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The Japanese model of long-term collaborative partnerships between firms and their suppliers has attracted much attention from business researchers and practitioners. Several U.S. and European auto-makers have attempted to establish similar partnerships of their own, seeking to reduce their supplier base and cultivate relationships with their best suppliers.1 As a result, the early involvement of suppliers in product-development and cost-reduction efforts is becoming standard practice in the automotive industry and beyond.2
A recent crisis involving Toyota and its supplier network suggests, however, that the Japanese model — or at least the Toyota model — involves more than a set of long-term relationships between a firm and a few select suppliers. As the Toyota group’s collaborative response to the sudden destruction of a key supplier’s plant suggests, the relationships among a firm’s suppliers are equally important. More generally, a complex mix of institutions permits self-organization during times of crisis with little need for a leader’s direct control.3 These strong relationships among many firms along with the steady but largely invisible control of a leader promote flexible and coordinated responses to crises. In addition, they foster long-term competitiveness through decentral- ized, groupwide efforts to solve day-to-day problems and improve performance.
On February 1, 1997, a fire at one of Aisin Seiki’s plants threatened to halt Toyota-group operations for weeks. Aisin Seiki, one of Toyota’s most trusted suppliers, was the sole source for proportioning valves (or P-valves, in the industry parlance), a small but crucial brake-related part used in all Toyota vehicles.4 Because of Toyota’s and Aisin’s dedication to the principles of just-in-time (JIT) production, only two or three days’ worth of stock was on hand. A shutdown of Toyota-group plants (including those of several hundred suppliers) seemed unavoidable.
The timing could not have been worse. Toyota plants were operating at full capacity with levels of overtime and use of temporary workers unheard of in years, in anticipation of a last-minute boom in automobile sales prior to the 2 percent consumption sales tax increase slated for April 1. Every day lost meant potentially huge and irretrievable losses in sales and profits for Toyota and related firms.5
Yet, remarkably, disaster was averted, and assembly plants were reopened after only two days of shutdown.
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1. J.H. Dyer, “How Chrysler Created an American Keiretsu,” Harvard Business Review, volume 74, July–August 1996, pp. 42–56;
S.R. Helper and M. Sako, “Supplier Relations in Japan and the United States: Are They Converging?,” Sloan Management Review, volume 36, Spring 1995, pp. 77–84; and
T. Nishiguchi, Strategic Industrial Sourcing: The Japanese Advantage (New York: Oxford University Press, 1994).
2. J.P. Womack and D.T. Jones, Lean Thinking: Banish Waste and Create Wealth in Your Corporation (New York: Simon & Schuster, 1996).
3. H. Ulrich and G.J.B. Probst, eds., Self-Organization and Management of Social Systems (Berlin: Springer-Verlag, 1984).
4. Although, in Japanese, the company’s name is pronounced “Aishin Seiki,” we use the registered English name “Aisin Seiki” in this article. Sales to Toyota currently account for 65 percent of Aisin’s total sales.
5. Another interpretation might suggest that the crisis occurred at a relatively good time, that is, when Toyota profits were at their third-highest level ever due to booming sales in Japan, the recent depreciation of the yen, and cost-saving efforts in product development and other areas that have saved Toyota nearly $2.5 billion. See:
B. Bremmer, L. Armstrong, K. Kerwin, and K. Naughton, “Toyota’s Crusade,” Business Week, 7 April 1997, pp. 44–50.
6. In this article, the term “Toyota group” refers to Toyota’s network of core suppliers, including affiliates (e.g., Aisin Seiki), independents (e.g., Kayaba Industry), and affiliated vehicle assemblers (e.g., Hino Motors). Toyota itself distinguishes the Toyota group, composed of fourteen of its closest affiliates, from the rest of its suppliers. All Toyota-group affiliates and many of Toyota’s important suppliers belong to the automaker’s supplier association, the Kyohokai (245 members); for more details, see:
M. Sako, “Suppliers’ Associations in the Japanese Automobile Industry: Collective Action for Technology Diffusion,” Cambridge Journal of Economics, volume 20, November 1996, pp. 651–671. Within this association is a core group of about sixty firms that account for 80 percent of Toyota’s total parts purchasing costs.
7. Interviews were conducted on March 24, 25, and 26, 1997, with managers of Toyota Motor Corporation, Aisin Seiki Co., Ltd., Koritsu Sangyo, Ltd., Taiho Kogyo Co., Ltd., Kayaba Industry Co., Ltd., and Denso Corporation (formerly, Nippondenso Co., Ltd.).
