Rating the Automotive Suppliers

The U.S. Big Three are once again falling behind their Japanese competitors, according to the 14th annual automotive industry study on the major U.S. and Japanese automakers’ working relations with their suppliers. Toyota, Honda and Nissan finished 1-2-3 respectively.

The study is watched carefully in automakers’ boardrooms because an OEM’s supplier relations rating can be directly correlated to its profitability and competitiveness—including which OEM customer is first to see a supplier’s newest technology and gets their best pricing.

The results of the 2014 North American Automotive-Tier 1 Supplier Working Relations Index Study show the following:

• Toyota’s and Honda’s efforts to improve supplier relations have paid off as they have regained their momentum and are ranked No. 1 and No. 2 respectively, while extending their lead. Honda is the “most preferred” customer among the six OEMs.

• Nissan, the second most improved overall following Toyota, has taken over third place from Ford.

• After showing no real improvement in supplier relations for four years, Ford has slipped back to fourth place, having been passed by Nissan.

• For the first time in six years, Chrysler’s overall ranking in supplier relations has fallen and the company is now ranked fifth, only one point above GM.

• In spite of its recent efforts to improve supplier relations, GM has fallen into last place overall among the Big Six.

• If the Big Three German automakers were included, BMW would be second overall, while Mercedes would be well below GM and Volkswagen would be in a very distant last place by a wide margin. The annual study focuses primarily on Chrysler, Ford, General Motors, Nissan, Honda, and Toyota, because these six automakers comprise 86 percent of light vehicle sales in the U.S. The German Three—BMW, Mercedes-Benz and VW—are reported separately.

This year’s results suggest that the industry could be entering a new era in supplier relations that doesn’t bode well for the U.S. Big Three, said John W. Henke, Jr., Ph.D., president and CEO of Planning Perspectives, Inc., the Birmingham, Mich.-firm that conducts the annual study. Henke is Professor of Marketing at Oakland University and a Research Fellow at The Center for Supply Chain Management, Rutgers University.

“History repeats itself. Historically, the Japanese automakers, especially Toyota and Honda, had a commanding lead in supplier relations and were the companies suppliers preferred to deal with. Then, the combination of the 2008 recession, the impact of the 2010 Japanese earthquake, and the increase in purchasing personnel caused both companies to lose their way and their rankings plummeted,” said Henke.

“Meanwhile the U.S. automakers, under new purchasing leadership, made significant improvements in their supplier relations. Now, however, the ranking trends suggest that the Japanese automakers have figured out their problems, corrected them, and are back on track, while the U.S. automakers appear to be faltering. In fact, this year GM and Chrysler supplier relations have fallen back into the Very Poor to Poor range.”

Henke and his team have identified two major sets of factors that affect supplier relations. In the first set are 16 variables that have been identified as the primary drivers of supplier relations. The variables comprise five components of the Working Relations Index that cover quality of the overall supplier relationship, communication, help given the supplier, working together, and supplier profit opportunity.

The second set of factors includes foundational business areas involving leadership, execution and fairness. These factors must be present to achieve good relations, but do not themselves impact the WRI rating. Foundational areas include such things as paying invoices on time, resolving payment issues fairly, allowing suppliers to recover some material cost increases, and OEM terms and conditions regarding intellectual property.

“You might think of foundational areas as being the equivalent of ‘quality’ in cars today; quality alone doesn’t drive sales, but without it, you’re not in the car business,” Henke said. “This year’s results show that the Japanese automakers have a better understanding of the foundational areas and are executing them more effectively than are the U.S. Big Three.”

Executive leadership and execution

One major foundational area this year’s study focused on is the role of the OEM's vice president of purchasing and his or her buyers in building trusting supplier relations. At some automakers, the study shows there is a disconnect between the executive leadership and the buyers, which can contribute to lower WRI ratings.

• Of the Big Six automakers, Honda’s and Toyota’s VPs and buyers are rated No. 1 and No. 2 respectively, in working to build more trusting supplier relations, and their buyers are being the most transparent among the OEMs in providing suppliers information. At both companies, the VPs and buyers are the most highly rated of the OEMs.

• At Nissan, the purchasing VP is seen as actively working toward building more trusting relations, and Nissan buyers are ranked higher in working to build trusting relations and in information transparency than the buyers at the US Big Three.

• GM’s purchasing vice president is also highly ranked in building trusting relations, following Toyota, but GM buyers are ranked very low in working to build trust and in being transparent when providing suppliers information suppliers need—only slightly above Chrysler.

• Efforts of Chrysler’s purchasing vice president to build more trusting relations are at their lowest level in two years and trending downward. Chrysler buyers are ranked the lowest of the Big Six in building trusting relations and in information transparency.

