https://hbr.

org/2004/12/buildingdeepsupplierrelationships

BuildingDeepSupplierRelationships
JeffreyLikerThomasChoi
FROMTHEDECEMBER2004ISSUE

TheBigThree[U.S.automakers]setannualcostreductiontargets
[forthepartstheypurchase].Torealizethosetargets,theylldo
anything.[Theyveunleashed]areignofterror,anditgetsworse
everyyear.Youcanttrustanyone[inthosecompanies].
Director,interiorsystemssuppliertoFord,GM,andChrysler,
October1999
Hondaisademandingcustomer,butitisloyaltous.[American]
automakershaveusworkondrawings,askothersupplierstobid
onthem,andgivethejobtothelowestbidder.Hondaneverdoes
that.CEO,industrialfastenerssuppliertoFord,GM,Chrysler,
andHonda,April2002
Inmyopinion,[Ford]seemstosenditspeopletohateschoolso
thattheylearnhowtohatesuppliers.Thecompanyisextremely
confrontational.AfterdealingwithFord,Idecidednottobuyits
cars.Seniorexecutive,suppliertoFord,October2002
Toyotahelpedusdramaticallyimproveourproductionsystem.
Westartedbymakingonecomponent,andasweimproved,
[Toyota]rewardeduswithordersformorecomponents.Toyotais
ourbestcustomer.Seniorexecutive,suppliertoFord,GM,
Chrysler,andToyota,July2001
Nocorporationneedstobeconvincedthatintodaysscaledriven,
technologyintensiveglobaleconomy,partnershipsarethesupply
chainslifeblood.Companies,especiallyindevelopedeconomies,
buymorecomponentsandservicesfromsuppliersthantheyused
to.The100biggestU.S.manufacturersspent48centsoutofevery
dollarofsalesin2002tobuymaterials,comparedwith43centsin

1996,accordingtoPurchasingmagazinesestimates.Businesses
areincreasinglyrelyingontheirsupplierstoreducecosts,improve
quality,anddevelopnewprocessesandproductsfasterthantheir
rivalsvendorscan.Infact,someorganizationshavestartedto
evaluatewhethertheymustcontinuetoassembleproducts
themselvesorwhethertheycanoutsourceproductionentirely.The
issueisntwhethercompaniesshouldturntheirarmslength
relationshipswithsuppliersintoclosepartnerships,buthow.
Happily,theadviceonthatscoreisquiteconsistent:Expertsagree
thatAmericancorporations,liketheirJapaneserivals,shouldbuild
supplierkeiretsu:closeknitnetworksofvendorsthatcontinuously
learn,improve,andprosperalongwiththeirparentcompanies.
(Incidentally,wedontmeanthatcompaniesshouldcreate
complexcrossholdingsofsharesbetweenthemselvesandtheir
suppliers,thewayJapanesefirmsdo.)
Forcorporationsintimidatedbytheprospectofbuildingfamilial
tieswiththesupplierstheyvetraditionallybullied,ourresearch
offerssomebadnewsandsomegoodnews.First,thebadnews:
Itstoughertobuildrelationshipswithsuppliersthancompanies
imagine.Formorethan20years,manyAmericanbusinesseshave
unsuccessfullytriedtobuildbondswithsuppliers.Aspartofthe
qualitymovementofthe1980s,thesecompaniesostensibly
adoptedtheJapanesepartneringmodel.Theyslashedthenumber
ofsupplierstheydidbusinesswith,awardedthesurvivorslong
termcontracts,andencouragedtoptiervendorstomanagethe
lowertiers.Theyalsogottoptiersupplierstoproducesubsystems
insteadofcomponents,totakeresponsibilityforqualityandcosts,
andtodeliverjustintime.In2001,theMalcolmBaldrigeNational
QualityAwardCommitteemadekeysupplierandcustomer
partneringandcommunicationmechanismsaseparatecategory
onwhichitwouldjudgethebestcompaniesintheUnitedStates.
However,whiletheseAmericancompaniescreatedsupplychains
thatsuperficiallyresembledthoseoftheirJapanesecompetitors,

