A new study released on August 4, 2014 by Planning Perspectives, Inc. revealed that major automakers could significantly improve their profits simply by improving their supplier relationships.
The results of the study showed a direct cause-effect relationship between the automotive manufacturer’s supplier relations and profitability.
For example, from 2007-2008, Chrysler had the worst supplier relations ranking in their history. The study showed if they had built more trusting relations and provided information transparency, they would have booked roughly $2 billion more in annual operating profit and $1052 more in profit per vehicle. Supplier relations are quantified by a Working Relations Index from results of a survey to suppliers measuring the trust, communication, help, and profit opportunity.
“For years, academics and management consultants have suggested companies focused on developing positive relations with their suppliers and other major stakeholders will perform better financially. Many CEOs and purchasing executives intuitively agree with them,” said Henke, CEO of PPI and author of the study.
The study reveals three critically important characteristics of supplier relations:
A causal relationship between supplier relations and OEM profit. The stronger the relationships with suppliers, the greater the supplier contribution to the manufacturer’s profit, and vice versa.
The economic value of supplier relationships and its value (non-price benefits) to the manufacturer is quantified.
It establishes the fact that the economic value of the suppliers’ non-price benefits can greatly exceed the economic benefit realized by suppliers’ pricing.
And while this study focuses mainly on the auto industry, the results certainly apply to companies in every manufacturing industry.
How can you improve supplier relations?
We’ve talked about the financial benefits of dynamic discounting, but your suppliers will also benefit greatly from faster, more affordable access to cash in order to operate and expand their business.
Also, a supplier portal strengthens your supplier relationships because it empowers them to be self-sufficient and provides full visibility into your payables process. Instead of your suppliers having to spend time calling you about the status of their invoice or payment, they can view that information in less than a minute online--any time of the day. Also, if they have a question about a PO, they can communicate and send messages right in the portal.