Supplier relationships and profitability – Prof. John Henke proves the link

It is rare to read something and realise that it will be referred to in procurement and indeed wider business circles for many, many years to come. But that is exactly how it felt reading a new report recently. The lead author is Prof. John Henke, of consulting firm Planning Perspectives and Oakland University (Rochester, MI). Henke is also a keynote speaker at the ProcureCon Europe conference in Berlin, November 3rd to 5th.

He and his firm are well known for their survey work of supplier buyer relationships (the “Working Relations Index®) in numerous industries, particularly in the North American automotive industry. As the new report says:

“For the past 14 years, he has published an annual ranking of the six major North American automakers called the Working Relations Index® that ranks the relations the Detroit 3 and Japanese 3 automakers each have with their suppliers. The German automakers were added to the Annual Study in 2012”.

The survey collects data from suppliers about how they perceive their relations with the automakers. The survey also collects supplier price concession data and the level of benefits suppliers provide those manufacturers. What Henke has done, working with his collaborators, is to analyse the data to look for significant causal correlations and conclusions that can be drawn -- and this is when it gets really interesting.

For the first time he has proved that better supplier relationships lead to better company business performance and profitability. There is clear causal correlation between supplier relations health and the bottom-line performance of the auto manufacturers (OEMs as they tend to be known in the industry). Previously most of us would have assumed that effective supplier relationship management drives bottom-line performance, but the evidence for this has been anecdotal. This academic-standard analysis turns anecdote into hard conclusions.

That would be interesting enough in itself, but there are two further powerful conclusions that have been drawn from the work. The first assesses how much of the OEM's profitability comes from supplier contribution, as opposed to managerial competence (the other 'catch-all' causal factor impacting company profit defined by Henke). Again, the data has provided the answer to this. It shows that on average around 60% of profitability can be ascribed to suppliers, which as we've already seen depends on the strength of the relationship. 40% then is allocated to “managerial contribution”.

The second conclusion is associated with the supplier contribution and works out how much of it is from supplier price concessions, and how much is from supplier non-price benefit contributions, such as supplier innovation sharing more efficient joint working together, or similar actions.

The analysis further suggests that the non-price benefits contribute around 10 times as much as price concessions. So now we can see the power of the overall argument. Suppliers’ contribution explains over 50% of overall profitability for these manufacturers. Within that, less than 10% is down to price concession contributions from suppliers. The vast majority is from other forms of supplier provided benefits and value. And finally, the study clearly substantiates that achieving this is directly linked to the strength of the buyer-supplier relationship.

Let that sink in for a moment and consider the power of that argument and how good it is to have some hard evidence to support what many in our world have been saying for years. In part two we will feature some points from our conversation with Prof. Henke –remember he is a keynote speaker at ProcureCon in Berlin on November 3rd to 5th.

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