8. Because the Japanese model of assembler-supplier relationships is already well documented, we do not detail them in this article; interested readers might benefit from consulting:
J.H. Dyer and W.G. Ouchi, “Japanese-Style Partnerships: Giving Companies a Competitive Edge,” Sloan Management Review, volume 35, Fall 1993, pp. 51–63;
T. Nishiguchi and J. Brookfield, “The Evolution of Japanese Subcontracting,” Sloan Management Review, volume 38, Fall 1997, pp. 89–101; and
J.P. Womack, D.T. Jones, and D. Roos, The Machine That Changed the World (New York: Rawson Associates, 1990).
9. Single sourcing is less common in Japan than is usually thought, as many Japanese automakers use “parallel sourcing”; see:
J. Richardson, “Parallel Sourcing and Supplier Performance in the Japanese Automobile Industry,” Strategic Management Journal, volume 14, July 1993, pp. 339–350.
Although a particular model’s parts may be sourced to a single supplier, slightly different versions are often sourced to a competing supplier, enabling the assembler to compare each firm’s performance and promote long-term competition between the suppliers. Single sourcing is usually adopted by smaller assemblers in Japan.
10. Like Denso Corp., Aisin Seiki was originally a department within Toyota before it was spun off as a subsidiary in 1949. Toyota presently owns approximately 20 percent of Aisin shares, and several of Aisin’s executives were originally Toyota managers, including Aisin’s current president Toyoda Kanshiro (the son of Toyoda Eiji, Toyota’s former president and current honorary chairman). But these formal and informal linkages are not sufficient to explain Toyota’s high reliance on Aisin. The supplier’s high performance and reliability must also be considered.
11. Toyota vehicles are assembled not only in Toyota’s own assembly plants but also in plants of Toyota keiretsu firms such as Toyota Auto Body, Araco, Kanto Auto Works, Toyoda Automatic Loom Works, Central Motors, Gifu Auto Body, Hino Motors, and Daihatsu Motor Co. On Tuesday, February 4, only Daihatsu’s Ikeda plant was kept open. Mitsubishi, which also used Aisin P-valves and had only about two days’ worth of stock, had to close some assembly lines on February 5. Isuzu and Suzuki were not affected, however, because they were able to prioritize production schedules for models not using Aisin P-valves and because they had five days’ and three or four days’ worth of P-valves in stock, respectively.
12. The Ministry of International Trade and Industry’s estimates of the loss in output during February 1997 caused by the fire were 8.3 percent for the entire transportation equipment industry and 1 percent for all metal-related industries.
13. As a consequence of the Kobe earthquake in January 1995, production was curtailed for several days, but not as severely as in the aftermath of the fire. Most production equipment (e.g., jigs and fixtures, machine tools, transfer machines) of the affected Toyota supplier plants (Sumitomo Electric and Fujitsu-Ten) was salvaged intact or repaired quickly, resulting in only minor disruptions for Toyota’s assembly plants and only for a few models. In contrast, Aisin P-valves, which are used in almost every Toyota model, and their assembly lines were burned down, with three transfer machines seriously damaged. After the earthquake, no temporary production sites outside the affected suppliers were set up, since Toyota assisted them at the suppliers’ own facilities.
14. “Sales, Profits Rise at Toyota Affiliates,” Nikkei Weekly, 19 May 1997, p. 7.
15. V. Reitman, “To the Rescue: Toyota’s Fast Rebound after Fire at Supplier Shows Why It Is Tough,” Wall Street Journal, 8 May 1997, pp. A1 and A16.
16. Toyota (69,000 employees) is the world’s third-largest automaker and Japan’s largest firm in terms of sales. Both Aisin Seiki (11,100 employees) and Denso (56,500 employees) are part of what Toyota defines as the Toyota group. Aisin and Denso sell, respectively, 65 percent and 50 percent of their output to Toyota and are, respectively, 20 percent and 23 percent owned by Toyota. Like many Toyota suppliers nowadays, their clients include every Japanese automaker as well as many other automakers in the world. Aisin specializes in brake-related parts (and its subsidiary, Warner-Aisin, in transmissions); Denso specializes in electric and electronic auto components and is now the world’s fourth-largest automotive parts supplier. Taiho Kogyo (1,350 employees), although not nominally part of the Toyota group, sells 74 percent of its output to group firms (59 percent to Toyota itself), is 58 percent owned by Toyota, and has many former Toyota managers occupying key positions, including Taiho’s chairman (in contrast, Denso has only one Toyota-bred executive). Its main products are engine bearings, aluminum die-cast products, and dies. Kayaba is considered to be an independent supplier in the Japanese auto industry, with both Toyota and Nissan owning approximately the same number of its shares (8.5 percent and 8.1 percent, respectively). Its clientele is diversified, with Toyota accounting for about 25 percent of sales and Mitsubishi and Nissan accounting for 16 percent and 12 percent, respectively. Kayaba specializes in shock absorbers and hydraulic equipment and has 47 percent of Japanese and 22 percent of world market share for shock absorbers. Koritsu Sangyo (320 employees) is a second-tier supplier highly dedicated to Aisin Seiki. It specializes in transmission-related parts.
