Editor's note: No one has missed the recent news headlines detailing the flat tires being experienced by the American car industry, even as Japanese competitors continue to thrive. One enduring key to the success of Toyota, Honda, et al. has been the keiretsu model, which leverages shared business interests among a tight network of suppliers.
In their study of how Toyota and Honda built their innovative supplier networks, published in a recent edition of Harvard Business Review, researchers Jeffrey K. Liker and Thomas Y. Choi found that the carmakers followed six distinct steps: understand how their suppliers work; turn supplier rivalry into opportunity; supervise their vendors; develop their suppliers' technical capabilities; share information intensively but selectively; and conduct joint improvement activities. Our excerpt looks at how Toyota and Honda fired up competition even with a limited vendor list.
Turn supplier rivalry into opportunity
For all the feel-good talk about developing manufacturer-supplier partnerships, Western executives still believe that the keiretsu system is, at its core, inefficient and inflexible. They assume that in the keiretsu model, companies are locked into buying components from specific suppliers, a practice that leads to additional costs and technological compromises.
We find that assumption to be incorrect. Neither Toyota nor Honda depends on a single source for anything; both develop two to three suppliers for every component or raw material they buy. They may not want ten sources, as an American business would, but they encourage competition between vendors right from the product development stage. For example, Toyota asked several suppliers in North America to design tires for each of its vehicle programs. It evaluated the performance of the tires based on the suppliers' data as well as Toyota's road tests and awarded contracts to the best vendors. The selected suppliers received contracts for the life of a model, but if a supplier's performance slipped, Toyota would award the next contract to a competitor. If the supplier's performance improved, Toyota might give it a chance to win another program and regain its market share.
| Neither Toyota nor Honda depends on a single source for anything. |
There is a key difference between the way American and Japanese companies fuel the rivalry between their suppliers. U.S. manufacturers set vendors against each other and then do business with the last supplier standing. Toyota and Honda also spark competition between vendors—especially when there is none—but only with the support of their existing suppliers.
In 1988, when Toyota decided to make cars in Kentucky, it picked Johnson Controls to supply seats. Johnson Controls wanted to expand its nearby facility, but Toyota stipulated that it shouldn't, partly because an expansion would require a large investment and eat into the supplier's profits. Instead, the Japanese manufacturer challenged Johnson Controls to make more seats in an existing building. That seemed impossible at first, but with the help of Toyota's lean-manufacturing experts, the supplier restructured its shop floor, slashed inventories, and was able to make seats for Toyota in the existing space. That experience helped the American vendor understand that it wasn't enough to deliver seats just in time; it had to use a system that would continually reduce its costs and improve quality. Such an approach would better align Johnson Controls' operating philosophy with Toyota's.
The relationship between manufacturer and supplier didn't end there. Six years later, when Toyota wanted to develop another source of seats, it refused to turn to another American manufacturer. Instead, it asked Johnson Controls if it was interested in entering into a joint venture with Toyota's biggest seat supplier in Japan, Araco, which was planning to enter the U.S. market. In 1987, Johnson Controls and Araco set up an American joint venture, Trim Masters, in which each held 40 percent of the equity and Toyota held 20 percent. Johnson Controls created a firewall so that Trim Masters would become a competitor in every sense of the word. A decade later, Trim Masters has become Johnson Controls' main rival for Toyota's seats business. In 2003, while Trim Masters had a 32 percent share of the business, Johnson Controls had a 56 percent share. Because of its investment in the joint venture, Johnson Controls has benefited from Trim Masters' success. Toyota turned a need to create competition between suppliers into an opportunity to cement its relationship with an existing vendor. 