OC Reilly Blog: Trust Equals Profitability in Supplier Relationships
By George Vunovic, Vice President of Technology Solutions, OC Reilly Inc.
Trust forms the foundation of all relationships, including those that develop within a business setting. No surprise there.
But a recent study conducted by a team of researchers, and outlined in an article appearing in the May/June 2014 issue of Supply Chain Management Review, takes that commonly held truism a step further. In the article, the researchers cite evidence that when businesses have high trust in their suppliers, higher profits also result.
Conversely, a lower level of trust in their suppliers means that businesses may be leaving attainable profits on the table. The researchers point to Chrysler as a case study, stating in the article that, “we calculate that poor – or low trust – supplier relations have cost Chrysler $688 of profit on every light vehicle they have manufactured and sold in the U.S. since 2001. This translates into $24 billion in lost operating profit (EBIT and extra-ordinary expenses) over the last 12 years.”
They say the automaker’s considerable volatility in supplier trust and profit per vehicle, as it went through a series of owners from 1992 to 2012, was unmatched by any other North American automobile OEM during that time. As suppliers came and went, it became difficult to establish relationships, much less trust. This period of volatility and instability cost Chrysler billions, the researchers concluded.
Chrysler was able to greatly improve its supplier trust quotient by actively and purposely increasing dialogue and transparency. All players in the vast Chrysler spectrum of suppliers knew what the others were doing, and as a result, Chrysler rose to the top of OEMs to whom suppliers would bring cost-saving ideas and new innovation for both products and processes, according to the article.
The key to establishing trust among suppliers – regardless of industry – remains starting the relationship on a platform of complete openness, a thorough understanding of the terms in play, and working with the assurance of good advice from experienced supply chain professionals.
Trust provides the platform for great relationships. It takes a concerted effort to achieve it and maintain it. But the results can be highly profitable.