Improving your bottom line by improving supplier relations

Improve-supply-chain

Good supplier relationships are vital to profits, yet many corporates struggle to establish and maintain healthy supplier partnerships. Procurement executives and professionals have always been well aware of the importance of a strong supply chain, but Treasury is now beginning to take an interest in how supplier relationships, supply chain health and payment terms affect profitability.

No sector is immune to the fallout from poor supplier relations, but it is a notable risk within the automotive industry. According to a recent Wall Street Journal article, “Top U.S. and Japanese automakers are losing out on hundreds of millions of dollars in potential cost savings because of lackluster relationships with their parts suppliers.”  This information comes from the Annual North American Automotive OEM–Tier 1 Supplier Working Relations Index® Study from Planning Perspectives Inc., which has been tracking automotive industry supplier relations trends for the past 17 years.

Many of the automakers quoted in the article cited internal process improvements as a solution to the problem. However, a Detroit Free Press article about the same report emphasized the importance of automakers “establish[ing] trust and communication with auto suppliers so they can all work toward a better product” and “treat[ing] a supplier as a partner rather than as an adversary.”

In a press release about the 2015 report, study author John W. Henke, Jr., Ph.D., said that his firm’s research includes “an economic model that proves a direct cause-effect relationship between an automotive OEM’s supplier relations and the OEM’s operating profit.”

This cause and effect situation is the result of the increased collaboration required given the inherent multi-tiered supply chain network. Many Tier 1 suppliers are directed to buy specific Tier 2 components by the OEM, which restricts suppliers’ ability to control their own costs, supply chains and ultimately their pricing flexibility.

Additionally, automotive contracts are usually awarded to suppliers for the life of the platform, typically five years, but have required annual price reductions. These price adjustments are not necessarily associated with the desired accompanying cost reduction roadmap to support consistent profitability for the supplier. Suppliers then need cooperation from the OEM throughout the life of the contract to approve design and process changes to enable the lower costs. Obviously, strained relationships can hinder this productivity.

The C2FO working capital market is a solution that many Global 2000 companies – including ten of today’s Fortune 60 – use to strengthen their supply chain and their bottom line simultaneously. It enables buyers and suppliers to collaborate on early cash flow at a rate that’s acceptable for both and directly provides an additional source of liquidity to suppliers across the supply chain.  It is a win-win scenario.

A buyer company like an automotive OEM which makes C2FO available to its suppliers can:

  • Improve the health of their supply chain by providing much-needed cash flow to their suppliers.
  • Help suppliers fund M&D, workforce compensation, R&D, and other vital functions that ensure an uninterrupted flow of quality goods.
  • Reduce risk by extending working capital down multiple tiers of the supply chain.

C2FO data analysis has consistently shown a high correlation between participation in the C2FO market and longevity of supplier relationships with their customers.

c2fo-supplier-longevity-chart

At 200 days, participating suppliers are approximately 30% more likely to continue invoicing their buyer. At 600 days, this number rises to 40%.

Suppliers that use C2FO are more likely to be financially stable and have long-term partnerships with their customers. C2FO helps de-risk the supply chain by providing suppliers access to more efficient cash flow, when they need it, at rates that are often less than their cost of borrowing, especially since they control what they are willing to offer in exchange for the early payment.

All of this takes place with the support of a large, worldwide team of professional C2FO supplier relationship managers. C2FO handles onboarding, training and customer service related to the use of their market. This allows the buying organization to focus on other important aspects of their supplier relationships, such as collaboration on product development and technological advances.

Since the economic downturn began to affect the automotive industry in 2006, automakers have focused heavily on adding surplus cash to their balance sheets. Recently, their investors have taken notice, and many of these companies have been faced with activist investors forcing companies to return this cash to shareholders if they are unable to put it to work at attractive returns in the core business or M&A. This investor induced-pressure has Treasury teams thinking more strategically about cash surplus and the potential for using it to improve their supply chains.

Supporting the businesses within your supply chain by providing the working capital they need is a sound option for companies in any industry that wish to reduce risk and improve their return on cash.