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7/31/2019 Role of Global Procurement in Value Chain
1/2
The Role of Global Procurement in the Value Chain
of Japanese Steel
Overview:
This case study is about the vital role played by Japans global procurement and
logistical strategy in that countrys road to the worlds leadership in steel exports
After the World War II, Japanese steel industry rose from a state of industrial disaster
to be the worlds leading exporter of steel in a period under 25 years.
The value chain is an especially useful framework for cutting through the complex
issues of the sources of globalization in highly competitive industries like steel in
Japan.
US steel firms were more highly integrated, the unique nature of Japans
procurement and logistical system created significant economies of scale by virtue ofindustry wide cooperation and learning, and through supplier-buyer arrangements
that offered all the benefits of vertical integration without its disadvantages.
Timeframe:
This case study is about the time frame of late 1950s to 1970s, where the role of
global procurement in value chain of Japanese steel industry was studied.
Environmental circumstances (PESTEL):
Non availability of raw materials like iron ore, coking coal and limestone, etc.
Japan imports almost all of the material inputs for making metal products, clothing,
and wide range of basic food stuffs.
After World War II, economic growth was badly required and steel worked as
important input to industrial and infrastructural requirement.
Steel exports could bring in foreign exchange for Japans growth more rapidly than
textiles, clothing and variety of other light goods.
Long distance of raw material countries and long distance to haul finished products.
Availability of low wage labour in Japan with high motivation as compared to USA.
Technological improvements were introduced by the Japan beginning from 1951 (hot
rolling of silicon sheet sheets) to 1976 (bottom-blown basic oxygen).
Key challenges, issues & problems:
Japan imports almost all of the material inputs for making metal products.
High cost of input material as it was imported from long distance countries like USA,
Australia and Canada.
Less labour productivity as compared to competitors (e.g. USA)
Huge gap between demand for steel and available resources. The production cost for Japanese was much higher than US.
7/31/2019 Role of Global Procurement in Value Chain
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Alternatives available to resolve the challenges, issues and problems:
With regard to lowering unit costs, the Japanese institutionalized coordinated
procurement of raw materials by acting as a single customer in international markets,
thus maximizing the industrys bargaining power.
Develop an information system for procuring factor inputs in an efficient manner. Utilize imaginative innovations in procurement practices to reduce raw material costs.
Harness technology to facilitate shifting sources to wherever the best bargains could
be struck.
Provide technical aid and capital, where necessary, for developing mineral
production and to help suppliers reduce their costs through the adoption of modern
technology.
To procure ores with low impurity levels to forego the expense of having to remove
those impurities later in the production process.
Switching over to coal as a cheaper source of fuel and to conserve energy due to
price rises of oil.
Success stor ies:
Japanese used both formal and informal organizational arrangements involving
industry wide linkages to extend the competitive scope of steel firms.
Low cost per unit of production was achieved by leveraging global sourcing options.
Japan became largest exporter of steel because of optimizing its resources and
taking long term actions based on its global procurement strategy.
All individual buyers in Japan came at single platform and procured raw material
collectively to get maximum scale of economies benefits. Also, the total cost of
performing all of the activities in Japans value chain for steel became lower than that
of the US.
Japanese firms aggressively continued to pursue all of the cost reductions in value
activities.
Key learning points w.r.t. sourcing, procurement and vendor management:
The principal lesson that can be learnt from Japanese steel experience is thenecessity for basing competitive strategies on comprehensive understanding of the
value chain of industries, especially the behavior of costs in largely undifferentiated
product markets.
The Japanese model is rapidly being replicated by a number of resource poor, newly
industrializing countries e.g. Korea and Taiwan, whose labour costs are significantly
lower than those in Japan.
Economies of scale in managing supplier located in different countries and in
procurement of common raw materials and sale of finished steel.
The procurement and logistic principles are applicable to a wide range of industries inboth highly industrialized and newly industrializing economies.