Influence of Supplier management in
Global Competition
1 DEDICATED ASSETS OR ARM’S LENGTH RELATIONSHIP
The competitiveness of automaker hugely depends on the efficiency and hard
works of its suppliers. These outside suppliers are often involved in design and
sometimes even in technological enhancements. Although original equipment
manufacturers such as General Motors and Toyota assemble final vehicles, as
much as 70% of the components typically come from outside parts suppliers.
A key part in the Japan’s manufacturing edge in automobile industry comes from
the long term, highly interdependent relationship among manufacturer and
suppliers. Whereas, in United States, the norm has been to keep suppliers at
arm’s length. Researchers have found that this forced the U.S. giants of GM and
Ford to lag behind their Japanese counterparts such as Toyota in the product
quality consistency and rapid technological enhancement.
However, the Japanese auto industry today is no longer in such favorable
circumstances. Declining production volume and poor financial performance due
to economic recession and appreciation in the value of the yen since 1990 have
induced Japanese automakers to change how they manage suppliers. For
example, Japanese automakers have disregarded past relationships in some cases
and switched to lower cost suppliers. They have also encouraged some suppliers
to diversify their sales base and sell to more than one automaker.
Japanese automakers continue to seek more effective and efficient
approaches to supplier management for their overseas manufacturing plants in
the United States, Europe, and other regions. Japanese automakers have
recognized that, to operate in different industrial, institutional, and cultural
settings, they need to modify their supplier management practices (as well as
their manufacturing and management practices). They cannot simply replicate
the supplier networks and relationships they have had in Japan. At the same time,
American and European automakers are also attempting to change their
traditional approaches to supplier management and move somewhat closer to
the Japanese model. Thus manufacturer-supplier relations around the world
today are clearly in a fascinating transitional phase.
These changes in the manufacturer supplier relationship have raised the following
questions
(i) If long-term contracts with suppliers are indeed efficiency-enhancing,
why are they not more common in the U.S. auto industry?
(ii) What has happened to induce U.S. automakers to shift away from their
traditional practice of short-term, adversarial, and arm's-length supplier relations
toward long-term contract?
(iii) Why are Japanese not replicating their tested strategy of long term and
dedicated relationships with suppliers in their US and European plants?
We will try to answer these questions and will see about what the literature has
to say about these changes in the further text.
2 COMPARISON OF JAPANESE AND US FIRMS: WHAT THE LITERATURE SAYS
Most of the literature we examine falls into four main areas: (1) the strategy of
manufacturer-supplier relations (i.e. studies dealing with choices of actions
towards make or buy decisions and towards supplier management); (2) the
structure of manufacturer supplier relations (i.e. studies dealing with vertical
integration, transaction patterns, numbers of suppliers, divisions of labor, or the
supply chain); (3) the process of manufacturer-supplier relations (i.e. studies
dealing with the behavior among firms, such as problem solving, communication,
and coordination activities and methods); and (4) the performance of
manufacturer-supplier relations (i.e. studies that track output measures such as
prices, quality, flexibility, or development lead time).
2.1 STRATEGY
Strategy, Structure and Process are not clearly separated in some literature. This
is not surprising, since the organization structure and process of firms often
follow their strategy, while preexisting structures, environmental settings, and
inter organizational relationships and processes are among the elements that can
constrain firms' strategic behavior. Japanese automakers have distinctive strategy
for supplier management as compared to their American counterparts, however
American automakers’ relationship with suppliers are also evolving towards their
Japanese counterparts.
The most important of all strategic decisions are Make-or-Buy decision. The act of
choosing between manufacturing a product in-house or purchasing it from an
external supplier. This is not surprising, since the organization structure and
process of firms often follow their strategy, while preexisting structures,
environmental settings, and inter organizational relationships and processes are
among the elements that can constrain firms' strategic behavior. In a make-or-buy
decision, the two most important factors to consider are cost and availability of
production capacity.
American automakers in early 20th century made a strategic decision to buy key
suppliers and manufacture most of their components in house and thus
restricting the outside companies to cause much influence on their suppliers
(Monteverde and Teece, 1982). To secure low prices, they generally made outside
suppliers bid on components, and had many suppliers per component so that no
one company could exert undue leverage over the automaker.
