The good news at Ford just keeps on coming, while less than positive news at Honda and Toyota also continues, as reflected in the results of the 10th annual North American OEM - Supplier Working Relations Study conducted by Planning Perspectives of Birmingham, Mich. (www.ppi1.com).
The annual study tracks supplier perceptions of their working relations with the top three U.S. and top three Japanese automakers across 14 commodity purchasing areas. This year 646 sales personnel from 510 suppliers participated, providing data for nearly 2,500 buying situations.
For the first time in the study's history, a U.S. automaker - Ford - was ranked in the top three OEMs, along with Honda and Toyota, who are in first and second place, respectively.
Nissan continues to slip in the rankings, dropping to fourth place this year, while GM - in fifth place - continues showing strong, steady improvement. Chrysler is also showing some improvement but is still in last place, the position it has held since 2008.
"If there was a silver lining to the recession for U.S. suppliers, it has to be that it caused the domestic automakers to wake up and realize how important their suppliers are to their future fortunes," says John W. Henke Jr., Ph.D., president and CEO, of Planning Perspectives. "This in turn has caused the automakers to redouble their efforts to improve their working relations with suppliers. As this year's results show, it's paying off."
The results of the study are used to calculate the Working Relations Index (WRI), which ranks each OEM across 17 variables comprising five key categories: how the OEM is perceived in terms of its overall Supplier Relations; OEM Communications with the supplier; OEM Help given to suppliers to reduce cost and improve quality; OEM Hindrance to suppliers doing their best job; and the supplier's Profit Opportunity at the OEM.
Over the years, the study has shown that automakers with a higher WRI realize significantly greater benefits from their suppliers than those automakers with a lower WRI. Similar results have been found in numerous industries.
Ford and GM were the biggest winners in this year's study, improving across the board in all five key categories of the WRI.
"Ford is doing everything right when it comes to supplier relations," says Henke. "Ford has shown steady improvement in all five key categories every year for the past four years, so it is not surprising that the company moved to third place overall. If Ford continues to improve at the same pace, and Toyota continues falling, Ford could surpass Toyota in the near future."
At the same time, GM has also shown strong gains in all key categories over the same period, while Honda, Toyota and Nissan have all declined. "At its current pace, GM could bypass Nissan in the next year or two," suggests Henke.
For instance, over the last four years in the "Help" category (how much help suppliers perceive they're receiving from the OEM to reduce cost and improve quality), Ford and GM improved 24 percent and 16 percent, respectively, while Honda and Toyota fell 7 percent and 13 percent. Similarly, in Supplier Profit Opportunity, Ford and GM improved 24 percent and 12 percent, respectively, while Nissan, Honda, and Toyota fell 12 percent, 9 percent, and 16 percent.
The results are directionally similar for the "Hindrance", "Relations" and "Communications" categories of the WRI.
Of the six OEMs, the U.S. automakers have been in the bottom half of the rankings since 2002 when the WRI was first introduced, while the Japanese automakers have continually been in the top half with Toyota and Honda having the highest WRI ratings (Fig. 1). This year, however, Ford and Nissan have swapped places.
"The way the rankings have changed for the Japanese companies and the U.S. automakers is staggering," says Henke. "Since 2007, Toyota, Nissan and Honda have dropped about 21, 14 and 11 percent, respectively, in their overall rankings, while Ford and GM have improved 63 and 31 percent, respectively (see Table 1).
"These are major shifts, which for Honda and Toyota are probably the result of the dramatic growth of these companies who were then hit with the recession and falling sales. This, in turn, led them to become somewhat adversarial in getting price reductions from suppliers.
"The improvement at Ford and GM reflects the realization of how much they really need their suppliers - especially given the fact that many of their suppliers went bankrupt or were nearly bankrupt to the extent that it threatened the automakers' ability to produce cars and trucks. As a result, both companies are working hard to be fair and manage their suppliers more equitably, while continuing to reduce the overall number of suppliers they're working with."
