Vendor Selection and

Development
Prepared by:
Asher Ramish

Lecture 11-12
 Synopsis

 Efforts to make Japanese Keiretsu

 How Toyota and Honda made an American
Keiretsu with its North American suppliers
 Key elements of successful relationship

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Toyota and Honda forming Keiretsu
 Building of supplier KEIRETSU in 80s and 90s by
American corporations i.e. GM, Ford and Chrysler
 A Keiretsu is a close knit network of vendors that
continuously learn, improve and prosper along with their
parent companies. Big three, therefore
 Awarded suppliers a long term contract
 Encouraged top tier vendors to manage lower tiers
 Started delivering just in time
 But didn’t alter the fundamental nature of their relationship
with suppliers

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Big three followed ……
 After a failure, Ford used online reverse Auctions to get
the lowest prices for the components

 General motors writes contracts that allow it to shift to a

less expansive supplier at a moment’s notice.

 Chrysler tried building a Keiretsu but, Daimler took over

the company in 1998, which stopped the efforts

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Toyota & Honda’s Keiretsu in US
 Actual situation was a bit different
 Toyota & Honda struck remarkable partnerships

 60% of 2.1 m total Toyota Lexus & 80% of 1.6 m

total Honda Acura were manufactured in North
America through partnerships of same suppliers
of Big Three

 Successfully built similar supplier webs in North

America that they used to build in Japan
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Survey in North America after making
an American Keiretsu, reports
 According to a survey by a Michigan-based research
company in 2003
 Toyota and Honda gained top rankings i.e. 1st and 2nd in
the categories of most preferred customers, trust,
perceived opportunity, better communicators, concerned
about supplier’s profitability
 Nissan got third, followed by big three on 4th, 5th & 6th
position
 Toyota & Honda designed new cars in 1-1.5 years as
against Ford, Chrysler & GM whose took 2-3 years

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 Key elements of successful
relationship
A. Understood how their suppliers work.
B. Turning supplier rivalry into opportunity.
C. Supervising their vendors.
D. Developed compatible technical capabilities.
E. Sharing of information intensively but
selectively.
F. Conducted joint improvement activities.

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 A. Understood how their suppliers
work
 Learn about supplier’s businesses
 Send executives for long times to see & understand for
themselves
 Managers at all levels study suppliers at their first hand
 Knowledge about operations & complete cost structures
 Honda, made a trial in 1987 & started business in 1988
 Whole year they took to understand how their suppliers
work

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 B. Turning supplier rivalry into
opportunity
 Encouraging competitions throughout vendor’s network
right from the product development stage
 Toyota asked for designing of tires for it’s vehicle programs to
several vendors
 Evaluating performances of tires based on vendor’s data as well
as Toyota’s road tests and awarded contract to the best
 Contracts through the life of a model
 Slipping of performance may shift the contract to it’s competitor
 Improving performance of previous vendor will again start
business with Toyota, but with another program to regain it’s
market share
 Story of a vendor of Toyota i.e. Johnson Controls

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 C. Supervising their suppliers
 Toyota and Honda don’t take a hands off approach with
their vendors as was assumed by many researchers.
 Toyota & Honda set targets for their vendors
 Monitor their performances all the time
 Helping them improve with first, second & third tier vendor
 Honda sends report cards every month to their vendors
 Containing reports about quality, delivery, quantity delivered,
performance history, incident report and comments
 Incident report had two sub sections; one for quality and other for
delivery.

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 D. Developing compatible technical
capabilities
 Toyota & Honda don’t source from low-wage countries
much; their supplier’s innovation capabilities are more
important than their wage costs
 A check list with hundreds of measurable characteristics
for each component
 Toyota & Honda start product development process with
their suppliers on-site by teaching them how to collect
data that American vendors neither had nor calculated.
 R&D sharing at their sites making them realized about
innovative capabilities they can adopt for.

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 D. Developing compatible technical
capabilities
 American vendors complain that Toyota and Honda give
them vague specifications for new tires.
 Doesn’t spell out the level of resistance of tire; it would
only demand right feel, a characteristic that is hard to
quantify.
 Gotsu, Gotsu (low freq. high impact motion tires)
 Buru, Buru (High freq. low impact vibrations they feel in their belly)
 Guest engineer program

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 E. Sharing information intensively
but selectively
 While Chrysler shared hell of data and held numerous
meetings with vendors. The philosophy seemed to be “ If
we share all information with vendors and keep talking to
them intensely, they will feel like partners.”
 Toyota and Honda however believed in communicating
and sharing information with vendors selectively and in a
structured fashion.
 Clear agendas of meetings, specific times and places
 Toyota divides components of new product into two
categories; one that can be easily made by vendors and
other that must be developed at Toyota
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 F. Joint improvement activities
 No. of Toyota & Honda engineers stationed in United
States for performing KAIZEN activities
 Big three spends a day to a week on improvement
activities while Honda spend 13 weeks
 By applying KAIZEN supplier’s productivity was
increased by about 50%, improved quality by 30% and
reduced costs by 7%
 Suppliers have to share 50% of cost savings with Honda
 This becomes baseline for new contracts
 Suppliers can apply KAIZEN to other processes as well

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