Welcome!

News Feed Item

New Study by Planning Perspectives, Inc. Shows Automakers Could Increase Profits by Millions by Improving their Supplier Relations

DETROIT, Aug. 4, 2014 /PRNewswire/ -- Results of a new study released today show that the major automakers – in fact, most manufacturing companies – could significantly improve their profits simply by improving their supplier relations.

The results are determined by the development of a unique economic model that proves and predicts a direct cause-effect relationship between an automotive OEM's supplier relations and the OEM's profitability, or in other words, an automaker's return on supplier relations.

According to the study, Chrysler, for instance, which went through a decade of turbulent ownership changes from 2000-2012 that included the worst supplier relations ever in 2007-2008, would have booked on average $2 billion more in annual operating profit and $1052 more in profit per vehicle if, during those years, it had maintained the higher level of supplier relations it achieved in 2011-2012.  This equates to a total of $24 billion in unrealized income over the period.

Similarly, annual profit gains could also be realized by all the automakers by improving supplier relations.  For instance, if each of the six automakers had scored only 10 percent higher on the 2014 Working Relations Index®, each would have gained an additional $58 to $152 in profit per vehicle, or $98 million to $400 million in operating profit, which can be attributed to the increase in better relations (see table below, columns 1 and 3), according to the study.


2014 WRI®1
 (Actual)

10% Higher WRI 

Est. Operating Income Increase per Vehicle

2013 N.A. Manufactured and Wholesaled Vehicles2

Total Increase in Operating Income
(1) * (2)

Est. Operating Income Percentage Increase3




(1)

(2)

(3)


GM

244

268

$152

2,638,000

$400,112,000

5.4%

Chrysler

245

270

$151

2,040,000

$307,720,000

10.6%

Ford

267

294

$130

2,526,000

$327,354,000

3.7%

Nissan

273

300

$123

792,000

$  97,260,000

6.1%

Honda

295

325

$ 94

1,591,000

$149,963,000

7.6%

Toyota

318

350

$ 58

1,697,000

$  98,904,000

4.2%


1 WRI® from Planning Perspectives' Annual N.A. Automotive OEM-Tier 1 Supplier Working Relations Index® Study reflects relations in the previous year; 2 Ward's Automotive Group, Southfield, MI; 3 Estimated percent increase based on operating income data obtained from 2013 OEM 10-K filings for Chrysler, Ford, and General Motors; and 2012 filings for Honda, Nissan and Toyota as fiscal 2013 data was not available when calculated.

The study's author is John W. Henke, Jr., Ph.D., president and CEO of Planning Perspectives, Inc., Birmingham, MI, (www.ppi1.com), and Professor of Marketing at Oakland University, Rochester, MI.  For the past 25 years, Henke has specialized in studying and reporting on OEM buyer and supplier relations in the automotive and 17 other industries. 

For the past 14 years, he has published an annual ranking of the six major North American automakers called the Working Relations Index® that ranks the relations the Detroit 3 and Japanese 3 automakers each have with their suppliers.  The German automakers were recently added.   

The new study titled OEM Profitability and Supplier Relations by Henke and his co-researcher, Professor Sengun Yeniyurt at Rutgers University Business School, New Brunswick, NJ, is based in part on data gathered over the past 13 years from Henke's annual Working Relations Index® Study, and breaks new ground in supplier relations and business performance analysis. 

"While Chrysler is a dramatic example because of its history of extreme volatility in supplier relations under various owners during the past 20 years, all of the major automakers could be making hundreds of millions dollars more annually if they focused more on improving their supplier relations," said Henke.

The horizontal broken line from 2000-2011 indicates the period that cost Chrysler $2 billion annually in operating profit or $1052 profit per vehicle. Over the 12 years, this “loss” totals $24 billion, graphically illustrating the impact of poor supplier relations on OEM profits. Note how Supplier Trust (red line) tracks Operating Income.

