Supplier Network Development: Localizing The Kyoryoku Kai In The West

Author(s):

Peter Hines
Peter Hines, Senior Research Fellow, Cardiff Business School, Aberconway Building, Colum Drive, Cardiff, UK, CF1 3EU, +44 222 874197.

79th Annual International Conference Proceedings - 1994 - Atlanta, GA

ABSTRACT
The post war years have witnessed the rise of Lean Production in Japan. However, arguably, the key to the latters' success is not that the Japanese assemblers have become lean themselves, but rather that they have developed a lean supplier network. The most important factor exhibited by the Japanese in building these inter-company relationships and creating a world class supplier base is the Kyoryoku Kai or Supplier Association. This has been demonstrated to give both the suppliers and final assemblers considerable competitive advantage. This paper explores the spread and necessary localization of these groups outside Japan and the benefits that may accrue.

INTRODUCTION
The lean supplier network that has been developed by Japanese firms is the foundation for the competitiveness of manufacturing industry in Japan today. This is because the final assembling firms such as Toyota and Hitachi add very little value to the products they produce. Indeed Toyota's share of the value of their end product in most cases does not exceed 20%. Thus to find the answer to the competitiveness of Japanese industry one is forced to look at the supplier networks of these final assemblers. This is the topic of this paper.

THE LEAN SUPPLIER NETWORK IN JAPAN
Benchmarking studies of UK and Japanese automotive suppliers carried out at Cardiff Business School (Andersen, 1993) have found that the performance gaps between these firms is at least as large as those found between their assembler customers by Womack et al (1990). This position is summarized in Figure 1. When this fact is coupled with the very high bought in content levels in Japan then it would appear that the competitiveness of the supplier network is the key to the Japanese assemblers competitive position.

  Japan Western Assembler (*1) Western Supplier (*2)
QUALITY
End of Life Defect Rates 1 2.00 100.00
COST/PRODUCTIVITY
Time per unit Produced 1 1.82 1.76
Space per Unit Produced 1 1.37 (*3) 1.39
Rework Percentage 1 3.33 2.73
DESIGN
Time to Market 1 1.27 1.61 (*4)
DELIVERY
Inventory Level 1 10.00 12.25
Delivery Frequency 1 6.76 6.71

  • 1 Compared with Japanese Assembler
  • 2 Compared with Japanese Supplier
  • 3 Space for Rework Activities
  • 4 Number of New Products as Percentage in Last Two Years

Figure 1 Comparative Process Control Abilities in Automotive Industry
Sources: Womack et al (1990), Andersen (1993)

Research conducted in Japan has shown that there is a unique system of dealing with suppliers in this country which has been termed by the author as Network Sourcing (Hines, 1994). There are ten key features exhibited by this Network Sourcing paradigm and these are reproduced in Figure 2. Although all of these features are closely interlinked and are all exhibited by the leanest supplier systems, preliminary research findings show that the last two, supplier coordination and supplier development (feature 9 and 10), appear to be the key to the development of the other factors. As a result detailed research in Japan between 1991 and 1993 has been undertaken to explore these important facets of Network Sourcing.

  1. SUPPLIER TIERING STRUCTURE
  2. FEW SUPPLIERS BUT RELIANCE ON MULTIPLE SOURCES
  3. HIGH ASSET SPECIFICITY
  4. LOW VALUE ADDED RATIOS
  5. BILATERAL DESIGN
  6. HIGH DEGREE OF SUPPLIER INNOVATION
  7. CLOSE HIGH TRUST LONG TERM SUPPLIER RELATIONS
  8. SUPPLIER GRADING AND SELF CERTIFICATION
  9. SUPPLIER COORDINATION
  10. SUPPLIER DEVELOPMENT

Figure 2 The Ten Key Features of Network Sourcing

The resulting Network Sourcing System allows for a very efficient flow of value adding processes at the most appropriate supplier tier. These networks of suppliers are closely integrated to the final assembler by a system of formal and informal ties which have allowed the specialist knowledge developed by such firms as Toyota to be devolved throughout the supplier network, often six or more tiers in depth. This process does not happen overnight and in the case of Toyota has taken over 50 years.

THE ROLE OF THE KYORYOKU KAI
The primary mechanism by which suppliers have been coordinated and developed to the level of abilities presently exhibited in Japan is the Kyoryoku Kai (literally Cooperative Circle) or Supplier Association. The Kyoryoku Kai is in essence a collection of a company's most important suppliers for their own and their customers mutual continual improvement. Commenting on these groups in the automotive industry (although they occur in other sectors as well) Michael Smitka (1991) noted "Supplier cooperation associations contributed to the efficiency of the subcontracting system, and not just to the maintenance of trust. Through the supplier associations, the auto firms were able to extend the implementation of JIT (just-in-time purchasing), SPC (statistical process/quality control) and VA/VE (value analysis/value engineering) across firm boundaries". He goes on to comment that "they also provided a convenient route for the auto firms to help suppliers improve their production methods and management capabilities. But the associations also became the organizational nexus for jointly coordinating the entire subcontracting system, serving as a forum for discussing corporate strategy and coordinating investment".

