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2004) "Supplier Development at Honda, Nissan and Toyota: Comparative Case Studies of Organizational Capability Development



What factors facilitate and constrain the sustained development and replication of organizational capabilities of suppliers? This question is addressed in a comparison of historical case studies of Toyota, Nissan and Honda in Japan. First, as expected, replication difficulty is overcome by enabling companies to share the practice, rather than the representation, of tacit knowledge. Second, interdependence in the hierarchy of routines that constitute organizational capabilities has led companies to broaden the scope of supplier development over time. Third, this broadening challenges suppliers to accept customer companies' intervention in internal investment decisions, requiring a certain mode of corporate governance. It is argued that the boundary of a capability-based firm may go beyond legally distinct units of financial control when firms are subjected to a cumulative process of capability enhancement. Copyright 2004, Oxford University Press.
Supplier Development at Honda, Nissan and Toyota:
Comparative Case Studies of Organizational Capability Enhancement*
Mari Sako
Professor of Management Studies
Said Business School
University of Oxford
Park End Street
Oxford OX1 1HP, UK
October 2002
* This study was funded by the International Motor Vehicle Program (IMVP), the UK
Economic and Social Research Council, and the Japan Foundation. I am grateful to the
interviewees at the three automakers and suppliers who gave generously of their time. I also
appreciate the comments of many colleagues, and in particular those of Bill Lazonick.
What factors facilitate and constrain the development and replication of
organizational capabilities at suppliers? This question is addressed in a comparison of
historical case studies at Toyota, Nissan and Honda in Japan. First, as expected, replication
difficulty is overcome by enabling companies to share the process of accumulating tacit
knowledge. Second, the interdependence in the hierarchy of routines, that constitute
organizational capabilities, has led companies to broaden the scope of supplier development.
Third, this broadening challenges suppliers to accept buyer companies’ intervention in
internal investment decisions, requiring a certain type of corporate governance. It is argued
that the boundary of a capability-based organization may go beyond legally distinct units of
financial control when firms are subjected to a cumulative process of capability enhancement.
Supplier Development at Honda, Nissan and Toyota:
Comparative Case Studies of Organizational Capability Enhancement
Supplier development –- a company’s undertaking to improve its supplier’s
capabilities – has been taken for granted in the Japanese automotive industry for several
decades, and has received attention in the US only recently (Handfield et al 2000). Unlike the
new product development process (notably Clark and Fujimoto 1991; Nobeoka 1997), the
automakers’ organizational processes for providing supplier development have not been
studied systematically. There is perhaps a good reason for this. First, supplier development
has been positioned as an activity that fits neither ‘market’ nor ‘hierarchy’. Consequently,
much of the attention, theoretically and empirically, has been given to incentives and
circumstances under which buyer firms may wish to ‘create lean suppliers’ rather than find
them in the market (MacDuffie and Helper 1997). Second, while new product development
process has a start and a finish with distinct projects leading up to the production of a new
car model, supplier development is less discrete and more cumulative in nature. There is
therefore a need to improve our understanding of supplier development as a cumulative
process by using the organizational capability approach.
This study concerns itself with both (a) companies’ organizational capabilities to
develop their suppliers, and (b) organizational capability as a subject taught to suppliers. It
sets out to answer the following question: what factors facilitate and constrain a firm’s
attempt to develop and replicate its organizational capabilities at suppliers, within the
intended boundary whilst preventing leakage to competitors? This article sheds some light
on this question by distinguishing among different types of capabilities and by linking
organizational capabilities more directly to corporate governance considerations.
The empirical work reported in this article is based on case studies of three major
Japanese automakers, Honda, Nissan and Toyota. Interviews were conducted with key
respondents (managers in purchasing and supplier development engineers) in the firms and
at some of their suppliers. Both historical and contemporary documents provided by the
companies were also consulted. The main aim of comparing the three companies, rather
than studying one firm, is to address the question ‘why do firms in the same industry differ in
their performance?’ by focusing on differences in organisational processes and incentives
(Nelson 1991). At the same time, survey evidence is used to gauge the differences in the
breadth and depth of supplier development activity in Japan, Europe and North America.
Section 1 discusses the organizational capabilities approach in so far as it is relevant
to the topic of supplier development. Section 2 surveys the range of supplier development
activities at each of the three automakers. Section 3 compares and contrasts the three
companies’ structures and processes for supplier development, and discusses the issue of
replication of such structures and processes outside of Japan. The paper concludes by
drawing broader theoretical implications concerning capabilities, governance and the
boundary of the firm.
1. Supplier Development as an Organisational Capability and a Mechanism for
Replicating It
Supplier development is a procedure by a company to help improve its existing
suppliers’ capabilities. More specifically, it may be interpreted as a firm’s attempt to replicate
some aspects of the in-house organizational capability at its suppliers. The ability to replicate
such capability is, in itself, also a capability. In the automobile industry, automakers may
send their own engineers to the supplier’s shopfloor to help solve a problem with a specific
component in order to meet the product launch date. They may provide training courses for
suppliers’ employees in techniques such as TWI, Quality Circles, Value Engineering, and
simultaneous engineering. They may also ask a supplier to work on a specific production line
for an extended period with a view to learning heuristics to achieve cost reduction, inventory
reduction or quality improvement.
The organizational capabilities that are being replicated at suppliers consist of a
hierarchy of practiced routines that are coherent (Nelson 1991, p.68). ‘Routines’ refer broadly
to the way things are done in an organisation, and may include not only well-specified
technical routines, but also ‘the relatively constant dispositions and strategic heuristics that
shape the approach of a firm to the non-routine problems it faces’ (Nelson and Winter 1982,
p.15). In so far as such routines involve an important element of interaction and coordination
between individuals, organizational capabilities are not fully reducible to individual skills.
Knowledge is typically distributed in different parts of the organization.
One important capability in supplier development is continuous improvement (or
Kaizen). In a Schumpetarian or evolutionary context, firms, residing in a world which is too
complicated to comprehend fully, have a disposition to satisfice. Such satisficing behaviour is
dislodged by heightened performance aspiration and/or by re-igniting learning through
continuous improvement (Winter 2000). The practice of continuous improvement amounts to
an effort to re-ignite the quest for improvement in organizational routines ‘so frequently that
the flame burns pervasively and continuously’ (Winter 2000, p.993), rather than starts and
stops in relation to the identification and solving of a specific problem (Winter 1994, p.103).
Continuous improvement is inherently firm-specific in its application and results, and
therefore is part of the intangible assets, for which no ready market exists. The distinctive
and difficult-to-replicate character of such assets is central to the sustenance of a firm’s
competitive advantage. It also explains why firms differ, even in the same industry in the
same country (Nelson 1991).
The organizational capabilities framework makes it possible to classify the content of
supplier development programmes along the following two dimensions:-
(a) Type of capability, classified into three levels: first, the most basic level of
‘maintenance capability’ (i.e. the ability to maintain a particular level of
performance consistently), second ‘improvement capability’ (Fujimoto 1997, p.12)
which affects the pace of performance improvements, and third the highest level of
‘evolutionary capability’ (i.e. capability for capability building) (Fujimoto 2000,
p.246). This last is to be distinguished from ‘dynamic capabilities’ (Teece and
Pisano 1994) to the extent that the emphasis is less on ‘adapting, integrating, and
reconfiguring internal and external resources in response to changing
environments’ (Teece 2002) and more on the sustained accumulation of the other
two capabilities. This, then, resembles dynamic capabilities in moderately dynamic
markets, rather than in high-velocity markets, as elaborated by Eisenhardt and
Martin (2000).
(b) Scope of activity: ranging from supplier development activity focused around a
model-specific component, to that for the whole factory or the whole company. The
broader scope implies not just an expansion from a specific production line to a
larger production area, but also an expansion to non-production areas (such as
product development and capital investment decisions).
The most limited aim of supplier development is to intervene in order to teach ‘maintenance
capability’ with respect to a specific component. At the other extreme, the most ambitious
aim is for a company to replicate at its supplier a whole set of organisational ‘routines’
underlying its own evolutionary capability.
In ‘Japanese-style’ supplier relationships, suppliers are given a consistent set of
incentives to learn and acquire organizational capability from their customer companies. Such
relationships are variously characterized as relational, obligational, trust-based and voice-
based (Dore 1983, Macneil 1985, Helper 1990, Sako 1992, Smitka 1989). The precise
mechanisms which structure such incentives include long-term trading that induces
investment in relation-specific skills (Asanuma 1989), a joint problem-solving approach
adopted in developing ‘black box’ parts (Clark and Fujimoto 1991, Fujimoto 1997), and a clear
rule for sharing gains between the automaker and the supplier (Smitka 1989, Macmillan
1990). Despite these incentive-structuring mechanisms, there remain at least three obstacles
to replication of automakers’ organizational capability by suppliers. Consequently, incentive
structuring is a necessary but not a sufficient condition for facilitating suppliers to acquire
organizational capability. Differences in core capabilities to overcome these barriers to
replication explain why firms in the same industry differ despite similarities in incentive
structuring mechanisms.