theydidntalterthefundamentalnatureoftheirrelationshipswith
suppliers.Itwasntlongintothepartneringmovementbefore
manufacturersandsupplierswerefightingbitterlyoverthe
implementationofbestpracticeslikecontinuousquality
improvementandannualpricereductions.Bytheturnofthe
millennium,twoadditionalfactorsmadecost,again,themain
criterioninsupplierselection.First,companiesweremoreeasily
abletosourceglobally,notablyfromChina.Theyjumpedtothe
conclusionthattheimmediatebenefitsoflowwagecosts
outweighedthelongtermbenefitsofinvestinginrelationships.
Second,thedevelopmentandspreadofInternetbasedtechnologies
allowedcompaniestogetsupplierstocompeteoncostmore
efficientlyandmorebrutallythantheyusedto.Consequently,
manufacturersupplierrelationsinAmericahavedeterioratedso
muchthattheyreworsenowthanbeforethequalityrevolution
began.IntheU.S.automobileindustry,forinstance,Forduses
onlinereverseauctionstogetthelowestpricesforcomponents.
GMwritescontractsthatallowittoshifttoalessexpensive
supplieratamomentsnotice.Chryslertriedtobuildakeiretsu,
buttheprocessunraveledafterDaimlertookoverthecompanyin
1998.Notsurprisingly,theBigThreehavebeenmoreorlessat
warwiththeirsuppliers.HavingwitnessedtheAmerican
automakersabjectfailuretocreatekeiretsu,mostWestern
companiesdoubttheycanreplicatethemodeloutsidetheculture
andsocietyofJapan.
Time,perhaps,forthegoodnews.Contrarytothecynicsbeliefs,
thereportsofthekeiretsusdemisearegreatlyexaggerated.The
Japanesesupplierpartneringmodelisalive,well,andflourishing
notjustinJapanbutalsoinNorthAmerica.Duringthepast
decade,$160billionToyotaand$75billionHondahavestruck
remarkablepartnershipswithsomeofthesamesuppliersthatareat
loggerheadswiththeBigThreeandhavecreatedlatterday
keiretsuacrossCanada,theUnitedStates,andMexico.Thetwo

Japanesecompaniesworkcloselywiththeirsuppliersinthose
areas.Ofthe2.1millionToyota/Lexusvehiclesandthe1.6million
Honda/AcuravehiclessoldinNorthAmericain2003,Toyota
manufactured60%andHondaproduced80%inNorthAmerica.
Moreover,thetwocompaniessourceabout70%to80%ofthe
costsofmakingeachautomobilefromNorthAmericansuppliers.
Despitetheodds,ToyotaandHondahavemanagedtoreplicatein
analienWesternculturethesamekindofsupplierwebstheybuilt
inJapan.Consequently,theyenjoythebestsupplierrelationsinthe
U.S.automobileindustry,havethefastestproductdevelopment
processes,andreducecostsandimprovequalityyearafteryear.
Considertheevidence:
In2003,whenPlanningPerspective,aBirmingham,Michigan
basedresearchcompany,conductedtheOEMBenchmarkSurvey,
oneoftheprincipalmeasuresofmanufacturersupplierrelationsin
theU.S.automobileindustry,itratedToyotaandHondaasthe
mostpreferredcompaniestoworkwith.In17categories,ranging
fromtrusttoperceivedopportunity,ToyotaandHondaled.They
werefollowedbyNissan,whileChrysler,Ford,andGMwerea
distantfourth,fifth,andsixth.Inparticular,supplierssaidthat
ToyotaandHondawerebettercommunicatorsandthattheywere
moretrustworthyandmoreconcernedaboutsuppliersprofitability
thanothermanufacturerswere.
WhileU.S.automakerstaketwotothreeyearstodesignnewcars,
ToyotaandHondahaveconsistentlybeenabletodosoinjust12
to18months.Lastyear,aJ.D.PowerandAssociatesstudyfound
thatsuppliersratedToyotaamongthebestandratedHondaabove
averageatpromotinginnovation.ThestudyfoundthatChrysler,
Ford,andGMwerebelowaverageatfosteringinnovationwith
vendors.
Accordingtoseveralacademicpapers,ToyotaandHondabrought
downthemanufacturingcostsoftheCamryandtheAccordby
about25%duringthe1990s.Still,thetwocompanieshave

appearedatthetopofsurveysbyJ.D.PowerandAssociatesand
ConsumerReportsoninitialqualityandlongtermdurability.They
alsoproducedthemostreliablecarsandrecalledfewervehiclesin
theUnitedStatesinthepasttenyearsthanGM,Ford,orChrysler
did.
JusthowdoToyotaandHondagetitrightwhentheirrivalsgetit
sowrong?WehavebeenstudyingtheAmericanandJapanese
automobileindustriesformorethantwodecades.Between1999
and2002,weinterviewedmorethan50ToyotaandHonda
managersinJapanandtheUnitedStates,severalexecutiveswho
hadleftthosecompaniesAmericansubsidiaries,andmanagers
frommorethan40suppliersintheNorthAmericanautomobile
industry.WealsovisitedToyotaandHondaplantsintheUnited
States,suppliersfactoriesandtechnicalcenters,theToyota
TechnicalCenterinAnnArbor,Michigan,andHondaof
AmericasPurchasingOfficeinMarysville,Ohio.Ourresearch
showsthatToyotaandHondahavedevelopedpartnershipswith
theirAmericansuppliersbyfollowingsimilarapproaches.more

ToughLove
WhenToyotaandHondasetupmanufacturingoperationsinNorth
Americainthe1980s,theystartedbyencouragingthecreationof
somejointventuresbetweentheirJapanesesuppliersand
Americancompanies.Later,theyselectedlocalcompaniesthey
coulddevelopassuppliers.Theygavetheirnewvendorssmall
orderstobeginwithandexpectedthemtomeetcertaincost,
quality,anddeliveryparameters.Ifsupplierscopedwiththefirst
orderswell,ToyotaandHondaawardedthemlargercontractsand
taughtthemtheirwaysofdoingbusiness.(Formoreonthese
approaches,seeJeffreyK.Likersbook,TheToyotaWay:14
ManagementPrinciplesfromtheWorldsGreatestManufacturer
andPoweredbyHonda:DevelopingExcellenceintheGlobal
Enterprise,byDaveNelson,RickMayo,andPatriciaE.Moody.)

