management best practice
Japanese Supply Chain Relationships
in a Recession
Mission to Japan, 1-9 March 1999
Executive Summary
Mission Members
- Mr Kenneth Cherrett (Mission Team Leader)
Director-General, Partnership Sourcing Limited
- Mr Gerry Boden
General Manager of Strategic Procurement, BT plc
- Mr Hywel Houghton-Jones
Head of Group Purchasing, Nationwide Building Society
- Mr Neill Irwin
Partnering Director, ICL
- Professor Richard Lamming
CIPS Professor of Purchasing and Supply Management
Director: Centre for Research in Strategic Purchasing
and Supply (CRiSPS) School of Management, University of
Bath
- Ms Marion Luckhurst
Procurement Director, Alenia Marconi Systems Ltd
Mission Objectives
To investigate and report on:
- The lessons that can be learned from the effects which
the current financial pressures in Japan and the East
Asian region are having upon supply chains.
- The expected developments in Japanese supply chains
over both the short and medium term.
- How ‘best practice’ procurement tools and
techniques are currently being utilised in Japan; i.e.
do they grow stronger or weaker during difficult trading
conditions?
- How developments in information management and electronic
commerce are being integrated and utilised in the current
supply chains in Japan.
- The involvement and roles of supply chains and professional
bodies in the organisational structures in Japanese companies.
- Opportunities for collaboration and co-operation in
Japanese supply chains and professional bodies.
- Japanese customers and suppliers wishing to form partnerships
with UK businesses and any barriers to the development
of such partnerships.
The Context
In 1991 the Japanese economy plunged into
recession and has yet to recover. In 1997 the country experienced
negative growth in real GDP for the first time in twenty
three years, and saw it again in 1998. Unemployment is set
to rise significantly over the next two years; Japanese
firms are stuck with high numbers of surplus employees who
have been promised lifetime employment. No respite is predicted
in the stalled growth until 2001.
Almost all Japan’s banks are technically
insolvent. In March 1999 the top fifteen banks collectively
announced plans for 21,000 job losses, in a deal with the
government that will see them write off Y19 trillion of
bad debt for 1998, taking a Y3.6 trillion loss but receiving
in return Y7.45 trillion of public funds, to boost their
flagging capital base.
The proportion of personal income going
on taxation, social security and debt burden is predicted
to increase from 45% in 1997 to 70% by 2025.
Relationships in Supply Chains
In post-war Japan, government policy drove
purchasing strategies. The same central policy making was
evident in the financial sector; interest rates were set
by the Ministry of Finance; banks simply followed one another
in agreed practice.
Typical supply relationships in Japan since
World War II could be characterised as tough but fair, with
the customer dominating the supplier in all matters. All
the detailed aspects of the relationship were designed to
develop the supplier to the customer’s requirements,
thereby creating long-term dependency. This was not seen
as aggressive, merely common sense. It also fitted the way
Japanese business structure developed after World War II;
many customer-supplier relationships effectively exclude
the possibility of the supplier conducting business with
other firms. The efficiency derived from customer dominance
and supplier obedience has been identified as a strategic
advantage for Japan in global competition within many product
markets.
The Mission
The development of efficient supply relationships
in post-war Japan apparently depended upon healthy levels
of demand, exports and finance. The question thus arises:
‘How has the recession affected the supply relationships
in Japan?’
Conclusions from the Mission
The Japanese have shown both strengths
and weaknesses in this crisis. The broad response has been
to shake out surplus capacity. The supply relationships
and ownership structures provide a setting within which
tough decisions can be made: suppliers do not doubt the
resolve, nor the motives, of customers who turn the screw.
Japanese customers and suppliers will go through the recession
together, recognising that not everyone will survive, nor
has a right to do so.
The expression 'supply chain management'
is not widely recognised in Japan; the expectation on the
part of firms is that their 'first-tier' suppliers will
manage the supply matters concerning the 'second tier' and
so on. Customer firms do not seek to intervene in the relationships
between their first and second-tier suppliers, nor do the
suppliers wish them to do so. In the strong keiretsu
structures, the parent firm naturally has more of an influence
over the activities of its indirect suppliers, via the first
tier, but in the recession these bonds appear to be weakening.
In the keiretsu, the traditional
policy of restricting suppliers to dealing with one customer
only (especially evident in the automotive industry) is
becoming less popular; suppliers are being encouraged to
deal with other customers, including the competitors of
their ‘parent’ (even carrying out joint R&D)
in order to learn new ideas and to supplement reduced levels
of orders with other, new business.
Japanese firms are applying greatly increased
pressure upon suppliers to reduce costs. In several industries,
it is still the practice for customers to tell suppliers
what cost reduction targets must be met; in some cases,
the 1998 annual reductions were 20%. Customers recognise
that this might lead to firms withdrawing or closing down
but this is considered a logical way of removing inefficiency
from the industry. As in the West, managers speak of ‘rationalising’
supply bases; for example, one large electronics manufacturer
claims to have reduced the number of its suppliers from
7,000 to 5,000. Target costing and cross-functional teams
are commonly used for cost reduction exercises but they
rarely involve suppliers.