First, barriers to replication of organisational capability is due to the tacit nature of
the knowledge being taught to suppliers. Manuals (i.e. for standardization and codification)
may exist, but typically, hands-on instruction must accompany classroom teaching, which
makes the process of replication labour-intensive (e.g. sending engineers to spend a
significant amount of time on the supplier’s shopfloor) and expensive (because economies of
scale are difficult to exploit). In this study, we may conjecture from the chosen mode of
supplier development (e.g. shopfloor visits vs seminars) what the automaker’s presumed
degree of tacitness concerning that which it is purporting to teach. The more automakers rely
on teaching through the practice of routines rather than the representation of routines, the
more complete the replication process is likely to be. Moreover, doing and teaching are
different things. In a craft skill context, some are excellent at doing but are unwilling to teach a
trick or two because that would undermine one’s power. More noted in the recent
management literature on knowledge is the fact that some are excellent at doing but are
unable to teach because of the tacit and complex skills involved: ‘we know more than we can
tell’ (Polanyi 1967, p.4). How can the amount of ‘telling’ be increased to match the level of
‘knowing’? This study shows empirically that the firm’s teaching capability is enhanced
when there are opportunities for it to practice in different settings.
Second, replication may be problematic because of a high degree of interdependence
among a firm’s supplier development process and other processes (or ‘routines’) in the
organisation. It has been noted that: ‘Recognizing the congruences and complementarities
among processes, and between processes and incentives, is critical to the understanding of
organisational capabilities’ (Teece and Pisano 1994, p.544). Consequently, partial imitation of
a few elements in a successful model may yield little benefits (Milgrom and Roberts 1995).
For example, the ‘lean production’ model is essentially interpreted to apply to the shopfloor.
But ‘lean production requires distinctive shopfloor practices and processes as well as
distinctive higher order managerial processes’ (Teece and Pisano 1994, p.543). This implies
that as a cumulative process, there is an in-built bias towards automakers’ strategy to broaden
and deepen the scope of supplier development, as they extend their activities beyond
shopfloor improvement procedures.
Third, this pressure to extend the coverage of capabilities in supplier development
programmes is at loggerheads with certain types of corporate governance. A system of
corporate governance shapes who makes investment decisions in corporations, what types of
investments they make, and how returns from investments are distributed (O’Sullivan 2000).
If a supplier is regarded as a legally distinct unit of financial control, the voice of the buyer
company may, or may not, be taken into account in the supplier’s investment decisions and
returns from investments. When performance improvement is a joint effort by the buyer and
the supplier, a rule for sharing gains may emerge. Such a rule eliminates the need to
negotiate each time gains are made, as well as align the incentive of suppliers to reveal the
gains when they are made. More tricky is the claim by buyer companies to have a say in the
supplier’s investment decisions. The replication of routines and processes across legally
distinct units of financial control may, therefore, be constrained by the need to compromise
suppliers’ financial (and more broadly managerial) autonomy in the process of replication.
2. Case Studies at Toyota, Nissan and Honda
Origin of Supplier Development
Toyota Motor Corporation’s purchasing philosophy is enshrined in the 1939
Purchasing Rules which state: ‘once nominated as Toyota suppliers, they should be treated as
part of Toyota (as branch plants); Toyota shall carry out business with these suppliers
without switching to others, and shall make every effort to raise the performance of these
suppliers’ (TMC 1988 p.76; Kyohokai 1994, p.18). But the post-war trigger for thinking more
concretely about supplier development was the so-called enterprise group diagnosis (keiretsu
shindan) conducted by the Aichi Prefectural Government during 1952-53 (Kyohokai 1967,
pp.24-5, Wada 1991; see also Fujimoto 1997, p.76&p.212; Nishiguchi 1994, p.65). The public
sector consultancy chose the Toyota keiretsu (in practice Toyota and its 21 key suppliers) as
the unit to evaluate along four criteria, namely the existence of a management policy,
productivity improvement, quality improvement, and the fulfillment of production plans
(Kyohokai 1967, p.24). The consulting exercise resulted in a heightened expectation that
Toyota provide assistance to improve suppliers’ company-wide managerial capabilities.
In the 1950s, lectures, seminars and training courses for Toyota employees were made
available to core supplier employees. For example, a 30 day lecture course on production
management, organised by the Japan Management Association (Nihon Noritsu Kyokai), was
first held in 1955 for Toyota and supplier employees, and was repeated 20 times until 1967,
producing 372 graduates (excluding Toyota employees) (Kyohokai 1967, p.32). These
supplier company employees were instrumental in standardizing tasks across factories in the
face of rapid output growth. According to one of them, ‘we made a round of Kyohokai
member companies as well as Toyota’s internal factories in order to conduct research into
improving work methods. Task improvements were seen to help anticipate repeated
pressures for cost reduction. So companies vied with each other to open up their own factory
as a study site, and were eager to polish each other’s skills’ (Kyohokai 1967, p.32). There were
also a whole series of lectures and seminars on quality control aimed at top and middle
managers of supplier companies in Kyohokai, which eventually established its Quality
Control Committee in 1961.
Despite these efforts, when Toyota won the Deming Award in 1965, JUSE (Japanese
Union of Scientists and Engineers) pointed out the sizeable gap in quality standards between
Toyota and parts suppliers (Nemoto 1983, p.151). Nemoto was appointed to head the
Purchasing Control Department (kobai kanribu), newly created in 1965, preceding the
establishment of Ohno’s Operations Management Consulting Division (OMCD) (seisan
chosabu) by five years. While Ohno’s mission was to promote Toyota Production System
(TPS) among suppliers, his lesser-known counterpart, Nemoto, was to diffuse Total Quality
Control (TQC) to the suppliers. This is the origin of the bifurcated responsibilities for
supplier development within Toyota (see Figure 1). Subsequently, the synergy generated in
the simultaneous application of TPS and TQC in the 1960s was enormous (Shimokawa et al
(eds) 1997, pp.23). It is well understood that TPS, a fragile low buffer system, exposes quality
problems through line stoppages and forces management to fix the root cause of the problem.
Less noted in the literature is the contribution TQC has made to the rapid diffusion of TPS
across Toyota factories, not only by educating middle managers in quality control techniques
but also by using Hoshin Kanri to link the shopfloor processes and targets to the policies of
higher level management. (Mr. Nemoto quipped that lean production is the Toyota way
minus Total Quality Control (Shimokawa et al (eds) 1997, p.7). ) By extension, Toyota’s
suppliers benefited from the simultaneous teaching of TQC and TPS.
OMCD’s Diffusion of Toyota Production System
Toyota Production System focuses on the elimination of waste, and is credited with
the creation of a set of tools and procedures, such as Kanban, quick die change, and
autonomation (Ohno 1978, Monden 1983). What came to be known as the Toyota Production
System was initially introduced to all Toyota factories in the 1960s. These factories demanded
just-in-time delivery of parts, but a real effort to implement just-in-time production within
supplier factories did not begin until the 1970s (Kyohokai 1994, p.91).
Despite this time lag, the establishment of the Operations Management Consulting
Division (OMCD) as part of Toyota’s production control function in 1970 facilitated a
seamless transfer of knowledge about Toyota Production System within Toyota and across to
its suppliers. This internal structure enabled OMCD to bypass the purchasing function and
establish direct links with core suppliers. Because OMCD is in charge of implementing TPS
both within Toyota factories and at its core suppliers, the same methods, procedures, and
heuristics are applied to internal and external factories by putting the same set of engineers in
charge of both. The OMCD employs around 50 supplier development engineers, who have
come up the ranks after in-company training placements in Toyota factories. Within Toyota,
Factory Jishuken (kojo jishuken) –- an autonomous study group -- takes place as a culmination
of education and training for Toyota’s middle managers and first-line supervisors. They are
considered the most important repository of Kaizen know-how on the shopfloor (Ishida et al
1996, Nemoto 1997). Regular Kaizen presentation meetings for factory managers and higher-
level management structure the supervisors’ incentive to make continuous improvements
with concrete results (Ishida et al. 1997).
Jishuken Groups for suppliers to improve their shopfloor by refining the application
of TPS came about in the 1970s, but were kept under wraps from external eye for a decade or
two. By all accounts, Jishuken seems to have had an informal beginning with some suppliers
requesting help from OMCD which took their top managers on a tour of other suppliers’
shopfloor. But the system became fairly formal by the early 1980s. In the late 1990s, there
were nine Jishuken Groups in all, two for body makers (9 factories) and seven for parts
manufacturers (47 factories). The total is therefore 56 factories belonging to 52 enterprises,
accounting for 80 per cent of all purchasing spend by Toyota. Toyota has given regard to
geographical proximity and the absence of direct competitors in forming these groupings.