WhenwecomparedtheelementsofToyotaspartneringmodel
withthoseofHondas,wefoundthatalthoughthetwocompanies
useddifferenttools,theyhadcreatedstrikinglysimilar
scaffoldings.Expertsusuallyemphasizetheuseofdeviceslike
targetpricing,butwebelieveToyotaandHondahavebuiltgreat
supplierrelationshipsbyfollowingsixdistinctsteps:First,they
understandhowtheirsupplierswork.Second,theyturnsupplier
rivalryintoopportunity.Third,theysupervisetheirvendors.
Fourth,theydeveloptheirsupplierstechnicalcapabilities.Fifth,
theyshareinformationintensivelybutselectively.Andsixth,they
conductjointimprovementactivities.Someofthesestepssupport
others.Forexample,ifmanufacturersdeploycontrolswithout
creatingafoundationofunderstanding,thatwillleadtogaming
behaviorbysuppliers.Wethereforeorganizedthesixstepsasa
supplierpartneringhierarchy,withoneleadingtothenext.Toyota
andHondahavesucceedednotbecausetheyuseoneortwoof
theseelementsbutbecausetheyuseallsixtogetherasasystem.
(SeetheexhibitTheSupplierPartneringHierarchy.)

TheSupplierPartneringHierarchy
MostvendorsbelievethatToyotaandHondaaretheirbestand
toughestcustomers.Thetwocompaniessethighstandardsand
expecttheirpartnerstorisetomeetthem.However,thecarmakers
helpsuppliersfulfillthoseexpectations.Clearly,Toyotaand
Hondawanttomaximizeprofits,butnotattheexpenseoftheir
suppliers.AsTaiichiOhno,whocreatedtheToyotaProduction
System,hassaid,Theachievementofbusinessperformanceby
theparentcompanythroughbullyingsuppliersistotallyaliento
thespiritoftheToyotaProductionSystem.Thekeywordinthat
statementisparent,whichsignalsalongtermrelationshipthat
involvestrustandmutualwellbeing.Atthesametime,the
relationshipconnotesdisciplineandtheexpectationof
improvementandgrowth.Take,forexample,Toyotas
ConstructionofCostCompetitivenessforthe21stCentury
(CCC21)program,whichaimsata30%reductioninthepricesof
170partsthatthecompanywillbuyforitsnextgenerationof
vehicles.Duringourinterviews,wedidnthearvendorsdecrying
CCC21asunfair.Instead,theywantedtogiveToyotatheprice
reductionsitsought.TheybelievedToyotawouldhelpthem
achievethattargetbymakingtheirmanufacturingprocesses
leaner,andbecauseofToyotastoughlove,theywouldbecome
morecompetitiveandmoreprofitableinthefuture.

UnderstandHowYourSuppliersWork
WheneverIask[executivesintheBigThree]howtheydeveloped
atargetprice,theansweris:silence.Theybasethetargetpriceon
nothing.Thefinancemanagerjustdivviesuptheavailablemoney:
Hereswhatwenormallyspendonbrakingsystems,hereswhat
youllgetthisyear.Theyhavenoideahowwellgetthosecost
reductions.Theyjustwantthem.Seniorexecutive,brakelining
suppliertoU.S.automakers,February2002

Unlikemostcompaniesweknow,ToyotaandHondatakethe
troubletolearnalltheycanabouttheirsuppliers.Theybelieve
theycancreatethefoundationsforpartnershipsonlyiftheyknow
asmuchabouttheirvendorsasthevendorsknowabout
themselves.Theydontcutcornerswhilefiguringoutthe
operationsandculturesofthefirmstheydobusinesswith.Toyota
usesthetermsgenchigenbutsuorgemba(actuallocationand
actualpartsormaterials)todescribethepracticeofsending
executivestoseeandunderstandforthemselveshowsuppliers
work.Hondausesasimilarapproach,andbothcompaniesinsist
thatmanagersatalllevelsrightuptotheirpresidentsstudy
suppliersfirsthandtounderstandthem.

