Building Deep Supplier RelationshipsJeffrey Liker / Thomas ChoiUniversity of Michigan/ Carey School of Business

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Two Japanese automakers have had stunning success building relationships with North American suppliers – often the same companies that have had contentious dealings with Detroit’s Big Three.

What are Toyota and Honda doing right?

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Building Deep Supplier Relationships

Vs.

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Businesses increasing rely on their suppliers to……

• Reduce costs• Improve quality• Develop new

processes & products faster than rivals

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By the turn of the millennium..

• Global sourcing quite common• Internet based technologies > compete on

cost more efficiently

• Hence cost became very important.

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2003: OEM Benchmark Survey: Toyota & Honda most preferred co. to work with.

Sales/ mn cars

Mfd. In USA(%)

From Vendors

(%)Toyota/ Lexus

2.1 60 75

Honda/ Acura

1.6 80 75

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Time to Design New Cars

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Big Three Toyota Honda

Mon

ths

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US manufacturers copied Japanese counterparts superficially…

• Slashed no. of suppliers• Awarded survivors long-term contracts• Encouraged top tier suppliers to manage lower

tiers• Top tiers to produce sub-systems ilo components• And take responsibility for: quality, cost & delivery

just-in-time• Used reverse auctions

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Two Kinds of Relationships

Power-based Relationship Shared Destiny Relationships

Win-lose Win-winTransactional Relationship basedShort term Long termYour problem Our problemMy benefit Our benefitMaximize autonomy Maximize

interdependanceExamples:GM/ Jose Ignacio Lopez Unipart/ British LeylandKinetic Honda Hero Honda

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A: Suppliers Serving US auto plants (n=90)B: Suppliers Serving Jap owned auto plants (n=90)

A To US Plants

BJap Plants

Inventory Turns 25 38

Emergency Shipping Costs $/ mn sales $

700 370

Ann % of truckloads filled to capacity

68 47

Defective ppm 292 222

Early Delivery 63 34

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A: Suppliers in US Serving US auto plants (n=90)B: Suppliers in US Serving Jap owned auto plants ( n=90)

A To US Plants

BJap Plants

No. of trucking co.s 4.3 1.4

Loading time (mins) 58 38

% using side loading trucks 0 19

WIP ( work shift) 5.4 3.9

Fin Goods storage time (work shift)

5.5 4.4

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Research Background

• 20 years’ study of US & Japanese auto industry• Between 1999 and 2002:

– 50 executives of Toyota & Honda interviewed in Japan & USA

– 40 managers from North American auto industry interviewed

– Several plant visits conducted

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The Supplier Partnering Hierarchy(Japanese Model)

1. Understand how your suppliers work

2. Turn supplier rivalry into opportunity

3. Supervise your suppliers

4. Develop suppliers’ technical capabilities

5. Share information intensively but selectively

6. Conduct joint improvement activities

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1. Understand how your suppliers work

• Learn about suppliers’ businesses

• Go see how suppliers work

• Respect suppliers’ capabilities

• Commit to co-prosperity

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2. Turn supplier rivalry into opportunity

• Source each component from two or three vendors

• Create compatible production facilities and systems

• Set up joint ventures with existing suppliers to xfer knowledge & maintain control

Johnson Controls

Trim Masters

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3. Supervise your suppliers

• Monthly report cards to core suppliers

• Immediate & constant feedback

• Senior managers involved in solving problems

Monthly Report Card• Quality• Delivery• Quantity delivered• Performance History• Incident Report• Comments

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4. Develop suppliers’ technical capabilities

Toyota & Honda don’t source from low-wage countries much; their suppliers’ innovation capabilities are more important than their wage costs.

• Build suppliers’ problem-solving skills

• Develop a common lexicon

• Hone core suppliers’ innovation capabilities

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- Guest engineer programs

- Check lists (exhaustive)

• Gotsu Gotsu: low frequency, high impact motions tires transmit to passengers’ lower backs.

• Buru Buru: high frequency, low impact vibrations they feel in the belly.

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5. Share information intensively but selectively

• Set specific times, places, & agendas for meetings

• Use rigid formats for sharing information

• Insist on accurate data collection

• Share information in a structured fashion

Jikon

SimpleParts

Design-in

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6. Conduct joint improvement activitiesHonda’s Best Practice

Program for Suppliers:• Productivity up 50%• Quality up 30%• Costs down 7%------------------------------Suppliers have to share

50% cost savings with Honda

• Exchange best practices with suppliers

• Initiate kaizen projects at suppliers’ facilities

• Set up supplier study groups.

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The Supplier Partnering Hierarchy

1. Understand how your suppliers work

2. Turn supplier rivalry into opportunity

3. Supervise your suppliers

4. Develop suppliers’ technical capabilities

5. Share information intensively but selectively

6. Conduct joint improvement activities