Such considerations are deemed important for intensive interaction and sharing of know-how
during Jishuken sessions.
Every calendar year, Jishuken activities are carried out within the broad policy
direction issued by OMCD (the 1998 focus, for instance was to adapt to model mix changes
and output fluctuations in the age of low demand). Within such a framework, each Jishuken
company chooses a specific theme in discussion with OMCD, and identifies a specific factory
area for study by the Group. Every year, each supplier company hosts a study over a two
months period. The study session begins by setting concrete performance targets in terms of
shopfloor indicators, such as productivity, cost reduction, and inventory turns. The senior
OMCD engineer in charge visits a supplier company under study around three times during
the two months period and generally makes severely critical observations, whilst more junior
OMCD engineers visit the company at other occasions to give more detailed guidance.
Jishuken members meet once a week to put forward concrete Kaizen ideas, most of which are
implemented by the host company before the two months are up. (For example, at JECO, 222
of the 248 Kaizen ideas put forward in total were implemented, an implementation rate of
90%.) A typical gathering would consist of around 30+ people, as each supplier company
nominates five participants. At the end of the year, all the Jishuken Groups gather in one
location to make presentations of their year’s achievements. Written documents of those
achievements are compiled and handed out to all participants.
Besides Jishuken, Toyota’s OMCD also provides individual assistance to suppliers on
an if-and-when-necessary basis. For instance, the purchasing department may request
assistance for a supplier with a pre-production problem in fixing its component quality.
What are the relative advantages and disadvantages of bilateral assistance and group
activities like Jishuken? An OMCD manager gave the following eloquent answer.
Individual assistance is good whenever we are looking for quick results. When a
supplier’s profits have plummeted suddenly, or when a supplier is not keeping up
with the launch of a new model, we send in our trained experts and tell everyone to
watch quietly. But this short-term, yet deep, intervention requires a tremendous
amount of resources on our part. More likely than not, suppliers feel they have
improved by doing what they are told, but do not understand why, and things come
to a halt when the experts go home. By contrast, Jishuken is good for developing and
training people, both at the suppliers and at Toyota. In order to make improvements
towards a set of targets by everyone putting their ideas forward, there are various
obstacles to be overcome along the way. It would most certainly be quicker for an
expert to take a lead and provide answers, but this would not result in developing the
skills of those who are led. The strength of the Toyota Production System lies in
creating as many people who can implement and put into practice the TPS on their
own as possible. So the most important thing for the survival of TPS is human
resource development. But also there is no point in holding study group sessions
without concrete results, because then companies would not be profitable. So we do
put serious pressure for Jishuken Groups to meet the targets.
Thus, Jishuken is a closely knit gathering of middle-level production technologists
from a stable group of companies, who engage in the experience of jointly developing better
capabilities for applying TPS through mutual criticism and concrete application. The two
modes of delivery by the OMCD, namely the Jishuken group activities and individual
assistance, are synergistic, in that the former gives suppliers the space to experiment and
explore on their own while the latter provides a top-down quick solution by Toyota experts,
which on its own may discourage learning. Jishuken also has the benefit of developing
Toyota’s own personnel in teaching tacit skills. Both modes of supplier development give
Toyota enormous access to the detailed cost structures of its main suppliers. This contributes
to the sustenance of Toyota’s core capability to engage in target costing, and to the retention
of manufacturing know-how for components which Toyota does not produce in-house. Thus,
there is a fine line to be drawn between monitoring and learning (Beaudet 1998, Hisatake and
Negishi 1996).
The Purchasing Department’s Diffusion of TQC
Like the OMCD, the Purchasing Department also relied on bilateral and multilateral
modes of supplier development. In the multilateral mode, the Department has been in charge
of the supplier association, Kyohokai, which, despite its ever-expanding membership,
remains a forum for imparting and sharing information in the supplier community. They
hold regular seminars, study group meetings, training courses, exhibitions and presentations
of members’ achievements in various matters including cost, quality, delivery and
development (Kyohokai 1994, Sako 1996).
More concrete individual guidance is given to suppliers that aspire to obtain the
Toyota QC Award, established soon after Toyota won the Deming Award in 1965 to motivate
suppliers to adopt TQC (Kyohokai 1994, pp.74-5; Nemoto 1978). As of September 1996, a
total of 44 suppliers obtained the Toyota QC Award. The Quality Technology Section of the
Purchasing Planning Department offers hands-on guidance in Hoshin Kanri, quality
assurance, cost control, Genba Kanri, delivery management and so on. Because of this
traditional TQC focus, the Purchasing Planning Department defines supplier assistance to be
about capability enhancement (taishitsu kyoka, ‘the strengthening of one’s constitution’ in a
literal translation). This is necessarily a long-term undertaking, involving assistance in
marketing, cost and investment planning, cost control, process improvements, and quality
More recently, however, an urgent task surfaced with the recession in the 1990s.
Whereas in 1988, 57 out of the 77 major suppliers (with 20% or more sales dependence on
Toyota) saw their revenues and profits increase, by 1993, only 3 were experiencing increases
while 57 were facing declining revenues and profits. Toyota responded by creating in 1993 a
Kaizen Promotion Section within the Purchasing Planning Department, staffed by 21
employees (15 of whom came from factory-level production engineering sections, while the
rest had cost and accounting expertise). The main task of this new section is to help suppliers
secure profits in the short run by various means including cutting pay and freezing
investment. In effect, the Purchasing Planning Department’s supplier assistance is two
pronged, one aimed at the short-term recovery of loss-making suppliers and the other for
longer-term capability enhancement regardless of profitability problems.
The account so far leads to a question about how the OMCD relates to the Purchasing
Department when dealing with the same set of core suppliers. The nature of coordination
between the OMCD and the Purchasing Planning Department is informal, based on personal
networks. No organisational procedures exist for informing each other’s work. According to
an OMCD manager:
When we go into a supplier, we do not put the purchasing function at the forefront.
We can see everything at the supplier company including the detailed breakdown of
costs. If rationalization is for the sole purpose of passing on the gains to the
purchasing department, suppliers would rather not make any improvements. So we
do not let the purchasing department know how much productivity improvements a
particular supplier has made as a result of our intervention.’
Similarly, a Purchasing Planning manager was confident that most suppliers are reassured of
the absence of a direct link between supplier assistance and price negotiations:
No supplier would do Kaizen if such a link is made. Within Japan, we tell the
suppliers, don’t worry, there is no need for such fear. If improvements were made
with OMCD assistance, the OMCD would never pass on to purchasing the
information with a view to reflecting it in component prices.
A supplier, participating in Jishuken and receiving assistance from the Purchasing Planning
Department, reinforced this view:
There are occasions, like with VA, when Toyota says let’s split the gains where they
relate directly to markets. But we feel that Toyota provide guidance, quite
consciously bringing our attention to other aspects from which we can gain for
ourselves regardless of Toyota. They tell us from time to time to direct our Kaizen
effort to these aspects.
In effect, the supplier in question is allowed to keep the gains from an OMCD intervention.
To summarize, Toyota’s OMCD has a separate existence from the Purchasing
Department, facilitating a smooth transfer of know-how between internal factories and
supplier factories, and giving suppliers an incentive to enhance their evolutionary capabilities
for the long-term rather than to seek a quick fix for commercial advantage. The OMCD and
the Purchasing Department, separately, emphasize the need for both short-term fixing of
problems and long-term capability enhancement. The resulting array of supplier
development channels, from group-based activities to individual assistance, enables Toyota
to ensure that both explicit and tacit knowledge is communicated to its core suppliers (Dyer
and Nobeoka 2000). Moreover, suppliers, by being taught TPS and TQC at the same time, are
able to exploit the synergy in sustaining continuous improvement.
Discontinuous History of Diffusing Synchronized Production and TQC
Like Toyota, Nissan’s Yokohama plant received an enterprise group diagnosis in
1953. The diagnosis revealed that many of the owner-managers of Nissan’s subcontracting
firms came from technical backgrounds, and lacked interest in management issues. The
diagnosis report recommended that Nissan provide guidance for its suppliers in ‘clearer
management direction, better organization structure, managerial planning and scientific
management principles, improved time management, and more attention to production
management’ (Ueda 1997, p.226). In reality, however, Nissan’s assistance was initially
restricted to the shopfloor, and it was not until the 1980s that broader managerial issues
(including TQC) were taken up seriously as a topic for supplier development. As described
below, the history of Nissan’s supplier development activity is marked by (a) significantly
early starts in adopting or devising new techniques, but also by (b) discontinuities in
initiatives for Nissan’s internal factories and those for its suppliers.
