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Letter to the Editor

New 2002 OEM Benchmark Study From Planning Perspectives, Inc., Suggests Better Supplier Relationships Help Japanese Automakers Outpace Detroit's Big Three

With the foreign domestic manufacturers continuing to eat away at the market share of Detroit's Big Three, the question inevitably arises, "How do they do it?"

Quality is a major factor, but how do they consistently achieve the highest quality levels in their vehicles?

The annual J. D. Power study on initial quality shows consumers perceive Japanese vehicles to be superior in quality, fit and finish which suggests better product engineering. The Harbour Report, another well-known industry benchmark, shows that the Japanese assembly plants turn out higher-quality cars and trucks than most plants operated by the Big Three, suggesting better manufacturing practices.

Now comes Planning Perspectives' 2002 OEM Benchmark Survey that shows the Japanese also have better working relationships with their suppliers than Detroit's Big Three and this has been true for more than a decade. Are all three of these factors contributing to the overall success of the Japanese?

"Everyone is always looking for the silver bullet but there really isn't one," said Dr. John Henke, marketing professor at Oakland University in Rochester, Mich., and president of Birmingham, Mich.-based Planning Perspectives, Inc., which specializes in studying buyer-supplier relationships at major U.S. corporations.

"We've seen that in every industry and company we have studied good overall performance results from better management of key processes across a company. It really gets down to a question of culture. Which company's management can rally the troops to accept nothing less than continuous improvement in everything they do, from providing their customers high quality goods, to being efficient internally in all operations, and to having good working relationships with their suppliers?

"Like the proverbial three-legged stool, if top company performance is the goal, all three areas -- product quality, internal efficiency, and good supplier working relationships -- are essential. If one area is missing, less than optimal results will be achieved."

Planning Perspectives' recently concluded 2002 OEM Benchmark Survey found that Toyota and Honda continue to set the standard for supplier-OEM working relationships. Other important findings included:

• Suppliers rank Honda and Toyota as the best OEMs with whom to conduct business
• Honda and Toyota balance quality with price when working with their suppliers while the domestic OEMs stress price significantly more than quality
• Detroit's Big Three have practices that hinder the suppliers from doing their best job in meeting the OEMs' price reduction and quality improvement expectations
• Domestic OEMs go about demanding price concessions from their suppliers in a manner that shows little concern for the suppliers' economic viability or supplier working relationships, while Honda and Toyota price reduction demands are conducted in a manner that demonstrates concern for both.

A major outcome of the study is the supplier ranking of the OEMs as a place to conduct business. Of the dozens of issues the survey explored, 18 criteria were organized into five basic areas to create the ranking:

1. Supplier-OEM working relationship, based on trust and other factors;
2. OEM communication with its suppliers;
3. OEM help given to suppliers;
4. OEM actions that hinder the suppliers' ability to do their best job; and
5. supplier profitability opportunity.

The overall ranking of the OEMs shows that suppliers clearly consider Toyota and Honda as the best OEMs with whom to conduct business by a wide margin over the three domestic OEMs. General Motors, Ford, and Chrysler had scores of 460, 464, and 477 respectively, while Toyota and Honda scored 30 percent higher at 610 and 604. Nissan was in the middle with a ranking of 532, well below Toyota and Honda, but over ten percent better than the domestic OEM rankings.

A key component in the working relationship ranking was the trust suppliers have of the OEMs. Suppliers reported that they have little trust of General Motors, Ford, and Chrysler which scored 2.12, 2.21, and 2.26, respectively, while supplier trust of Toyota and Honda was 50 percent above that of the domestic OEMs at 3.40 and 3.32, respectively.

In addition, suppliers reported they felt Toyota and Honda communicate with them much more openly and honestly, on a more timely basis, and with more information than do the domestic OEMs. In addition, suppliers reported that they receive more help from Toyota and Honda to reduce their costs and improve their quality than they receive from any of the domestic OEMs.

According to the survey, Detroit's Big Three hinder suppliers from doing their best job more than do Toyota or Honda. For instance, all OEMs have late engineering changes. However, excessive and late engineering changes that hurt suppliers' ability to develop the product on time and meet quality goals occur significantly more at the domestic OEMs than at either Toyota or Honda.

In addition, suppliers experience significantly more conflicting objectives across functional areas at the three domestic OEMs than they do at the three Japanese auto makers. The result is that it is much more difficult for suppliers to the domestic OEMs to achieve the OEMs' sourcing objectives than it is at the three Japanese companies.

