MetalMiner: Collaboration may be overused in supplier relationship management circles. In other words, some people may consider this "fluff." Can you anecdotally talk about these benefits such as higher quality, lower prices and more technology sharing?
John Henke: Let me step back for a minute. The real issue in supply working relations and trust has nothing to do with whether you like the other person or not. The question becomes, do you know with certainty that the other party won't take advantage of you? It's about being able to work together...in a truly collaborative arrangement. Decisions get made on the basis of "I have more to lose than to gain," where you know the other party won't be opportunistic – that's what we are talking about in working relations and what our WRI (Working Relations Index) measures. Our index contains nothing about price reductions per se. Money remains independent of the relationship.
MM: What action steps do you see domestic OEMs needing to take in order to build trust, an area that they appear to still have some weakness?
JH: We see a couple of areas for improvement. First, the domestics still initiate excessive and later-stage engineering design changes more so than, say, the Japanese (though they all suffer from this). Engineering design changes cost both money and quality. The second area for improvement involves examining the OEM's contract terms and conditions as they relate to supplier intellectual property. In other words, are contracts fair to the suppliers? The perception (and possibly the reality) is that the domestics are "less equitable" with contract T's and C's than Honda and Toyota. Terms could be a barrier to innovation. Terms have to be more like Honda, Toyota and Nissan.
MM: Is it premature or can we definitely say that the "hammer-over-the-head" approach or heavy-handed supplier negotiation approach, say, of GM years ago is a loser? In other words, do we know quantitatively that this approach is a loser?
JH: We have done a lot of research in this area. We know that the better the relations, or the more trusting the relations, the greater the pricing concessions suppliers are willing to give. We know this conclusively in the North American auto industry. In addition, we also know that the better relations, the more likely that suppliers will bring innovation to their customers.
We have seen quality improve and a whole range of other things. One of the challenges facing this type of research involves the fact that approaches don't immediately go to the bottom line, but they have to be inferred. For example, what does it mean to be first in the market? Thomas Stallkamp [former president of Chrysler] who popularized the SCORE [Supplier Cost Reduction Effort] model emphasized win-win supplier-customer relations. He told existing suppliers it was their business to lose. And not surprisingly, the suppliers did more product development on their own dime and the benefits passed down to the OEM, which was often able to re-deploy resources to other products.
We've seen benefits on the assembly lines as well. Everybody appears to have adopted the collaborative approach because the heads of these organizations believe this is required and know it is the right way. Clearly Honda and Toyota know it.
However, we see two "buts" to the story. The first involves what happens when the industry starts minting money again. We have to be careful that we don't get sloppy. The second -- what happens when some of these people leave? We have seen time and time again that suppliers literally can identify when someone moves positions within purchasing and has different views. We can see the WRI fluctuate. We believe less of a concern exists at Honda and Toyota but it remains a challenge for the domestic producers.