Helper (1989, 1991) applied Hirschman's (1970) framework and suggested a
classification scheme based on how companies resolve problems. In an "exit"
strategy, the customer that has a problem with the supplier finds a new supplier.
In a "voice" strategy, the customer works with the supplier to resolve the
problem (Helper, 1991: 15). Helper distinguished the voice versus exit strategies
by two dimensions: information exchange (the nature and mutuality of the
information flow between supplier and customer) and commitment (the
supplier's degree of certainty that the customer will continue to buy its products
for some length of time). When both information exchange and commitment are
low, the relationship becomes "exit." When both are high, it becomes "voice."
To accommodate growth in production levels that began in the late 1930s and
early 1940s, and then rose dramatically from the mid-1950s, Japanese
automakers, led by Toyota and Nissan, decided to subcontract increasing
amounts of parts production and even some final assembly. They also invested in
their key suppliers providing them with loans, and transfer of executives and
engineers to these companies. These strategic decisions permanently altered the
“structure” and “process” of Japanese manufacturing as other firms also followed
the footsteps of Nissan and Toyota in raising their levels of outside contracting
and increasing and forming supplier network.
Nishiguchi (1994) found that Japanese subcontracting once incorporated dualistic
elements, i.e. it used to take advantage of lower wages and other costs in the
secondary economy consisting of smaller firms. More recently, however, firms
(producers in particular) appear to maintain this structure for strategic reasons to
gain the economic benefits. He argued that Japanese subcontracting is
distinguished by the economic benefits derived from inter firm problem-solving
mechanisms that ensure high quality, low cost products.
2.2 STRUCTURE
Japanese automakers have low in house manufacturing as compared to their U.S.
competitors. A research shows that during 1980s, Japanese in house
manufacturing was estimated to be between 20% to 30%, as compared to 50% in
1950s. These Japanese levels presented a stark contrast to GM, which ranged
between 50% and 70%. Ford was between 40% and 50%. Chrysler, at about 30%,
was comparable to the Japanese. The Japanese levels are deceptively low,
however, because key Japanese suppliers are often affiliated with particular
automakers through partial stock ownership (a pattern rarely observed in the
United States). For example, at least Toyota and Nissan had "group" vertical
integration rates that approximated 70% to 80% of their manufacturing costs
(Cusumano, 1985).
The U.S. automakers’ decision of Vertical Integration or make or buy was based
on transaction costs. Monteverde and Teece (1982) concluded that transaction
considerations surrounding the cultivation of particular skills encourage vertical
integration. Results have shown that, although, transaction costs (such as the
volume uncertainty of a component) existed, comparative production costs were
far more important. In other words, if an outside supplier's costs were lower than
internal production costs, the automaker generally purchased the component.
Hart (1989) applied the property rights approach to the case of GM's taking over
Fisher Body in the 1910s. He argued that not transaction costs but the need to
control Fisher's physical assets led GM to take the action. On the other hand,
Langlois and Robertson (1989) claimed that the search for a general theory of
vertical integration is perhaps less interesting than seeking a schema that
determines when various particular explanations, such as stages of industrial life
cycle, conditions of demand, economies of scale and appropriability are
applicable.
Although the degree of vertical integration is certainly an important issue, since
the mid- 1980s, GM and Ford have followed the Japanese and Chrysler in
reducing their levels of in-house manufacturing. Studies have shown that the
number of parts per supplier have decreased in U.S. in recent years. Trends
suggest that the strategy and structure of manufacturer-supplier relations in the
United States is becoming closer to that found in the Japanese automobile
industry.
A key reason for higher number of suppliers of Japanese firms is their tiered or
pyramid structure of contracting. Japanese automakers buy sub-assembly units
or system components from first-tier suppliers, who buy parts from
subcontractors in the second tier, who buy from subcontractors in the third tier,
and so on. Nishiguchi (1994: 122) called this a structure of "clustered control."
Japanese automakers thus have direct transactions with only a small number of
first-tier suppliers. American automakers, in contrast, purchase parts at relatively
lower stages of assembly from a larger number of parts manufacturers.