Photo - http://photos.prnewswire.com/prnh/20140804/132984

"For years, academics and management consultants have suggested companies focused on developing positive relations with their suppliers and other major stakeholders will perform better financially.  Many CEOs and purchasing executives intuitively agree with them," said Henke. 

"Consultants have tended to support their conclusions with anecdotal information, while academics have used rigorous statistical methods to support the many benefits they have identified that result from good supplier relations.  However, no one has been able to show, let alone prove, a cause-effect relationship between supplier relations and customer profits.  We have now done it."

The study is important because, for the first time, it reveals three critically important characteristics of supplier relations, said Henke:

  1. It proves a causal relationship between supplier relations and OEM profit.  The better the relations with suppliers, the greater the supplier contribution to the OEM's profit; the more adversarial the relations, the less the contribution to OEM profit.
  2. It quantifies the economic value of suppliers' non-price benefits to the OEM for such things as supplier sharing new technology, providing "A team" support to the OEM, providing support that goes beyond the supplier's contractual obligation, and other "soft" benefits.
  3. It establishes the fact that the economic value of the suppliers' non-price benefits can greatly exceed the economic benefit realized from suppliers' price concessions.  On average, this can be up to 4-5 times greater, and often much more (see bar charts below).

 

Historically, the domestic automakers - Ford, GM, and Chrysler - have received much less in non-price benefits from their suppliers than have the Japanese automakers as indicated by the size of the blue vertical bars.  While there has been some improvement in recent years, the domestics' Working Relations Index line (red) is again trending downward, while the Japanese WRI line is trending upward.  Note how much shorter the blue bars are for the Detroit Three compared to the Japanese Three.

Photo - http://photos.prnewswire.com/prnh/20140804/132990

 

 

Toyota, Honda and to a lesser degree, Nissan - have received much more in non-price benefits from their suppliers than have the domestic automakers as indicated by the height of the blue vertical bars.  While the Japanese Three lost some ground in supplier relations from 2008-2011, all indications are they have regained their footing and their average Working Relations Index line (red) is again trending upward, while the Detroit Three WRI line is trending downward.

Photo - http://photos.prnewswire.com/prnh/20140804/132998

 

"If the automakers – especially the US automakers – really want to improve their profitability over the long term, they need to re-prioritize their efforts," said Henke.  "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.     

"Our study shows that if the OEMs focused their energy on improving their working relations with their suppliers – working with them as trusted partners for the long haul – the OEMs would realize much greater profit improvement than any adversarial efforts may generate.  Toyota and Honda are proof of this."  

Henke's annual Working Relations Index® Study has shown conclusively that automakers which rank highest on the Working Relations Index® not only get greater direct economic benefit from their suppliers in the form of greater price concessions but they also realize greater non-price benefits. 

Supplier non-price benefits include such things as advanced technology, more supplier resources committed to their businesses, and higher quality parts and components. These can make a significant contribution to reducing OEM operating costs -- including lower warranty and recall costs – and increased profit per vehicle.  However, until now, the economic contribution of these "soft" non-price benefits was unknown.

Typical Supplier Non-Price Benefits Contributed to OEM Customers

  • Quicker time to market
  • Greater supplier investment in OEM business
  • Better two-way communication to head-off problems earlier
  • More technology sharing, earlier
  • Improved quality
  • Improved delivery performance

Unique study

The OEM Profitability and Supplier Relations study is unique.  Academia, consultants and OEM managers have long been able to quantify the impact on profits of such things labor costs and supplier price concessions.  But no one has even been able to quantify the suppliers' non-price contribution. The new study shows that OEM profitability results from three sources:

  • The OEM's internal managerial capabilities, which includes such things as skills, productivity, sales incentives, manufacturing efficiency, etc.
  • Suppliers' pricing and price concessions.
  • Suppliers' non-price benefits such as new technology, customer support and other "soft" benefits. These non-price benefits contribute to the OEM customer's efficiency and effectiveness, and thereby help reduce the OEM's costs of operation.

