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Toyota, Trust & Fairness

February 3, 2010

The warning signs have been there for a couple of years, according to industry expert John Henke. “Toyota relations (with suppliers) have dropped precipitously during the past two years. New  people hired in North America in the last three years or so have not learned ‘the Toyota way’. As a result, supplier relations are not as close today as they were for years.”

John Henke was commenting on the recent recall crisis that has dented the Toyota image. He was talking to me on an IACCM ‘Ask The Expert’ interview, where we discussed supplier relationship management (recording of the full interview available at John knows what he is talking about. As a Professor of Marketing and President of Planning Perspectives Inc., he has undertaken studies of manufacturer – supplier interfaces in the automotive industry for almost 20 years. Throughout the last decade, he consistently warned the big US OEMs that their market behavior was destroying supplier trust and loyalty … but of course, they chose not to listen.

In the interview , John outlined the ‘Working Relation Index’, a method he has developed to test the health of supplier relationships. “Toyota still has relatively good supplier relations,” he observes. “But in recent times, there has been more evidence of an iron fist. There is still a sense that if you meet requirements, you can be a supplier for life. There is still a sense of the kindness that if you fail once, you will get help to restore and maintain performance.” But that kindness seems to be eroding, with the culture moving towards cost-cutting and some of the more aggressive practices that are typical in the United States.

Market conditions demanded rapid actions on cost reduction and this led to ‘heavy-handed’ actions which have been noticed by suppliers. “The issue is ‘adversarialism'”, says John. “A study in 2008 showed that price reduction pressure in itself has no impact (on relationships), it is the manner in which it is done that matters.”

The way that the relationship is structured and negotiated is key to setting expectations – and therefore contracting and terms and conditions really matter. Good performance depends on a sense of fairness, on good communications, on mutual opportunities to make money. John listed examples such as shared benefit from supplier-created savings, visible rewards for doing a good job (for example, more business), a sense of partnership in raising quality or efficiency. Without these characteristics, there comes a time when the supplier asks “Is it worthwhile doing business with this customer?”

John observed that within most companies, there are dramatic differences in supplier satisfaction, varying between geographies or business divisions. Yet few companies are good at analyzing or sharing this information, in order to understand and adopt improved practices enterprise-wide. The growth of interest in Supplier Relationship Management as a discipline is in part a response to this inconsistency and also to the need to better manage risk. However, there is no agreement on the form that SRM should take. For example, is it a special program restricted to a select few suppliers? Is it an extension of Procurement or a separate businesss discipline?  

I will write more on John Henke’s opinions and research on those topics shortly.

  1. People who say “don’t play with success”, are tagged as old thinkers, whole departments were swept away and new dynamic procurement teams brought in to squeeze discounts and savings, everyone has to understand that if you make suppliers bleed doing business then there are high stakes in it, with soaring metal and energy costs its impossible to maintain the consistency in quality. It doesn’t matter how good you negotiate or bind contracts, QC front line and at the line level is the key, this responsibility cannot be outsourced as there is huge consequential effects as seen in case.

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  1. Toyota Incidents Raise Questions About The Future Of Procuement « Commitment Matters
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