Again, these and other differences between Japanese and U.S. automakers have
been diminishing over time. Bakos and Brynjolfsson (1993) demonstrated that
when non-contractible supplier investments such as investments in quality,
responsiveness and innovation are important, the incentive considerations
would lead buyers to limit the number of suppliers. This argument is consistent
with the actual trend in the American auto industry.
Japanese suppliers play a larger role in part manufacturing as shown by, Asanuma
(1989), Clark and Fujimoto (1991), and Nishiguchi (1993). Clark and Fujimoto
(1991) categorized the role of suppliers in product development into three
modes: (1) suppliers that develop parts entirely as standard products (supplier
proprietary parts); (2) suppliers that conduct detailed engineering based on
functional specifications provided by automakers (black-box parts); and (3)
suppliers that only produce parts completely designed by the automakers
(detailed-controlled parts). Their survey data indicated that, in the mid- to late
1980s, black-box parts accounted for 60% of Japanese components. In the U.S.,
however, detailed-controlled parts accounted for 81%.
Japanese manufacturer-supplier relations are sometimes thought to be exclusive,
with the assumption that only one supplier can enter the market for one
automaker. However, such "one-to-one" relationships are relatively rare. the
transaction patterns differ widely by the type of part. For example, there is a near
"one-to-one" relationship for fuel tanks, with neither side having a particular
advantage. In the case of electronic switches, however, the automakers
(customers) seem more powerful. On the other hand, suppliers are in the
"power" position for glass parts. Manufacturers and suppliers have very loose
relationships with regard to commodity products such as tires. The relations
between automakers and suppliers might differ depending on transaction
patterns. Variations in how manufacturers outsource different parts can lead to
different levels of competitive pressure on suppliers, different degrees of
dependency on suppliers, and opportunistic behavior by suppliers.
Another topic of recent research is the structure of the entire supply chain from
first-tier suppliers to third-tier or lower suppliers. To study this subject, Fujimoto,
Sei and Takeishi (1994) jointly conducted a questionnaire survey during 1992,
analyzing how automakers in a particular region of Japan divided labor in both
production and engineering among all levels of suppliers. The survey data
suggests a pyramid-like structure of tiered suppliers as well as several
specific observations summarized in given Table.
Description of Suppliers by Tiers
(Summary of Survey Results in Kangawa, Japan)
Attributes First tier Second tier Third tier
Employees # of employees Larger (1200) Middle (70) Smaller (10)
Average age of Younger (39) Middle (42) Older (46)
employees
Buyers Buyers Mainly Mainly 1st and Mainly 2nd and
assemblers 2nd, but also 3rd, but also 1st
and1st tiers, but assemblers and tiers
also 2nd and 3rd 3rd tiers
tiers
Diversified
Final Assemblers Diversified Diversified Limited to local
Average # of More (5.3) Middle (4.5) Less (2.5)
assemblers
Relations with Starting Mainly 1950's Mainly 60's (32%), Mainly 70's (47%)
the primary year (45%) then 70's (24%) and 80's (42%)
buyer
Participating 79% join 70% join 30% join 45% no
kyoryokukai kyoryolkukai
Support from Equity share Equip. loan (25%) Tech. support
(41%), (11%)Equip. loan
buyers Directorship Tech. support (11%) No support
(33%), (19%) No support (79%)
Equip. loan (25%) (54%)
No support(38%)
Operations Operations in Subassembly, Subassembly, Welding,
of the major charge stamping stamping machining
part machining, machining,
welding welding
2.3 PROCESS
A third area of literature deals with the process or behavioral characteristics of
manufacturer-supplier relations, that is, how manufacturers and suppliers
manage and coordinate their relationships.
Nishiguchi (1994) found that the Japanese producer strategy of delegating a
substantial portion of manufacturing functions to subcontractors has encouraged
joint problem solving and generated various methods of problem solving, such as
the target cost system, VA/VE problem solving techniques and resident engineers.
