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Strategic Sourcing Through Keiretsu Suppliers of Toyota

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Objective: Hi everyone. By virtue of my coming from Toyota, with which I was associated for a major part of my career, I like to share a few interesting perspectives on Toyota's Keirestsu suppliers. I was fortunate enough to manage key Keiretsu suppliers of Toyota, who continue to contribute significantly to Toyota's progress worldwide. These suppliers are a significant piece in Toyota's strategic sourcing principles. The objective of this blog is to take you through the Keiretsu concept, how would a Toyota sourcing manager manage these suppliers and how would one leverage relationship with these suppliers to obtain long term savings and supply reliability (a TQM philosophy for Purchasing - variability reduction in everything is the prime focus).

Since I have directly managed some key Japanese suppliers such as Denso, Sumitomo, Yazaki, Toyota Boshoku (earlier Araco), Panasonic, Sony, Toyota Tsusho and Alpine and indirectly (Japanese technical support for non-Japanese suppliers) managed a few such as Shin Kobe (for Exide batteries) and Toyota Gosei, I would like also to share a few personal experiences, without reference to numbers, actual strategies and the specific supplier details. I would like to share this as one of the initial ones that I like to blog further as a series, if I get good responses. A few of the above suppliers (not all)  have a Keiretsu relationship with Toyota.

Introduction to Keiretsu and its meaning: Toyota has controlling stakes or cross holdings with the key suppliers in its supply base - this is to enable Toyota control some important supply parameters like cost, quality and delivery and also TTM (Time to Market). This closely knit supply base form what is known as the "Keiretsu". This is one of the many ways in which Toyota manages the uncertainty with respect to the supply conditions.

Toyota realized that suppliers played a bigger role in the OEM's success than the OEM's own efforts and developed ways and techniques to reduce the risks and uncertainties in the environment. One of the ways was to not treat suppliers "as suppliers" but as partners. This is one single biggest factor that contributes to what is generally accepted as the "Toyota Way in supplier management".  Toyota recognizes that about 70% of the vehicle cost can be controlled by an effective supplier base and inbound logistics.

Why Keiretsu? As a sourcing strategy, Keiretsu is used to: (1) reduce / control supply risks, (2) enhance supplier capability / competitiveness and (3) achieve market growth.

(1)    Mainly a risk reduction strategy - supplier financial risk, quality risk and risk of supply chain disruptions. Keiretsu suppliers have strong financial indices and the best inventory practices. Toyota sourcing teams have a constant tab on the financial ratios of these suppliers. Quality of parts is determined through concurrent engineering (with detailed deployment of PFMEA, QFD and other concepts) involving teams from sourcing, product development, marketing, quality and production teams. Building quality robustness is important because TPS needs Kanban and Kanban has lesser tolerance on part disruptions, thus closely weaving the supply chain closely into the product development system itself. Most of these suppliers follow VMI, Kanban, cross docking and Jumbiki (in which JIT is taken to the extreme with parts being picked up from the supplier every 15 minutes !! Like to explain this in more detail in the blogs to come)

(2)    Supplier Competitiveness - this signifies overall competitiveness especially cost, quality and delivery as also product innovation. The key component of this piece is cost. Unit price from these suppliers to Toyota is generally perceived to be higher than the competition. Then, how is it possible to bring in cost competitiveness? The answer is this: Toyota provides the overall specification of the components to these suppliers through a request for designing and developing a part / component with a specific cost target (shall explain in detail about cost targets in one more blog). The cost includes the TCO of the part. The costs from the concurrent engineering phase, the supply chain costs (in implementing TPS) and field performance are taken into the part cost. Hence the cost of the parts that get assembled onto a vehicle are perceptibly costlier on the face of it since it is a TCO cost but significantly lower the overall cost of ownership!! As an examples a Denso starter / Alternator is a galactic wonder - can run over two lifetimes of the vehicle (I wish I could explain here the technology behind a square cross section wire, a Teflon coated bearing or a unique torque curve)

(3)    Achieve market growth - here is what a long term supplier relationship can do, more significantly than achieving volume discounts and consolidation. Most of these suppliers are firsts in achieving something remarkable for the OEM. The first halogen free wiring harness in APAC or the first AC to release hydronium ions for a rejuvenated feeling in the car (the New Camry). This not only helps in reducing the TTM but also helps in a strong product positioning and customer recall.

