No corporation needs to be convinced that in today’s scale-driven, technology-intensive global economy, partnerships are the supply chain’s lifeblood. Companies, especially in developed economies, buy more components and services from suppliers than they used to. The 100 biggest U.S. manufacturers spent 48 cents out of every dollar of sales in 2002 to buy materials, compared with 43 cents in 1996, according to Purchasing magazine’s estimates. Businesses are increasingly relying on their suppliers to reduce costs, improve quality, and develop new processes and products faster than their rivals’ vendors can. In fact, some organizations have started to evaluate whether they must continue to assemble products themselves or whether they can outsource production entirely. The issue isn’t whether companies should turn their arms-length relationships with suppliers into close partnerships, but how. Happily, the advice on that score is quite consistent: Experts agree that American corporations, like their Japanese rivals, should build supplier keiretsu: close-knit networks of vendors that continuously learn, improve, and prosper along with their parent companies. (Incidentally, we don’t mean that companies should create complex cross holdings of shares between themselves and their suppliers, the way Japanese firms do.)
Building Deep Supplier Relationships
Reprint: R0412G
More and more businesses are counting on their suppliers to lower costs, improve quality, and develop innovations faster than their competitors’ suppliers can. To this end, many experts agree that American firms, like their Japanese rivals, should build supplier keiretsu: networks of vendors that learn, improve, and prosper in sync with their parent companies.
As history has shown, however, that’s easier said than done. Some U.S. corporations created supply chains that superficially resembled those of their Japanese competitors, but they didn’t alter the nature of their relationships with suppliers. As a result, relations between U.S. manufacturers and their suppliers have sunk to the lowest levels in decades.
But reports of keiretsu’s demise are overblown. The Japanese supplier-partnering model is alive and well—in North America as well as Japan. During the past ten years, automakers Toyota and Honda have struck successful partnerships with some of the same suppliers that are at odds with the Big Three and created effective keiretsu across Canada, the United States, and Mexico.
So how do Toyota and Honda do it? The authors, who have studied the American and Japanese automobile industries for more than 20 years, found that Toyota and Honda have built great supplier relationships by following six steps. First, they understand how their suppliers work. Second, they turn supplier rivalry into opportunity. Third, they monitor vendors closely. Fourth, they develop those vendors’ capabilities. Fifth, they share information intensively but selectively. And sixth, they help their vendors continually improve their processes.
Toyota and Honda succeed because they consistently follow all six directives. Thus, the automakers have not only stayed in the game with the Big Three but have also redefined the playing field.
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