17. Mainly P-valve production was to be out-sourced in this way. Existing capacity to produce clutch master and tandem master cylinders in-house was deemed sufficient; these parts were not manufactured solely at Aisin’s Kariya plant, whereas P-valves were. Only five firms were needed to assist Aisin with the production of the clutch master and tandem master cylinders.
18. Wall Street Journal, 8 May 1997.
19. Koritsu Sangyo is perhaps an exceptional case.Its president heads Aisin’s supplier association. It is one of Aisin’s best-performing suppliers, the winner of several awards for quality. It is highly dedicated to Aisin (the supplier’s president wished he had had thirty hours per day instead of just twenty-four to help Aisin during this incident), the result of decades of continuous and stable relationships involving not only business transactions but also know-how exchange and capability-upgrading activities.
20. Kinkyu seisan fukkyu kodo gaido (Action guide for the emergency recovery of production), Aisin Seiki Co., Ltd., 30 September 1997. The booklet was edited by Aisin’s Corporate Planning Office, following the Aisin president’s directive that the office record everything that happened from day one of the incident so that its lessons could be compiled for later use.
21. The booklet contained: (1) a list of the major difficulties encountered during the crisis, including those caused by Aisin’s mistakes (e.g., distributing drills made for special-purpose machinery that could not be found); (2) guidelines for organizing an emergency response (e.g., how to set up an “emergency response unit” and various teams); (3) key points on what made the rapid recovery possible; (4) a flow chart describing Aisin’s efforts from the beginning to the end of the crisis; (5) a flow chart describing each team’s function; and (6) detailed guidelines for each team’s activities (including examples of checklists and order forms used during the crisis).
22. Hundreds of Denso employees were involved daily in P-valve production, working double shifts and weekends for the first two weeks. At Taiho, about seventy people were directly involved in the emergency production effort, including fifty-five people fully dedicated to P-valve production. At Toyota, twenty-five employees were directly involved in in-house P-valve production, while hundreds more were sent to Aisin and other firms to assist in the recovery effort.
23. It should be noted that Toyota could afford such payments at the time because profits were higher than expected, mainly as a result of the continued depreciation of the yen. The compensation scheme can also be interpreted as having the objective of spreading the unexpected gains from the lower yen and thus averting criticisms that Toyota was monopolizing them.
24. Suggestions proposed for alleviating the risk of interruptions caused by such disasters included (1) reducing variety of parts, among other reasons because excessive variety of P-valves complicated the setting up of alternative production sites after the fire; (2) dispersing production facilities; (3) increasing education efforts toward fire and accident prevention; and (4) increasing parallel sourcing. Regarding P-valves, however, unconfirmed reports suggest that Toyota will probably continue to rely almost exclusively on Aisin for P-valves, indicating a reluctance to forfeit the many benefits of single sourcing, e.g., possibility of important cost reductions through exploitation of scale economies; simplification of parts procurement and quality-control activities, and building of trusted relationships with a reduced number of suppliers.
25. The examples of 320-employee Koritsu Sangyo being the first to complete a P-valve after the fire or of Kayaba’s six-employee prototype specialist that made its own drills for P-valve use are telling in this regard.
26. A. Beaudet, “Knowledge Diffusion in the Japanese Automotive Industry: The Role of Kyoryokukai and Jishuken” (Hitotsubashi University, Graduate School of Economics, unpublished master’s thesis).
27. I. Nonaka, “The Knowledge-Creating Company,” Harvard Business Review, volume 69, November–December 1991, pp. 96–104;
I. Nonaka and H. Takeuchi, The Knowledge-Creating Company: How Japanese Companies Create the Dynamics of Innovation (New York: Oxford University Press, 1995).
28. It should be noted that P-valves are relatively mature products and that Aisin’s technology was not particularly advanced or of a proprietary kind.
29. T. Nishiguchi and E. Anderson, “Supplier and Buyer Networks,” in E.H. Bowman and B.M. Kogut, eds., Redesigning the Firm (New York: Oxford University Press, 1995), pp. 65–84.
30. J.H. Dyer, “Specialized Supplier Networks as a Source of Competitive Advantage: Evidence from the Auto Industry,” Strategic Management Journal, volume 17, April 1996, pp. 271–291.