Only handpicked Toyota buyers manage Keiretsu suppliers since these suppliers are generally exacting from the standpoints of the buyer's knowledge on TPS, sourcing and Toyota's yearly Hoshin (I shall explain more in detail about Toyota's Hoshin Kanri and sourcing principles in one of the upcoming blogs). The spend is generally very high due to the value of the parts and there are a lot of simultaneous initiatives running such as VA/VE (for a car release 3~4 years later), productivity improvements, SARBOX, SOC (substances of environmental concern), best cost parts for BRIC countries and so on. One of the basic learnings for anybody in the KM / IT / ITES / ICT industry is the visual control systems that these manufacturing bellwether companies handle - used for project management, stakeholder management, product development and simply for PDCA. And I realize that visual control itself is a blog that I can share sometime !!

One of the possible disadvantages of partnerships with suppliers (Keiretsu) as opposed to what is followed by other OEMs is that the suppliers make many of these parts as blackbox parts so as to provide competitive advantage to Toyota!! Nevertheless, very important components of a car in terms of value and criticality are developed with Keiretsu companies. Some critical parts are the ECU (Engine Control Unit), Seating System (government regulations are strong here), Air Conditioner etc. In most other semi / less critical parts, the supplier has to make the drawing as per Toyota requirement and submit for approval. On the other hand, a company like Toyota Tsusho is a trading company with some of the most amazing best practices in handing inventory and logistics.

I have a few more related topics to speak about on Toyota's supply chain and would like your comments to flow in so that it can be more interactive - an opportunity to share views further on this. If you have any doubts or would like to discuss / share further, I invite you to write to me. Would be great to exchange these perspectives. Thank you.

Comments

Coming from the Toyota’s main competitor, General Motors – let me present the other side of the story. GM used to have majority stakes in most of their critical components suppliers before 1980s but it led to a lot of inefficiencies and GM pulled its stake in most of the companies – Delphi, Allison Transmission, Detroit Diesel and Hughes Electronics were some of them. So having a controlling stake in Supplier Company doesn’t guarantee a success in Supplier Relationship Management. It has to be backed up with a very strong commitment and a robust governance mechanism – something that Toyota was able to achieve, probably due to Japan’s unique business culture.

Very intriguing topic from the pioneers of supply chain - Toyota. Lots to learn. Keep it going.

Thanks Durgesh - your views are correct. The main difference between the way GM and Toyota handle suppliers is totally different. Even where Keiretsu does not exist, Toyota tends to have a long term relationship with suppliers !! So, does it have something to do with culture? To a large extent, yes. But the main point here is that the whole of Japan was in doldrums after WW II and Toyota "went requesting" suppliers to produce parts for them. Toyota and their suppliers were on the same rocking boat. Moreover, quite a few suppliers were Toyota spin-offs and continued to make parts for them. GM ideology is different. GM was a dominant force during those time and grew by acquisitions / aggresion rather than by the organic route. Ofcourse, I also worked with GM for quite sometime.

Very well written Prashanth. The supplier relationship is a critical area of course. So Keiretsu which is deployed for usually preferred/long term and strtegic suppliers like focussed by Toyota, is equally applicable for other firms and sectors too. Once firms are clear on the category of suppliers, they can choose the level of participation and pro-rata governance. A lot of firms like retail do similar stuff too. Apple does all that for ipad with Foscon in China. However, meeting of minds has to be 100% to have something like this become successful.

All the above are great points and it is great to have suppliers like the Keiretsu group but what to do when certain risks are not in the control of the suppliers, such as political risks,natural calamities,government policy changes etc?

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