The Challenge: Calculating the Value of Non-Price Benefits

Determining the economic value of suppliers' profit contribution to an automaker was a challenge. While each automaker's annual financial and production data are publicly available in several forms (annual reports, 10-K filings, media reports and others), the study required all the OEMs' financial measures to be standardized for domestically manufactured and sold light-duty vehicles for each of the six major automakers across each of the 14 years of the study, which ranged from 2001-2013.

Next, a model was created relating the OEM supplier relations to the OEMs' gross profits per vehicle, and another to the OEM's operating profits (EBIT) per vehicle.  Then the economic value of price concessions suppliers provide the OEM had to be determined for each OEM.  This was relatively easy because price concession data is among the proprietary information PPI has gathered from suppliers since 2001 in its annual Working Relations Index® Study.  

Finally, the most elusive value – the supplier non-price benefits contribution to OEM profitability – had to be determined. This was the most difficult problem to solve because there is no way to directly measure the economic contribution of each of the various non-price benefits.

Supplier price concession contribution (shortest bar) is only a fraction of the total supplier contribution to OEM profits.  When added to the supplier non-price contribution (third bar from left) the total exceeds the OEM’s managerial contribution (fourth bar) to OEM profits.

Photo - http://photos.prnewswire.com/prnh/20140804/132999

However, because both the supplier price concession and the total supplier contribution can be calculated, it essentially becomes an algebraic equation that solves for "X" – the supplier non-price benefit contribution.  With this value, all three annual supplier contribution figures can be determined for each OEM.

Conclusion 

"Our study proves that the most significant economic impact a supplier has on its OEM customers' profits comes from the non-price related benefits it brings to the automaker," said Henke. 

"In fact, our calculations show that across the six major automakers, on average, 51 percent of the automakers' profit per vehicle can be accounted for by the relations the OEM has with its suppliers. That contribution is comprised of supplier price concessions which are as little as 5 percent of the total supplier profit contribution when relations are particularly good (see graph above, Supplier and Managerial Contribution to OEM Profitability). 

"The results clearly show that the OEM interested in improving its profitability should definitely look to its suppliers, not to squeeze them for lower prices, but to work toward achieving better relations with them, and by working to develop and then maintain sustainable long-term positive relations with them."

It is important to realize, said Henke, that while the OEM Profitability and Supplier Relations Study focused on the auto industry, the results clearly apply to companies in every manufacturing industry.

 

SOURCE Planning Perspectives, Inc.

More Stories By PR Newswire

Copyright © 2007 PR Newswire. All rights reserved. Republication or redistribution of PRNewswire content is expressly prohibited without the prior written consent of PRNewswire. PRNewswire shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

