Strong supplier relationships leads to higher profitability

Gurjit Degun
4 August 2014

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4 August 2014 | Gurjit Degun

Better supplier relationship management could significantly improve company profits, with "soft" benefits offered by suppliers worth more than the value achieved from price concessions.

OEM Profitability and Supplier Relations - which is based in part on data gathered over the past 13 years from the annual Working Relations Index Study published by consultancy Planning Perspectives - ​found the better the relationship an automotive manufacturer has with its suppliers, the greater its profits are.

It explained the relationship “quantifies the economic value of suppliers’ non-price benefits to the OEM”. This includes a supplier sharing new technology, providing the best team to support to the manufacturer, and providing support that goes beyond the supplier's contractual obligation.

The report added the research “establishes the fact that the economic value of the suppliers’ non-price benefits can greatly exceed the economic benefit realised from suppliers’ price concessions”. On average, this can be up to four to five times greater, according to the research.

It pointed to Chrysler which went through a “decade of turbulent ownership changes from 2000 to 2012 that included the worst supplier relations ever in 2007 to 2008”. It would have taken an average $2 billion more in annual operating profit if, during those years, it had maintained the higher level of supplier relations it achieved in 2011-2012. This equates to a total of $24 billion in unrealised income over the period, the survey results said.

The report’s author John Henke, president and chief executive officer at Planning Perspectives, told SM this is the first time research has been able to prove the correlation between strong supplier relationships and greater profit. He explained increases in profit would also be seen across other sectors, although to a smaller degree because they spend less on procurement.

“One of the unique things about the auto industry is that a very high percentage of their revenue is spent on their suppliers,” he said. “In this case, we are looking at 80 per cent to 85 per cent. So that’s one of the reasons you see in our research that there’s really a profound impact on small changes in the supplier relations. Just a 10 per cent increase can result in a huge amount of money.

“The idea is the same [across the manufacturing and service sectors] but the total impact relative to revenue is going to be smaller. It doesn’t matter what business you’re in, if you want to maximise the opportunity to make a profit it is absolutely important that you develop the best possible relationships you can with your suppliers because they do unquestionably impact your firm’s profitability.”

Henke said buyers need to be aware the actions they take are “necessary” to build good supplier relations. “In doing so they have to be aware which of these actions directly impact how suppliers perceive working with them and what actions they take that are necessary to build good relations,” he said.

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