HBRSpotlight

•The Cihauv

Two Japanese automakers have had stunning successbuilding relationships with North Annerican suppliers-oftenthe same companies that have had contentious dealings withDetroit's Big Three. What are Toyota and Honda doing right?

by Jeffrey K- Liker and Thomas Y- Choi

uildingDeep supplier^Relationships

"The Big Three [U.S. automakers] set annual cost-reduction targets [for theparts they purchase]. To realizo those targets, they'll do anything. [They'veunleashed] a reign of terror, and it gets worse every year. You can't tr\istanyone [in those companies]."

- Director, interior systems supplier to Ford, CM, and Chrysler, October 1999

"Honda is a demanding customer, but it is loyal to us. [American] automakershave us work on drauhngs, ask other suppliers to bid on them, and give the jobto 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 theylearn how to hate suppliers. The company is extremely confiTontational. Afterdealing 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 bymaking one component, and as we improved, [Toyota] rewarded us vrtthorders for more components. Toyota is our best customer." ' ,

- Senior executive, supplier to Ford, GM, Chrysler, and Toyota, July 2001

No corporation needs to be convinced that in today's scale-driven,technology-intensive global economy, partnerships are the supplychain's lifeblood. Companies, especially in developed economies, buymore 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 2002to buy materials, compared with 43 cents in 1996, according to Purchasing maga-zine's estimates. Businesses are increasingly relying on their suppliers to reduce

104 HARVARD BUSINESS REVIEW

DECEMBER 2004

>

The 21&t-Century Supply Chain

costs, improve quality, and develop new processes andproducts faster than their rivals'vendors can. In fact, someorganizations have started to evaluate whether they mustcontinue to assemble products themselves or whetherthey can outsource production entirely. The issue isn'twhether companies should turn their arms-length rela-tionships with suppliers into close partnerships, but how.Happily, the advice on that score is quite consistent: Ex-perts agree that American corporations, like their Japa-nese rivals, should build supplier keiretsu: close-knit net-works of vendors that continuously leam, improve, andprosper along with their parent companies. (Incidentally,we don't mean that companies should create complexcross holdings of shares between themselves and theirsuppliers, the way Japanese firms do.)

For corporations intimidated by the prospect of build-ing familial ties with the suppliers they've traditionallybullied, our research offers some bad news and somegood news. First, the bad news; It's tougher to build rela-tionships with suppliers than companies imagine. Formore than 20 years, many American businesses have un-successfully tried to build bonds with suppliers. As part ofthe quality movement of the 1980s, these companies os-tensibly adopted the Japanese partnering model. Theyslashed the number of suppliers they did business with,awarded the survivors long-term contracts, and encour-aged top-tier vendors to manage the lower tiers. They alsogot top tier suppliers to produce subsystems instead ofcomponents, to take responsibility for quality and costs,and to deliver just in time. In 2001, the Malcolm BaldrigeNational Quality Award Committee made "key supplierand customer partnering and communication mecha-nisms" a separate category on which it would judge thebest companies in the United States.

However, while these American companies createdsupply chains that superficially resembled those of theirJapanese competitors, they didn't alter the fundamentalnature of their relationships with suppliers. It wasn't longinto the partnering movement before manufacturers andsuppliers were fighting bitterly over the implementationof best practices like continuous quality improvement andannual price reductions. By the tum of the millennium, twoadditional factors made cost, again, the main criterion insupplier selection. First, companies were more easily ableto source globally, notably from China. They jumped tothe conclusion that the immediate benefits of low wage

Jeffrey K. Liker (liker@umich.edu) is a professor of industrialand operations engineering at the University of Michigan inAnn Arbor. Thomas Y. Choi (thomas.choi@asu.edu) is a pro-fessor of supply chain management at the W.R Carey Schoolof Business at Arizona State University in Tempe.

costs outweighed the long-term benefits of investing inrelationships. Second, the development and spread ofInternet-based technologies allowed companies to getsuppliers to compete on cost more efficiently-and morebrutally-than they used to. Consequently, manufacturer-supplier relations in America have deteriorated so muchthat they're worse now than before the quality revolutionbegan. In the U.S. automobile industry, for instance, Forduses online reverse auctions to get the lowest prices forcomponents. GM writes contracts that allow it to shift toa less expensive supplier at a moment's notice. Chryslertried to build a keiretsu, but the process unraveled afterDaimler took over the company in 1998. Not surprisingly,the Big Three have been more or less at war with theirsuppliers. Having witnessed the American automakers'abject failure to create keiretsu, most Western companiesdoubt they can replicate the model outside the culture andsociety of Japan.