Latest Stories
Cloud Expo, Inc. has announced today that Andi Mann and Aruna Ravichandran have been named Co-Chairs of @DevOpsSummit at Cloud Expo Silicon Valley which will take place Oct. 31-Nov. 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. "DevOps is at the intersection of technology and business-optimizing tools, organizations and processes to bring measurable improvements in productivity and profitability," said Aruna Ravichandran, vice president, DevOps product and solutions marketing...
SYS-CON Events announced today that TMC has been named “Media Sponsor” of SYS-CON's 21st International Cloud Expo and Big Data at Cloud Expo, which will take place on Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. Global buyers rely on TMC’s content-driven marketplaces to make purchase decisions and navigate markets. Learn how we can help you reach your marketing goals.
Amazon started as an online bookseller 20 years ago. Since then, it has evolved into a technology juggernaut that has disrupted multiple markets and industries and touches many aspects of our lives. It is a relentless technology and business model innovator driving disruption throughout numerous ecosystems. Amazon’s AWS revenues alone are approaching $16B a year making it one of the largest IT companies in the world. With dominant offerings in Cloud, IoT, eCommerce, Big Data, AI, Digital Assista...
SYS-CON Events announced today that TechTarget has been named “Media Sponsor” of SYS-CON's 21st International Cloud Expo, which will take place on Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. TechTarget storage websites are the best online information resource for news, tips and expert advice for the storage, backup and disaster recovery markets.
SYS-CON Events announced today that IBM has been named “Diamond Sponsor” of SYS-CON's 21st Cloud Expo, which will take place on October 31 through November 2nd 2017 at the Santa Clara Convention Center in Santa Clara, California.
We build IoT infrastructure products - when you have to integrate different devices, different systems and cloud you have to build an application to do that but we eliminate the need to build an application. Our products can integrate any device, any system, any cloud regardless of protocol," explained Peter Jung, Chief Product Officer at Pulzze Systems, in this SYS-CON.tv interview at @ThingsExpo, held November 1-3, 2016, at the Santa Clara Convention Center in Santa Clara, CA
SYS-CON Events announced today that Conference Guru has been named “Media Sponsor” of SYS-CON's 21st International Cloud Expo, which will take place on Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. A valuable conference experience generates new contacts, sales leads, potential strategic partners and potential investors; helps gather competitive intelligence and even provides inspiration for new products and services. Conference Guru works with conference organi...
Managing mission-critical SAP systems and landscapes has never been easy. Add public cloud with its myriad of powerful cloud native services and this may not change any time soon. Public cloud offers exciting new possibilities for enterprise workloads. But to make use of these possibilities and capabilities, IT teams need to re-think everything they have done before. Otherwise, they will just end up using public cloud as a hosting platform for their workloads, aka known as “lift and shift.”
Multiple data types are pouring into IoT deployments. Data is coming in small packages as well as enormous files and data streams of many sizes. Widespread use of mobile devices adds to the total. In this power panel at @ThingsExpo, moderated by Conference Chair Roger Strukhoff, panelists looked at the tools and environments that are being put to use in IoT deployments, as well as the team skills a modern enterprise IT shop needs to keep things running, get a handle on all this data, and deliver...
SYS-CON Events announced today that Enzu will exhibit at SYS-CON's 21st Int\ernational Cloud Expo®, which will take place October 31-November 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. Enzu’s mission is to be the leading provider of enterprise cloud solutions worldwide. Enzu enables online businesses to use its IT infrastructure to their competitive advantage. By offering a suite of proven hosting and management services, Enzu wants companies to focus on the core of their ...
You know you need the cloud, but you’re hesitant to simply dump everything at Amazon since you know that not all workloads are suitable for cloud. You know that you want the kind of ease of use and scalability that you get with public cloud, but your applications are architected in a way that makes the public cloud a non-starter. You’re looking at private cloud solutions based on hyperconverged infrastructure, but you’re concerned with the limits inherent in those technologies.
"Tintri focuses on the Ops side of the DevOps, which basically is pushing more and more of the accessibility of the infrastructure to the developers and trying to get behind the scenes," explained Dhiraj Sehgal of Tintri in this SYS-CON.tv interview at 20th Cloud Expo, held June 6-8, 2017, at the Javits Center in New York City, NY.
Both SaaS vendors and SaaS buyers are going “all-in” to hyperscale IaaS platforms such as AWS, which is disrupting the SaaS value proposition. Why should the enterprise SaaS consumer pay for the SaaS service if their data is resident in adjacent AWS S3 buckets? If both SaaS sellers and buyers are using the same cloud tools, automation and pay-per-transaction model offered by IaaS platforms, then why not host the “shrink-wrapped” software in the customers’ cloud? Further, serverless computing, cl...
You know you need the cloud, but you’re hesitant to simply dump everything at Amazon since you know that not all workloads are suitable for cloud. You know that you want the kind of ease of use and scalability that you get with public cloud, but your applications are architected in a way that makes the public cloud a non-starter. You’re looking at private cloud solutions based on hyperconverged infrastructure, but you’re concerned with the limits inherent in those technologies.
Automation is enabling enterprises to design, deploy, and manage more complex, hybrid cloud environments. Yet the people who manage these environments must be trained in and understanding these environments better than ever before. A new era of analytics and cognitive computing is adding intelligence, but also more complexity, to these cloud environments. How smart is your cloud? How smart should it be? In this power panel at 20th Cloud Expo, moderated by Conference Chair Roger Strukhoff, paneli...