Toyota, which is developing a new fleet of electric vehicles, came top in the SRM ranking  © Toyota
Toyota, which is developing a new fleet of electric vehicles, came top in the SRM ranking © Toyota

Procurement must be made priority for automakers

Automakers with the best supplier relations will be ahead of the game in the transition to electrification, according to a study.

As demand for new technologies becomes a major challenge for vehicle producers, Toyota and Honda – who top the 2019 North American Automotive OEM - Supplier Working Relations Index (WRI) – show how effective communication with suppliers and assistance in cost reduction and technology investments keep profits up and mitigate production disruptions.

Purchasing needs to be made a strategic priority, according to the WRI, otherwise manufacturers are likely to struggle with the constant change in supply and production demand resulting from the “rapid transition” to electrification and automation, according to Dave Andrea, principal in strategy and automotive at consulting firm Plante Moran.

He said: “Purchasing has to be as much a strategic priority of OEMs as engineering is, in order to deliver the electrified, automated and the new mobility business models envisioned for the next generation of vehicles.

“We don't believe [OEMs] will keep up with the pace of change in the overall industry. From the standpoint that when you look at the suppliers [who] provide 60-70% of the value of the vehicle, all of those disruptions will be delivered through the supply base. Are the purchasing organisations positioned well enough to deliver that supply base in the future?”

The WRI study shows suppliers' judgement on the overall customer supplier relationship based on five components: trust, communication, assistance, measurement of hindrance on supply base, and opportunity for supplier profitability. Six automotive manufacturers were evaluated: Honda, Toyota, General Motors (GM), Ford, Nissan, and Fiat Chrysler Automobiles (FCA) US.

Toyota and Honda topped the WRI study in all areas, with Honda rated at 3.55 out of 4 and Toyota rated 3.52 out of 4 for communication. Andrea attributes their top positions to maintaining consistency of operations through effective communication, “timely resolution of issues”, and “stable production schedules”.

Toyota recently announced production shifts to meet market demands, including joint production with Mazda in Alabama, starting in 2021, and joint production with Lexus in Canada, starting in 2022. These have been handled effectively due to communication with their supply base, said Andrea.

Andrea emphasised the need for OEMs to hone their ability to work with suppliers to reduce costs, share risks and identify growth opportunities. 

“When we look at all of the variability and the volatility that's coming at the industry in the next five to ten years, and beyond, that element [supplier profit/growth opportunity] is a significant one for all OEMs and purchasing groups,” he said.

Along with demand for future technology comes shared risks between suppliers and OEMs, including production schedule disruption and loss of profit. The assistance and accessibility of communication given to suppliers during development of technology is a key factor in whether suppliers choose to work with certain automotive manufacturers, as this can reduce costs and improve efficiency. Buyers need to ensure “commercial issues are dealt with in an equitable manner” in order to show the customer can share investment risks, said Andrea.

GM has improved their supplier trust rating year-on-year due to how they handle changes to production schedules and “sunk costs in the supply base” resulting from investments in new technology programmes.

The WRI findings showed Toyota was the most preferred customer with 4.43 out of 5, with a slight improvement since 2018, followed by Honda (4.37), Ford (4.15), GM (4.08), FCA US (3.39), and Nissan (2.97).

A clear divergance in results has been occurring since 2014 between low performing companies such as FCA US and higher performing manufacturers such as Toyota due to the challenge of delivering the “capacity and capabilities” needed to enable the transformation in the industry, said Andrea.

Respondents in the WRI study are salespersons from first tier suppliers serving the top three US and top three Japanese automakers.

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