2013 Annual OEM-Supplier Study Shows Automakers' Lack of Focus has Stalled Improvements in Supplier Relations

DETROIT, May 13, 2013 /PRNewswire/ -- Confronted with greater demands than ever to make major investments in global facilities and in new technologies to achieve much higher corporate average fuel mileage goals, the OEMs should be redoubling their efforts to develop more collaborative supplier relations in order to leverage their combined resources.  However, that doesn't appear to be the case, according to the results of the 2013 North American Automotive - Tier 1 Supplier Working Relations Index^® Study, conducted by Planning Perspectives, Inc. 

The annual study focuses primarily on General Motors, Ford, Chrysler, Toyota, Nissan and Honda because these six automakers comprise 77 percent of light vehicle sales in the U.S.  The European 3 – VW, BMW and Mercedes-Benz – are reported separately.

Results of this year's study show no meaningful change since last year, except Honda, whose supplier relations continue to slowly drop.

"Given the challenges facing the automakers, to say this year's results are disappointing would be an understatement," said John W. Henke, Jr., Ph.D., president and CEO of Planning Perspectives, Inc., Birmingham, MI, (www.ppi1.com) whose firm conducts the annual study.

While still in first and second place respectively in this year's overall Working Relations Index (WRI^®) rankings, Toyota's score is virtually the same as last year with a gain of only one point, while Honda lost six points and has continued its downward slide to its worst score since the study began.  Ford remains comfortably in third place, followed by Nissan, neither of whom has shown sustained improvement for four years.   

General Motors remains unchanged and in fifth place followed by Chrysler, who managed to pick up two points, but remains in sixth place.

"It's apparent that while the automakers' top purchasing executives generally understand and support positive working relations, this support has not been translated into a consistent action plan for improvement.  The lack of improvement among these automakers' purchasing areas over the past several years suggests that none of them has implemented a well-defined, focused plan to improve their supplier working relations.  Or, if they have such a plan, it is not being implemented at the level of day-to-day contact with suppliers.  Either way, this is not good for the OEMs or the suppliers," says Henke.

WRI Rankings of the Detroit 3 and Japanese 3 automakers are virtually unchanged for 2013, except for Honda which slid six points.

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Historically, Toyota and Honda set the standard for the study.  From 2004 – 2007 they performed well above the rest of the industry with overall WRI scores in the 350-415 point range.

Back then, the top-rated automaker, Toyota, scored 415 and the worst, GM, scored 114, with 301 points separating them. Since the recession in 2008, the two Japanese pace-setters have fallen dramatically to the 280-300 range, while the Detroit 3 improved to the 250-270 range. Today only 47 points separates Toyota at the top, from Chrysler at the bottom.

According to the Henke, there are several reasons for Toyota's and Honda's fall, and the current stagnation of the other OEMs.  Among them: 

• With the rapid growth of Toyota and Honda in the U.S., both companies had to dramatically grow their purchasing staffs in recent years, and it became impossible to maintain the much-heralded Japanese culture with the continuing influx of new employees. 
• For both Honda and Toyota, ironically, the growth in personnel in the past two years has been associated with a considerable drop in Help provided suppliers to reduce costs and improve quality, and in Communication with suppliers relative to 2004-2007. The profit opportunity for suppliers has also dropped in 2012-2013 for suppliers at both companies.
• For Toyota, suppliers indicate that the Buyers have been less active in building trusting supplier relations each of the last several years.
• Honda and Ford are leveraging the expertise of their suppliers more than the other OEMs in that they involve suppliers earlier and more effectively through-out their product development process than do the other OEMs.  However, Ford, Chrysler, GM and Nissan have the least disciplined engineering function in that they have had significantly more excessive/late engineering changes than Toyota for the last several years.
• Chrysler and GM for the past two years, and Ford and Nissan for the past four years have shown little change in virtually all WRI–related measures suggesting unfocused efforts to improve supplier relations.
• There is still considerable performance variation among all OEMs' Purchasing Areas.  For instance, this year Ford's Electrical & Electronics group scored 324, while its Body-in-White group only scored 249 – a 75-point spread (see Table 1 below).  It's noteworthy that last year Ford's Electrical & Electronics group was its worst performer at 239; this year it is best at 324, again suggesting unfocused efforts to improve supplier relations.

