The High Cost of Poor Supplier Relationships

We’ve seen several headlines over the past six months about how poorly suppliers are being treated these days. Here’s a sampling:

Extending payment terms to as much as 120 days is the most common tactic large companies are using to benefit at the expense of their suppliers. As noted in the New York Times article linked above:

Most [large companies extending payment terms] are trying to maximize use of their capital, bankers who work with supply chain finance say. By pushing out payments to suppliers to three and four months, companies have more cash for any number of projects. Mondelez, for one, is buying back stock. Kellogg is in the middle of a restructuring. Procter & Gamble’s move to extend its payment terms to 75 days in 2013 has probably added $1 billion so far to its cash flow, according to one estimate.

Whether it’s extending payment terms, or taking a strong “What’s In It for Me?” approach to negotiations, the end result is often the same for companies that bully their suppliers: short term gains that are ultimately negated by increased costs, quality problems, supplier bankruptcies, and other issues further down the road.

What is the cost of poor supplier relationships? A recent study conducted by Planning Perspectives Inc. (PPI), an independent auto maker-supplier consultancy, answers that question for the OEMs in the U.S. automotive industry: “Ford, General Motors, FCA US and Nissan collectively would have earned $2 billion more in operating profit last year had their supplier relations improved as much as Toyota’s and Honda’s did during the year.”

The study is based on a survey of 435 automotive suppliers, and the financial impact was derived using an economic model developed by John W. Henke, Jr., Ph.D., president and CEO of PPI, who is also a Professor of Marketing at Oakland University, Rochester, MI, and a Research Fellow at the Center for Supply Chain Management at Rutgers University.

The press release doesn’t provide details about the economic model, but this excerpt sheds some light on the factors contributing to the benefits enjoyed by the automakers with good supplier relationships:

The study shows that suppliers with good working relations with an OEM provide their customer considerable benefits. These suppliers:

  • Are more willing to invest in new technology to meet future OEM needs, and are more willing to share new technology with the OEM
  • Are more willing to support the automaker beyond contractual terms
  • Communicate more openly and honestly with the OEM
  • And importantly, give greater price concessions to the OEM

Whereas, automakers with poor relations:

  • Receive smaller price concessions and must work harder to get them
  • Get less experienced supplier personnel supporting them
  • And typically are not among the first to get the suppliers’ best ideas and new technology

I’ll just repeat what I’ve said in the past: Companies of Yesterday take a “What’s in it for Me?” approach to business relationships, where negotiations are viewed as a zero-sum game with a clear winner and loser (and the goal is to always be the winner), while Companies of Tomorrow will take a “What’s in it for We?” approach, which in Kate Vitasek’s words, “flips conventional negotiation on its head and shifts the perspective to where it belongs: viewing the relationship as the substance of the deal, not merely a ‘once and done’ transaction.”

How would you characterize the relationship you have with your suppliers? Would your suppliers say the same thing about you? Do you treat your suppliers better, worse, or the same as your competitors? How much money are you leaving on the table by not improving your supplier relationships?

Important questions to ask and answer, sooner rather than later.

(For related commentary, see Nothing Easy About Supplier Relationship Management)