Synchronized production (doki seisan) is Nissan’s own philosophy and method for a
demand-pull low-buffer production system, dating back to the early 1960s. As a
management philosophy, it sought to exploit the existing imbalance between the firm and the
environment as an opportunity for making continuous improvement. This philosophy was to
be implemented in three stages: (a) through line balancing to improve the efficiency of
machinery and manpower; (b) through balancing production processes with processes which
precede and follow production; and (c ) through synchronizing the production system with a
future management vision (Takarakai 1994, pp.116). Juzo Wada, heading the purchasing
department in the 1960s, is credited with devising the idea, and effected a ‘synchronization
experiment’ in 1963 to spread this production system to core suppliers through the supplier
association, Takarakai (Nissan 1965 p.388; Takarakai 1994, pp.116). The experiment
eventually faded way, and Nissan’s purchasing function re-started supplier development
with a focus on APM (Action Plate Method) in the 1970s and 1980s, and on Capability
Enhancement Activity in the 1990s. The mid-1990s also saw Nissan establish a Synchronized
Production Promotion Department in order to diffuse synchronized production internally to
Nissan’s factories. Thus, unlike at Toyota, the function responsible for diffusing
synchronized production internally is separate from that for suppliers.
There is a similar de-linking between Nissan’s internal efforts and actions for
suppliers in the area of TQC. Nissan was awarded the Deming Prize as early as in 1960, and
used Takarakai as an organ to provide education and training on TQC to member suppliers
around that time (Udagawa et al 1995, p.86). But Nissan tended to treat the Deming Award
as an end in itself, and did not continue to nurture internal expertise nor diffuse TQC to
suppliers. In fact, it took Nissan 22 years before it established the Nissan QC Award for
members of Takarakai in 1982. In the meantime, Nissan provided individual assistance to
suppliers in quality control techniques, putting an emphasis on product quality. With the
start of the teaching of company-wide TQC to suppliers, just over 30 suppliers obtained the
Nissan QC Award, but only 6 years on in 1988, the award was suspended and abandoned in
effect. In the 1990s, Nissan took a renewed interest in improving product quality, and newly
established a TQM Promotion Department to revive TQC within Nissan.
From Group-based to Individual Supplier-based Assistance
Nissan, like other automakers, has classified its component suppliers using multiple
gradations. Initially, the core group was Nissan’s main supplier association, Takarakai,
consisting of around 100 member companies throughout its history (1958-1991). In 1966, a
second supplier association, Shohokai, was formed as a looser gathering of bigger and more
independent suppliers. In 1969, Takarakai implemented a major organisational reform, to
introduce selectivity by making a distinction between activities for all members (e.g. lectures
and QCC conferences) and ‘autonomous activity’ by six newly formed committees, each
consisting of 10 or less member firms producing similar products (Takarakai 1994, p.58;
Udagawa et al 1995, p.88). These committees were very active in sharing information and
ideas through mutual factory visits and study groups. Nissan’s purchasing function was in
charge of promoting supplier association activities by providing direction, advice and
In 1983, Takarakai’s organization was restructured again by creating (a) a joint
committee to seek common themes across the six committees, and (b) five specialist
functional committees (in TQC, education, logistics, health & safety, and the promotion of
Nissan cars) (Takarakai 1994, p.92). Thereafter, the locus of activity shifted from the six
committees to the specialist functional committees. This was followed by a further attempt to
simplify Takarakai activities in 1987, as member suppliers entertained a feeling that Takarakai
had run its course. Just before Takarakai and Shohokai were merged in 1991, the most active
part of Takarakai took the form of a Specialist Committee for Capability Improvement
(taishitsu kaizen senmon iinkai), one of the functional committees that had been the TQC
committee until 1987 (Takarakai 1994 p.111). When Takarakai disbanded itself for the
merger, this Specialist Committee was also disbanded, and the Capability Enhancement
Promotion Committee was established under the auspices of the Engineering Support
Department. In order to be member of this Committee, suppliers must be more than 20%
owned by Nissan, over 30% of the supplier’s sales turnover go to Nissan group companies,
and the total annual sales to Nissan must exceed 20 billion yen. Although the 25 suppliers
that met these criteria are expected to learn from each other, Nissan’s assistance is largely on a
one-to-one basis (see below).
Broadening and Deepening Supplier Development Activity
Nissan has two foci of supplier development activity, namely component-based
assistance and factory-wide assistance. The former involves the teaching of various
techniques to improve cost, quality, delivery and development, and is captured most recently
by Saimal Activity. The latter, factory-wide assistance, is known as Capability Enhancement
Activity, and incorporates synchronized production, TPM, and Genba Kanri.
In the mid-
1990s, it consisted of a three year programme to implement synchronized production. The
aim in the first year was to improve the use of direct labour, in the second year to improve
indirect labour, and in the third year to cut overheads. Starting initially with three factories
from three supplier firms, there were 40 factories from 12 companies participating in this
programme by 1997. Typically, a supplier specifies a model factory which is diagnosed and
improved with intensive help from Nissan engineers; 3-4 engineers visiting the factory 4
times a month is a guideline, and it is known for a Nissan engineer to be resident at the
supplier for 3 months. Beyond this stage, the supplier receives a visit from a Nissan engineer
twice a month. Not only is the supplier expected to expand the scope of his activity within
the model factory (from direct to indirect labour, etc), it is also expected to apply what has
been learnt at the model factory to another factory.
Nissan’s Capability Enhancement Activity places great emphasis on evaluation and
diagnosis. The thinking here is that without concrete evaluation measures, Nissan cannot
provide effective assistance, nor would suppliers feel convinced of the need to make
improvements. Since the mid-1990s, Nissan has developed a whole series of measures for
suppliers concerning (a) their financial performance, (b) data on quality, cost and delivery,
and (c ) evaluation of systems governing components, factories, and companies. For example,
component-based evaluation involves benchmarking 90 component types of 200 Japanese
companies, along six criteria, namely quality (e.g. in-process defect rate), reliability (e.g.
equipment breakdown), flexibility (e.g. die change time), speed (e.g. cycle time), economy
(e.g. output per time unit), and continuity (e.g. the proportion of processes which are
continuous). Each criterion may consist of multiple measures, and an overall index is
calculated by combining the six criteria.
Since 1995, up-to-date performance measures of the 25 core supplier companies are
displayed in a showroom located within the Engineering Support Department. Moreover,
there are three meetings every year for the 25 companies, one at the company president level
and the other two for manufacturing directors. The meetings have the purpose of sharing
information about evaluation data and of creating a consensus about future directions. The
sensitivity of the information and the presence of direct competitors within the group of 25
suppliers require much care and attention in the way it is handed out. But on balance,
Nissan’s Engineering Support Department believes that the disclosure of evaluation data has
a beneficial effect of stimulating healthy rivalry for improvement. Besides the meetings of the
25 suppliers as a whole, there are other smaller group meetings of suppliers located in
specific geographical areas, when suppliers make presentations of Kaizen examples from
their factories. These are fora for exchanging ideas about successful results, but not where
joint studies and problem-solving (a la Toyota’s Jishuken) are carried out by supplier groups.
Saimal Activity (Saimal standing for ‘simultaneous’ in simultaneous engineering) is a
1990s programme to help suppliers improve the component development process. The timing
coincides with Nissan’ drive to adopt simultaneous engineering as a major corporate vehicle
to improve its performance (Okurasho 1997, p.71). The component technology group of
Nissan’s Engineering Support Department is in charge of developing a number of tools (such
as the Saimal Job Plan spelling out detailed steps in developing a part for a new model) and
evaluation measures to assess suppliers’ capability in managing the component development
process. Saimal Activity has targeted specific components, particularly (a) components which
tend to have unstable inter-face quality, such as lamps and weather strips; (b) components
which suffer from many design changes before Job 1, such as harnesses, carpets, seats and
door trims; and (c ) expensive components whose costs are difficult to reduce, such as metal
pressings, air conditioners, door locks, air bags, steering wheels, and engine and transmission
parts. The Engineering Support Department evaluates whether the Saimal Activity has taken
root at the supplier companies, by examining not only outcomes (in terms of quality, cost and
delivery) but processes. The latter involve such things as whether the Saimal Job Plan has
been adhered to or not, whether in-company education system is adequate at the supplier,
and whether the supplier takes an initiative to make suggestions to Nissan. Only if a supplier
scores highly on both outcomes and processes would it graduate from the stage of receiving
regular visits by Nissan engineers.
To summarize, Nissan’s supplier development is much more individual company
based than at Toyota, and suppliers share ideas and achievement through presentation
meetings and displays but not through sharing in the experience of joint problem-solving.
But similar to Toyota, the scope of activity has broadened considerably over time, to factory-
wide assistance through its Capability Enhancement Activity, and to pre-production stages of
component development through its Saimal Activity. The latter has been complementary to
the former, in being able to incorporate tooling improvements or design change ideas that
cannot be taken up for existing models in future models.