Sako (1992) tried to explain the nature of relationships by doing a detailed case
studies of European and Japanese Electronic Industries. she distinguished two
ideal types of buyer-supplier relations: "obligational contractual relations" and
"arms-length contractual relations." In contrast to the arms-length contractual
relations, obligatory contractual relations have "a great transactional dependence
on trading partners, a longer projected length of trading, a greater willingness to
accept or offer orders before prices were negotiated and fixed, less
contractualism, a greater degree of uncosted sharing of technological know-how
and risk associated with business fluctuations"
Bensaou (1992) studied how automakers coordinated relations with suppliers in
the U.S. and Japanese automobile industries, focusing on the use of information
technology. Relying on a survey distributed to managers at Japanese and
American automakers, Bensaou analyzed uncertainty issues and coordination
mechanisms. Uncertainty included environmental, partnership, and task
concerns; coordination included structural, process, and technological
mechanisms. His statistical analysis identified nine patterns of "fit" configurations
between uncertainty and coordination: structural relationships; electronic
integration; arms length relationships; mutual adjustment; quasi-integration;
remote control; partnership control; electronic coordination; and electronic
control, with each having a distinct set of uncertainty and coordination
mechanism. For instance, in arms length relationships, under high environment
and task uncertainty, firms did not make a high investment in coordination. This
study revealed that these different configurations existed in both the United
States and Japan. Bensaou found four configurations present in both countries, as
well as two specific to the United States and three specific to Japan.
Japanese automakers share more information with suppliers, and have suppliers
make more dedicated investment and build plants at a closer distance than the
American counterparts, indicating higher "site, physical and human asset
specificity" of Japanese supplier relations.
2.4 PERFORMANCE
Researchers have used various measures in their attempts to gauge the
performance of manufacturer-supplier relations. These measures cover diverse
aspects of product development, manufacturing, pricing, investment patterns,
operating costs, and logistics.
Clark and Fujimoto (1991) estimated that the more extensive involvement of
suppliers and the strong supplier relationships of Japanese automakers accounted
for one-third of their advantage in product development hours. Suppliers also
appeared to account for four to five months of the Japanese advantage in
product-development lead time.
In pricing and the manufacturing quality of purchased parts, Cusumano and
Takeishi (1991) found that Japanese automakers, in contrast to U.S. automakers,
enjoyed lower defect rates and more accurate target-price ratios (the degree to
which suppliers met their proposed prices by the time they started production).
The Japanese also benefited from greater price and defect reductions over time.
In manufacturing flexibility, Nishiguchi (1994) reported that Japanese automotive
components producers surpassed all competitors in areas such as product mix
and product variations, design changes, manpower flexibility, inventory levels,
and delivery frequency. The next most flexible suppliers were the Japanese
transplants in the United States, and then suppliers to U.S. and European auto
producers.
Helper (1991) showed that voice relationships generally lead to higher
performance. She then argued that a rich flow of information between suppliers
and manufacturers made possible the effective use of techniques such as value
analysis and value engineering. As evidence, she produced survey results
indicating that suppliers with voice (as opposed to exit) relationships with their
customers used more computer numerically controlled (CNC) machine tools and
computer aided design (CAD) tools, produced in smaller batches, and more
rapidly installed quality assurance systems.
Sako (1991) concluded from her case study that obligational contracting
promoted competitiveness by economizing on organizational costs. These costs
include searching for suppliers, as well as the costs of negotiations, inventories,
monitoring, and the like.
Bensaou (1992) measured the coordination performance between manufacturers
and suppliers by asking automakers' purchasing and engineering managers to rate
suppliers on issues such as satisfaction ratings with delivery times and buffer
inventory levels. Among the nine configurations of coordination that he found,
five emerged as relatively high performing. Within Japan, electronic control
relationships showed the best performance, whereas, within the United States,
electronic coordination exhibited the highest level of performance.
Dyer (1995) reported a positive relationship between interfirm asset specificity
and performance. Comparative data for Toyota, Nissan, GM, Ford and Chrysler
suggest a positive relationship between interfirm human asset cospecialization
and both quality and new model cycle time, as well as between site specialization
and lower inventory costs. He argued that a tightly integrated production
network, characterized by proximity together with a high level of human
cospecialization, outperforms a loosely integrated production network with a low
level of human cospecialization.
Japanese automakers continue to seek more effective and efficient approaches to
supplier management for their overseas manufacturing plants in the United
States, Europe, and other regions. Japanese automakers have recognized that, to
operate in different industrial, institutional, and cultural settings, they need to
modify their supplier management practices (as well as their manufacturing and
management practices). They cannot simply replicate the supplier networks and
relationships they have had in Japan.