TABLE 1. 2002 - 2010 Overall OEM - Supplier Working Relations Index
YEAR 2009 - 2010 2007 - 2010
OEM % Change % Change
2002 2003 2004 2005 2006 2007 2008 2009 2010
--- --- --- --- --- --- --- --- ---
Honda 297 316 384 375 368 380 359 349 340 -2.6% -10.5%
-----
Toyota 314 334 409 415 407 415 367 339 330 -2.7% -20.5%
------ --- --- --- --- --- --- --- --- --- ---- -----
Ford 167 161 163 157 174 162 191 232 264 13.8% 63.0%
---- --- --- --- --- --- --- --- --- --- ---- ----
Nissan 227 259 302 298 300 289 253 268 249 -7.1% -13.8%
------
GM 161 156 150 114 131 174 163 183 228 24.6% 31.0%
---
Chrysler 175 177 186 196 218 199 161 162 187 15.4% -6.0%
-------- --- --- --- --- --- --- --- --- --- ---- ----
The Working Relations Index (WRI) ranks OEMs' supplier working
relations based on 17 variables across five (5) categories: OEM-
Supplier Relationship, OEM Communication, OEM Help, OEM Hindrance,
and Supplier Profit Opportunity. WRI scores can range from zero to
500, with 500 indicating the strongest supplier relations. A WRI
ranking of zero to 249 indicates very poor to poor supplier working
relations; 250-349 indicates adequate relations; and 350-500
indicates good to very good supplier working relations.
While Ford and GM have shown they can move toward more trusting supplier relations, they still have a long way to go, particularly when it comes to getting supplier price concessions. In this area, the three Japanese automakers are still well ahead - but they are slipping.
"The U.S. automakers are improving their approach to getting price reductions, but they still don't fully appreciate that threats of changing suppliers or other forms of retaliation, whether real or perceived, don't help their cause," says Henke. "This suggests that either upper management's message has not gotten down to the purchasing team members in the trenches, or perhaps those purchasing personnel working directly with suppliers still believe that the old, adversarial approach still works best when it comes to price reductions. Old habits are tough to change."
Although Ford and GM have made dramatic improvements in this area, this year's study shows that 21 percent and 29 percent of their suppliers, respectively, say threats and retaliation are the most important tactics these OEMs use to get price concessions, while only 8 percent of Toyota's suppliers would agree. However, last year, only five percent of Toyota's suppliers said that, and Honda's suppliers who feel threatened jumped to 14 percent from 8 percent last year.
"Although suppliers report a significant increase in threats and fear of retaliation at Honda, this kind of tactic is abhorrent to the Honda culture. Once Honda's management sees these results, I suspect they will change rather quickly," says Henke.
Why the Automakers Should Care
Favorable supplier rankings of the automakers have a very real impact on the OEMs' future fortunes. For many years, the study has shown that automakers with the best rankings, specifically Toyota and Honda, receive the greatest benefit from their suppliers in a variety of areas including lower costs, higher quality, and supplier innovation.
As can be seen in Table 2, as the WRI ranking increases, supplier trust of the OEM goes up and the OEM becomes a more preferred customer. This has corresponding practical benefits for the OEM.
Suppliers are more willing to share new technology with Honda and Toyota than with GM and Chrysler. In addition, suppliers are more willing to invest in new technology for Honda, Toyota, and Ford than they are for Nissan, GM, and Chrysler.
Table 2. 2010 Benefits for OEM
-------------------------------
Chrysler GM Nissan Ford Toyota Honda
Supplier willingness to
invest in new technology for
OEM(1) 2.65 3.11 3.28 3.43 3.76 3.86
Supplier willingness to share
new technology with OEM(1) 2.30 2.49 2.78 2.75 3.19 3.24
Working Relations Index 187 228 249 264 330 340
Supplier trust of OEM(1) 2.51 2.69 2.92 3.08 3.45 3.67
Preferred Customer(2) 2.95 3.75 3.72 4.26 4.55 4.79
(1) Five point scale (2) Six point scale
"The Working Relations Index is not a popularity measure," says Henke. "It is a measure of how suppliers perceive their OEM customer works with them. As we've seen in every industry in which we have done similar studies, suppliers act toward their customers as they perceive their customers act toward them.