Nissan has adapted to this broadening of the content of supplier development by
moving the Engineering Support Department (kobai gijutsubu) of the purchasing function
from Nissan’s HQ location in Ginza to Nissan Technical Centre in March 1993. Geographical
proximity facilitates better coordination. The Engineering Support Department also doubled
its size in the 1990s (from around 40 to over 80 engineers), by incorporating activities hitherto
carried out by other functions such as quality and logistics. What has remained unchanged is
the unified internal structure for providing supplier development assistance. Nissan has a
clear view about the advantages of letting a centralised purchasing function take a lead in
providing supplier development services. Only the purchasing function is in a position to
promote a consistent set of activity starting from the comparison of suppliers’ technological
standards, the setting of improvement targets, the implementation of programmes, price
revision, and the reflection of improvements made in the next round of supplier selection.
Supplier development activities which are linked to supplier selection are thought to increase
the effectiveness of the activities, and Nissan sees it as an advantage to be able to directly
reflect the result of the supplier development activities in price revisions. In short, suppliers’
mind is necessarily concentrated when it is a matter of survival in the form of securing future
Honda’s Philosophy of Supplier Relations
Honda espouses free competition, equal partnership, and suppliers’ managerial self-
reliance as three fundamental principles in purchasing. These principles arose out of
necessity and experience of being a motorcycle firm that entered the auto sector late in the
1960s. Free competition means that as a matter of policy, Honda is to buy products from
anywhere in the world as long as they are good and cheap. Equal partnership means the
avoidance of heavy-handed tutelage that has typified the relationship between Toyota and
many of its long-standing loyal suppliers. Supplier’s self-reliance implies balancing
responsiveness to Honda’s needs with a sufficiently diversified customer base.
Honda places its supplier development activity in the context of this purchasing
philosophy. Its purchasing department sees its history of supplier development as reflecting
a shifting balance between cooperation and competition, with equal weights in the 1970s, in
favour of cooperation in the 1980s, and back towards competition in the 1990s. This seesaw
originated after the 1973 oil shock when some of Honda’s smaller suppliers found themselves
at risk with a large reduction in Honda’s orders. The recession since the 1990s poses a similar
risk for some suppliers, but before Honda feels able to throw them out to face global
competition, it is devoting resources to bring them up to world-class level of competitiveness.
Multiple Channels of Supplier Development
Honda’s supplier development activity may be traced back to the formation of study
groups in the aftermath of the first oil shock in 1973. By this time, Honda had nurtured a core
group of suppliers with either shareholding or heavy trading linkages with Honda, in order
to cope with a sixteen-fold increase in car production in its initial ten year history. Suddenly,
with no growth prospects for the auto industry, Honda realized the need to cut costs to
survive. Since Honda relied heavily on purchased parts and 50-60% of the parts costs were in
materials, attention naturally turned to cutting the costs of materials. This material-focused
activity eventually extended to examining production processes and capital equipment. At
first, a team of seven Honda engineers from the Purchasing Department identified a group of
8 supplier companies, and started implementing changes, starting with cleaning the shopfloor
(3S and 5S) and changing the factory layout. This activity came to be known as SBP (‘Soft
Best Position’) as part of the Maru A Plan (1974-79).
Typically, a model line was chosen at a supplier. At first, the Honda team made
essential changes and showed what could be done, so as to convince the supplier that making
those changes were worthwhile. According to a leading member of this initial team, talking
about a typical supplier’s shopfloor:
It was dirty, it was messy and there were so many problems. The starting point was
what to do with all these problems. Honda realized that changes had to be made to
compete globally, but also that its affiliates could not keep up with the competition.
We knew that treasures could be found among the mess, but once the main action
points were listed, it became clear that suppliers would not be able to implement
them if they were just told what to do. We came to realize that there was no choice
but to work together. So we started by asking a supplier company to form a joint
Kaizen team with Honda engineers.
Once such a joint team was formed, the Honda engineers were fully active in implementing
shopfloor improvements, starting with 3S. Moreover:
We chose to work on the thing which would have the greatest impact on profits or
quality. The issue was how to make suppliers’ top management realize that the
changes made would lead to greater profits or better quality, because once they
realize this, things would run on an automatic pilot. We therefore had to work
together to increase performance, and when that was achieved, Honda did not take
away the fruit of the achievement. We entrusted this capital gain to the supplier
During the Maru A Plan period, a 50-50 sharing rule came into effect, and has been strictly
adhered to ever since.
The shopfloor Kaizen activity on a chosen model line was followed by ‘autonomous
activities’ by suppliers themselves. The activities focused on two extensions: applying what
was achieved on the model line to other production lines in the supplier company, and
forming a study group with other suppliers in the same sector to take turns to improve a
model line at one of the suppliers. The Maru A Study Movement consisted of 68 suppliers,
later rising to around 100. They were grouped into sectoral categories such as pressing,
welding, plastic moulding, casting, forging, diecast, machining, and assembly. Honda’s
initial focus on materials, then on capital equipment in the form of HBP (see later), made the
choice of this sectoral organizing principle seem natural. An alternative organizing principle
of dispersing direct competitors in different group, as for Toyota’s Jishuken, has the
advantage of minimizing barriers to sharing know-how amongst direct competitors. But
Honda’s group arrangement has the advantage of focusing on sector-specific technology.
‘There is no point in talking to the machining group about plastic moulding. The machining
group must discuss what has to be done to become No.1 in the world of machining, while the
plastic moulding group discusses what it takes to be No.1 in that sector’, explained Honda’s
purchasing manager.
From Soft BP to Hard BP and SSP: Broader and Deeper Supplier Development Intervention
The core supplier development activity at Honda has been BP. BP, when the term
was devised in the mid-1970s, stood for Best Position, although later in the 1980s it came to be
various things, including Best Practice, Best Process, Best Performance, Best Profit and so on,
particularly when applied to Honda of America Manufacturing. Within BP, there is also a
distinction between SBP and HBP, which is very well known within Honda and the
community of Honda suppliers. The two may be distinguished as follows.
1. Soft BP is achieved through changes which can be made without spending money
(e.g. 3S), while Hard BP is achieved by making new capital investment.
2. Soft BP involves changes made after Job 1, while Hard BP starts from pre-production
stage, around 2 years prior to Job 1.
3. Soft BP results in kaizen (small improvements), while Hard BP results in kaikaku
(larger jumps in performance improvement). For instance, a stamping press speed is
made faster these days by relying on two speeds in a stroke, a fast speed until the press
is close to the metal, and a slower speed when the press actually touches the metal sheet.
A large jump in performance was achieved when new investment was made to
incorporate this two-speed stamping idea.
SBP originated in the post-1973 oil shock effort, while HBP became popular after the
1985 yen appreciation and the ensuing investment boom. HBP started towards the end of the
Maru B Plan (1984-86), when Honda demanded a 15% cost reduction from its suppliers (5-5-5
or Go-Go-Go, meaning 5% reduction per annum for three consecutive years). Since there
were limits to how much changes one could make after Job 1, attention turned to Hard BP
before the start of production. The HBP Campaign in Japan was formalized by setting up
study groups of suppliers and Honda factories. Capital investment, particularly in labour-
saving automation using specialised transfer lines, was regarded as a solution to productivity
bottlenecks. While rapid capital investment was a general trend in the late 1980s bubble
economy, Honda’s own philosophy concerning its production system – particularly the idea
of increasing line speed and shortening the lines by relying on specialised functional robots
(Amikura 1989, 1992) – also fueled this tendency. With the benefit of hindsight, BP Campaign
in Japan is therefore regarded as responsible for the expensive over-reliance on capital
investment in Honda’s supply chain.
During the 1990s recession, Honda shifted its emphasis away from Hard BP back to
Soft BP, and sought less expensive improvements in work organisation, process layout, and
problems with second-tier suppliers. In this vein, Honda announced a new initiative called
SSP (Slim and Solid Production) as part of its Fifth Medium Term Plan. SSP marks a
departure from previous supplier development programmes at Honda in extending the scope
of development from a production line to the entire supplier company. A three step
development is envisaged, first efficiency improvements in the production line, second in the
product development system, and third in the management system so that it can expand sales
and invest overseas. One Honda supplier development engineer is in charge of 3 SSP
suppliers, and spends full-time guiding these three firms. Each SSP supplier appoints a LPL
(Large Project Leader) and a PL (Project Leader), who are involved in setting performance
targets which become part of the supplier’s management plan. Linking the supplier’s
improvement activities to a company-wide management plan at the supplier may be seen to
be the replication of Honda’ own practice of linking supplier development programmes to its
medium-term (three year) business plans. Since its inception, a new plan for supplier
development was announced with a rough three year cycle, starting from Maru A Plan (1974-
79), Post-Maru A Plan (1980-83), Maru B Plan (1984-86), Maru G Plan (1987-89), Maru E Plan
(1990-92), and the Fifth Medium Term Plan for 1993-95.