ToyotaandHondabelievethey
cancreatethefoundationsfor
partnershipsonlyiftheyknow
asmuchabouttheirvendorsas
thevendorsknowabout
themselves.
Theprocesscantakeawhile,butitusuallyprovestobevaluable
forboththesuppliersandthemanufacturers.In1987,whenHonda
ofAmericawastoyingwiththeideaofusingAtlanticTooland
Dieasasourceforstampingandweldingjobs,itsentoneofits
engineerstospendayearwiththeClevelandbasedcompany.For
12months,themiddlemanagerstudiedthewaytheorganization
worked,collecteddataandfacts,andinformallysharedthe
findingswithhiscounterpartsatAtlantic.Overtime,theyagreed

withtheHondaengineersconclusionsandimplementedmanyof
hissuggestions,whichledtomarkedimprovementsontheshop
floor.Aboutsixmonthsintohisstay,theHondaengineerasked
Atlanticstopmanagerstoshowhimthecompanysbooks,which
theyreluctantlyagreedtodo.BythetimetheHondaengineerleft,
heknewalmosteverythingaboutAtlanticsoperationsandcost
structure.
Thatknowledgeprovedusefulwhenthetwocompaniesstarted
doingbusinesstogetherin1988.Japanesecompaniestraditionally
workbackwardwhensettingpricesforthecomponentsand
servicestheybuy.InsteadoffollowingtheAmericanpracticeof
calculatingcosts,addingaprofitmargin,andsettingtheproducts
price,Japaneseexecutivesstartwiththepriceoftheproductthey
believethemarketcanbear.Thentheyfigureoutthecoststhey
canincurtomakethedesiredprofitsonthatitem.Thatpractice
allowstheexecutivestosettargetprices:theamountstheycan
affordtopaysuppliersforcomponentsandservicesgiventhe
budgetfortheproduct.Accordingly,whenHondasubmittedthe
targetpricesforthefirstjobsitgaveAtlantic,bothfirmsknewthe
supplierwouldmakeaprofit.Itwouldbeasmallprofit,though,
becauseHondaexpectedAtlantictoincreaseitsprofitmarginby
cuttingcostsovertime.
Alittleempathybreedsagreatdealofmutualunderstanding.
AtlanticsignedonpartlybecauseitbelievedHondawasacting
fairlybyallowingittomakeaprofitonthefirstdeals.Becauseof
theHondaengineersvisit,thesupplieralsofeltconfidentthat,
withHondasassistance,itwouldbeabletoreduceitscosts.Once
AtlantichaddisplayeditsabilitytohandleHondasorders,the
automakerrecommendedthecompanytoitsothersuppliers.Asa
result,Atlanticsbusinessrosesteadilyduringthenextfiveyears.
Itsinterestingtonotethataroundthesametime,Atlanticattained
thecovetedSpear1supplierstatusatGM.Thatdesignation,GM
claimed,wouldsurelyleadtomorebusinesswiththemanufacturer

anditssuppliers.Butsoonthereafter,GMreduceditsorderswith
Atlanticwithoutexplanation.Thesupplierdidntgetmore
businessfromGMduringthenexttwoyears,andthepartnership
impliedbytheSpear1statusnevercametofruition.

TurnSupplierRivalryintoOpportunity
Chryslerwasourbestcustomer,andwewouldbreakourbackfor
them.Nowwefeelwerejustanothersupplier.[Ithas]putusina
bucketwitheveryoneelse,andwefeellikeanyothervendor.
Seniorexecutive,suppliertoDaimlerChrysler,July1999
Forallthefeelgoodtalkaboutdevelopingmanufacturersupplier
partnerships,Westernexecutivesstillbelievethatthekeiretsu
systemis,atitscore,inefficientandinflexible.Theyassumethatin
thekeiretsumodel,companiesarelockedintobuyingcomponents
fromspecificsuppliers,apracticethatleadstoadditionalcostsand
technologicalcompromises.Wefindthatassumptiontobe
incorrect.NeitherToyotanorHondadependsonasinglesource
foranything;bothdeveloptwotothreesuppliersforevery
componentorrawmaterialtheybuy.Theymaynotwantten
sources,asanAmericanbusinesswould,buttheyencourage
competitionbetweenvendorsrightfromtheproductdevelopment
stage.Forexample,ToyotaaskedseveralsuppliersinNorth
Americatodesigntiresforeachofitsvehicleprograms.It
evaluatedtheperformanceofthetiresbasedonthesuppliersdata
aswellasToyotasroadtestsandawardedcontractstothebest
vendors.Theselectedsuppliersreceivedcontractsforthelifeofa
model,butifasuppliersperformanceslipped,Toyotawould
awardthenextcontracttoacompetitor.Ifthesuppliers
performanceimproved,Toyotamightgiveitachancetowin
anotherprogramandregainitsmarketshare.more
ThereisakeydifferencebetweenthewayAmericanandJapanese
companiesfueltherivalrybetweentheirsuppliers.U.S.
manufacturerssetvendorsagainsteachotherandthendobusiness