Time, perhaps, for the good news. Contrary to the cyn-ics'beliefs, the reports of the keiretsu's demise are greatlyexaggerated. The Japanese supplier-partnering model isalive, well, and flourishing-not Just in Japan but also inNorth America. During the past decade, $160 billion To-yota and $75 billion Honda have struck remarkable part-nerships with some of the same suppliers that are at log-gerheads with the Big Three and have created latter-daykeiretsu across Canada, the United States, and Mexico.The two Japanese companies work closely with their sup-pliers in those areas. Of the 2.1 million Toyota/Lexus ve-hicles and the i.6 million Honda/Acura vehicles sold inNorth America in 2003, Toyota manufactured 60% andHonda produced 80% in North America. Moreover, thetwo companies source about 70% to 80% of the costs ofmaking each automobile from North American suppli-ers. Despite the odds, Toyota and Honda have managedto replicate in an alien Western culture the same kind ofsupplier webs they built in Japan. Consequently, theyenjoy the best supplier relations in the U.S. automobileindustry, have the fastest product development processes,and reduce costs and improve quality year after year. Con-sider the evidence:

• In 2003, when Planning Perspective, a Birmingham,Michigan-based research company, conducted the OEMBenchmark Survey, one of the principal measures ofmanufacturer-supplier relations in the U.S. automobileindustry, it rated Toyota and Honda as the most preferredcompanies to work with. In 17 categories, ranging fromtrust to perceived opportunity, Toyota and Honda led.They were followed by Nissan, while Chrysler, Ford, andGM were a distant fourth, fifth, and sixth. In particular,suppliers said that Toyota and Honda were better com-municators and that they were more trustworthy and

106 HARVARD BUSINESS REVIEW

•BulldlngPeep Supplier RelationshJIpa

more concerned about suppliers' profit-ability than other manufacturers were.

• While U.S. automakers take two tothree years to design new cars, Toyotaand Honda have consistently been ableto do so in just 12 to 18 months. Last year,a J.D. Power and Associates study foundthat suppliers rated Toyota aiTiong the bestand rated Honda above average at pro-moting innovation. The study found thatChrysler, Ford, and GM were below aver-age at fostering innovation with vendors.

• According to several academic pa-pers, Toyota and Honda brought downthe manufacturing costs of the Camryand the Accord by about 25% during the1990s. Still, the two companies have ap-peared at the top of surveys by J.D. Powerand Associates and Consumer Reports oninitial quality and long-term durability.They also produced the most reliable carsand recalled fewer vehicles in the UnitedStates in the past ten years than GM,Ford, or Chrysler did.

Just how do Toyota and Honda get itright when their rivals get it so wrong?We have been studying the American andJapanese automobile industries for morethan two decades. Between 1999 and 2002,we interviewed more than 50 Toyota andHonda managers in Japan and the UnitedStates, several executives who had left fci^^™«i*»those companies' American subsidiaries,and managers from more than 40 suppliers in the NorthAmerican automobile industry. We also visited Toyotaand Honda plants in the United States, suppliers' facto-ries and technical centers, the Toyota Technical Center inAnn Arbor, Michigan, and Honda of America's Purchas-ing Office in Marysville, Ohio. Our research shows that To-yota and Honda have developed partnerships with theirAmerican suppliers by following similar approaches.

Tough Love

When Toyota and Honda set up manufacturingoperations in North America in the 1980s, theystarted by encouraging the creation of some

joint ventures between their Japanese suppliers and Amer-ican companies. Later, they selected local companies theycould develop as suppliers. They gave their new vendorssmall orders to begin with and expected them to meetcertain cost, quality, and delivery parameters. If suppliers

coped with the first orders well, Toyota and Honda awardedthem larger contracts and taught them their "ways" ofdoing business. (For more on these approaches, see JeffreyK. Liker's book. The Toyota Way: 14 Management Principles

from the World's Greatest Manufacturer and Powered byHonda: Developing Excellence in the Global Enterprise, byDave Nelson, Rick Mayo, and Patricia E. Moody.)