Honda’s expansion in the scope of supplier development has been facilitated by
changes in internal organization structure. 1974, the year when Honda formally began its
supplier development activity, also saw the establishment of a supplier development support
team at the HQ Purchasing Department, which later became the Purchasing Technical Centre.
The HQ Purchasing Department incorporates the Purchasing Quality Centre and the
Purchasing Technical Centre, the two centres taking a lead in supplier development. The
Purchasing Technical Centre (initially with 7 engineers in 1974, increasing to 58 engineers by
1997) corresponds to Toyota’s OMCD and Nissan’s Engineering Support Department. Since
the early 1990s, these centres are located at Honda’s Tochigi site, which also has the product
development function, just like at Nissan Technical Centre, in order to intensify coordination
between purchasing and the design and development function. Maru I Study Group, a
supplier forum for promoting concurrent engineering and the use of on-line links as a tool for
management decision making, is predicated on such close cross-functional coordination.
To summarize, one may conjecture that little supplier development would follow
from Honda’s purchasing philosophy of open competition and equal partnership, if taken at
face value. In reality, however, Honda’s supplier development activity started after the 1973
oil shock, and looks similar to Nissan’s and Honda’s in using both individual-based shopfloor
assistance and study groups. Moreover, the content of Honda’s supplier development
activity has broadened and deepened over time, ultimately addressing the supplier’s
company-wide capability. This is evident in the progression from Soft BP to Hard BP, and
the setting of SSP performance improvement targets as part of suppliers’ management plan.
3. Comparisons and Discussion
Figure 2 summarizes the main supplier development activities at the three Japanese
automakers, by juxtaposing them along two axes identified in Section 1, namely the type of
capability taught to suppliers and the scope of activity. This section discusses three things
with reference to Section 1’s framework: (a) similarities among the three companies’
organizational capability in supplier development, (b) how the three companies differ in this
respect, an (c) the issue of replication of such supplier development systems outside of Japan.
Common Features of the Three Companies
(1) The recipients of supplier development assistance are divided into an inner group and an outer
group. The recipients of intensive supplier development are limited to the inner core of
strategic suppliers. This core is defined relatively narrowly, ranging from 25 companies
at Nissan and 52 at Toyota, up to 63 at Honda. The long-term trading relationship,
rather than share ownership per se, is the key to establishing shared goals between a
automaker and suppliers. Nevertheless, even within this group with long-term
commitment, each of the three automakers clearly distinguishes between the inner core
of suppliers to which processes for ‘capability enhancement’ are taught in a hands-on
manner, and the other suppliers who are only given incentives to make improvements
through long-term customer commitment and a rule for sharing gains. This distinction
ensures that tacit knowledge is shared only with the inner core. Over time, the stable
supplier base, typically represented by supplier associations, has expanded, and the
inner core group had to be identified. The inner group of suppliers may be regarded as
within the boundary of the focal firm, in so far as common language and processes
promote knowledge sharing within that boundary (Kogut and Zander 1992).
(2) Multiple channels of supplier development are offered. Each automaker has an array of
supplier development programmes, ranging from individual assistance to group-based
assistance, from seminars or lectures to joint-problem solving in concrete settings, but
also with different aims (e.g. short-term fixes to instill ‘maintenance capability’ vs long-
term development of ‘evolutionary capability’). A number of mechanisms are
worthwhile unbundling here. First, each company seeks to teach both explicit and tacit
knowledge. For tacit knowledge, all three companies continue to expend a considerable
amount of resources (50 – 80 engineers) to teach in a hands-on manner, reflecting their
belief that tacit knowledge can be replicated and sustained only through this mode of
teaching. Also the practice of routines and the representation of routines (through
documentation) are brought closer by triangulating with different modes of teaching
suppliers. Second, multiple channels help to achieve a balance between self-learning (or
mutual learning amongst suppliers) and more heavy-handed assistance for immediate
tangible results. Toyota has achieved this by making the OMCD and the Purchasing
Planning Department separately responsible for supplier development, and by
complementing individual assistance with Jishuken groups. Nissan and Honda also
give individual assistance and facilitate study groups for their suppliers. Third, an
incentive for suppliers to engage in long-term learning is secured by devising rules to
share specific gains from short-term intervention, and to let suppliers appropriate wider
gains from long-term capability enhancement.
(3) The scope of supplier development activity is getting broader and deeper in practice. Starting
with the enterprise group diagnosis at Toyota and Nissan in the mid-1950s, the
automakers were expected to nurture their suppliers in a holistic manner. This meant
not just teaching a toolkit of shopfloor Kaizen techniques but teaching suppliers a
modern management control system, most tangibly in the form of Total Quality Control.
Even at Honda which did not attempt to spread TQC to its suppliers, the linking of
performance improvement targets to business plans (esp. in HBP and SSP) has ensured a
company-wide commitment at the recipient supplier companies. In practice, all three
companies started with assistance in shopfloor improvements. But the case studies show
that over time, their activities extended to areas outside the shopfloor, and in particular
product development processes in the 1990s. This broadening of the scope of supplier
development is due to the coherence and complementarity in the hierarchy of routines
(for example between TPS and TQC, or between pre-production and post-production
processes in simultaneous engineering).
How Firms Differ
The three broad similarities listed above skate over some significant differences
among the three automakers. In particular:
(1) They make different assumptions about the optimal extent of information and know-how
sharing among the core suppliers. First, although all three companies created a forum at
which a small group of supplier companies engage in joint study, some groups truly
share in the process of problem-solving (Toyota’s Jishuken being the extreme example),
while others share successful solutions mainly through presentation meetings (as at
Honda and Nissan). The focus on the latter assumes that much can be communicated
through the representation, rather than the practice, of routines. At Toyota, study
groups contain no direct competitors, whereas Honda and Nissan group suppliers
according to their component sector. Know-how sharing is more likely to take place
among suppliers in the absence of direct rivalry in business.
(2) Toyota’s bifurcated internal structure for providing supplier development has a different set of
advantages and disadvantages from Nissan’s and Honda’s unitary structure. The division of
labour between Toyota’s OMCD in diffusing TPS and the Purchasing Department in
diffusing TQC has worked well in bringing about synergy at the suppliers. This
bifurcated structure proved to be advantageous in giving suppliers the opportunities to
learn about TPS as though they were extensions of Toyota’s internal factories, shielded in
part from the Purchasing Department’s commercial negotiations. By contrast, the
establishment of Nissan’s Engineering Support Department and Honda’s Purchasing
Technical Centre led to the full incorporation of supplier development in various arena
(including quality, logistics, product development, etc.) within the purchasing function.
The centralized unified structure has the advantage of making suppliers listen, but is
accompanied by the potential danger of undermining their willingness to learn.
Replication outside Japan?
The organisational capabilities perspective points to the root cause of the difficulty in
replicating the Japanese automakers’ supplier development capability outside of Japan. Apart
from (a) differences in historical trajectories and (b) tacit and difficult-to-codify knowledge
contained in what is taught to suppliers, the enlarged scope of supplier development activity
renders the replication of the whole system more difficult and unlikely. This is a serious
point, indicating a deeper current that goes against the more superficial trends in
convergence towards ‘partnership’-based supplier relations in North America and Europe
(Helper and Sako 1995; Sako, Helper and Lamming 1995).
The IMVP supplier survey
, conducted by the author in collaboration with Helper,
asked suppliers how their customer company would react if a competitor offered a lower
price for a product of equal quality. An increasing proportion of suppliers said their
customers would ‘help them to match a competitor’s effort’ (from 39% in 1990 to 81% in 1994
in the UK, 33% in 1990 to 53% in 1994 in the rest of Europe, and from 34% in 1989 to 53% in
1993 in North America). Japanese suppliers that expected their customers to offer help, by
contrast, declined from 45% to 40% of the total. But 18.7% of Japanese suppliers continued to
receive long-term supplier development assistance (‘customer company provided personnel
who worked two weeks or more on suppliers’ shopfloor to improve its processes’), while the
proportions were 9.6% in North America and 6% in Europe. This is one indication that when
suppliers answer ‘customers help match a competitor’s effort’, they mean different types of
help. Some help is for the long-term development of a supplier’s capabilities. Others are more
of a quick fix. An example of the latter is General Motor’s PICOS programme, a one week
shopfloor Kaizen workshop which is rarely repeated for the same supplier. Thus, even with
the diffusion of stable supplier relationships, supplier development in North America and
Europe may continue to have a less ambitious aim to improve suppliers’ maintenance
capability and perhaps their improvement capability, but rarely their evolutionary capability.
