How researcher quantifies the value of good supplier relations
TRAVERSE CITY, Mich. -- What is it worth for an automaker to have good relations with its suppliers?
For Honda and Toyota, quite a lot, according to a study published today by researcher John Henke.
Henke, who does an annual survey of supplier relations of major automakers in North America, even took a whack at quantifying the contribution suppliers made to automakers’ profits.
For Honda, a close working relationship with suppliers boosted its profits by $3,185 per vehicle sold from 2008 through 2013, according to the new study.
Suppliers boosted Toyota’s profits by $2,390 per vehicle and Nissan’s by $2,165. Ford gained $1,968 per vehicle, and General Motors got $1,675 per unit.
At the bottom of Henke’s list of six automakers studied was Chrysler Group, which generated supplier profits of $1,504 per vehicle.
While Honda and Toyota fared relatively well, Henke concluded that all six automakers could fatten their profits if they place a higher priority on good relations with their suppliers.
“All of the major automakers could be making hundreds of millions dollars more annually if they focused more on improving their supplier relations,” Henke said in his report.
The new survey is an outgrowth of Henke’s annual supplier relations survey, which his consulting firm, Planning Perspectives Inc. of suburban Detroit, published in May.
So how did Henke quantify suppliers’ contributions to automakers’ profits?
He started with each automaker’s gross profit per vehicle, as noted in their financial reports, then subtracted major costs such as manufacturing, parts, r&d and administrative expenses.
The remaining profit, he deduced, could be attributed to the contributions of a supplier. Then Henke took one additional step: He deducted the price cuts that suppliers granted to their customers.
After deducting those price cuts, Henke dubbed the remaining profit the automaker’s “non-price benefits” produced by suppliers.
Non-price benefits might include a supplier’s commitment to share its best technology, or a vendor’s quicker time to market with a new product, or a supplier’s decision to assign its best executives to a particular customer’s project.
One other nuance: Henke did not include results for GM and Chrysler in 2009, when both companies declared bankruptcy.
Henke’s key takeaway: The automaker’s financial gain that can be attributed to a supplier’s price cuts are dwarfed by the supplier’s non-price benefits.
For example, Henke estimates that Toyota gained $144 per vehicle from supplier price cuts, compared with $2,390 per vehicle from non-price benefits.
Henke concludes: “While adversarial tactics, such as beating up suppliers for lower prices, work in the short-term, they don’t offer nearly the benefit in the long-term that improving supplier relations does.”
Several automakers reacted cautiously to the report, neither endorsing nor disputing the results. One spokesperson called the survey “an interesting exercise.”
Said Chrysler purchasing chief Scott Kunselman: “We intend to stay focused on building strong, efficient and innovative partnerships with our suppliers.”
You can reach David Sedgwick at email@example.com.