Mastering the fundamentals of procurement can bring big gains in operating profit. Conversely, weakness in the fundamentals can cause companies to miss out on those gains. Recently, we learned just how much money that could be, at least in the automotive industry.
Mastering the fundamentals of procurement can bring big gains in operating profit. Conversely, weakness in the fundamentals can cause companies to miss out on those gains. Recently, we learned just how much money that could be, at least in the automotive industry.
The latest North American Automotive Tier 1 Supplier Working Relations Index Study, just released by consultancy Planning Perspectives, Inc. (PPI), says that Toyota and Honda have the best relationships with suppliers and have benefitted economically from their SRM efforts. Among the benefits: early access to suppliers’ new technology, support from suppliers beyond that required by contract terms, and greater price concessions.
Ford, GM, Chrysler, and Nissan haven’t mastered the fundamentals, at least according to respondents to the study. If they had improved their working-relationships rankings from last year by 8.7%, as Toyota and Honda did, they would have collectively realized an estimated $2bn more in operating income, says John Henke, president of PPI. GM alone, he says, may have earned an additional $750m.
The PPI Working Relations Index Study, now in its 15th year, tracks suppliers’ perceptions of their relationships with automakers. Auto executives study the Index closely, as well they should because of its scope. Respondents to this latest study represent 44 of the top 50 North American suppliers, and 67 of the top 100 North American suppliers.
Henke says that among the relational activities that turn out to be important are fair and equitable financial practices, a history of honoring contracts, and protection suppliers’ intellectual property. The characteristics of buyers are important too, including whether they are knowledgeable, trustworthy, whether they work to resolve issues quickly, and whether they are open and honest in their communications. It comes down to commitment and whether companies take their supplier relationships seriously and work at them, says Henke.
CPOs already know all of that. And Henke gives credit to those who practice the fundamentals. Last year, he praised the efforts of two Toyota procurement executives, Simon Nagata, who is now executive vice president and chief administrative officer of Toyota North America, and Robert Young, vice president of purchasing for Toyota Motor Engineering and Manufacturing North America, for improving the automaker’s relationships with North American suppliers.
On the matter of price negotiations, GM seems to be on track for better relationships. The automaker has instituted a “one-cost model” that essentially eliminates the traditional bidding process for parts. GM analyzes a supplier’s factory and cost-data information, then agrees on a contract for the life cycle of a vehicle. The process can eliminate the need for annual price reductions.
Getting the procurement fundamentals right in any industry shouldn’t be hard. The trick is to get others in the organization to understand the importance of those fundamentals. Studies like this one could be a valuable tool for gaining that understanding.
This article is a piece of independent writing by a member of Procurement Leaders’ content team.
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The views expressed in this post and throughout the series are the autor's own and not intended to reflect the views the YQ Matrix platform, its users or any associated organisations.
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