When we compared the elements of Toyota's partner-ing model with those of Honda's, we found that althoughthe two companies used different tools, they had createdstrikingly similar scaffoldings. Experts usually emphasizethe use of devices like target pricing, but we believe To-yota and Honda have built great supplier relationshipsby following six distinct steps: First, they understand howtheir suppliers work. Second, they turn supplier rivalryinto opportunity. Third, they supervise their vendors.Fourth,theydeve]optheirsuppliers'technical capabilities.Fifth, they share information intensively but selectively.And sixth, they conduct joint improvement activities.

DECEMBER 2004 107

The 21st-century Supply Chain

Some of these steps support others. For example, if man-ufacturers deploy controls without creating a founda-tion of understanding, that wiil lead to gaming behaviorby suppliers. We therefore organized the six steps as asupplier-partnering hierarchy, with one leading to thenext. Toyota and Honda have succeeded not because theyuse one or two of these elements but because they use allsix together as a system. (See the exhibit "The Supplier-Partnering Hierarchy.")

Most vendors believe that Toyota and Honda are theirbest-and toughest-customers. The two companies sethigh standards and expect their partners to rise to meetthem. However, the carmakers help suppliers fulfill thoseexpectations. Clearly, Toyota and Honda want to maxi-mize profits, but not at the expense of their suppliers. AsTaiichi Ohno, who created the Toyota Production Sys-tem, has said, "The achievement of business performanceby the parent company through bullying suppliers is to-tally alien to the spirit ofthe Toyota Production System."The key word in that statement is "parent," which signalsa long-term relationship that involves trust and mutualwell-being. At the same time, the relationship connotesdiscipline and the expectation of improvement and growth.Take, for example, Toyota's Construction of Cost Compet-itiveness for the 21st Century (CCC21) program, whichaims at a 30% reduction in the prices of 170 parts that thecompany will buy for its next generation of vehicles. Dur-ing our interviews, we didn't hear vendors decryingCCC21 as unfair. Instead, they wanted to give Toyota theprice reductions it sought. They believed Toyota wouldhelp them achieve that target by making their manufac-turing processes leaner, and because of Toyota's toughlove, they would become more competitive - and moreprofitable - in the future. _ ••

Conduct Joint Improvement activities.• Exchange best practices with suppliers.

. Initiate kaizen projects at suppliers'facilities.

• Set up supplier study groups.

Share information intensively but selectively.• Set specific times, places, and agendas for meetings.

• Use rigid formats for sharing information.

• Insist on accurate data collection.

• Share information in a structured fashion.

Develop suppliers* technical capabilities.• Build suppliers' problem-solving skills.

• Develop a common lexicon.

• Hone core suppliers' innovation capabilities.

Supervise your suppliers.• Send monthly report cards to core suppliers.

• Provide immediate and constant feedback.

• Get senior managers involved in solving problems.

Tum supplier rivalry into opportunity.• Source each component from two or three vendors.

Create compatible production philosophies and systems.

• Set up joint ventures with existing suppliers to transfer

knowledge and maintain control.

Understand how your suppliers work.• Learn about suppliers' businesses.

• Go see how suppliers work.

• Respect suppliers'capabilities.

• Commit to coprosperity.

Understand VLovr Your Suppliers Work

"Whenever 1 ask | executives in the Big Three) how theydeveloped a target price, the answer is: silence. They basethe target price on nothing. The finance manager justdivvies up the available money: 'Here's what we nor-mally spend on braking systems, here's what you'll getthis year.' They have no idea how we'll get those cost re-ductions. They just want them."

