News Column

Carmakers Could Boost Profits With Better Supplier Relations

August 4, 2014

Brent Snavely, Detroit Free Press

Aug. 04--Chrysler could have made $24 billion more over the past 12 years if it had simply managed its relationships with suppliers better, according to a new study by Planning Perspectives.

John Henke, CEO of Planning Perspectives, conducts an annual study that ranks automaker's relationships with suppliers. Now he has put together a new study that measures the costs related to poor supplier relationships.

Henke's research also shows that each of the six largest automakers in the U.S. could have gained an additional $58 to $152 in profit per vehicle, or $98 million to $400 million, if they had improved their supplier relations by 10%.

Henke and many supplier executives have argued that suppliers sell their best technology and highest quality components to the customers who treat them best, which, in turn, leads to better cars, higher quality and better sales.

But putting a price tag on those supplier improvements has been impossible to measure -- at least until now.

Henke says he has used his historical data, combined with a complex statistical formula, to calculate benefits and drawbacks of good and bad supplier relationships.

"For years I have been trying to look at this relationship between supplier relationships and profitability," Henke said.

When suppliers have bad relationships with any automaker and are forced to cut their costs too far, they tend to give their newest and best technology to other automakers. Eventually, the automakers with better technology and higher quality parts earn higher profits, Henke said.

In fact, according to Henke's calculations, as much as 50% of an automaker's profits can be traced back to suppliers.

The potential savings is most evident with Chrysler. The Auburn Hills automaker's relationships with suppliers declined from 1998 to 2001 and fell even farther between 2005 to 2008.

Henke estimates that Chrysler, which was acquired by Daimler AG in 1998 and Cerberus Capital Management in 2007, could have booked an average of $2 billion more in annual operating profit if it had maintained the same level of supplier relationships that it had in 2005.

General Motors, Henke estimates, could have earned $400 million more, or $152 per vehicle, in 2013 if its supplier relationships were better.

He said Chrysler's relationships with suppliers has improved since Fiat became its controlling shareholder in 2009.

"Chrysler continues to find tremendous value in the relationships we have cultivated with our suppliers," Scott Kunselman, Chrysler's senior vice president of purchasing said in a statement. "We intend to stay focused on building strong, efficient and innovative partnerships with our suppliers."

The potential for bigger profits is lowest for Honda and Toyota, which have traditionally had better relationships with suppliers.

Henke estimates that Honda could have improved its profits by $150 million in 2013, or $94 per vehicle, with a 10% improvement in supplier relationships while Toyota could have improved its profits by $99 million or $58 per vehicle.

"Our study shows that if the (manufacturers) focused their energy on improving their working relations with their suppliers -- working with them as trusted partners -- the (manufacturers) would realize much greater profit than any adversarial efforts may generate," Henke said. "Toyota and Honda are proof of this."

Contact Brent Snavely: 313-222-6512 or Follow him on Twitter @BrentSnavely.


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Original headline: Study finds automakers could boost annual profits with better supplier relationships

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Source: (c)2014 the Detroit Free Press

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