Top Automakers Ranked on Supplier Relations

Aug. 14, 2008
Annual study evaluates supplier working conditions at six major OEMs.

Manufacturers are always evaluating supplier performance. But those relationships are a two-way street, and it's important that both sides are doing their part. In a recent study conducted by research firm Planning Perspectives Inc., companies supplying the automotive industry were given a chance to rank the six major North American automakers to evaluate the quality of the other side of the supplier relationship.

Now in its eighth year, the firm's annual Working Relations Study determines supplier working conditions in numerous areas at the North American domestic OEMs (GM, Ford and DaimlerChrysler) and the foreign domestic OEMs (Toyota, Honda and Nissan). This year, 284 Tier 1 suppliers representing 54% of the OEMs' annual buy responded to the survey. Demographically, the supplier respondents represent 23 of the top-50 North American suppliers, 46 of the top-100, and 71 of the top-150.

In the 2008 results, Toyota and Nissan dropped significantly from last year, while Honda virtually tied Toyota for the best working relations among the automakers. Chrysler, according to the study, is in freefall, continuing its decline from 2006 and is now in last place, slightly below General Motors. Ford however, has improved dramatically and jumped two ranks to fourth place.

Overall, supplier relations at Chrysler, Nissan and Toyota have dropped to their lowest levels in five years, with Chrysler dropping 26% in just the last two years. Honda could have easily surpassed Toyota this year had it not been for a very low ranking of its chassis and electrical-related parts groups. Ford improved 18% this year by making steady gains in several important areas including supplier trust, which is at a five-year high for the automaker.

According to the study, Ford has become the most preferred domestic automaker to do business and GM the least preferred. In spite of Ford's gains, however, the company is still far behind Toyota and Honda, both of whom are ranked equally as the most preferred North American automaker.

"In the years we've been conducting this study, we've never seen such dramatic year-over-year shifts in the rankings of the six domestic and foreign domestic automakers," says John W. Henke, Jr., Ph.D., president and CEO of Planning Perspectives and professor of marketing at Oakland University in Rochester, Mich.

"This could signal a new chapter in OEM supplier relations going forward. Chrysler's showing is especially unfortunate. Fifteen years ago, Chrysler was clearly ranked No. 1 by suppliers, but today has fallen rather dramatically to last place since being taken over by Cerberus," Henke said.

In spite of Toyota having the most dramatic overall decrease in the study's eight year history -- 48 points -- the two top-ranked Japanese automakers still have a commanding lead in good working relations with their suppliers and are by far the automakers suppliers prefer to do business with.

According to the study, this comes as no surprise. In four critical areas that directly impact suppliers' financial viability -- OEM concern for supplier profit margins, suppliers' perceived ability to make a fair profit, OEM fairness in allocating charge-backs, and supplier ability to recover material costs -- Toyota and Honda are ranked far higher than GM, Ford and Chrysler.

Henke says the WRI rankings mean much more to the OEMs than winning or losing a popularity contest. Poor supplier relations can have serious long-term consequences at a time when the U.S. automakers can least afford any more bad news.

"Last year GM's largest suppliers indicated that they were sharing new technology without the assurance of a purchase order and investing in new technology in anticipation of future business to the greatest extent in many years because of improved relations with GM, he explains. This year Chrysler's suppliers tell us that they have significantly pulled back in both of these areas because of worsening relations with Chrysler."

"Now is not the time to take an adversarial approach to working with suppliers. Every automaker should be striving to work in a more trusting way with its suppliers so that it can take full advantage of the benefits they offer and strengthen its marketplace advantage. Suppliers simply respond in kind, and Chrysler is paying the price," Henke adds.

Since 2002 when Planning Perspectives started tracking supplier investments, the study shows suppliers have continually decreased investment in the domestic OEMs in terms of R&D expenditures, as well as in service and support. The poorer working relations at Nissan have also resulted in suppliers cutting back in both of these areas for the automaker. Suppliers to Honda and Toyota continue to invest more this year than last year, although at a somewhat lower level.

The WRI rates these six major North American OEMs in 17 key areas that impact their supplier working relations. These include such things as degree of trust, open and honest communication, amount of help given to suppliers to reduce costs and the supplier's profit opportunity at the OEM. WRI scores can range from zero to 500, with 500 indicating the best supplier relations. A WRI ranking of zero to 249 indicates very poor to poor supplier working relations; 250-349 indicates adequate relations; and 350-500 indicates good to very good supplier working relations.

Of the six automakers, the domestic OEMs have been on the bottom half of the scale and the foreign domestic automakers have continually been on the top half with Toyota and Honda continually having the highest ratings.

This year Chrysler ranks at the bottom of the six North American OEMs with a ranking of 161, a 38 point drop from last year (Table 3). After a 43-point gain last year that moved GM out of last place, the company has slipped from a ranking of 174 to 163 this year, principally because of a dramatic 43-point drop in the working relations ratings of its powertrain suppliers. Ford climbed out of last place to fourth place, moving from 162 last year up to 191 this year.

Nissan remains in third place, while continuing its two-year drop from 300 to 253. Honda and Toyota both fell. Toyota dropped from an all-time high of 415 to 367 (the largest drop by an automaker in the history of the study). Honda dropped from 380 to 359, caused largely by a very poor rating by suppliers of electric and electronics and chassis-related parts. Had it not been for these declines, Honda could easily have taken the top spot this year.

In addition to ranking supplier working relations on an overall basis, the study measures how suppliers rank working relations for six major purchasing areas within each OEM. What is significant is that the WRI for each purchasing area varies considerably within and across each OEM.

At GM, for instance, which has an overall WRI ranking of 163, working relations in the powertrain area -- its best group last year at 193 -- fell to its worst this year at 150, while the body-in-white area ranked at a low 131 last year climbed to the top group at GM this year at 187. All other GM purchasing groups fall in between.

All purchasing groups at Toyota, which had an overall WRI of 367, fell dramatically in their rankings in 2008. Toyota's best group last year -- electrical and electronics at 523 -- fell 100 points to 423 this year but still ranks as the area with the best supplier working relations in Toyota. However, its interior group fell from second place last year at 427 to last place in Toyota this year with a ranking of only 329.

According to Henke, supplier working relations within each OEM varied among the various purchasing areas, indicating that it is the OEM personnel who have the day-to-day responsibility of working with suppliers who are the primary determinants of the company's supplier relations.

This indicates the importance of having performance metrics in place to drive the desired behavior of these individuals," said Henke. "The challenges of rampant increases in material costs, poor economic conditions, and increasingly intensive competition require that each OEM works more closely than ever with its suppliers to maximize its chances for success.

The turmoil in supplier relations among all of the OEM implies that purchasing VPs may have forgotten this fundamental premise of supplier relations, Henke explains. As a result, he says OEMs needs to go back to the basics of human behavior to ensure that they develop the kind of supplier relations they need to survive.

"By putting in place performance metrics that drive the behaviors of the personnel who interface with suppliers, the needed supplier relations will occur, Henke adds. With the right performance metrics every OEM can improve its supplier relations to the benefit of both itself and its suppliers."

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