- Senior executive, brake-lining supplier to U.S.automakers, February 2002

U nlike most companies we know, Toyota andHonda take the trouble to learn all they canabout their suppliers. They believe they can

create the foundations for partnerships only if they knowas much about their vendors as the vendors know about

The Supplier-PartneringHierarchy

themselves. They don't cut corners while figuring out theoperations and cultures of the firms they do businesswith.Toyota wsQsXhQlQvvnsgenchigenbutsu oxgembo (ac-tual location and actual parts or materials) to describe thepractice of sending executives to see and understand forthemselves how suppliers work. Honda uses a similar ap-proach, and both companies insist that managers at alllevels-right up to their presidents-study suppliers first-hand to understand them.

The process can take a while,but it usually proves to bevaluable for both the suppliers and the manufacturers. In

108 HARVARD BUSINESS REVIEW

1987, when Honda of America was toying with the ideaof using Atlantic Tool and Die as a source for stampingand welding jobs, it sent one of its engineers to spend ayear with the Cleveland-based company. For 12 months,the middle manager studied the way the organizationworked, collected data and facts, and informally sharedthe findings with his counterparts at Atlantic. Over time,they agreed with the Honda engineer's conclusions andimplemented many of his suggestions, which led to markedimprovements on the shop floor. About six months intohis stay, the Honda engineer asked Atlantic's top manag-ers to show him the company's books, which they reluc-tantly agreed to do. By the time the Honda engineer left,he knew almost everything about Atlantic's operationsand cost structure.

That knowledge proved useful when the two compa-nies started doing business together in 1988. Japanesecompanies traditionally work backward when settingprices for the components and services they buy. Insteadof following the American practice of calculating costs,adding a profit margin, and setting the product's price,Japanese executives start with the price of the productthey believe the market can bear. Then they figure out thecosts they can incur to make the desired profits on that

-Building Deep Supplier Relationahips

the next five years. It's interesting to note that around thesame time, Atlantic attained the coveted Spear 1 supplierstatus at GM. That designation, GM claimed, wouldsurely lead to more business with the manufacturer andits suppliers. But soon thereafter, GM reduced its orderswith Atlantic without explanation. The supplier didn't getmore business from GM during the next two years, andthe partnership implied by the Spear l status never cameto fruition.

Tum Supplier Rivalry into Opportunity

"Chrysler was our best customer, and we would break ourback for them. Now we feel we're just another supplier.I It has j put us in a bucket with everyone else, and we feellike any other vendor."- Senior executive, supplier to DaimlerChrysler, July 1999

For all the feel-good talk about developing manu-facturer-supplier partnerships. Western execu-tives still believe that the keiretsu system is, at its

core, inefficient and inflexible. They assume that in thekeiretsu model, companies are locked into buying com-ponents from specific suppliers, a practice that leads to

Toyota and Honda believe they can create thefoundations for partnerships only if they know asmuch about their vendors as the vendors knowabout themselves.

item. That practice allows the executives to set targetprices: the amounts they can afford to pay suppliers forcomponents and services given the budget for the prod-uct. Accordingly, when Honda submitted the target pricesfor the first jobs it gave Atlantic, both firms knew the sup-plier would make a profit. It would be a small profit,though, because Honda expected Atlantic to increase itsprofit margin by cutting costs over time.

A little empathy breeds a great deal of mutual under-standing. Atlantic signed on partly because it believedHonda was acting fairly by allowing it to make a profiton the first deals. Because of the Honda engineer's visit,the supplier also felt confident that, with Honda's assis-tance, it would be able to reduce its costs. Once Atlantichad displayed its ability to handle Honda's orders, theautomaker recommended the company to its other sup-pliers. As a result, Atlantic's business rose steadily during

additional costs and technological compromises. We findthat assumption to be incorrect. Neither Toyota nor Hondadepends on a single source for anything; both developtwo to three suppliers for every component or raw mate-rial they buy. They may not want ten sources, as an Amer-ican business would, but they encourage competition be-tween vendors right from the product development stage.For example, Toyota asked several suppliers in NorthAmerica to design tires for each of its vehicle programs. Itevaluated the performance ofthe tires based on the sup-pliers'data as well as Toyota's road tests and iiwarded con-tracts to the best vendors. The selected suppliers receivedcontracts forthe life of a model, but if a supplier's perfor-mance slipped, Toyota would award the next contract toa competitor. If the supplier's performance improved, To-yota might give it a chance to win another program andregain its market share.