withthelastsupplierstanding.ToyotaandHondaalsospark
competitionbetweenvendorsespeciallywhenthereisnonebut
onlywiththesupportoftheirexistingsuppliers.In1988,when
ToyotadecidedtomakecarsinKentucky,itpickedJohnson
Controlstosupplyseats.JohnsonControlswantedtoexpandits
nearbyfacility,butToyotastipulatedthatitshouldnt,partly
becauseanexpansionwouldrequirealargeinvestmentandeatinto
thesuppliersprofits.Instead,theJapanesemanufacturer
challengedJohnsonControlstomakemoreseatsinanexisting
building.Thatseemedimpossibleatfirst,butwiththehelpof
Toyotasleanmanufacturingexperts,thesupplierrestructuredits
shopfloor,slashedinventories,andwasabletomakeseatsfor
Toyotaintheexistingspace.ThatexperiencehelpedtheAmerican
vendorunderstandthatitwasntenoughtodeliverseatsjustin
time;ithadtouseasystemthatwouldcontinuallyreduceitscosts
andimprovequality.SuchanapproachwouldbetteralignJohnson
ControlsoperatingphilosophywithToyotas.
Therelationshipbetweenmanufacturerandsupplierdidntend
there.Sixyearslater,whenToyotawantedtodevelopanother
sourceofseats,itrefusedtoturntoanotherAmerican
manufacturer.Instead,itaskedJohnsonControlsifitwas
interestedinenteringintoajointventurewithToyotasbiggest
seatsupplierinJapan,Araco,whichwasplanningtoentertheU.S.
market.In1987,JohnsonControlsandAracosetupanAmerican
jointventure,TrimMasters,inwhicheachheld40%oftheequity
andToyotaheld20%.JohnsonControlscreatedafirewallsothat
TrimMasterswouldbecomeacompetitorineverysenseofthe
word.Adecadelater,TrimMastershasbecomeJohnsonControls
mainrivalforToyotasseatsbusiness.In2003,whileTrim
Mastershada32%shareofthebusiness,JohnsonControlshada
56%share.Becauseofitsinvestmentinthejointventure,Johnson
ControlshasbenefitedfromTrimMasterssuccess.Toyotaturned
aneedtocreatecompetitionbetweensuppliersintoanopportunity

tocementitsrelationshipwithanexistingvendor.

SuperviseYourSuppliers
[TheBigThree]arehallmonitors:Ihavetogetfromthisdoorto
thatdoor,andtheyaskformypass.Youdoeverythingyoucanto
meettheirobjectives,buttheykeepputtingbarriersintheway.
Engineeringdirector,BigThreesupplier,April2001
VendorswetalktoinEurope,theUnitedStates,andMexico
assumethatJapanesestylepartnershipsarerelationshipsbetween
equals.TheymisconstruewinwindealstomeanthatToyotaand
Hondatrusttheirsuppliersenoughtoletthemdotheirownthing.
Butinfact,thetwoJapaneseautomakersdonttakeahandsoff
approach;theybelievesuppliersrolesaretoovitalforthat.They
useelaboratesystemstomeasurethewaytheirsupplierswork,to
settargetsforthem,andtomonitortheirperformanceatalltimes.
ControlsaretheflipsideofthetrustthatToyotaandHondahave
intheirsuppliers.
Honda,forinstance,usesareportcardtomonitoritscore
suppliers,someofwhichmaybeevensecondorthirdtier
vendors.UnlikemostFortune1,000companies,whichsend
reportstosuppliersannuallyorbiannually,Hondasendsreportsto
itssupplierstopmanagementeverymonth.Atypicalreporthas
sixsections:quality,delivery,quantitydelivered,performance
history,incidentreport,andcomments.Theincidentreportsection
hasasubcategoryforqualityandanotherfordelivery.Hondauses
thecommentssectiontocommunicatehowthesupplierisdoing.
WeveseencommentslikeKeepupthegoodworkandPlease
continuetheeffort;itisgreatlyappreciated.Hondaalsousesthis
sectiontohighlightproblems.Forinstance,Hondawillwrite,
Labelerrorsrecordedon[partdescriptionandnumber].
Countermeasurespresentedwerentadequate.
Hondaexpectsitscoresupplierstomeetalltheirtargetsonmetrics
likequalityanddelivery.Ifavendormissesatarget,thecompany

reactsimmediately.Inearly1998,atieronesupplierdidntmeet
anontimedeliverytarget.Withinhoursofmissingitsdeadline,
thevendorcameunderintensescrutinyfromHonda.Ithadto
explaintothemanufacturerhowitwouldtrytofindthecauses,
howlongthatmighttake,andthepossiblemeasuresitwould
employtorectifythesituation.Untilitdidthat,thesupplierhadto
promisetoaddextrashiftsatitsowncosttoexpediteorder
delivery.BothToyotaandHondateachsupplierstotakeevery
problemseriouslyandtouseproblemsolvingmethodologiesthat
uncoverrootcauses.Ifsuppliersarentabletoidentifythecauses,
themanufacturersimmediatelysendteamstohelpthem.The
manufacturersengineerswillfacilitatethetroubleshooting
process,butthesuppliersengineersmustexecutethechanges.
IncontrastwithmostAmericancompanies,ToyotaandHonda
expecttheirsuppliersseniormanagerstogetinvolvedwhenever
issuesarise.Thatexpectationoftencausesproblems.Forexample,
in1997,whenaNorthAmericansupplierranintoadesignrelated
qualityissue,thevicepresidentoftheToyotaTechnicalCenter
immediatelyinvitedhiscounterpartforavisittodiscussthe
matter.Whentheexecutivearrived,itbecameclearthathedidnt
understandtheproblemoritscauses.Idontgetintothatkindof
detail,hestated.Hewasapologeticabouttheproblem,however,
andfirmlyassuredhiscounterpartthathewouldtakecareofit.
ButthatlevelofinvolvementwasntenoughforToyotas
managers.TheTechnicalCentervicepresidentaskedthe
Americanexecutivetogoandseeforhimselfwhattheglitches
wereandreturntodiscusssolutionswhenheunderstoodtheissues.
Aroundthesametime,Toyotafoundaqualityproblemwithwire
harnessesthatYazakiCorporationhadsupplied.Thevendors
presidentflewtotheGeorgetown,Kentucky,plantandspenttime
ontheshopfloorobservinghowToyotasworkersassembledthe
harnesses.Onlyaftertheexecutivepersonallyunderstoodthe
situationdidYazakiformallypresenttoToyotathe

