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(originally published by Booz & Company)


Transforming an Adversarial Relationship

A survey of automakers and their suppliers unearths the management prerequisites for working together profitably.

The U.S. and European automobile industry is in the midst of a critical period in its history. Margins continue to decrease; for many, legacy costs such as debt service, pensions, and health care remain an ongoing burden. Volatility in the commodities markets is making cost management difficult at best. Competition has increased, not just from such established Asian manufacturers as Toyota and Honda but from new market entrants such as Tata and Chery. At the same time, however, there is extraordinary opportunity: Research and development efforts in alternative fuels and high-performance materials are reaching a critical mass as the globalization of markets and of the supply chain offers a wider range of possibility for purchasing and sales.

Taking advantage of these opportunities and overcoming these challenges requires a healthy relationship between manufacturers and suppliers. This relationship is the root of innovation implementation, quality targets, and cost control. Furthermore, many of the industry’s opportunities can be exploited only if manufacturers and suppliers work in concert, making “big bet” investments in research, infrastructure, and markets and sharing advanced technology. However, the manufacturer–supplier relationship is beset by a great deal of friction, the result of decades of mistrust between historically unequal partners. That friction has increased in recent years because of lower margins and greater market pressure; indeed, some manufacturers that were once praised by suppliers for evenhandedness have recently adopted a more aggressive approach.

To determine the elements of a successful manufacturer–supplier relationship and the skills needed by leaders working toward or sustaining such a relationship, Booz & Company joined with executive search firm Russell Reynolds Associates to conduct 43 in-person interviews of senior executives at nine major manufacturers and 19 leading suppliers in the United States and Europe. Included in this survey were companies such as Ford, BMW, Volvo, and Mercedes on the original equipment manufacturer side, and BorgWarner, Visteon, Lear, and Johnson Controls among the suppliers. These interviews covered the nature of the arrangements between automakers and suppliers, how their relationships have changed over time, and areas in which their partnerships have worked and where there was room for improvement. An analysis of those interviews produced a clear view of the characteristics of a high-performing relationship, the environment necessary to sustain it, and the qualities needed in executives charged with implementing it.

Much of the discussion regarding the manufacturer–supplier relationship in recent years has been framed in terms of two contrasting models. The first is the price-based sourcing relationship, which has traditionally dominated in the United States. Here, the manufacturer calls for competitive bids on the desired goods in an effort to get the lowest price for components and materials that meet the specifications it set. Suppliers, in turn, look to meet exactly those requirements at the highest price they can command — and recover what they give up in price concessions by charging aggressively for design changes. There is little motivation for either side to collaborate or share knowledge.

In contrast, the second model — relationship-based sourcing — is centered on collaboration. This model is the favored approach in Asia, where it integrates naturally with lean manufacturing and just-in-time supply chain management. Suppliers and manufacturers work together to develop ways to provide components and materials more cheaply and share knowledge to foster innovation. The supplier receives a price that reflects a profit margin both sides agree to, as well as incentives for product improvement and further cost reduction. Although the supplier has less autonomy over its bottom line, it enjoys a steadier and more secure business partnership.

The survey found that, in general, most automakers and suppliers prefer the relationship-based model over the price-based approach. Apparently, they are drawn to the potential value of close, interwoven — and sometimes interlocked — relationships with their partners. But at the same time, they acknowledge that the relationship-based model is difficult to implement. Hence, it often ends up a wish list item that recedes from possibility even as these companies may transform themselves in other ways, such as by improving corporate governance and manufacturing efficiency.

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  1. Ronald Haddock, Michael Pfitzmann, and Reid Wilk, “Knowledge-based Sourcing in China,” s+b Leading Ideas Online, 10/14/08: How structural shifts in China’s economy are forcing companies to adopt more personal strategies for supplier relationships.
  2. Bill Jackson and Michael Pfitzmann, “Win-Win Sourcing,” s+b, Summer 2007: The most effective procurement model fosters knowledge sharing, not mistrust.
  3. Bill Jackson and Conrad Winkler, “Building the Advantaged Supply Network,” s+b Resilience Report, 09/15/04: Collaborative strategies with examples from aircraft, consumer products, and auto manufacturers, plus advice for step-change planners.
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