The annual study released by Planning Perspectives aims to underscore how important it is to build strong relationships between suppliers, and customers. Specifically, this study analyzes automakers, and their willingness to work with their suppliers.
John Henke, CEO of Planning Perspectives, details how the economic model tied to the study can measure the link between positive supplier relations and an automaker’s operating profit. The measure of supplier relations is what Henke calls the Working Relationship Index. Toyota and Honda improved an average of 8.7% over 2014.
“If supplier relations at Ford, Nissan, Chrysler and GM also improved by 8.7% they each would have realized significantly higher operating income — an estimate $2.02 billion collectively.”
As you could imagine, automakers want a suppliers’ best technology at the lowest possible price, an adverse relationship if we’ve ever known one. But pressure from investors and management force purchasing departments, such as GM’s, to pay less even as production increases.
Henke is quick to point out that it’s not always about securing the lowest price, however. Sometimes a supplier will hold back on its best engineering efforts, or even tuck away its newest innovation, due to that adverse relationship we mentioned.
To remedy this, General Motors has begun offering 10 year contracts with suppliers to ensure a commitment. 10 years is a long time, sometimes spanning two generations of a particular vehicle.
“Longer-term contracts can make a difference if they also come with suppliers being treated in a more trustworthy way,” Henke said.
As the report points out, the benefits to automakers of greater trust include suppliers’ willingness to share their newest and best technology and to provide stronger support. You can’t have your cake and eat it too.
“Each contract between an automaker and supplier specifies what’s expected of the supplier,” Henke said. “If relations are strong the supplier is more than willing to go beyond that.”