Archive: August, 2015

The price of supplier relations

Much has been written about supplier relationship management (SRM) but the claimed benefits are rarely expressed in financial terms or supported by robust evidence. I was therefore interested to read the 2015 Annual Automotive Industry Study by Planning Perspectives, Inc.. Now in its 15th year, it tracks suppliers’ perceptions of their working relationships with their automotive customers. This type of research always produces headline grabbing numbers and this study is no exception: Ford, General Motors, FCA US and Nissan collectively would have earned $2 billion more in operating profit last year had their supplier relations improved as much as Toyota’s and Honda’s during the same period.

Putting the narrow focus of the study and headlines to one side for a moment, I like the report because it quantifies and, for the first time, puts a price on the value of supplier relations. The approach is based on game theory and so can be applied to most supplier relations situations whether buying services in Sweden or commodities in China.

The study incorporates an economic model developed by John Henke, president and CEO of Planning Perspectives, called the Working Relations Index (WRI). It has 5 components each with a number of different variables (see below):

  • Supplier/company relationship – measures trust and the effectiveness of the working relationship
  • Company communication – measure the degree to which communication is honest, timely and sufficiently detailed
  • Company help – measures the help provided by the customer to reduce the supplier’s costs and improve quality
  • Company hindrance – negative measures including the degree to which objectives conflict, specifications are unclear, the customer is inflexible and supplier has a say in product development
  • Supplier profit opportunity – the supplier’s perception that rewards/costs are shared and the customer understands the profit impact on the supplier from changes in their behaviour

Although I think the WRI can be applied widely, it is interesting to read Henke’s comments on this year’s study (particularly if you are a petrol head).

“Toyota and Honda had the highest ranking because supplier relations were a priority throughout their organisations and particularly within their purchasing organisations. This included the vice president of purchasing down to the buyers who work with the suppliers on a daily basis. They executed the basics better, that is, they had good business practices (eg does the customer have fair and equitable financial practices, are contracts honoured, is the head of purchasing working to improve relations etc) and the buyers were sufficiently skilled to carry out the work (eg do they have the required knowledge for their job, do they work to resolve issues quickly and effectively, are they open and honest when communicating with suppliers etc).”

“Once the basics were in place then working on activities such as the nature of the relationship helped improve the WRI score. The nature of the relationship changed depending on the degree of open and honest OEM communication, the help the OEM provided the supplier to reduce cost and improve quality, the level to which the OEM hindered the supplier in doing its best job, and finally, the long-term profit opportunities the supplier perceived were available.”

Henke thinks that GM, Ford, FCA and Nissan did poorly because “their supplier relations programs were not sufficiently focused, the buyers and engineers responsible for implementing the improvements were not capable of doing so, or more likely, were not sufficiently motivated do so and when internal mandates came down to reduce cost, buyers reverting back to their old adversarial ways of getting the reductions, because for them building collaborative supplier relations was of little importance.”

The study offers a fascinating insight into the supplier relations in a specific industry over a long time period. By comparing the dollar value of each component across the different customers it provides a clear illustration of the opportunity cost of supplier relations. I suspect that Henke’s comments are not surprising to those actively involved SRM, however, I hope the research helps them articulate the importance of engaging across their organisation and building the business case to secure investment in the appropriate resources.