Customers and suppliers alike report that
there is an increasing propensity to consider re-sourcing
business if a supplier cannot achieve the necessary levels
of cost reduction. This is not new but there is now a different
perception of costs and benefits associated with helping
the supplier to improve.
In all but the most tightly knit keiretsu,
there is divestment underway.
Firms do not appear to be repatriating
business to provide work for their surplus labour; Japanese
labour costs are amongst the highest in the world. Withdrawal
from the West in favour of Asian operating bases is, however,
a serious prospect. When the products made in Japanese plants
outside Asia reach the end of their lives it appears likely
that the investment may not be maintained.
Japanese firms have opened International
Purchasing Offices (IPOs) in other countries, to source
globally. Thus, for example, an IPO in Singapore (a popular
location) can purchase foreign, branded goods without the
high costs of Japanese distribution channels, shipping them
directly to plants elsewhere in the region or world.
In some sectors it is recognised that if
a firm can purchase an item for 20% less than the current
price it will re-source. If the alternative is a non-Japanese
firm, the necessary margin is 25%. Most of the products
bought from EU or USA are covered by patents and only available
from there; i.e. duress purchases.
Customers appear to expect suppliers to
survive on their own in respect of competitiveness and process
technology; they are not prepared to wait for them to ‘catch
up’ if they fall behind. In only the tightest of keiretsu
relationships is there a hint of customers coaching suppliers
on technology — the general picture is one of market
forces, tempered by track record and pragmatism.
Even in the longest established Japanese
Purchasing departments, little training other than learning
on the job is practised and there is little research shared
between firms and universities. Until recently, little international
perspective was instilled in Buyers. There appears to be
widespread agreement from senior general managers, however,
that Purchasing is a very important management area —
it is just not seen as one in which professional education
and training are necessary.
It is clear that Japanese firms have not
developed ‘partnering’ in supply as it is recognised
in the West. The dominance of customers still appears largely
benevolent but not to the point of shoring up weak suppliers,
nor flouting market forces.
Japan appears to be well behind the West
in the use of electronic commerce and the Internet. Communications
between customers and suppliers are typically at the stage
of developing EDI (Electronic Data Interchange) — the
focus of attention in the West a decade ago. The high costs
of Internet connection have prevented its wide adoption
domestically and its use for anything beyond EMail has yet
to become commonplace in business.
One scenario for the future is that the
large, over-capacitated groups could ‘spin-out’
new companies, to produce new products developed by joint
research and development programmes. The innovative new
products, and the R&D associated with them would thus
remain in Japan while less volatile, lower value, items
could be made in Japanese plants elsewhere in Asia. The
spin-out companies would become the new closely-tied suppliers
to their ‘parent’ firms — benefiting from
the same supportive relationships that have been seen in
Japan in the past.
It may be expected that industrial purchasers
in Japan will need to adopt the purchasing policy that has
been publicly articulated by Toyota: to work hard in seeking
the best solutions available from world class suppliers,
rather than simply expecting them to bring their ideas to
Toyota. Purchasing and supply strategists within the motor
giant expresses this as "Learning by trying not buying."
Implications for UK Business
- UK firms currently doing business with Japanese customers
will need to redouble efforts to improve continuously
to meet the increased demands of cost reductions and keep
the business;
- As Japan looks to its local region for supplies, firms
may lose opportunities for UK investment from Japanese
customers and must consider making their own investments
in East Asia;
- Such investments in third countries may need to achieve
world class levels of performance immediately, i.e. no
‘ramp up’ period. This will entail setting up
strategic supply chains before commencing production;
- Merger and acquisition activity is being encouraged
in Japan; non-Japanese firms are active in this respect;
- The stock market situation and general difficulty in
raising capital in Japan mean that it might be a favourable
time to buy Japanese companies;
- Japanese firms may keep leading edge technology at home,
sourcing standard, stable products elsewhere in East Asia.
This creates problems for UK firms needing to compete
on the basis of advanced knowledge;
- The initiatives in the December 1998 White Paper might
create industrial organisations as important for the UK
as the sectoral development associations have been for
Japan, if they include co-operation on pre-competitive
R&D.
Acknowledgements
The mission team would like to place on
record their appreciation of the tremendous help and support
received from the DTI and the staff of the British Embassy
in Tokyo, the interpreters and all of the Japanese companies
who hosted meetings with the team during their visit.
To purchase the full report (£25 per
copy) contact:
Group Secretary
Partnership Sourcing Ltd
St. Christopher House
Southwark Street
London
SE1 0TE
Tel: 020 7921 1600
Fax: 020 7921 1601
Web: www.pslcbi.com
The Partnership Sourcing website is http://www.pslcbi.com/
DTI supported this mission, but is not
responsible for the report as the report reflects the views
of the mission team members.
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