Such groups are one of the primary reason for the competitiveness of Japanese final assemblers. It was interesting to note whilst visiting some very small factories (with less than 30 employees) in the Tokyo region that they were happily working with techniques such as kaizen groups, JIT manufacturing and Poke Yoke devices which are only now becoming common in the best Western multinational organizations.

In order to see how such groups operate a short case observed by the author will be discussed. Mazda, the automotive assembler, presently add around 30% of the value of their products and their design input is a similar proportion. The remainder is the responsibility of their supplier network. This places Mazda in a rather vulnerable position due to their high reliance on outside design and supply. This is counterbalanced by a high reliance on Mazda by most of their suppliers allowing for a mutually dependent and close relationship.

Mr Tatsutomi, the Purchasing Director, has pursued a policy of encouraging the supply base not only to be highly efficient, but also to have the design and development capabilities required by the rapidly changing demands of the consumer base.

Three suppliers were visited all exhibiting a high reliance on Mazda. The first, Kanda (transmission manufacturer) relies on Mazda for 69% of its business; Hirotec (door and body pressings) for 72% and Delta Kogyo (seats) for almost all its business. As a result the Organization of firms into a supplier association was an essential way of helping them gain the rapid design abilities required in the automotive sector.

Mazda presently has around 450 subcontractors with half this number organised into three regional Kyoryoku Kai in the Tokyo, Osaka and West Japan areas. These supplier associations are largely supplier-led with the agendas set according to the suppliers, suggestions. However, the meetings are the regular planned contact between companies with a view to avoiding unplanned fire-fighting type meetings. The Supplier Association meetings typically involve a two way communication, particularly concerning future activities as well as an arena for lectures on particular areas requiring joint development such as changes to supply arrangements. In addition, the associations have a number of workshops for members to help disseminate new techniques, especially in the area of quality improvement and cost reduction.

An important feature of the Mazda supplier network is that not only do they operate three dynamic supplier associations but they have over the last twenty years helped their direct suppliers to do the same so that the beneficial strategies and tools and techniques developed can be spread to lower tier suppliers. Indeed, each of the three suppliers visited operated their own supplier associations with their key subcontractors.

THE ROLE OF THE KYORYOKU KAI OUTSIDE JAPAN
As yet there are only a handful of examples of Kyoryoku Kai outside Japan. There are three main reasons why there is only a limited number of such groups outside Japan.

Firstly, such groups may be considered by the Japanese to be part of their "crown jewels" and something they are not keen to share with Western competitors. Secondly, the type of inter-company relationships presently exhibited in the West, namely arms length or adversarial, do not make the setting up of such groups easy or even possible due to high levels of mistrust. The third reason is that Japanese inward investors do not regard local suppliers as being developed enough to benefit from supplier associations and that they lack sufficient Japanese staff trained and capable of setting up these groups. Whatever the individual reason, without outside assistance it is to be expected that such groups will only develop slowly and mainly be associated with Japanese owned companies.

KYORYOKU KAI CASES OUTSIDE JAPAN
In order to increase the number of these beneficial groups in the UK environment and test the necessary localization required, work at Cardiff Business School has centered on facilitating the creation of a number of such groups within different industrial sectors, supply tiers and nationalities of customer companies. This work has been undertaken in collaboration with the welsh Development Agency. The first of these groups was centered around Calsonic Llanelli Radiators, a Japanese owned automotive cooling system manufacturer. Subsequent groups have been formed at retail, assembler and lst tier level in the electronics, furniture, telecommunication, defense, office equipment and food retailing industries with Japanese, British, French, German and North American owned companies.

As noted above, the spread of Kyoryoku Kai outside Japan has been very slow. Indeed with the exception of those groups directly or indirectly facilitated by the author there are only four other known examples. These are Toyota (Kentucky, USA), NUMMI (California), Canon (France) and Crosfield Electronics (UK).

The work carried out by the author in Japan, the United States and Europe has shown that various degrees of localization are required for successful application outside Japan. The following main adaptations are generally recommended:

  1. membership should not be limited to direct suppliers as in Japan, as the active development and networking with some indirect suppliers was felt to be critical.

  2. The inclusion of service companies, particularly those that constitute the outward face of the customer firm's quality. Such firms would include specialist design houses and transport firms.

  3. The size should be kept small, at least in the first months so that customer and suppliers could learn the technique together. An initial maximum size of 12 firms was felt to be necessary.

  4. A modification of the traditional Japanese paternalistic relationship whereby suppliers are dominated. It was felt that a more equal and democratic forum would be more applicable in the West.

