Japan's Big Three automakers take a fundamentally different approach to working with their suppliers

It's no secret that vehicles made by the Japanese Big Three automakers have ranked highest in quality and customer satisfaction for more than a decade, and that the Japanese manufacturers continue gaining market share while the domestic Big Three's share slips.

But what hasn't been obvious until now is the role that an automaker's relationship with its suppliers plays in this trend.

Results from the 2003 North American Automotive Tier 1 Supplier Study show that the domestic Big Three and Japanese Big Three have fundamentally different approaches to working with their suppliers and suggests that this difference could be a major factor in the consistently high quality and competitive gains by the Japanese.

These results have now been ranked on a new industry index called the "OEM-Supplier Working Relations Index (WRI)" that shows the Japanese automakers consistently moving up the scale toward better relations and the U.S. automakers remaining at the bottom of the scale.

The 2003 Index again shows Toyota and Honda at the top with a ranking of 334 and 316 respectively, with GM at the bottom with a ranking of 156 and Ford slightly better at 161 (see Table 1). The 2003 WRI shows that each of the Japanese Big Three improved and are well above the industry mean, while Ford and GM are below the industry mean and lost ground. Chrysler was also below the industry mean but improved slightly this past year.

"It's important to note as well that the industry average rose 7.4 percent over the two-year period driven by gains made by the Japanese Big Three," said John W. Henke Jr., whose firm, Planning Perspectives Inc., conducts the annual study on which the WRI is based.

"This indicates that the Japanese OEMs keep raising the bar in the area of supplier working relations and are increasing the gap between themselves and the domestic Big Three."

According to the study, the domestic Big Three consistently do three things that tend to degrade their relationships with suppliers and cause them to have a lower WRI rating: they alienate suppliers, they don't involve suppliers in their business and they don't look to suppliers for support and help. The Japanese Big Three do just the opposite.

"What is apparent is that the Japanese OEMs are applying continuous improvement practices to their supplier working relations just as they have done to their manufacturing processes, and as a result they continue to win the cost-quality-technology race," said Henke.

The 2003 study involved analyzing OEM-supplier relations across 1,262 business situations and ranked the OEMs in five areas that comprise 17 variables. Based on this analysis, the WRI for 2003 did not change for the domestic OEMs, but improved for each of the Japanese Big Three.

Notably, the price reduction demands an OEM makes on suppliers has minimal impact on the WRI. Rather, it is the total working environment of the OEM that impacts the WRI.

"It's clear from comparing our 2002 and 2003 studies that the domestic OEMs have done virtually nothing to change their working relations with suppliers over the past two years, while the Japanese Big Three continue to improve. Both groups are reaping what they sow," said Henke.

"The domestic OEMs have assumed that getting price reductions from their suppliers and having good supplier working relations are mutually exclusive. Nothing could be further from the truth. Honda and Toyota, and to some extent Nissan, recognize that they can pressure their suppliers for considerable price reductions and quality improvements and still have good supplier working relations. It all comes down to how you work with people that determines whether or not you get the best performance from them."

The affect of the different approaches of how the domestic Big Three and the Japanese Big Three work with their suppliers is more dramatic when individual product areas are considered. For example, in the electrical area Toyota is ranked highest with a WRI of 416, followed by Honda (317), Chrysler (250), Nissan (240), GM (181) and Ford (110).

"These disparities are also found across product areas within each OEM indicating different approaches are being followed within the OEM in working with suppliers. By comparing WRIs across product areas, OEM management will be able to determine if the results are consistent with their expectations of behavior within their firm," said Henke, who also serves on the faculty of the School of Business Administration at Oakland University.

The results of the survey also indicate why OEMs with good supplier working relations gain a competitive advantage.

"Over the years, we have seen a consistent pattern that shows OEM behavior directly affects supplier behavior. Our studies show that the further up the index an OEM moves, the more suppliers are willing to help the OEM. Suppliers will share more technology with the OEM, are more willing to invest in new technology in anticipation of business, and they will provide higher quality goods and high levels of service to the OEM. The Japanese OEMs clearly understand this and it's helping them gain competitive advantage and market share," he said.

The survey found that Toyota and Honda continue to set the standard for OEM-supplier working relationships, as they have for the past three years. 

Other important findings show the following.

• Suppliers continue to rank Toyota, Honda and Nissan as the most trustworthy and they have continued to improve their ranking each of the last past three years. Ford, GM and DaimlerChrysler are ranked as the least trustworthy and have gotten less trustworthy since 2001.

• Suppliers are most willing to share technology with Honda, Nissan and Toyota who continue to improve their position. Ford, DaimlerChrysler and GM all rank lowest, with Ford and DaimlerChrysler losing ground.

• While all six OEMs are making strong demands for price reductions, suppliers indicate they'll reduce services to the domestic OEMs to compensate for the price concessions they gave to them, while their service levels to the foreign domestics will increase.

• Suppliers say Toyota continues to have the fewest late engineering changes, followed closely by Nissan and Honda. Ford had the most late changes, closely followed by GM and DaimlerChrysler.

• In terms of which OEM provides them the best opportunity to make an acceptable profit margin on their business, suppliers rate Toyota and Honda highest, followed by Nissan, DaimlerChrysler, Ford and GM.

• Finally, Toyota and Honda tend to balance cost vs. quality when selecting suppliers and provide the greatest amount of help to suppliers to achieve improved quality levels. Ford, GM and DaimlerChrysler emphasize cost over quality by more than four times, while providing suppliers the least help to reduce costs and improve quality.

"Given the domestic automakers' public comments about how much they value their suppliers and how much they want to work together as partners, it's clear that the domestic OEMs put cost at the top of the list, well ahead of trustworthiness, partnership, technology sharing, open and honest communication, and other factors that go toward building long-term relationships. As we have seen, these factors directly impact their competitiveness, sales and the bottom line," said Henke.

The supplier survey is conducted annually in February and March. This year, it involved responses from 261 Tier 1 suppliers including 63 of the Top 100 and was based on 1,262 buying situations. The participating suppliers' combined sales represent 51 percent of the OEM's annual purchase of components.

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