Study: Better Supplier Relations = More Profits for Carmakers

America's six largest carmakers lost $1.4 billion in potential operating profit last year because of shortcomings in their relationships with top suppliers, says Planning Perspectives Inc. in Birmingham, Mich.

The estimate springs from a new analysis that calculates return on supplier relations. The projections are based on the firm's annual "working relations" index, in which suppliers rate carmakers in such areas as communication, trustworthiness and protection of proprietary information.

In its OEM Profitability and Supplier Relations report, Planning Perspectives uses the index to show a direct link between supplier relations and carmaker profits. The firm figures 51% of a carmaker's profit per vehicle is tied to its relations with vendors, which contribute more than two-thirds of a car's components and technologies.

The study contends that carmakers lose potential profit if they treat suppliers poorly, because it causes vendors to hold back ideas, divert their best engineering and design knowhow and pay less attention to refining design and production activities.

The report figures that, if carmakers improved their working relations index 10% last year, they would have netted $58-$152 in additional profit for each vehicle they made in North America. Planning Perspective says the difference works out to $400 million for General Motors, $327 million for Ford and $308 million for Chrysler.

The analysis also says the long-term economic value of a supplier's non-price benefits quality and willingness to share advanced technologies, for example is at least four times greater than the short-term gain to the carmaker of squeezing suppliers for price concessions.

The study opines that carmakers who want to improve profitability should focus on establishing "sustainable long-term positive relations" with key suppliers.