countermeasuresithadalreadytakentofixtheproblem.

DevelopCompatibleTechnical
Capabilities
[Theterm]supplierdevelopmentgivestheimpressionthat
suppliersneedtobedeveloped.Therealityisthatwesuppliers
generallydevelop[theAmericanautomobilemanufacturers]
people.Theycomeinandtelluswithanironhandhowtorunour
business,andwethenhavetotrainthemaboutwhatwedo!
Managingdirector,suppliertooneoftheBigThree,August1999
Thenotionofsourcingcomponentsfromlowwagecountriesin
AsiafascinatesWesterncompanies.ManyU.S.automakersand
theirsuppliershavesetmultibilliondollartargetsforpurchasing
componentsfromChinaasifthatwouldbeanaccomplishmentin
itself.Thatraisesthequestion:WhyhaventToyotaandHonda
switchedtoChineseandIndiansuppliers,too?Accordingtoour
research,neithercompanysourcesverymuchfromthosecountries
primarilybecausesuppliersthereofferthemonlywagesavings.
ThatisntenoughforToyotaandHonda,whichbelievethat
suppliersinnovationcapabilitiesaremoreimportantthantheir
wagecosts.

ToyotaandHondadontsource
fromlowwagecountries
much;theirsuppliers
innovationcapabilitiesare
moreimportantthantheirwage

costs.
ToyotaandHondahaveinvestedheavilyinimprovingtheability
oftheirfirsttiervendorstodevelopproducts.Whiletheirlongtime
supplierslikeDenso,Aisin,andAracocandesigncomponentsfor
thecarmakersindependently,NorthAmericanvendorsstilldont
knowthemanufacturerswellenoughtodoso.Forexample,tires
arecriticaltoavehiclescomfort,safety,handling,andnoiselevel,
butAmericanvendorscomplainthatToyotaandHondagivethem
vaguespecificationsfornewtires.Hondadoesntspelloutthe
levelofresistanceitexpectsfromatire;itwillonlysaythatthe
tirehastohavetherightfeelacharacteristicthatishardto
quantifyandthatitwillbeadjustedasthevehicleisdesigned.
Toyotasengineershavedevelopedaspecialvocabularyto
describetheeffectoftiresonpassengers.Forinstance,theyuse
gotsugotsutorefertothelowfrequency,highimpactmotions
tirestransmittopassengerslowerbacksandburuburutodescribe
thehighfrequency,lowimpactvibrationstheyfeelintheirbelly.
Toyotasengineersexpectsupplierstounderstandwhattheyare
talkingaboutandtoidentifysolutionstoproblemstheengineers
describe.Untilvendorslearntounderstandtheterminologythat
ToyotaandHondauseandareabletotranslatethosevague
requirementsintodesignsolutions,theycantdevelopnew
productsforthem.more
Thatswhybothcompanieshavecreatedguestengineerprograms.
ToyotaandHondaaskfirsttiersupplierstosendseveraloftheir
designengineerstothemanufacturersoffices,wheretheywork
alongsidetheparentcompaniesengineersfortwotothreeyears.
Eventually,thesuppliersengineerswillunderstandthe
developmentprocessandcomeupwithdesignideasforToyota
andHonda.Meanwhile,themanufacturershavehelpedvendorsby
settinguplearninglinks,forgedbymovingworkersorlaunching
transnationalproductdevelopmentprojects.Forinstance,since

