Four Steps to Improve Profitability and Innovation through Supplier Relations
Most CEOs and C-suite leaders invest time to build trusting relationships with customers, employees, stockholders and influencers. But suppliers? Not so much. That relationship is generally relegated to the Chief Procurement Officer (CPO) and the Purchasing team.
And that’s a problem. Why?
Decades of research proves that positive, productive partnerships with suppliers result in improved profits and other benefits – including supplier willingness to share new technology, assign their best personnel and provide support beyond contractual obligations. That’s a great opportunity. But building and sustaining relations is a team sport, requiring collaboration across the C-suite.
Let’s dig deeper.
Manufacturers typically spend half their revenue on purchased goods and services. For non-manufacturing companies, it’s about a third. Firms with poor supplier relationships pay an average of 3-8 percent piece price premium, based on the suppliers’ forecast of how they expect to be treated over the life of their contract.
How do we know this?
Planning Perspectives, Inc. (PPI), a Michigan-based firm, is a leading authority on company-supplier relations. Led by President John Henke, Ph.D., PPI has conducted surveys to determine suppliers’ perceptions of working relations with client companies since 1990. Their research shows stronger relationships between customers and suppliers results in greater price and non-price benefits for the customer, as well as greater supplier contribution to the customer’s profit.
For 16 years, PPI has conducted the North American Automotive OEM-Supplier Working Relations Index (WRI) study which evaluates and ranks the supplier relations of Ford, General Motors, Fiat Chrysler Automobiles (FCA), Nissan, Toyota and Honda. Two examples show the impact of supplier relations on the bottom line.
In 2015, FCA’s Working Relations Index declined slightly from 2014 with a score of 222 vs. 224. PPI’s data indicates that FCA lost $244/vehicle in supplier contributions to their profit per vehicle. With N.A. production and sales of about 2.292M light vehicles, this translates to a total loss of $559M in supplier contributions to 2015 N.A. profits. If FCA had not loss this supplier contribution, the company’s operating income (EBIT) would have been 16.9 percent greater for vehicles produced and sold in North America that year.
GM’s Working Relations Index increased to 250 in 2015, up from 224 the previous year. PPI data indicates GM’s improved relationships resulted in a supplier profit contribution increase of $800/vehicle in 2015. With N.A. production and sales of 2.720M light vehicles that year, this translates to a total supplier profit contribution to GM’s operating income (EBIT) for light vehicles produced and sold in North America of $2.176B or 19.74 percent of their reported N.A. operating income.
“There’s real money to be made from good relations with suppliers,” Henke says. “While OEM leaders often believe that simply pressuring suppliers to reduce price is the path to improve profit, our research shows collaboration and building trust are far more effective in realizing sustained profit contributions from suppliers.”
Alignment is key to improvement.
While the Chief Procurement Officer leads the development of trust with suppliers, Henke says the CEO and top leaders in Finance, Engineering, Manufacturing and program teams – and every level of the Purchasing organization – play key roles in shaping and maintaining a collaborative strategy.
In many organizations, there are competing or even conflicting demands across functions when working with suppliers. Engineering wants high-tech designs. Manufacturing wants low inventories and “no questions asked” return practices. Finance wants the lowest possible piece price. And everyone wants top quality, just-in-time delivery and optimal capital utilization.
Purchasing’s role is to reconcile and prioritize these objectives and represent a balanced voice of their company to suppliers and of the suppliers to their firm.
Alignment is key not only in OEMs, but with suppliers, too. Leaders in every function must have a shared commitment to deliver what’s best for the business – not only their parts or components business, but for their customers’ business, too. When there is a shared commitment to optimize value across the total enterprise, everyone wins.
Give me an example.
“ABC” supplier provides numerous components to one of the world’s largest automakers, including fascias. In recent years they had a relatively robust relationship, but ABC’s paint process was lacking. The OEM’s program team including Purchasing, Engineering and Manufacturing met with ABC to explain the need to move to waterborne paint.
As a team, they explored the capital utilization requirements and enterprise cost, making both visible to leaders at the automaker and ABC. Based on customer and business requirements and open communication, the OEM committed to provide ABC two vehicle life cycles of business for multiple plants. ABC invested in the new paint system, satisfying the needs of the automaker and its customers. In this real-life example, everyone won.
What’s the upshot?
Beyond sharing a collaborative philosophy across the C-suite and at every level of Purchasing, there are four ways companies can build trust, strengthen supplier relations and generate higher value for customers and stockholders:
- Develop Enterprise Metrics – Behavior follows what’s measured. Work across your organization to define quality, cost, capital utilization and other key metrics that drive enterprise value. Understand the role each function and your suppliers play to achieve the metrics and create shared accountability to deliver them.
- Communicate Openly and Often – Share metrics, requirements and specifications with suppliers early and communicate changes and feedback in a timely manner. Ensure information is complete and clear. Encourage questions and listen to suppliers’ suggestions. Share best practices or lessons learned from other suppliers or areas of your business. Leverage supplier advisory boards to raise issues, prioritize concerns and address them.
- Create Shared Solutions – Encourage your company’s engineers, program teams, Manufacturing, Purchasing and Finance employees to visit suppliers and understand their business. Involve suppliers in developing vs. dictating solutions. Ensure your program and Engineering teams invest resources to work on current and past model components that still require refinement.
- Provide Enterprise Rewards – Every link in the customer value chain needs to make money – including suppliers, so they can invest in capital, R&D and product development. Ensure you meet commitments in terms of volume, payment terms and resources. And when metrics are achieved, ensure suppliers reap the rewards along with your own team. Reward top suppliers with more and better business and make those decisions visible so others are motivated to earn more too.
“If companies consistently invest in these steps over time, they will earn their suppliers’ trust,” Henke says. “That trust translates into multiple benefits that improve an OEM’s competitiveness and greater supplier contributions to the OEM’s profits.”