quality, said in a statement, “We are very proud to have improved our working relations with our supply base by an industry-best 51 percent since 2009. We intend to stay focused on building strong, efficient and innovative partnerships with our suppliers.”

There’s a strong non-price benefit to improving supplier relations, Henke said. If the supplier trusts the company it works with, there’s a greater chance it will share new technology and offer better quality products and help that goes beyond contractual obligations.

“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 said. “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.”

An executive from the Original Equipment Suppliers Association, a Troy-based organization for auto suppliers, said suppliers want automakers to be consistent in their processes throughout all their global markets, and that Ford, GM and Chrysler are improving.

“It’s research like this that can justify a business case for improved relationships,” Dave Andrea, OESA’s senior vice president, industry analyst and economics, said in an interview. “Even if you disagree with the specific dollar amounts, you can see the magnitude where friction and waste at this interface is.”
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