10 November 2008 | Geraint John
Groundbreaking research has shown that the degree of trust in buyer-supplier relations has a direct and quantifiable impact on a company's financial performance.
Analysis of a decade's worth of data from the US automotive industry found that, on average, 14 per cent of revenue, 33 per cent of profit and 56 per cent of profit per vehicle could be attributed to trusting supplier relations rather than a company's own people, skills and other internal capabilities.
Speaking at the ProcureCon 2008 event in Geneva last week, John Henke, president of US consultancy Planning Perspectives (PPI) said his research proved for the first time that the economic value of trust was both real and significant.
"What we are saying is that there is a real monetary value associated with what you do with your suppliers," he told the audience of about 200 procurement professionals. "There is no question about that."
Henke's team took financial results for 1997-2006 among the six big American carmakers - General Motors, Ford, Chrysler, Toyota, Honda and Nissan - and overlaid PPI's own data on the quality of buyer-supplier working relations for the same period.
While this analysis couldn't pinpoint exact figures for each manufacturer with sufficient certainty, he explained, the industry averages could be applied to a company's financial results to give a rough indication of the value of trust.
In the case of Toyota - the company with the best supplier relations - it meant that in 2006 more than $21 billion of revenue and $1.1 billion of profit was directly attributable to trust rather than other factors.
In general terms, the figures suggested that, at a level of 14 per cent, for every $1 billion in revenue, $140 million was accounted for by trusting relations. Even if the figure dropped to 5 per cent, that was still $50 million, Henke noted.
"This suggests to me that it might be worthwhile spending a couple of million dollars to improve your supplier relations," he said, adding that significant results could be achieved in as little as two years.
Henke argued that procurement was "unquestionably the primary driver of supplier relations in the organisation" and hence had to champion such initiatives.
"Strong supplier relations has got to be a core competency of procurement," he said. "I would go so far as to say that if procurement does not make this a top objective, and top management doesn't fund it… they are fiscally irresponsible."