ToyotaworkswithDensoinJapan,technologyandknowledge
transferstakeplacefromToyotasJapanoperationstotheToyota
TechnicalCenterinMichiganandfromDensoinJapantoDenso
inSouthfield,Michigan.ThentheToyotaTechnicalCenterand
DensoworktogethertodevelopcomponentsfortheU.S.market.
ToyotaandHondahavealsocreatedchecklistswithhundredsof
measurablecharacteristicsforeachcomponent.American
suppliersoftendonthavethedatatheJapanesecompanies
demandbecauseothermanufacturersdontaskforthem.Toyota
andHondastarttheproductdevelopmentprocesswiththeir
suppliersonsitebyteachingthemhowtocollectdata.For
example,Toyotaexpectsprecisedataonthetolerancesthatthe
suppliersequipmentcanholdsoitcandesigntheproduct
appropriately.OneofitsAmericansuppliersdidnthavethat
informationforacomponentbecauseithadntmeasuredthose
parametersfordecades.WhenToyotadiscoveredthat,ithelpedthe
suppliersetupadatacollectionsystembeforethetwocompanies
figuredoutwaystoimprovetheprocess.Clearly,assuppliers
developthecapabilitiestomeettheJapanesemanufacturers
requirementsfordataanddesign,theybecomemorevaluableto
themthanlowcostvendorswithoutthosecapabilitiescouldbe.

ShareInformationIntensivelybut
Selectively
Theresadangerintraining[Chryslersengineers].Ourpeople
areveryopen,andtheywilltellourcustomerseverything.They
dontknowthatChryslersengineerslaterusethatagainstus:So
andsosaidyoucandothatinaweek[andthatsortofthing].
Directorofengineering,Chryslersupplier,August1999
WhenChryslertriedtobuildanAmericankeiretsuintheearly
1990s(seeJeffreyH.Dyer,HowChryslerCreatedanAmerican
Keiretsu,HBRJulyAugust1996),itsharedreamsofdataand
heldnumerousmeetingswithsuppliers.Chryslersphilosophy

seemedtobe,Ifweinundatevendorswithinformationandkeep
talkingtothemintensely,theywillfeellikepartners.Toyotaand
Honda,however,believeincommunicatingandsharing
informationwithsuppliersselectivelyandinastructuredfashion.
Meetingshaveclearagendasandspecifictimesandplaces,and
therearerigidformatsforinformationsharingwitheachsupplier.
ThetwoJapanesecompaniesknowthatsharingalotof
informationwitheveryoneensuresthatnoonewillhavetheright
informationwhenitsneeded.

ThetwoJapanesecompanies
knowthatsharingalotof
informationwitheveryone
ensuresthatnoonewillhave
therightinformationwhenits
needed.

ToyotaandHondashareinformationcarefullywhentheyre
developingnewproductswiththeirsuppliers.Toyota,forinstance,
dividescomponentsintotwocategories:thosethatvendorscan
designbythemselvesandthosethatmustbedevelopedatToyota.
Thefirstcategoryincludesfloorconsoles,sunroofs,mirrors,locks,
andothersmallcomponents.Supplierscandesignthose
componentswithoutmuchinteractionwithToyotasengineers
becausethepartsworkrelativelyindependentoftherestofthe
vehicle.Thesecondcategoryincludespartsthatinterfacewiththe
sheetmetalandtrimofthebody.Toyotamustdesignthese
componentsmorecollaborativelywithsuppliers.Itinsiststhat

suppliersdevelopthepartsonToyotaspremisesinclose
consultationwiththemanufacturersengineers.AttheToyota
TechnicalCenter,thedesigninroomhousessupplierswhowork
inthesameroomonthesameproject.Theydesigncomponents
intonewvehiclesusingToyotasCADsystems.Suppliershaveto
workattheTechnicalCenterbecauseToyotagivesthemalotof
proprietaryinformation,andtheyneedtoworkhandinhandwith
Toyotaengineers,especiallyduringtheearlyphasesofaproject.
Thesameprinciplethatinundatingpeoplewithdatadiminishes
focuswhiletargetedinformationleadstoresultsextendsto
strategy.Hondausesonlyonetopmanagementmeeting,orjikon,
toshareplanswitheachsupplier.ThemeetingsinvolveaHonda
teamusuallytwovicepresidentsofsuppliermanagementand
severalassistantvicepresidentsandasupplierteam.Thejikon
happenwithinthreemonthsoftheendofthefiscalyear,whichis
whenmostsuppliersmakeinvestmentdecisionsandotherstrategic
plans.Onlycoresuppliersparticipateinthemeetings,whichtake
placeattheregionalandgloballevels.Hondainvitesonesupplier
fromeachregiontotheglobaljikoninTokyoeveryyear;itheld
oneononemeetingswith35NorthAmericansuppliersin2003.
Thediscussionsdontextendtooperationalmattersbutinstead
coveronlytoplevelstrategicissues.Hondatellsthesupplierswhat
kindsofproductsitintendstointroduceandwhattypesofmarkets
itplanstocultivateinthecomingyears.Thecompanythen
discussesthesuppliersstrategicdirectionintermsoftechnology,
globalization,majorinvestments(suchascapitalgoodsandplant
expansion),andideasaboutnewproducts.Themeetingsalsocover
improvementsthatwillbenecessaryinthequality,cost,and
deliveryofthevendorsproducts.