  5. To start the group a benchmarking of each supplier is to be undertaken which can act as the focus for deciding future events as well as a measuring tool for development success.

  6. Lastly, particularly as the technique is very new outside Japan and involves considerable administrative support especially in the setting up stages, outside facilitation was felt necessary.

In many respects therefore the UK experience of supplier associations has been a localised version of the Japanese Kyoryoku Kai taking advantage of western tools but adapted to the European environment. The first of these, Calsonic Llanelli Radiators Supplier Association was set up in 1991 around the automotive cooling system manufacturer.

It is not the intention of this paper to relate the detailed experiences of each UK group but rather to give an understand of the Kyoryoku Kai technique and its application outside Japan. However, it will be useful to review the first Welsh example, particular the early stages as these are the most critical to the success of the association. (A fuller account of this work can be found in Hines, 1994). As mentioned above, the Calsonic Llanelli Radiators Supplier Association was set up in 1991 as a pilot scheme to test the applicability of the Kyoryoku Kai to the UK. The project was undertaken by the author and Calsonic Llanelli Radiator staff with financial assistance from the Welsh Development Agency.

The first group of firms involved totalled nine in number, five of which were indirect suppliers particularly relating to design and tool making. The concept was explained in detail to each of these firms and all companies contacted agreed to take part, although two later withdrew. In order to gain a closer understanding of the firms a detailed questionnaire was completed on a face-to-face basis. Subsequently a benchmarking assessment was made of all the companies, including Calsonic Llanelli Radiators in order to understand their absolute and relative development positions across a range of relevant attributes.

  1. BENCHMARK PRESENT COMPETITIVE POSITION
  2. SELECT APPROPRIATE COORDINATION AND DEVELOPMENT TOOLS
  3. GAIN INTERNAL ACCEPTANCE AND CREATE CROSS FUNCTIONAL TEAM
  4. SELECT APPROPRIATE SUPPLIERS
  5. BENCHMARK SUPPLIER POSITION
  6. JOINTLY TARGET IMPROVEMENTS
  7. FOCUS COORDINATION AND DEVELOPMENT EFFORTS
  8. UNDERTAKE GROUP ACTIVITIES
  9. MEASURE IMPROVEMENTS
  10. REFOCUS size OF GROUP AND TARGET AREAS

Figure 3 A Generic Model for the Creation of a Supplier Association

This information was then presented to the collected suppliers at the first official meeting in September 1991. This was used as the basis for deciding the future direction and priorities of the group in terms of mutual development. This direction would revolve around the following areas seen as key to future development:

  1. employee involvement schemes
  2. machine downtime analysis and improvement schemes
  3. value analysis
  4. integrated design and
  5. external relations with suppliers and customers.

It was also decided that seminar meetings for senior staff would be held quarterly with workshops on specific tools for "operational" staff to be held between each seminar. More recently Calsonic Llanelli Radiators have started a second similar group with a third is planned for later in 1994 which will bring 30% of suppliers and over 90% of purchasing spend within the associations.

Commenting on the early work of this group Professor Dan Jones (co- author of The Machine that Changed the World) noted "Supplier Clubs were very important in diffusing best practice lean production throughout the supply chain in Japan. This pioneering venture in Wales will I am sure be instrumental in starting a similar process in Europe".

As a result of the work at Calsonic Llanelli Radiators and the other groups in the UK, USA and France a generic model for the creation of a Western style Supplier Association has been formulated. This is reproduced in Figure 3.

CONCLUSION
Early research carried out in the automotive, electronics and capital equipment industries in Japan has demonstrated that the Kyoryoku Kai has been a powerful technique for the development of suppliers. This tool has undoubtedly played a significant part in the competitive positioning of final assemblers in Japan, particularly as the discrete industries in which it is used demonstrate very high subcontracting levels and hence the abilities of the supplier network are of paramount importance.

The localization of the Kyoryoku Kai outside Japan has now started. Work in the UK has demonstrated that significant departures from the Japanese approach are advisable although Canon in France have demonstrated that considerable success can still be achieved even if little or no modification takes place. Plans have been laid in the UK for further Supplier Associations although about 15 have already been set up. However, as yet only 2 groups have been set up in the United States.

REFERENCES

  1. Andersen Consulting. The Lean Enterprise Benchmarking Project. London: Andersen Consulting, 1993.

  2. Hines, Peter A. Creating World class Suppliers: Unlocking Mutual Competitive Advantage. London: Pitman Publishing, 1994.

  3. Nishiguchi, Toshio. Strategic Dualism: An Alternative in Industrial Societies. Nuffield College, oxford: PhD Thesis, 1989.

  4. Smitka, Michael. Competitive Ties - Subcontracting in the Japanese Automotive Industry. New York: Columbia University Press, 1991.

  5. Womack James, Daniel Jones and Daniel Roos. The machine That Changed The World, New York: Rawson Associates, 1990.

Back to Top