DETROIT — The real story in this year’s rankings of automakers by their suppliers in the 12th annual study of OEM working relations is not their overall rankings, but rather the dramatic and continuing slide of Toyota and Honda, and the continuing improvement of Chrysler Group, General Motors and Ford since 2005.
While still in first and second place overall respectively in this year’s rankings, Toyota and Honda – which had the highest scores in the study in the 2005-2007 period – have fallen this year to their worst scores in 11 years while Chrysler, GM and Ford have improved dramatically and as a group, have achieved their highest scores. Nissan’s rankings have also fallen during the same period but showed slight improvement this year; however, it could lose fourth place to GM or Chrysler next year if these companies continue their current trend lines. Only eight points separate the three.
For 2012, Toyota and Honda still rank first and second overall, while Ford fell slightly but continues to lead the US automakers and remains in third place overall even though its improvement has been stalled for the last three years. Nissan showed slight improvement and is in fourth place, while GM and Chrysler continue to improve and remain in fifth and sixth place respectively, according to the 12th Annual North American Automotive OEM-Tier 1 Supplier Working Relations Index® Study conducted annually by Planning Perspectives, Birmingham, MI, USA.
The study tracks supplier perceptions of working relations with their automaker customers in which they rank the OEMs across the six major purchasing areas broken down into 14 commodity areas. The results of the study are used to calculate the Working Relations Index (WRI®) based on 17 working relations variables. This year, 564 supplier personnel from 439 suppliers participated, representing 62 percent of the six automakers’ annual buy.
However, all is not rosy for any of the automakers. “It’s a concern that all of the automakers are ‘converging toward mediocrity’ in the overall low Adequate range in the Working Relations Index which is equivalent of a grade C in academia,” says John Henke, president of Planning Perspectives and a Professor at Oakland University. In fact, 40 percent of suppliers still rank the Detroit 3 and Nissan in the “Poor – Very Poor” range. According to the Henke, there are several reasons for this:
- Much of the improvement of the US automakers has come by fixing some fundamental relations problems – the “low hanging fruit” says Henke — problems that are relatively easy to identify and rectify, such as Chrysler improving processes to quickly rectifying late payment issues.
- There is still considerable performance variation among all OEMs’ purchasing areas except GM’s. For instance, this year Honda’s Electrical & Electronics group scored 328, while its Body-in-White group only scored 231 (see Table 1 below).
- Implementation of the Working Relations variables year-to-year is inconsistent within each OEM. For example, if GM had maintained its ranking in the “Help” category this year, it probably would have surpassed Nissan and Ford in its overall WRI ranking.
- While automakers’ top purchasing executives understand and support positive working relations, many individual buyers who work for them apparently do not.
Table 1. Inconsistencies Across Purchasing Areas is Costing the OEMs
|OEM||Highest Ranked||Lowest Ranked||WRI |
|Purchasing Area||WRI||Purchasing Area||WRI|
|Honda||Electrical & Electronics||328||Body-in-White||231||97|
|Ford||Body-in-White||287||Electrical & Electronics||239||48|
Cost of Poor Relations; Benefits of Good Relations; Shortage of good suppliers
The costs to automakers of poor working relations are substantial, and the importance of good relations is significant and will only increase going forward with more automakers manufacturing more vehicles in North America, while competing for the same suppliers.
Over the years, the study has shown convincingly that automakers with Good-Very Good working relations get the following benefits. Their suppliers:
- Are more willing to invest in new technology, and more willing to share new technology with the OEM
- Are more willing to support the automaker beyond contractual terms
- Are assigning their “A teams” in terms of OEM support personnel
- Are communicating more openly and honestly with the OEM
- Are willing to give greater price concessions to OEMs
“However, in spite of their willingness to give greater price concessions, OEMs have to give up the idea they can expect 5% reduction annually,” says Henke. “That’s a race to the bottom and it will eventually destroy suppliers. The price of vehicles does not decrease five percent a year; if it did, automakers would go out of business. So why should the price of parts?”