ConductJointImprovementActivities
WereashowcasesupplierforToyota.Toyotaimprovesits
systemsandshowshow[implementingthosechangeswill]

improve[yourproductionsystem,too].Wehaddiscussionswith
[oneoftheBigThrees]socalledcontinuousimprovementexperts
fromPurchasing.Hewantedtoseewhatweweredoingbutdidnt
havemuchtoadd.Salesdirector,BigThreesupplier,July
1999
ManyAmericansupplierscelebratedwhentheyfirstreceived
businessfromToyotaorHonda.Theyknewthatinadditiontonew
business,theywouldgetopportunitiestolearn,toimprove,andto
enhancetheirreputationswithothercustomers.BecauseToyota
andHondaaremodelsofleanmanagement,theybringaboutall
aroundimprovementsintheirsuppliers.
Honda,forexample,hasstationedanumberofengineersinthe
UnitedStates,andtheyleadkaizen(continuousimprovement)
eventsatsuppliersfacilities.Whileotherautomakersdevoteone
daytoaweektodevelopingsuppliers,Hondacommits13weeksto
itsdevelopmentprogram,whichentailsthecreationofamodel
productionlineinthesuppliersfactory.Hondasengineersbelieve
thatthecompanysgoalsextendbeyondtechnicalconsulting;the
aimistoopencommunicationchannelsandcreaterelationships.
ThatswhyHondasengineersstayintouchwithsupplierslong
afterreturningtotheirownplants.Thatdedicationtofollow
throughpaysoff:HondasBestPracticesprogramhasincreased
suppliersproductivitybyabout50%,improvedqualityby30%,
andreducedcostsby7%.Thatisntentirelyaltruistic;suppliers
havetoshare50%ofthecostsavingswithHonda.Thereduced
costsalsobecomethebaselinefornewcontractsthatsupplierssign
withHonda.However,thesuppliersbenefit,too,becausetheycan
applywhattheyhavelearnedtotheirotherproductlinesforHonda
anditscompetitorsandkeepallthosecostsavings.
Similarly,ToyotateachessuppliersitsfamedToyotaProduction
System.Thecompanyhasalsosetupjishuken,orstudygroup
teams,asawaytohelpthemanufactureranditssupplierslearn
togetherhowtoimproveoperations.Executivesandengineerswho

workforToyotaanditssuppliersmeetunderthedirectionofa
Toyotasenseiandgofromplanttoplantimprovingsuppliers
processes.Theseactivities,whichareorchestratedinsomecases
bytheBluegrassAutomotiveManufacturersAssociation(BAMA),
ToyotasNorthAmericansuppliergroup,givesuppliersmanagers
handsonexperiencewiththeToyotaProductionSystemin
differenttypesofenvironments.Theactivitiesalsocreatebonds
amongToyotassuppliersbecauserepresentativesofthevendors
gettogetherallthroughtheyearandsharepractices,information,
andconcerns.more
Inaddition,BAMAprovidessupporttosuppliersthatchooseto
helpthemselves.Forexample,in2000,whenTennecos
Smithville,Tennessee,exhaustsystemsplantdecidedtoinitiatea
leanmanufacturingtransformation,itturnedtoBAMAforhelp.
Throughtheassociation,Tennecosmanagersidentifiedand
visitedsomeofthebestleansuppliersintheUnitedStates.That
experiencehelpedthemdevelopavision.Themanagersthen
identifiedaleanmanufacturingexpertwithinthecompanyand
wentthroughaoneyeartransformationthatincludedchangingthe
plantlayout.By2002,theTennecoplanthadreducedheadcount
by39%,improveddirectlaborefficiencyby92%,eliminated$5
millionofinventory,reduceddefectsinmaterialsfrom638to44
partspermillion,andwonaToyotaawardforqualityanddelivery
performance.Tennecowasagreatstudent,butitalsohadagood
mentorinBAMA.
ThefirststepToyotaandHondatooktocreateleanenterpriseswas
todevelopsupplierstofilltheirNorthAmericanneeds.Oncethe
foundationwasinplace,theymovedontothetaskofconnecting
suppliersintoextendedleanenterprises.Thisisstillaworkin
progress.Byestablishingthesixlevelsofthesupplierpartnering
hierarchy,ToyotaandHondahavecreatedabaseonwhichtheir
supplierscancontinuouslylearnandgetbetter.ManyToyotaand
Hondaprogramsthatappeartobeshorttermcostcuttingmoves

areactuallyexperimentsinlearning.Forexample,Toyotathinksof
itsCCC21initiativenotasapricereductionprogrambutasaway
ofcreatingachallengingenvironmentthatmotivatesitssuppliers
toimprove.Itswellawarethattoachievea30%reductionin
costs,vendorswillhavetoquestioneveryoperatingassumption.
Tobesuccessful,anextendedleanenterprisemusthaveleadership
fromthemanufacturer,partnershipsbetweenthemanufacturerand
suppliers,acultureofcontinuousimprovement,andjointlearning
amongthecompaniesinthesuppliernetwork.ThatswhatToyota
andHondaareultimatelytryingtoachievethroughtheirremade
inAmericakeiretsu.