DECEMBER 2004 109

HBRSpotlight

TheZlat-Century-Supply Caialii

There is a key difference between the way Americanand Japanese companies fuel the rivalry between theirsuppliers. US. manufacturers set vendors against eachother and then do business with the last supplier stand-ing. Toyota and Honda also spark competition betweenvendors-especially when there is none-but only with thesupport of their existing suppliers. In 1988, when Toyotadecided to make cars in Kentucky, it picked Johnson Con-trols to supply seats. Johnson Controls wanted to expandits nearby facility, but Toyota stipulated that it shouldn't,partly because an expansion would require a large invest-ment and eat into the supplier's profits. Instead, the Japa-nese manufacturer challenged Johnson Controls to makemore seats in an existing building. That seemed impossibleat first, but with the help of Toyota's lean-manufacturingexperts, the supplier restructured its shop fioor, slashed in-ventories, and was able to make seats for Toyota in the ex-isting space. That experience helped the American vendorunderstand that it wasn't enough to deliver seats just intime; it had to use a system that would continually reduceits costs and improve quality. Such an approach wouldbetter align Johnson Controls'operating philosophy withToyota's.

The relationship between manufacturer and supplierdidn't end there. Six years later, when Toyota wanted to

Supervise Your Suppliers"[The Big Three] are hall monitors: I have to get from thisdoor to that door, and they ask for my pass. You do every-thing you can to meet their objectives, but they keepputting barriers in the way."

- Engineering director. Big Three supplier, April 2001

V endors we talk to in Europe,the United States,and Mexico assume that Japanese-style partner-ships are relationships between equals. They mis-

construe win-win deals to mean that Toyota and Hondatrust their suppliers enough to let them do their ownthing. But in fact, the two Japanese automakers don't takea hands-off approach; they believe suppliers' roles are toovital for that. They use elaborate systems to measure theway their suppliers work, to set targets for them, and tomonitor their performance at all times. Controls are thefiip side ofthe trust that Toyota and Honda have in theirsuppliers.

Honda, for instance, uses a report card to monitor itscore suppliers, some of which may be even second- orthird-tier vendors. Unlike most Fortune 1,000 companies,which send reports to suppliers annually or biannually,Honda sends reports to its suppliers' top management

Toyota and Honda don't source from lo^v-countries much; their suppliers' innovationcapabilities are more important than their wage costs.

develop another source of seats, it refused to tum to an-other American manufacturer. Instead, it asked JohnsonControls if it was interested in entering into a joint ven-ture with Toyota's biggest seat supplier in Japan, Araco,which was planning to enter the U.S. market. In 1987,Johnson Controls and Araco set up an American jointventure. Trim Masters, in which each held 40% ofthe eq-uity and Toyota held 20%. Johnson Controls created afirewall so that Trim Masters would become a competi-tor in every sense ofthe word. A decade later. Trim Mas-ters has become Johnson Controls' main rival for Toyota'sseats business. In 2003, while Trim Masters had a 32%share of the business, Johnson Controls had a 56% share.Because of its investment in the joint venture, JohnsonControls has benefited from Trim Masters' success. Toyotaturned a need to create competition between suppliersinto an opportunity to cement its relationship with anexisting vendor.

every month. A typical report has six sections: quality,delivery, quantity delivered, performance history, inci-dent report, and comments. The incident report sectionhas a subcategory for quality and another for delivery.Honda uses the comments section to communicate howthe supplier is doing. We've seen comments like "Keepup the good work" and "Please continue the effort; it isgreatly appreciated." Honda also uses this section to high-light problems. For instance, Honda will write, "Label er-rors recorded on Ipart description and number]. Coun-termeasures presented weren't adequate."

Honda expects its core suppliers to meet all their tar-gets on metrics like quality and delivery. If a vendormisses a target, the company reacts immediately. In early1998, a tier-one supplier didn't meet an on-time-deliverytarget. Within hours of missing its deadline, the vendorcame under intense scrutiny from Honda. It had to ex-plain to the manufacturer how it would try to find the

no HARVARD BUSINESS REVIEW

Deep Supplier Belationshlps

causes, how long that might take, and the possible mea-sures it would employ to rectify the situation. Until it didthat, the supplier had to promise to add extra shifts at itsown cost to expedite order delivery. Both Toyota andHonda teach suppliers to take every problem seriouslyand to use problem-solving methodologies that uncoverroot causes. If suppliers aren't able to identify the causes,the manufacturers immediately send teams to help them.The manufacturers'engineers will facilitate the trouble-shooting process, but the suppliers' engineers must exe-cute the changes.

