Tier 1 Suppliers Continue To Prefer Japanese Over U.S. Automakers

INDUSTRY NEWS Tier 1 Suppliers Continue To Prefer Japanese Over U.S. Automakers BIRMINGHAM, MI (June 12, 2006) - A comprehensive, annual study of OEM-Tier 1 supplier working relations just released by Planning Perspectives Inc. (PPI) suggests that if the domestic automakers don't change their ways with respect to relationships with Tier 1 suppliers, more trouble is on the horizon. Of particular note is the continuing shift in loyalties and resources - capital and R&D expenditures, service and support - of Tier 1 suppliers to Japanese automakers. PPI notes that the shift is driven largely by how suppliers feel they are treated overall by the automakers. The continuing trend of U.S. automakers and their primary focus on cost reduction is a factor, but suppliers feel these demands are made with little regard to their businesses. According to the study, which compares OEMs' emphasis on cost vs. quality, suppliers said that the domestic automakers are far more focused on cost reduction than product quality. The study did note that in 2006, the Big Three did show some improvements on this issue, with Chrysler making the most strides. Among other conclusions highlighted in the study, Japanese automakers continue to build working relationships with suppliers at a rate exceeding their U.S. counterparts. In addition, Tier 1 suppliers see value in improving quality for Japanese OEMs, while they simply maintain quality for domestic automakers. Trust, communication levels and profitability continue to remain higher with foreign automakers. "In all the other industries we've studied such 
as aerospace, electronics, 
and computers, 
no one treats 
their suppliers as 
poorly as the US automakers do." 
- John Henke, PPI CEO

PPI's CEO John Henke noted, "In all the other industries we've studied such as aerospace, electronics, and computers, no one treats their suppliers as poorly as the U.S. automakers do."

Nuts and bolts The annual study rates six automakers - GM, Ford, DaimlerChrysler, Toyota, Honda and Nissan - on their working relations with their suppliers. The results are calculated using PPI's Working Relationship Index (WRI).  The WRI is based on suppliers' ratings of the U.S. automakers across 17 business practices and across five broad areas: Relationship, OEM Communication, OEM Help, OEM Hindrance, and Supplier Profit Opportunity. WRI scores can range from zero to 500, with 500 being the best. A ranking of zero to 249 is considered poor; 250 to 349 is adequate; and 350 to 500 is considered good to very good. Criteria used in formulating WRI scores include: * Supplier trust of the automaker. * OEM's open and honest communication with suppliers. * The OEM providing timely information to suppliers. * Degree of help the OEM provides the supplier to reduce cost and improve quality. * Level of excessive and late engineering changes by OEMs. * How early suppliers are involved in the automakers' product development process. * Whether an automaker gives the supplier some means to recover costs on cancelled or delayed programs. * Suppliers' perceived ability to make an acceptable return over the long term on the OEM's business.Overall OEM-Tier 1 Supplier 
Working Relations Index 
2002 - 2006OEM20022006% ChangeToyota31440729.6Honda29236826.0Nissan22530033.3Average22326619.3Chrysler17621823.8Ford1661744.8GM164131-20.1(Table source: PPI Inc.)

Of the six automakers, PPI says the U.S.-based OEMs have been on the bottom half of the scale and the Japanese automakers on the top half since the WRI's inception in 2002. In 2006, GM ranked 131, a 17-point gain over last year; Ford's ranking of 174 followed GM, also a 17-point gain. Chrysler, with a ranking of 218 - a 22-point gain over 2005 - continues its five-year trend of small, but steady annual improvements and leads the U.S. automakers, says PPI. 

The Japanese, however, remain well ahead and have by far the best working relations with their suppliers. Toyota ranked 407, Honda 368 and Nissan 300. All three are at virtually the same ranking they were last year.

Build on strengths, minimize weaknesses Also noteworthy is the spread of WRI scores for different purchasing areas within each automaker. While the average score provides a comparative indicator for OEM-Tier 1 supplier relationships, specific scores for each of the 17 criteria show areas where each automaker is relatively stronger or weaker. Among the six automakers, Toyota's electrical and electronics group has the best working relations in the industry of any OEM buying group. PPI's CEO John Henke said, "Supplier working relations within each OEM vary among the various purchasing areas, indicating that it is the OEM personnel who have the day-to-day responsibility of working with suppliers that are the primary determinants of the overall supplier relations. This indicates the importance of having performance metrics in place to drive the desired behavior of these key individuals." According to the study, 72 percent of Toyota's suppliers and 55 percent of Honda's rate those OEMs as "very preferred" or "most preferred" to do business with, compared to only 5 percent of GM's and 10 percent of Ford's suppliers rating them as preferred. Henke commented, "While Ford and GM have shown some small gains overall, they have a long way to go to reach the level of Honda and Toyota, and it's going to take a real corporate commitment on the part of each companies' management team to keep things going in the right direction and continue improving. Part of this commitment must include having the performance metrics in place that will continue to drive the behavior that brought about the change suppliers experienced during the past year."For those interested, copies of the overall study, as well as more specific in-depth reports on each OEM and purchasing group, are available from PPI Inc.(Source: Planning Perspectives Inc.)