Building Deep Supplier Relationship

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•The HBR Spotlight

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Two Japanese automakers have had stunning success building relationships with North Annerican suppliers-often the same companies that have had contentious dealings with Detroit's Big Three. What are Toyota and Honda doing right?

by Jeffrey K- Liker and Thomas Y- Choi

uilding Deep supplier^
"The Big Three [U.S. automakers] set annual cost-reduction targets [for the parts they purchase]. To realizo those targets, they'll do anything. [They've unleashed] a reign of terror, and it gets worse every year. You can't tr\ist anyone [in those companies]." - Director, interior systems supplier to Ford, CM, and Chrysler, October 1999

Relationships

"Honda is a demanding customer, but it is loyal to us. [American] automakers have us work on drauhngs, ask other suppliers to bid on them, and give the job to the lowest bidder. Honda never does that." -CEO, industrial fasteners supplier to Ford, CM, Chrysler, and Honda, April 2002

"In my opinion, [Ford] seems to send its people to 'hate school' so that they learn how^ to hate suppliers. The company is extremely confiTontational. After dealing with Ford, 1 decided not to buy its cars." - Senior executive, supplier to Ford, October 2002

"Toyota helped us dramatically improve our production system. We started by making one component, and as we improved, [Toyota] rewarded us vrtth orders for more components. Toyota is our best customer." ', - Senior executive, supplier to Ford, GM, Chrysler, and Toyota, July 2001

o 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 higgest 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

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HARVARD BUSINESS REVIEW

DECEMBER 2004 >

The 21&t-Century Supply Chain

costs outweighed the long-term benefits of investing in relationships. Second, the development and spread of Internet-based technologies allowed companies to get suppliers to compete on cost more efficiently-and more brutally-than they used to. Consequently, manufacturersupplier relations in America have deteriorated so much that they're worse now than before the quality revolution began. In the U.S. automobile industry, for instance, Ford uses online reverse auctions to get the lowest prices for components. GM writes contracts that allow it to shift to a less expensive supplier at a moment's notice. Chrysler tried to build a keiretsu, but the process unraveled after Daimler took over the company in 1998. Not surprisingly, the Big Three have been more or less at war with their suppliers. Having witnessed the American automakers' abject failure to create keiretsu, most Western companies doubt they can replicate the model outside the culture and society of Japan. Time, perhaps, for the good news. Contrary to the cynics'beliefs, the reports of the keiretsu's demise are greatly exaggerated. The Japanese supplier-partnering model is alive, well, and flourishing-not Just in Japan but also in North America. During the past decade, $160 billion Toyota and $75 billion Honda have struck remarkable partnerships with some of the same suppliers that are at loggerheads with the Big Three and have created latter-day keiretsu across Canada, the United States, and Mexico. The two Japanese companies work closely with their suppliers in those areas. Of the 2.1 million Toyota/Lexus vehicles and the i.6 million Honda/Acura vehicles sold in North America in 2003, Toyota manufactured 60% and Honda produced 80% in North America. Moreover, the two companies source about 70% to 80% of the costs of making each automobile from North American suppliers. Despite the...
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