Finally, Toyota and Honda also provide greater opportunities for their suppliers to make a profit than do the domestic OEMs. Suppliers report that both Toyota and Honda are significantly more willing to cover their sunk costs when programs are delayed or cancelled than are the domestic OEMs. Also, suppliers said that the domestic OEMs show virtually no concern that they are able to maintain their profit margins when giving the OEMs price reductions. This is not the case with Toyota and Honda, both of whom are significantly more concerned about their suppliers' profit margins, according to the study.

"We believe that by virtue of the manner in which they interact with suppliers, each OEM impacts the quality of the goods they purchase and subsequently the quality of their end products," said Henke.

Suppliers reported that Toyota and Honda tend to balance quality and cost when working with their supply base, but this is not the case with the domestic OEMs, who place considerably more emphasis on cost.

For example, while all six OEMs are concerned about price when selecting suppliers, Chrysler, Ford, and General Motors emphasize price three times as much as quality, than does Toyota and Honda.

And while all OEMs pressure their suppliers for improved quality, Toyota and Honda place more pressure on their suppliers than do the domestic OEMs. When it comes to helping their suppliers improve quality, Toyota and Honda also provide significantly more help to suppliers in achieving this goal than do the domestics OEMs.

In addition, the study revealed that suppliers believe that Toyota and Honda are doing a significantly better job internally in continuous quality improvement than are the domestic OEMs. This is also the case when it comes to internal continuous cost reduction efforts.

All OEMs are placing considerable pressure on their supply base for price reductions and it is widely recognized that price concessions given to the OEMs impact the long-term financial viability of OEMs' suppliers. However, suppliers report that the price concessions they gave Honda, Nissan, and Toyota resulted from a balance of productivity improvements and givebacks (i.e., a simple cost-down that decreased their profit margin).

However, price concessions at the domestic OEMs were comprised of approximately one-third (36 percent) productivity improvements and two-thirds (64 percent) givebacks.

The survey also revealed a basic difference is why suppliers gave price concessions to the OEMs. At the Big Three domestic OEMs, the two primary reasons why suppliers said they gave price concessions were "aggressive price reduction pressure" and "threats to reduce their current business." While both of these factors also were experienced somewhat by suppliers at Toyota and Honda, it was to a much lesser extent.

On the other hand, three times as many suppliers reported the price reduction concession they gave to Toyota and Honda was the result of "loyalty" to a long-time customer.

These price giveback experiences help to explain why suppliers consider that Toyota and Honda provide more profitability opportunities than do the domestic OEMs.

The suppliers' experiences in working with the six major North American OEMs indicate that Toyota's and Honda's approach to working with their supply base has clearly paid off for them. The 2002 OEM Benchmark Survey identifies three important corporate cultural reasons for this:

1. Toyota and Honda are concerned with the long-term viability and economic success of their supply base. Both OEMs take a more moderate approach to price reductions with their suppliers and are able to do so because their internal efforts to reduce costs are far more effective than are similar efforts by the domestic OEMs.
2. When Toyota and Honda establish policies and procedures for dealing with suppliers, they implement them with more consistency over a longer period of time. This pattern of consistency is best exemplified by the level of trust suppliers have had for both OEMs over the past 12 years.
3. Toyota and Honda understand the dynamics of effective supplier-OEM working relationships, and these dynamics are clearly understood throughout their companies and are experienced by their suppliers.

For the past 12 years Planning Perspectives has been conducting in-depth surveys of suppliers for automotive OEM and Tier 1 clients. In 2001 the Annual North American Automotive OEM Benchmark Survey, which is sponsored solely by PPI, was initiated.

The 2002 OEM Benchmark Survey is based on the responses of 279 Tier 1 suppliers, 56 of whom are among the Top 100 North American suppliers. It was conducted in May-June of this year. The annual sales of the suppliers who participated in the Study represent approximately 47 percent of the annual buy of the six major North American OEMs (Chrysler, Ford, General Motors, Honda, Nissan, and Toyota) who were benchmarked in the study. The suppliers shared their experiences of providing goods to specific purchasing sections at each OEM, to whom they were currently supplying goods. As a result, a total of 1218 buying situations were reported by the suppliers. The findings of the study are based on the suppliers' experiences associated with these buying situations.

Planning Perspectives, Inc., a 27 year old firm, provides customized research and consulting directed toward helping their clients understand how they can best leverage their resources to build successful business-to-business marketing relations and purchasing - supplier interfaces.

©2002 Collision Repair Industry INSIGHT
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