"On the other hand, both Ford and GM seem to be committed to continuous improvement in their supplier working relations, with Ford's three-year improvement at 63 percent and GM's at 31 percent. These are excellent turn-arounds that show both companies appreciate the benefits they can realize from good supplier relations," says Henke. "They've gotten the message that their future depends in large part on their suppliers, so they're beginning to work much better with them - especially their larger suppliers.
"There is no easy way to achieve strong supplier relations. It takes hard work, and as the WRI indicates, it's a complex process that requires focusing on a broad range of factors that influence supplier working relations. But it is clearly worth the effort."
Working Relations Variations Across OEM Purchasing Areas
In addition to ranking supplier working relations on an overall basis, the study measures how suppliers rank working relations for the six major purchasing areas within each OEM. What is significant is that the WRI for each purchasing area varies considerably within each OEM (Table 3).
Again this year, for instance, Chrysler's Body-In-White group had the lowest overall WRI ranking of 161 of any group at the six automakers. While very poor, it was a dramatic improvement over last year when its Body-In-White group was rated at 89 - by far the worst supplier working relations ranking of any purchasing area within any of the six automakers in the history of the study. Chrysler's best group is Chassis with a ranking of 201.
TABLE 3. 2010 High - Low Purchasing Area WRIs for Each OEM
OEM Highest Ranked Lowest Ranked
Purchasing
Purchasing Area WRI Area WRI
Chrysler Chassis 201 Body-in-White 161
General
Motors Chassis 236 Interior 219
Electrical &
Nissan Electronics 276 Exterior 229
Ford Body-in-White 289 Interior 240
Electrical &
Toyota Electronics 367 Body-in-White 322
------ ------------- --- ------------- ---
Powertrain
----------
Electrical &
Honda Electronics 357 Body-in-White 334
----- ------------- --- ------------- ---
At the other extreme, Toyota's Electrical and Electronics group garnered the highest WRI of 367, with the same group at Honda close behind at 357. Toyota's lowest rankings were in both their Body-In-White and Powertrain groups at 322 each. Honda's lowest ranking group was Body-in-White at 334.
Of the U.S. automakers, Ford had the highest rated purchasing group - its Body-In-White group - with a ranking of 289, and Interior rated lowest at 240. GM's best area was Chassis at 236, while its lowest ranking was also Interior at 219.
"Supplier working relations within each OEM vary across the various purchasing areas, indicating that it is the OEM personnel who have the day-to-day responsibility of working with suppliers who are the primary determinants of the company's supplier relations," say Henke. "This underscores the importance of having performance metrics in place to drive the desired behavior of these individuals if a company hopes to improve its supplier working relations."
About the study
Now in its 10th year, the annual study determines the supplier working conditions in numerous areas at the North American domestic OEMs (GM, Ford and Chrysler) and the foreign domestic OEMs (Toyota, Honda and Nissan). This year, 646 sales persons from 510 Tier 1 suppliers - representing 2,447 buying situations (e.g., supplying brake systems to Chrysler, tires to Toyota, seats to GM) and 61% of the OEMs' annual buy - responded to the survey. Demographically, the supplier-respondents represent 37 of the Top 50 North American suppliers, 61 of the Top 100 and 80 of the Top 150 North American suppliers. The study culminates in the Working Relations Index (WRI) which is a quantitative ranking by suppliers of their working relations with each of the six OEMs.
About PPI
Since 1990, PPI has specialized in developing and implementing in-depth surveys of suppliers for the automotive OEMs and Tier 1 suppliers, and companies in numerous other service and manufacturing industries worldwide, including the aircraft engines, computer, construction tools, electronics, energy, and food industries. In 2001, PPI initiated its syndicated annual North American Automotive OEM - Supplier Working Relations Study. This annual study has been recognized as the benchmark of supplier working relations for the automotive industry in the Harvard Business Review and several books. The Studies provide critical sales and financial planning information for suppliers and their sales, marketing, and financial staffs, as well as a means by which OEMs and their purchasing staffs can get a reality check on their working relationships with suppliers. John W. Henke Jr., Ph.D., is president of Planning Perspectives Inc., and a professor of marketing at Oakland University in Rochester, Mich.