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 / Winter 2008 /Issue 53(originally published by Booz & Company)


Supplier Empowerment and the Bottom Line

A Tight-knit Supply Base
A truly strategic approach to building a diverse supplier base requires a fundamentally different perspective that looks beyond both the corporate social responsibility movement and the tactical focus of most current corporate practices. The best example of this kind of perspective comes from our observation of the way that the best Japanese companies, such as Toyota and Honda, built local supplier bases when they began manufacturing in the United States. Although their goal was geographic rather than demographic diversity, they employed the requisite strategic mind-set and pursued their goal with disciplined, pragmatic focus. Their efforts were all the more significant because traditionally, Japanese companies, with their highly homogeneous culture, have not focused on diversity. More importantly, their example demonstrates how supplier development fosters broad-based economic growth, in this case reinvigorating the U.S. automotive supply base to achieve world-class performance.

When Honda and Toyota built their U.S. assembly plants in the 1980s in Ohio and Kentucky, re­spectively, each already possessed a highly capable base of keiretsu suppliers. The Japanese manufacturers could have simply imported parts from these suppliers or asked them to build plants in the United States. But the Japanese recognized the need for a strong U.S. supply base to support their long-term growth plans. So they invested in finding capable suppliers and encouraged their existing suppliers to form joint ventures with U.S.-based suppliers to help build domestic capabilities.

The best Japanese companies know how to build a tight-knit supply base through intensive interaction and a methodical approach to expanding scope and responsibility over time. Thus, in the early 1980s, the purchasing team from Honda of America visited thousands of metal stampers as Honda set up operations in Ohio. Suppliers were examined against world-class cost standards and selected largely on the strength of their commitment to meet that benchmark. Initially, new suppliers were given a few simple parts that were also sourced from a Japanese keiretsu supplier. Honda’s engineers then worked with the companies to improve their operations. Over time, a given supplier graduated to more complex parts and assemblies, but Honda remained ready to help the supplier when needed. This suggests a long-term and developmental approach that contrasts with most supplier diversity models in the field today.

Dave Nelson, former head of purchasing for Honda of America, enjoys telling the story of one supplier that began suffering from quality problems after years of solid performance. The supplier had nearly doubled its labor force over a short period of time to accommodate Honda’s growth, pushing it beyond the limits of the current management team. Honda dispatched four staff members to work with the supplier full-time for 10 months to build the necessary management capability.

Today, many of the best automotive suppliers in the world, such as Johnson Controls and BorgWarner Inc., are headquartered in the United States. Thanks to mentorship from Honda and Toyota, these manufacturers are not de­pendent on the now-struggling Detroit Three but instead serve vehicle manufacturers all over the world. And Honda and Toyota now have a much larger portfolio of capable suppliers to draw on to support their long-term strategic plans. More companies need a similar outlook today to build a top-quality, diverse supply base that will help ensure economic success in an in­creasingly diverse world where costs, quality, and collaboration can provide competitive advantage.

How to Choose Carefully
The Japanese analogy highlights the criticality of selecting the right partners. In addition to a mind-set change, effective supplier diver­sity must build on a deeper under­standing of the size, scope, and challenges that characterize diverse suppliers. A truly strategic sourcing effort focuses investment in areas offering the potential for significant impact. The view that “any diverse supplier will do” obscures the dramatic differences across firms.

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