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Should We Join
a Keiretsu?
efore the recent derailment of Japan's unstoppable economic miracle, some Western observers attributed their successes to the ingrained tradition of the keiretsu — the extensive supplier-manufacturer linkages pervading Japanese industry. In the group-oriented culture of Japan, the keiretsu is an established network of essentially captive suppliers meeting the raw material, parts and component requirements of dominant manufacturers.

          The traditional keiretsu embodies advantages as well as weaknesses. The good news is that the keiretsu gives the supplier the smaller business a guaranteed customer, an assured price structure, predictable production and delivery schedules, clear quality and performance standards, and insulation from direct interactions with the marketplace. This stable environment often encouraged close cooperation between the supplier and manufacturer leading to continual product development, quality improvements, and reductions in cost. What could be better?

          The bad news is that the keiretsu often breeds inflexibility.  While it may be paid lip service, supplier innovation inevitably lags when one is shielded from the marketplace; the suppliers' survival may not be dependent upon being positioned at the leading edge of their fields. Pricing often becomes a kind of transfer pricing rather than competitive market pricing. Captive suppliers live in a comfortable dependency relationship with their primary often sole customer, but are often out-of-touch with the exigencies of the real world. In time, this rigidity can erode the manufacturer's market position, eventually threatening even the endurance of the supplier. A relationship that initially appeared to be so comfortable frequently disables the supplier who becomes detached from the competitive realities of the marketplace. What could be better?

          What could be better, of course, are the advantages of the keiretsu without its weaknesses. The strong fetters of tradition have made it difficult for the Japanese to effect the necessary changes, and have resulted in their economic slippage during the past few years. However, a number of US manufacturers, upon carefully observing the keiretsu, appear to have retained its strengths and avoided its weaknesses. And this can offer attractive marketing opportunities to the owner/manager of the smaller business.

          The Motorola Paging Products Group and the Chrysler Corporation are two American manufacturers that have pioneered these enhanced relationships with their suppliers. Commanding a 60 percent share of the global paging products market, Motorola attributes much of its achievement to its supplier alliances that have yielded substantial gains in cost, technology, quality and cycle times. One key to this success is the insistence upon supplier independence in opposition to the Japanese dependence thereby fostering innovation. This requires Motorola to restrict its procurement contracts to a limited share of each supplier's total output.

          Another key demonstrated by the Chrysler Corporation is the integration of their own and their suppliers' activities to magnify their combined performance rather than the separate performance of each. For example, only by openly identifying all cost sources for both Chrysler and the supplier and grasping their interactions can the lowest total cost be realized. This team process led to the development of a new component that, while more expensive than the original part, dropped the cost of the total vehicle through a reduction in assembly time. This same team process in contrast with an adversarial process can alleviate problems of response time and quality when the objective is to improve jointly rather than in isolation.

          One manifestation of these new supplier-manufacturer relationships is the emphasis upon trust in lieu of contracts. Legal documentation is unable to anticipate the many cooperative activities and intense flexibility required for meaningful integration. Both Motorola and Chrysler employ simple one-page procurement agreements.

          The emerging popularity of these kinds of partnerships offer attractive opportunities to the smaller business. Manufacturers are seeking high levels of integration and innovation. They do not want to be an antagonist, but to be their suppliers' best customer. They are seeking suppliers who are technically and financially strong, who are investing for the future, and who are committed to their shared strategic objectives.

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Thomas A. Faulhaber, Editor
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Revised: September 01, 2023 TAF

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