• Ford’s purchasing vice president is ranked last in building trusting relations but he is new to his position and hasn’t had time to fully establish himself. However, Ford buyers lead Chrysler and GM in their efforts to build trusting relations and in supplier information transparency.

“The best possible situation is an automaker with a strong executive purchasing leader who is consistent and fair in execution and who communicates well, and has buyers who follow this lead. That is what’s happening at the Japanese Big Three,” says Henke, “and it is an important contribution to their moving ahead of the Detroit Three again.”

Key findings

General Motors: For the first time in six years, GM’s ranking in supplier relations has dropped, putting it back into the Poor to Very Poor range. The primary reasons for the drop are a decrease in supplier trust, in supplier communication and the amount of help GM provides (or doesn’t provide) to suppliers to reduce cost and improve quality. GM is ranked lowest in protecting suppliers’ intellectual property and proprietary information. GM is also the least likely to allow recovery of material cost increases. As a result, GM is now the least preferred customer of suppliers, in spite of the efforts of the purchasing VP to improve, an example of good leadership, but poor execution by buyers who interface with suppliers on a daily basis.

Nissan: Nissan has improved across all areas of the WRI—the only OEM to do so. Significant improvement occurred due to suppliers being given greater flexibility in meeting piece price and tooling objectives, and in Nissan covering sunk costs when programs were delayed or cancelled. Nissan, however, is the least fair, along with Chrysler, in allocating chargebacks to suppliers, but its treatment of confidential proprietary information and intellectual property is significantly higher than Chrysler or GM.

Chrysler: For the first time in six years, Chrysler’s overall supplier relations ranking has decreased, albeit slightly, putting it back into the Poor to Very Poor range. Chrysler buyers are ranked lowest in building trust and in transparency when providing information. Chrysler significantly trails all OEMs in paying invoices on time and according to terms, and in resolving issues in a fair and equitable manner.

Ford: Ford’s overall supplier relations remained stagnant for the fifth year. It now trails Nissan because of a drop in supplier communication and in help it provides suppliers to reduce cost. Also, suppliers are significantly more likely to recover material cost increases from Ford than either Chrysler or GM, but significantly less so than from Honda and Toyota.

Honda: For the first time since 2007, Honda’s overall supplier relations have improved in the WRI ratings to being significantly higher than the Detroit Three, but trailing Toyota. Of the Big Six car companies, Honda is the most preferred customer, significantly more so than Nissan and the Detroit Three. Honda’s increase is due primarily to improvement in three key areas: supplier

relationship, supplier communication, and supplier profit opportunity. Honda is top-rated with Toyota in paying invoices on time and according to terms, as well as in resolving invoice payment issues. Honda is also tied with Toyota in allowing suppliers to recover material cost increases and in the confidential treatment of proprietary information and intellectual property.

Toyota: Toyota has finally rediscovered the “Toyota Way” and is showing its first improvement in the WRI ratings in seven years. Toyota improved in nearly all key areas including supplier trust, communication, help provided to suppliers to reduce cost and improve quality, supplier profit opportunity, and in involving suppliers throughout its product development process – which significantly increased. Toyota is ranked highest in paying invoices on time, resolving payment issues in a fair and timely manner, as well as in allocating chargeback to suppliers and allowing suppliers to recover materials cost increases.

Toyota is also the most highly rated in confidential treatment of supplier proprietary information and intellectual property, and in terms and conditions concerning proprietary information and intellectual property.

“Cleary Toyota and Honda are, once again, setting the standard for doing the right things right when it comes to supplier relations, and it will pay off competitively for them in the future if they keep it up. But they still have a ways to go,” said Henke.

“A few years ago, we documented the competitive advantages that accrue to an OEM from suppliers who prefer working with them, not the least of which is getting suppliers’ best technology, the best pricing, and the best service. Chrysler and GM need to get their buyers on-board and tie their compensation to improved supplier relations if they hope to be the beneficiaries of all that suppliers can provide them. Clearly, their buyers are the weakest link in their supplier relations.”

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. They also are more willing to support the automaker beyond contractual terms, communicate more openly and honestly with the OEM, and give greater price concessions to OEMs.

Inconsistent Performance across OEM Purchasing Area

Another factor that can impact the WRI ratings is performance consistency across an automaker’s six major purchasing areas and reducing the range between the top-ranked purchasing area and lowest ranked area. While Toyota is top-ranked overall, there is an 83-point range between its highest-ranked purchasing area, electrical & electronics, and its lowest-ranked purchasing area, interior. Conversely, while GM is last in the WRI rankings this year, it has only a 49-point spread between its highest ranked purchasing area and its lowest ranked area. Nissan, ranked third overall, is best in consistency across purchasing areas with only a 32-point spread.

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