Whereas, automakers with poor relations with their suppliers:
- Receive smaller price concessions and must work harder to get them
- Are supported by less experienced supplier personnel
- Typically are not among the first to get their suppliers’ best ideas and innovations
How to Improve Supplier Relations: Focus and Discipline
The most important factor in improving supplier relations is consistency in managing the purchasing-engineering-quality interfacing activities. “The automakers must understand that maintaining supplier working relations is a never ending process; it’s dynamic, not static, and requires continuous attention,” says Henke.
“Decades ago, US automakers thought they were building the best vehicles possible – until the Japanese came here and suddenly everything changed. Automakers now expect 100 percent quality and are building the best vehicles they ever have.
“It is going to take that kind of focus and discipline to consistently achieve high levels of supplier relations – and the payoff will be just as valuable. Look at Chrysler’s performance during the Stallkamp days and where Toyota was only five years ago in the WRI ranking. It can be done – and Dan Knott did a remarkable job getting Chrysler turned around. However, the challenge for Chrysler, GM and Ford will be to continually improve how they are working with their suppliers in the coming years and not stall, or worse – fall back to their adversarial practices – something that suppliers are telling us more frequently is already happening.”
The WRI consists of five key behavioral Component areas broken down into 17 variables that contribute to good supplier relations. The five areas are OEM Help, OEM Hindrance, Relationship, Communication and Profit Opportunity. “It’s obvious these are not being implemented consistently nor are they being measured, and many buyers are not performing as if they understand that good working relations are essential to their company’s future,” says Henke.
There are two key things these automakers can do to tackle this problem, he says:
- Automakers should focus resources and training on improving “working relations quality” with measurable performance metrics — just as they did to improve product and manufacturing quality.
- Train the buyers better and make sure they understand that poor supplier relations are costing the automaker money and will no longer be tolerated.
The German Big Three
In 2010, Planning Perspectives began studying the Big Three German automakers in with manufacturing operations in North America: Volkswagen, Mercedes-Benz and BMW. Because this study is very new, its results are not yet included in the “official” Working Relations Index because the data doesn’t yet provide the historical depth of information necessary to explain trends and relationships relative to other OEMs.
However, certain broad trends are identifiable and credible.
For instance, since 2010, all three German automakers have fallen in their WRI rankings as dramatically as have the Japanese domestics, as the chart below shows – and for the same reasons: Wide variations in managing the Working Relations Components across purchasing areas. In fact, the German automakers’ variations are much wider than either the US or Japanese Big 3.
At Mercedes, for instance, its chassis area scored a very high 397, while its Powertrain area was more than 200 points lower at 192.
In addition, Trust has fallen all three years for the German automakers, while it has increased significantly during the period for both the US and Japanese automakers as the chart below shows (note the descending green lines).
Overall rankings – combining the Big Three German, Japanese and US automakers puts BMW and Mercedes at the top of the nine automakers, with VW at the bottom – as shown in the chart below.
About The Study: Now in its 12th year, the Annual North American Automotive OEM-Tier 1 Supplier Working Relations Index® 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, 564 sales persons from 439 Tier 1 suppliers – representing 1,915 buying situations (e.g., supplying brake systems to Chrysler, tires to Toyota, seats to GM) and 62% of the OEMs’ annual buy – responded to the survey. Demographically, the supplier-respondents represent 39 of the Top 50 North American suppliers, 67 of the Top 100 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. For the last three years, VW, BMW, Mercedes Benz have also been included.
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 relations with suppliers. John W. Henke, Jr., Ph.D. is president of Planning Perspectives, Inc., and a Professor of Marketing at Oakland University in Rochester, MI. PPI is based in Birmingham, Michigan USA and can be reached at +1.248.644.7690. Visit PPI at www.ppi1.com.