Further, many suppliers provided anecdotal comments in the study in which they said that the Detroit 3 are slipping back into some of their pre-recession bad habits.  One supplier commented:  "They seem to have forgotten the help we gave them during the 2008-2009 recession because they're back to their old tricks."

The annual 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 six purchasing areas are: powertrain; chassis; exterior; interior; electrical & electronics; and body-in-white.   

The results of the study are used to calculate the WRI based on five key areas that contribute to collaborative supplier relations:  OEM Help, OEM Hindrance, OEM-Supplier Relationship, OEM Communication and Supplier Profit Opportunity.  These areas, in turn, are further broken down into 17 working relations variables. This year, 583 supplier personnel from 441 suppliers participated, representing 61 percent of the six automakers' annual buy. 

Supplier Relations Improve with Consistency

The most important factor in improving supplier relations is consistency in managing the everyday purchasing-engineering-quality interfacing activities in a collaborative manner, said Henke.

"Maintaining good supplier working relations is a never ending process; it's dynamic, not static, and requires continuous attention.  Purchasing management must make sure their Buyers understand poor supplier relations is costing the automaker money and is unacceptable."

Poor Supplier Relations Impacts the Bottom Line

The costs to automakers of poor working relations are substantial, and will only increase going forward, said Henke.  

"We are in one of the most capital intensive periods the automotive industry has ever known.  New fuel economy standards, powertrains and fuels; global environmental requirements; global expansion; and increasing global competition are all placing enormous financial and human resource demands on automakers and their suppliers.  

"These pressures are further exacerbated by the large number of new product launches each OEM has in the pipeline for the next several years.  No automaker has the resources to go it alone, particularly when it is realized that each spends about 60 – 70 percent of its revenue on suppliers.  If an automaker doesn't work in a more collaborative manner with its suppliers, they'll never realize the full competitive and financial benefits of good supplier relations, and at worst they'll fail."   

Over the years, the study has shown convincingly that automakers with Good-Very Good working relations realize considerable benefits.  Their suppliers: 

• Are more willing to invest in new technology to meet future OEM needs, and are more willing to share new technology with the OEM (see Table 2)
• Are more willing to support the automaker beyond contractual terms
• Communicate more openly and honestly with the OEM
• Give greater price concessions to OEMs.

Whereas, automakers with poor relations:

• Receive smaller price concessions and must work harder to get them
• Support the OEM with less experienced supplier personnel
• Typically are not among the first to get their suppliers' best ideas and new technology

The European Big Three

In 2010, Planning Perspectives began studying the Big Three German automakers with manufacturing operations in North America: Volkswagen, Mercedes-Benz and BMW.  Some broad supplier relation trends are identifiable and interesting. 

For instance, since 2010, BWM, after dropping for two years has improved this past year to lead all OEMs, including the Detroit 3 and the Japanese 3, with a WRI of 324. 

Mercedes and Volkswagen, however, continue to slide in the rankings with Mercedes now trailing Toyota with a WRI^® of 289 and VW trailing all OEMs with a WRI of 231.  Interestingly, the WRI rankings for the two Volkswagen operations -- VW-Puebla and VW-Chattanooga -- are 241 and 216, a 25 point difference.

The increase at BMW has resulted from a mix of changes, i.e., increases and decreases in rankings, across the WRI^® components.  The BMW WRI increase came about because of improvements in the Hindrance and Communication components, which offset reductions in the Help, Relationship, and Profit Opportunity components. 

The WRI decreases for Mercedes and VW have occurred because of reductions in the Help, Communication, Relationship, and Profit Opportunity components, which were greater than an increase in the Hindrance component. 

If the Japanese 3, the Detroit 3 and European 3 were combined on a consolidated WRI graph as below, BMW would rank highest of the nine automakers and VW the lowest.

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About The Study:  Now in its 13^th year, the Annual North American Automotive OEM-Tier 1 Supplier Working Relations Index^® Study determines the supplier working relations in numerous areas at the Detroit 3 (GM, Ford and Chrysler) and the Japanese 3 (Toyota, Honda and Nissan).  This year, 583 sales persons from 441 Tier 1 suppliers – representing 1,844 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 38 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 X 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.

SOURCE Planning Perspectives, Inc.