Yesterday in What can we learn from Keiretsu? we outlined methods in which correctly applied Keiretsu teachings could rejuvenate your supply chain, referencing a report released by the CAPS Center for Strategic Supply Research Supply Management Research Group last year titled “Japan’s Keiretsu as a Strategic Relationship with Suppliers”. However, the teachings do not end there. This year, the CAPS Center for Strategic Supply Research Supply Management Research Group released “Strategic Supply Management at Japanese Companies”.

This report, which starts off by chronicling the impact of Nissan CEO Carlos Ghosen, the shift to strategic purchasing and the rise of the concept of supply management (primarily in the US and Europe), the enhancement of business competitiveness through strategic purchasing, and the evolution of the purchasing function in Japanese companies describes the challenging issues in the shift to strategic purchasing, offers a perspective on strategic purchasing from the Japanese perspective, and ends with a case study that demonstrates the beginning of strategic purchasing in proactive companies that are seriously considering moving forward the status quo that is the result of traditional Keiretsu practices focused on strong ties with traditional partners and not necessarily the best partners.

It points out that in recent years, the goal of Japanese manufacturing corporations has been to build an efficient supply chain that decreases lead time, improves quality, and reduces inventories and costs associated with the logistics process. After all, improving the logistics supply process reduces lead time and improves inventories, even if actual transportation costs are not decreased. Furthermore, whereas purchasing has always played an important role in cost reduction, there is also a new, and increased, emphasis on quality control, supply management, and accurate, quick deliveries from suppliers.

Purchasing is also taking on more of a research role, as its close contact with external resources puts it in a strategic position. In some engineering companies, purchasing is responsible for:

• giving advice on potential new contracts
• exchanging engineering information with suppliers
• participating in design review, facilitating supplier decisions, and leading cost reduction and value analysis efforts
• cost research for marketing requests

It also outlines the major competencies that are required for strategic purchasing:

• intelligence and the ability to identify what information is needed and how it will help them attain their goals
• IT literacy and competence
• supply chain knowledge

and how Japanese companies are embracing these competencies.

So what does all that mean? In addition to holding on to the best practices of the east, Japanese companies are embracing the best practices of the west. Maybe we should latch on to their best practices as well.

Keiretsu, which can be briefly described as a long continual business relationship, in one way or another has been a significant force in the Japanese economy for over sixty years and despite its long and varied history, criticisms, the Structural Impediments Initiative, and economic downturns, is still a strong foundation for many supply chain relationships in Japan.

“Japan’s Keiretsu as a Strategic Relationship with Suppliers”Therefore, even though some economists would argue that it contradicts the basic principles of the free trade of capital, there must be something to it. Therefore, I think the issue is worth exploring, with the goal of taking away lessons that can be used to improve our supply relationships, especially considering that current markets and supply chains are now filled with volatility and risk. And a great starting point is , a study released by the CAPS Center for Strategic Supply Research Supply Management Research Group last year.

The report indicates that a Keiretsu relationship can be defined as a series of repetitive transactions that occur long term between two or more entities in an asymmetrical relationship where one entity uses its position to govern the relationship. A Keiretsu relationship is based on a close and stable business collaboration between affiliated entities. There are different forms of the relationship, and the term is difficult to narrowly define, but all forms center on a long continual business relationship.

This report, which points out that Keiretsu has a long and varied history starting in world war two, covers the major evolutions over the last six decades and notes that changes in the competitive corporate environment leads to diversity in the Keiretsu system. Sometimes external circumstances force a company to end or restrict some of their Keiretsu subordinates if the relationship did not meet the demands of the increased competition and other times a company could use the circumstances to its advantage to work within the confines of its Keiretsu relationships to increase its competitive edge.

Keiretsu relationships in Japan generally display a number of common features:

• long-term trade relationships that often prevent third parties from participating freely in the market;
  although this can stifle free-trade relationships that depend on competition, this can also create excellent economic efficiencies and make sense among companies that specialize in a particular product
• companies often hold significant amounts of each other’s stock to prevent other companies from acquiring shares;
  although this seems to contradict the basic principles of the free trade of capital, this can create stability in the stock market and provides protection against hostile takeovers
• fixed non-symmetrical trade between companies
• “dispatching” executives into the Keiretsu
  it is such a common practice, once a parent company’s executive or chief executive retires, to dispatch that person to another company in the Keiretsu that it is a defining characteristic of Japanese Keiretsu
• supplementation and replacement through business sharing;
  a parent company, with cooperation of the subcompany, establishes guidance systems governing production technology and quality control methodology

Furthermore, Keiretsu is often established to

• move low-value-add production to subsidiaries
• ensure continuous high quality production capability to avoid excess production and consumer problems
• improve risk management, especially with regards to variable or uncertain demand
• ensure that increased sales mean a corresponding increase for subsidiaries
• prevent technological information from being disclosed to competitors through close continuous relationships

A close examination of each of the above points is based on an underlying idea that can improve your supply chain. Specifically:

• strategic long-term trade relationships with key partners with a long-term focus on process improvement can generate excellent efficiencies
• a minor position in your key partners demonstrates commitment, and it can help provide financial stability in unstable times
• non-symmetrical trade stabilizes the relationship
• seasoned executives have a lot to offer, and should consider consulting beyond retirement from full time positions
• companies with more resources and established processes should transfer those capabilities to their strategic suppliers to improve processes and reduce costs
• a company should be focused on high-value-add production, and since value-add production is relative, low-value-add production for one company might be high-value-add production for its supplier
• the best way to maintain quality is to maintain relationships with suppliers who consistently produce quality
• risk can be shared among partners and reduced
• strategic relationships can insure that your key suppliers succeed and remain stable
• forming key relationships with key suppliers that can adapt to changing demand minimizes the spread of trade secrets

Thus, even though over-applied Keiretsu can lead to closed markets, correctly applied Keiretsu teachings can rejuvenate your supply chain.