This less ambitious aim in supplier development is intricately related to differences in
corporate governance between Japan, North America and Europe. Honda’s distinction
between SBP and HBP provides a concise illustration of this point. In Japan, Honda initially
targeted SBP, then moved onto HBP which required Honda to be intimately acquainted with
its suppliers’ investment and management plans. In the US, Honda of America
Manufacturing (HAM) began to implement SBP in earnest in 1987, but faced suppliers’
reluctance to disclose financial and other information to HAM particularly when it came to
HBP (e.g. involving capital investment in new plants) (MacDuffie and Helper 1997). The
distinction between HBP and SBP is used for suppliers in the UK also. However, HBP is said
to be difficult because it touches on the heart of management decisions over capital
investment. Some supplier company managers told Honda UK that they needed
shareholders’ approval, and shareholders’ interest may well conflict with making capital
investment. A senior Japanese purchasing manager at Honda UK asserted: ‘Various activities
have started here, and UK managers have begun to understand the need for HBP in form, but
not many have really felt the need under their skin as they continue to pay attention to
shareholders.’ Hence, HBP as a supplier development programme is also an issue of
corporate governance. Differences in corporate governance are likely to lead to persistent
differences in the content of supplier development activity.
In conclusion, the contrast made in the current study is not so much just between
short-term adversarial vs long-term cooperative supplier relationships, or between buying-in
from a lean supplier vs creating one. Even with an apparent shift towards longer-term
committed relationships, there remains an essential difference between a relationship in
which the automaker is just a good source of information on ‘best practice’ and a situation in
which the automaker actually teaches the know-how to enhance the supplier’s organizational
4. Conclusion
Social scientific research on supplier relations has been intricately linked to attempts
at developing a valid theory of the firm that addresses both its internal governance and the
boundary decision. From the supplier relations perspective, the theorizing was very much
taken in two steps; first, firms decide over whether or not to make or buy (the boundary
decision), and second, they decide over what sort of relations they wish to have with
suppliers (arm’s-length or relational). Transaction cost economics (TCE) was used for the first
decision (Williamson 1975), whilst TCE was increasingly supplanted by other theories (e.g. on
trust) to account for hybrid modes that lay between market and hierarchy (Adler 2001). This
marriage of TCE with other theories has been uncomfortable, not least because TCE is
primarily a static theory that has little to say about innovation and the internal governance of
As a better alternative, the organizational capabilities perspective adopted in this
article focuses on how firms can best draw their boundaries so as to enhance their capacity to
accumulate their competence or capabilities. Accordingly, the boundary of the ‘firm’ is
defined, not by law (and the share ownership patterns) nor exchange (i.e. calculations of
transaction costs), but by considerations over the production of capabilities. As shown
empirically, within the capability-based organization boundary, ‘routines’ exist for tacit
knowledge to develop and replicate easily. This boundary, however, may go well beyond
legally defined corporate entities, if a buyer firm providing supplier development is allowed
to take part in suppliers’ investment decisions. Thus, the replication of organizational
capabilities is not just a matter of collective-cooperative learning, by shielding actors from
‘high powered’ market pressures. It is also a matter of corporate governance.
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Figure 1: Bifurcated Structure for Supplier Development at Toyota
Purchasing Planning
Operations Management
Consulting Department
Diffuse Toyota Production
System through:
• Individual assistance
Diffuse Total Quality Control
• Toyota QC Award
• Management Kaizen Plan
• Supplier association
Figure 2: Typology of Supplier Development Activity
Scope of
Type of capability
taught to suppliers
production line
Factory Beyond
production (e.g.
Saimal Plan
Toyota’s Mgt
Kaizen Plan
In making a conceptual distinction between maintenance and improvement capabilities, we
assume that the daily management of production requires a conscientious application of the standard
work methods. However, as Nemoto points out, there are two meanings of standardization, one
referring to absolute standards for safety or compatibility, such as British Standard or JIS, and the other
to the process of improving any points which are found to be deficient by following the standard work
methods (Nemoto 1985, p.63). In the latter meaning, standardization is not an end but the beginning of
making improvements (see also Adler 1993, MacDuffie 1997). In this sense, maintenance capability is
intricately linked to improvement capability.
One common ‘routine’ for ‘improvement capability’ (but not for maintenance capability) is
policy deployment (Hoshin Kanri) in Total Quality Control, which involves the setting of objectives for
improvement to be achieved within a specified period of time. The term, Hoshin Kanri, was coined in
1965 by the tire maker, Bridgestone, when it was preparing for the Deming Award in 1968. The
company felt the need to coin a new term that focused on processes, because the known technique of
MBO (management by objective) tended to become too results oriented (Kogure 1988, p.162).
This sub-section describes the situation at Nissan prior to Renault’s equity participation.
Nissan has put much emphasis on educating both its own employees and suppliers about
Genba Kanri. The internal education is the responsibility of the Personnel Department, while the
responsibility for spreading it to suppliers resides with two experts in the Engineering Support
Department. The Genba Kanri course for suppliers consists of the teaching of NTWI (Nissan’s version
of Training-within-Industry), and a five-day practice course involving a competition among 3 teams of 7
participants each over solutions to building a plastic car model. Each team contains participants from
several different supplier companies, and is potentially a forum for suppliers to learn from each other.
Questionnaire surveys were sent to first-tier suppliers in North America, Japan and Europe in
1993 and 1994. Response rates were 55%, 30%, and 16%, with valid samples of 675, 472, and 262 in
North America, Japan and Europe respectively. See Sako, Lamming and Helper (1995) for details.
... They also found that in product purchasing buyer is more central to the relationship and has greater influence over the communication media choice and buyer is interested in informal communication like telephone communication. In case of service purchasing buyer is less central to relationship and for communications he uses legalistic means such as email Sako (2004) in his study of Honda, Nissan and Toyota considers two key areas, the first being that an organisation has to have its own organisational capability for supplier development, and secondly it must have a mechanism for transferring (or replicating) capability to its suppliers. He classes this capability into three levels. ...
... At this level, activity focuses on maintaining a given level of performance such as quality defects, on time delivery performance or costs. The second level is improvement, and as the name suggests focuses on increasing the existing capability of the supplier to new, higher levels of performance (Sako, 2004). The third, and highest, level of supplier development capability is evolutionary capability. ...
... This level is the transferring of development capability to the supplier, such that the first two levels of development become integral in the internal way of working of the supplier, and they continue even without ongoing pressure from the customer. This requires the transfer of tacit knowledge as well as the easier to transfer explicit knowledge, and consequently is the most challenging of the three levels (Sako, 2004). Tacit knowledge and learning is the most difficult for a competitor to replicate within their supply chain and so becomes a valuable source of competitive advantage (Nonaka & Takeuchi, 2006). ...
... Such enhancement positively affects the end product manufacturing and sales. Indeed, in many industries, manufacturers with highly advanced supply chain management spend much time and effort to facilitate collaboration between suppliers for higher operational performance (Basole, 2016;Potter & Wilhelm, 2020;Sako, 2004;Usta et al., 2015). For example, Toyota sets a supplier association and pursues strengthening cooperation and knowledge sharing between members (Bernstein et al., 2015;Toyota, 2016). ...
... Most reputable high-performing firms (e.g., Apple and Samsung Electronics) are known for their effective supply networks that exhibit greater interaction and collaboration among the entities (Basole, 2016). Likewise, in many industries such as semiconductor, defense, and automotive, manufacturers encourage and facilitate supplier-supplier collaboration for higher operational performance (Sako, 2004;Usta et al., 2015). ...
... Next, we pay attention to whether the collaboration benefit can be translated into the profit improvement of the suppliers as well as the manufacturer, as a high-profit level can sustain the effort for mutual prosperity. Lastly, we examine the effectiveness of an additional lever, the manufacturer's financial support (subsidy), for supplier-supplier collaboration as exemplified by Toyota (Bernstein et al., 2015;Sako, 2004). More precisely, we ask if the subsidy creates a synergy with the order allocation policy to expedite the collaboration and benefit the manufacturer. ...
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In response to rapidly changing market conditions, manufacturers are increasingly trying to induce collaborative interactions between suppliers to facilitate the sharing of problem-solving ideas, technical advice, and managerial know-how. However, even if supplier-supplier collaboration is an effective way to enhance operational performance, it could be challenging if the suppliers compete to win the same order from the manufacturer. By employing a game-theoretical model, this study explores how a manufacturer can leverage the order allocation policy to facilitate collaboration between two competing suppliers. The results show that the timing of the order allocation policy announcement is critical. If the policy is announced after observing the behavior of the suppliers, the manufacturer cannot induce the desired outcome. However, the announcement that precedes the behavior of the suppliers can lead to collaboration between suppliers if the associated cost is affordable. The maximum affordable level that reflects each supplier’s collaboration burden becomes mild when the suppliers possess a similar capability and secure a sufficient margin. Unlike the manufacturer, who always benefits from suppliers engaged in collaboration, collaborative suppliers require more restricted conditions to generate a higher profit. We also examine the effectiveness of an additional lever, the manufacturer’s financial support or subsidy for supplier-supplier collaboration. Our result indicates that if the subsidy is inappropriately determined, it could become a waste of resources.