In contrast with most American companies, Toyota andHonda expect their suppliers' senior managers to get in-volved whenever issues arise. That expectation often causesproblems. For example, in 1997, when a North Americansupplier ran into a design-related quality issue, the vicepresident of the Toyota Technical Center immediatelyinvited his counterpart for a visit to discuss the matter.When the executive arrived, it became clear that he didn'tunderstand the problem or its causes. "I don't get intothat kind of detail,"he stated. He was apologetic about theproblem, however, and firmly assured his counterpartthat he would take care of it. But that level of involvementwasn't enough for Toyota's managers. The Technical Cen-ter vice president asked the American executive to go andsee for himself what the glitches were and return to dis-cuss solutions when he understood the issues. Around thesame time,Toyota found a quality problem with wire har-nesses that Yazaki Corporation had supplied. The ven-dor's president fiew to the Georgetown, Kentucky, plantand spent time on the shop floor observing how Toyota'sworkers assembled the harnesses. Only after the execu-tive personally understood the situation did Yazaki for-mally present to Toyota the countermeasures it had al-ready taken to fix the problem.

Develop Compatible Technical Capabilities

"[The term] 'supplier development' gives the impressionthat suppliers need to be developed. The reality is thatwe suppliers generally develop [the American automo-bile manufacturers'] people. They come in and tell uswith an iron hand how to run our business, and we thenhave to train them about what we do!"

- Managing director, supplier to one ofthe Big Three,August 1999

The notion of sourcing components from low-wage countries in Asia fascinates Western com-panies. Many U.S. automakers and their sup-

pliers have set multibillion-dollar targets for purchasingcomponents from China as if that would be an accom-

plishment in itself. That raises the question: Why haven'tToyota and Honda switched to Chinese and Indian sup-pliers, too? According to our research, neither companysources very much from those countries primarily be-cause suppliers there offer them only wage savings. Thatisn't enough for Toyota and Honda, which believe thatsuppliers' innovation capabilities are more importantthan their wage costs.

Toyota and Honda have invested heavily in improvingthe ability of their first-tier vendors to develop products.While their longtime suppliers like Denso, Aisin, andAraco can design components for the carmakers inde-pendently. North American vendors still don't know themanufacturers well enough to do so. For example, tiresare critical to a vehicle's comfort, safety, handling, andnoise level, but American vendors complain that Toyotaand Honda give them vague specifications for new tires.Honda doesn't spell out the level of resistance it expectsfrom a tire; it will only say that the tire has to have theright "feel"-a characteristic that is hard to quantify-andthat it will be adjusted as the vehicle is designed. Toyota'sengineers have developed a special vocabulary to de-scribe the effect of tires on passengers. For instance, theyuse gotsu gotsu to refer to the low-frequency, high-impactmotions tires transmit to passengers' lower backs andburu buru to describe the high-frequency, low-impact vi-brations they feel in their belly. Toyota's engineers expectsuppliers to understand what they are talking about andto identify solutions to problems the engineers describe.Until vendors learn to understand the terminology thatToyota and Honda use and are able to translate thosevague requirements into design solutions, they can't de-velop new products for them.

That's why both companies have created guest engi-neer programs. Toyota and Honda ask first-tier suppliersto send several of their design engineers to the manufac-turers' offices, where they work alongside the parent com-panies' engineers for two to three years. Eventually, thesuppliers' engineers will understand the developmentprocess and come up with design ideas for Toyota andHonda. Meanwhile, the manufacturers have helped ven-dors by setting up learning links, forged by moving work-ers or launching transnational product developmentprojects. For instance, since Toyota works with Denso inJapan, technology and knowledge transfers take placefrom Toyota's Japan operations to the Toyota TechnicalCenter in Michigan and from Denso in japan to Denso inSouthfield, Michigan. Then tbe Toyota Technical Centerand Denso work together to develop components for theU.S. market.