... The supplier development philosophy originated from the Japanese automotive industry after the World War Two. According to Sako (2013), lectures, seminars and training courses for Toyota Motor Corporation employees were made available to core supplier employees as early as the 1950s. Supplier development later spread and gained root in the European and North American automotive industries in the 1980s (Handfield, Krause, Scannell & Monczka, 2009). ...
... Several empirical studies in the Japanese automotive industry (Sako, 2013) and in other Western manufacturing industries have established a positive relationship between the supplier partnership and the buying firm's overall performance i.e. based on the resultant improvements in the suppliers' product and delivery performance and in their capabilities (De'Toni & Nassimbeni, 2010;Krause, Scannell & Calantone, 2012). Tracey and Tan (2011) study also found that the involvement of suppliers in the buyer's product development process and continuous improvement programs increase customer satisfaction and the overall firm performance. ...
... The role of trust has been debated in the alliance literature; studies adopting TCA see trust as creating the potential for betrayal, while others argue that trust could facilitate learning while limiting an alliance partner's opportunistic behavior (Kale et al., 2000). Since the infancy of the alliance learning approach, scholars have done much to study the practices that enable alliance learning , such as dedicated alliance functions (Ireland et al., 2002;Kale, Dyer, & Singh, 2002), alliance management practices (Dyer & Nobeoka, 2000;Ireland et al., 2002;Kale & Singh, 2009), coaching practices , social capital, trust and positive reinforcement (Ariño & De La Torre, 1998;Kale et al., 2000), or supplier associations, consulting groups, and learning teams (Dyer & Hatch, 2004;Sako, 2004), emphasizing the intentional development of strategic networks (Möller & Svahn, 2006). ...
Full-text available
The present study examines the alliance learning literature in these uncertain times, which highlights the importance of alliance learning that takes place across organizational boundaries within a variety of business ecosystems. The study builds on a literature review of 198 articles and uses bibliographic coupling to identify four sub-streams of alliance learning research: 1) learning in strategic alliances, 2) relationship learning, 3) learning in innovation networks, and 4) learning in social networks. We review and analyze the alliance learning research streams, identify gaps, and develop a research agenda for alliance learning research.
... As an example, consider supplier relationships in the Japanese automobile industry. Both supplier competition for a share of manufacturer demand and cooperation on technological improvements (through joint efforts) have been maintained through implicit contracts (e.g., Dyer & Chu, 2003;Sako, 2004). At a broader industry level, companies may need to cooperate in creating markets while competing for larger market shares (Branderburger & Nalebuff, 1996). ...
... The role of trust has been debated in the alliance literature; studies adopting TCA see trust as creating the potential for betrayal, while others argue that trust could facilitate learning while limiting an alliance partner's opportunistic behavior (Kale et al., 2000). Since the infancy of the alliance learning approach, scholars have done much to study the practices that enable alliance learning , such as dedicated alliance functions (Ireland et al., 2002;Kale, Dyer, & Singh, 2002), alliance management practices (Dyer & Nobeoka, 2000;Ireland et al., 2002;Kale & Singh, 2009), coaching practices , social capital, trust and positive reinforcement (Ariño & De La Torre, 1998;Kale et al., 2000), or supplier associations, consulting groups, and learning teams (Dyer & Hatch, 2004;Sako, 2004), emphasizing the intentional development of strategic networks (Möller & Svahn, 2006). ...
... However, it is also important to note that upgrading features of automotive suppliers can be determined by the nationality of OEMs. Sako (2004) analysed organisational structure and process in relation to supplier development by identifying the differences in the governance of different nationalities. In her perspective, supplier development under European and North American OEMs is based on short-term assistance and is less ambitious in terms of improving supplier capabilities. ...
Full-text available
This study examines the role of Magyar Suzuki in the Hungarian automotive industry. It is the oldest foreign vehicle manufacturer and a symbol of modernisation in the post-communist era in Hungary. Due to EU's local content rule, Magyar Suzuki, in comparison with its counterparts in the region, has established a locally embedded supply chain network. Magyar Suzuki has facilitated process and product upgrading of the local suppliers in Hungary. Nevertheless, functional upgrading is relatively limited due to automotive multinational corporations' recognition of Hungary as a low-cost production location, a low level of R&D operation, and a small domestic market.
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This study examined the relationship between supplier relationship management strategies and operational effectiveness of food and beverages firms in Nigeria. This study adopted a cross-sectional survey and correlation investigation to establish relationship between supplier relationship management strategies and operational effectiveness of food and beverages firms in a non-contrived setting. The population of this study comprises of twelve (12) food and beverage firms in Rivers State, listed in the Nigerian Stock Exchange Facts Book of 2017/2018. A sample of 60 respondents were drawn from the management cadre of the firms under our study. A self-administered structured questionnaire was used to collect primary data and the data obtained were accordingly analyzed using Pearson's Product-Moment Correlation. The result revealed that there is significant and positive relationship between supplier relationship management strategies and operational effectiveness of food and beverages firms in Nigeria. Based on the findings of this study, the paper concludes that a positive and significant relationship exists between supplier relationship management strategies and operational effectiveness. It therefore, recommends that food and beverages firms that have not been using supplier relationship management strategies should to a large extent adopt supplier relationship management strategies to be competitive and enhance organizational performance.
Full-text available
This article analyzes survey data to explore how companies with specific supplier development programs overcame common pitfalls in assisting their suppliers improve their performance. The authors provide a process map for deploying supplier-development initiatives. After identifying critical commodities and suppliers, a cross-functional team meets with top managers at the supplier firms to discuss areas of improvement as well as key metrics and cost-sharing mechanisms needed to evaluate the success of the effort. Lastly, firms need to monitor and modify their supplier development strategies, as appropriate. The survey data indicate that organizations generally experience three types of pitfalls, mostly in the final stages of the process. Supplier-specific pitfalls stem from a lack of initial commitment. Companies can avoid these by using evaluation systems that compare measurements and performance among suppliers, holding kaizen events at supplier sites, identifying cost-saving opportunities through target pricing, and designating a supplier employee to ensure that buyer-supplied training is put into practice. Tying a supplier's performance improvement to receiving future orders is a particularly dramatic way to get the attention of managers at a supplier. Same buyers also offer their resources to suppliers, such as providing personnel support for some period of time to improve operations or building training centers for supplier use. Buyer-specific pitfalls also stem from a lack of commitment. Consolidating purchases to one or a few suppliers is one approach to creating the volume needed to justify investing in a supplier-development effort with the remaining suppliers. Examining how these suppliers impact the quality of products or using total-cost-of-ownership data can yield further proof of the benefits of supplier development. Buyer-supplier interlace pitfalls originate in the areas of trust, alignment, and communication. Although written contracts may be important, some buyers rely more on close relationships rather than on contracts to build trust. Others use "expectation road maps" to tell suppliers where they are going and better ensure buyer/supplier alignment. Financial incentives, "designed in" supplier products, and expected contract renewal are also incentives for gaining a supplier's commitment to a supplier-development effort.
This paper focuses on dynamic capabilities and, more generally, the resource-based view of the firm. We argue that dynamic capabilities are a set of specific and identifiable processes such as product development, strategic decision making, and alliancing. They are neither vague nor tautological. Although dynamic capabilities are idiosyncratic in their details and path dependent in their emergence, they have significant commonalities across firms (popularly termed ‘best practice’). This suggests that they are more homogeneous, fungible, equifinal, and substitutable than is usually assumed. In moderately dynamic markets, dynamic capabilities resemble the traditional conception of routines. They are detailed, analytic, stable processes with predictable outcomes. In contrast, in high-velocity markets, they are simple, highly experiential and fragile processes with unpredictable outcomes. Finally, well-known learning mechanisms guide the evolution of dynamic capabilities. In moderately dynamic markets, the evolutionary emphasis is on variation. In high-velocity markets, it is on selection. At the level of RBV, we conclude that traditional RBV misidentifies the locus of long-term competitive advantage in dynamic markets, overemphasizes the strategic logic of leverage, and reaches a boundary condition in high-velocity markets. Copyright © 2000 John Wiley & Sons, Ltd.
In this book, the editors and a team of distinguished international contributors analyse the nature of organizational capabilities, studying how organizations do things, use their knowledge base, and diffuse that knowledge in competitive environment. Offering both theoretical analysis and detailed evidence from a variety of individual firms and sectors, this book presents insights into the relationship between organizational structures and organizational capabilities, the patterns of accumulation of technical knowledge, and the management of competence‐building in changing markets.