Toyota and Honda have also created checklists with hun-dreds of measurable characteristics for each component.

DECEMBER 2004 111

The 21st-century Supply CaiaiiLHBRSpotlight

American suppliers often don't have the data the Japanesecompanies demand because other manufacturers don'task for them. Toyota and Honda start the product devel-opment process with their suppliers on-site by teachingthem how to collect data. For example, Toyota expectsprecise data on the tolerances that the supplier's equip-ment can hold so it can design the product appropriately.One of its American suppliers didn't have that informa-tion for a component because it hadn't measured thoseparameters for decades. When Toyota discovered that, ithelped the supplier set up a data collection system beforethe two companies figured out ways to improve the pro-cess. Clearly, as suppliers develop the capabilities to meetthe Japanese manufacturers' requirements for data anddesign, they become more valuable to them than low-costvendors without those capabilities could be.

Share Information Intensivelybut Selectively

"There's a danger in training [Chrysler's engineers]. Ourpeople are very open, and they will tell our customerseverything. They don't know that Chrysler's engineerslater use that against us: 'So-and-so said you can do thatin a week' |and that sort of thing]."

- Director of engineering, Chrysler supplier, August 1999

W hen Chrysler tried to build an Americankeiretsu in the early 1990s (see Jeffrey H.Dyer, "How Chrysler Created an American

Keiretsu,"HBRJuly-August 1996), it shared reams of dataand held numerous meetings with suppliers. Chrysler'sphilosophy seemed to be,"If we inundate vendors with in-formation and keep talking to them intensely, they willfeel like partners."Toyota and Honda, however, believe incommunicating and sharing information with suppliersselectively and in a structured fashion. Meetings haveclear agendas and specific times and places, and there arerigid formats for information sharing with each supplier.The two Japanese companies know that sharing a lot ofinformation with everyone ensures that no one will havethe right information when it's needed.

Toyota and Honda share information carefully whenthey're developing new products with their suppliers. To-yota, for instance, divides components into two catego-ries: those that vendors can design by themselves andthose that must be developed at Toyota. The first categoryincludes floor consoles, sunroofs, mirrors, locks, and othersmall components. Suppliers can design those compo-nents without much interaction with Toyota's engineersbecause the parts work relatively independent ofthe restofthe vehicle. The second category includes parts that in-

terface with the sheet metal and trim of the body. Toyotamust design these components more collaboratively withsuppliers. It insists that suppliers develop the parts onToyota's premises in close consultation with the manu-facturer's engineers. At the Toyota Technical Center, the"design in" room houses suppliers who work in the sameroom on the same project. They design components intonew vehicles using Toyota's CAD systems. Suppliers haveto work at the Technical Center because Toyota givesthem a lot of proprietary information, and they need towork hand in hand with Toyota engineers, especially dur-ing the early phases of a project.

The same principle-that inundating people with datadiminishes focus while targeted information leads to re-sults-extends to strategy. Honda uses only one top man-agement meeting, orJikon, to share plans with each sup-plier. The meetings involve a Honda team - usually twovice presidents of supplier management and several as-sistant vice presidents - and a supplier team. The jikonhappen within three months of the end of the fiscal year,which is when most suppliers make investment decisionsand other strategic plans. Only core suppliers participatein the meetings, which take place at the regional andglobal levels. Honda invites one supplier from each regionto the global jikon in Tokyo every year; it held one-on-onemeetings with 35 North American suppliers in 2003. Thediscussions don't extend to operational matters but in-stead cover only top-level strategic issues. Honda tells thesuppliers what kinds of products it intends to introduceand what types of markets it plans to cultivate in the com-ing years. The company then discusses the supplier's stra-tegic direction in terms of technology,globalization, majorinvestments (such as capital goods and plant expansion),and ideas about new products. The meetings also coverimprovements that will be necessary in the quality, cost,and delivery ofthe vendor's products.

Conduct Joint Improvement Activities

"We're a showcase supplier for Toyota. Toyota improvesitssystemsand shows how [implementingthose changeswill] improve [your production system, too]. We had dis-cussions with [one ofthe Big Three's] so-called continu-ous improvement experts from Purchasing. He wantedto see what we were doing but didn't have much to add."

- Sales director, Big Three supplier, July 1999

Many American suppliers celebrated when theyfirst received business from Toyota or Honda.They knew that in addition to new business,

they would get opportunities to learn, to improve, andto enhance their reputations with other customers. Be-

112 HARVARD BUSINESS REVIEW

cause Toyota and Honda are models of lean manage-ment, they bring about all-around improvements in theirsuppliers.

Honda, for example, has stationed a number of engi-neers in the United States, and they lead kaizen (continu-ous improvement) events at suppliers' facilities. Whileother automakers devote one day to a week to developingsuppliers, Honda commits 13 weeks to its developmentprogram, which entails the creation of a mode! produc-tion line in the supplier's factory. Honda's engineers be-lieve that the company's goals extend beyond technicalconsulting; the aim is to open communication channelsand create relationships. That's why Honda's engineersstay in touch with suppliers long after returning to theirown plants. That dedication to follow-through pays off:Honda's Best Practices program has increased suppliers'productivity by about 50%, improved quality by 30%, andreduced costs by 7%. That isn't entirely altruistic; suppliershave to share 50% ofthe cost savings with Honda. The re-duced costs also become the baseline for new contractsthat suppliers sign with Honda. However, the suppliers

Building Deep Supplier Relationships

Tenneco's Smithville, Tennessee, exhaust-systems plantdecided to initiate a lean-manufacturing transformation,it turned to BAMA for help. Through the association,Tenneco's managers identified and visited some of thebest lean suppliers in the United States. That experiencehelped them develop a vision. The managers then identi-fied a lean-manufacturing expert within the company andwent through a one-year transformation that includedchanging the plant layout. By 2002, the Tenneco planthad reduced head count by 39%, improved direct laborefficiency by 92%, eliminated $5 million of inventory, re-duced defects in materials from 638 to 44 parts per mil-lion, and won a Toyota award for quality and delivery per-formance. Tenneco was a great student, but it also had agood mentor in BAMA.

The first step Toyota and Honda took to create lean en-terprises was to develop suppliers to fill their NorthAmerican needs. Once the foundation was in place, theymoved on to the task of connecting suppliers into ex-tended lean enterprises. This is still a work in progress. By

The two Japanese companies know that sharing a lotof information with everyone ensures that no one willhave the right information when it's needed.

benefit, too, because they can apply what they havelearned to their other product lines for Honda and itscompetitors and keep all those cost savings.

Similarly, Toyota teaches suppliers its famed ToyotaProduction System.The company has also set upjishuken,or study group teams, as a way to help the manufacturerand its suppliers learn together how to improve opera-tions. Executives and engineers who work for Toyota andits suppliers meet under the direction of a Toyota senseiand go from plant to plant improving suppliers' processes.These activities, which are orchestrated in some cases bythe Bluegrass Automotive Manufacturers Association(BAMA), Toyota's North American supplier group, givesuppliers'managers hands-on experience with the ToyotaProduction System in different types of environments.The activities also create bonds among Toyota's suppliersbecause representatives of the vendors get together allthrough the year and share practices, information, andconcerns.

In addition, BAMA provides support to suppliers thatchoose to help themselves. For example, in 2000, when

establishing the six levels ofthe supplier-partnering hier-archy, Toyota and Honda have created a base on whichtheir suppliers can continuously leam and get better.Many Toyota and Honda programs that appear to beshort-term cost-cutting moves are actually experimentsin learning. For example, Toyota thinks of its CCC21 ini-tiative not as a price reduction program but as a way ofcreating a challenging environment that motivates itssuppliers to improve. It's well aware that to achieve a 30%reduction in costs, vendors will have to question every op-erating assumption.

To be successful, an extended lean enterprise must haveleadership from the manufacturer, partnerships betweenthe manufacturer and suppliers, a culture of continuousimprovement, and joint learning among the companies inthe supplier network. That's what Toyota and Honda areultimately trying to achieve through their remade-in-America keiretsu. ^

Reprint R0412GTo order, see page 151.

DECEMBER 2004 113