Honda Motor Company Ltd.
International Purchasing Division
Questions for Discussion:
1. How does Mr. Honda’s history with suppliers relate to Honda’s current
supply management strategy?
2. Why is purchasing so important at Honda?
3. How does purchasing rank in the corporate structure at Honda?
4. How is Honda organized globally? How does this help/hinder the
purchasing function at Honda?
5. What are the key elements of Honda’s supplier evaluation policy? How
does it differ from others (e.g. the Big Three)?
6. What is Honda’s policy on new product development and supplier
involvement? How does it differ from other automotive companies?
7. Does Honda support local sourcing from domestic suppliers? What are the
advantages / disadvantages of this approach?
8. Honda’s policy and commit to long-term relationships has been criticized
as being “too loyal”, and Honda will go to “ridiculous lengths” to maintain
a supplier relationship before severing ties. What do you think about these
criticisms?
9. The “keiretsu” system in Japan has been described as having advantages
and disadvantages. Does Honda have a keiretsu (answer: no, not really)?
What are advantages of a keiretsu? Discuss the case of Nissan: their
keiretsu is breaking up under ownership by France’s Renault. What do you
think this means for Japanese buyer-supplier relationships in the
automotive industry?
History of Japanese Exports – Automotive
Mr. Obi provided the interviewers with a book that was recently published by the
Japanese Automobile Manufacturers Association (JAMA) called “Two Decades. . . “,
(attached) which was for publicity purposes. This book was largely published to divert
trade issue complaints, but really only states the facts on Japan’s investments in the
United States in the automobile industry. The book notes that the commitment to
localize production is not limited to assembly factories, but that Japanese auto
companies have moved R&D and design facilities to the U.S., and also purchase a
significant amount ($22 B ) worth of auto parts from U.S. suppliers. Over the last twenty
years, Japanese companies have invested $14 B, and now employ 43,000 US workers
directly, plus 300,000 in the dealer networks. Of all the companies, Honda has one of
the largest investments ($3B), surpassed only by Toyota’s facility in Kentucky ($3.9 B).
However, Toyota has produced the most vehicles (634,374) than any other Japanese
manufacturer.
Honda’s Export Strategy The fact that Honda is leading the Japanese effort in the
U.S. is not surprising. Honda is today the most globalized automobile manufacturer,
(although still not the highest sales). In November 1997, the Honda Washington D.C.
office released the report “Honda and U.S. – Japan Automotive Trade” (attached), which
summarizes how Honda has become a leading automotive exporter from North America,
has boosted the domestic content of its U.S.-built cars to more than 90%, and has
purchased over $6 B annually from US suppliers. The report provides an overview of
Honda’s commitment to global trade and the positive benefits that result for U.S. jobs,
suppliers, consumers and exports. Honda has also recently partnered with Chrysler to
sell their Jeeps in Japan. Other reports include the Annual Report, the Semi annual
report, and the “Global Partnership” document which is used as an orientation guide for
new suppliers.
Honda truly pioneered the ramping up and localization of production in the U.S. This
strategy has been very successful in neutralizing the effect of currency exchange rate
problems between the U.S. and Japan. Today, there is a great deal of “crossfertilization” between the two companies. Honda is very sensitive to international
requirements, and has always believed that exporting from other countries to Japan was
important. Evidence of this trend can be seen in the career path of Mr. Obi.
Mr. Obi majored in English at Tokyo University, and joined Honda in 1962 (a total of 35
years with Honda!) Today he is 58 or 59 years old, and is close to mandatory retirement
(at60). At that time, Honda was not producing automobiles, only motorcycles (see
History of Honda table in “Tochigi Plant” document). He has worked abroad 4 different
times, two of which were in the U.S. The first time he worked in motorcycle sales for 5
years in Los Angelex (between 1962-1967), and later worked for HAM to export Hondas
to Japan (in 1977). He also worked with Honda International Trading, which was started
in 1972. This organization is a branch of Honda, and Mr. Obi’s task was to find and
export original equipment parts from the U.S. to Japan. Examples include carpeting, GE
headlamps, PPG glass, seat fabrics, and catalytic converters produced by Englehard.
Today, converters are still exported to Japan. In other cases, such as headlamps,
exporting is not done. This is because the original headlamps were all circular and the
same size – today, each headlamp is customized, but GE is still the primary producer of
them. Glass is still imported, as it is cost competitive. He then came back to Japan for 5
years, in 1982. He has been involved in many strange experiences as a result. For
instance, he once took a return trip with live cattle from Los Angeles being exported to
Tokyo! Honda International was importing the cows, who were sold to butchers. (There
were no regulations regarding importation of live cows at the time, only sides of beef!)
He was also involved in importing aluminum ingot scrap, since all Honda engines have
been made out of aluminum for many years. The scrap was used in secondary diecast
in production of its lightweight engines.
Mr. Obi was also assigned in Swindon, U.K., before production started, and was
involved in a great deal of supplier pre-qualification. This occurred later after he
switched to purchasing over from sales. At that time, he was in assigned to complete a
preliminary study of production possibilities in the UK, and was involved in initiating a
collaboration with Rover. Rover subsequently adopted several of Honda’s designs and
began production of Honda-designed vehicles, which sold even better than Honda’s cars
(see notes – Rover). This agreement was subsequently terminated when Rover was
purchased by BMW. Honda became independent, but still has some stamping done by
Rover for Honda (body panels).
Pacific Automotive Cooperative – Government Intervention
Government Intervention
In 1986, the Japanese and American governments initiated its Market Oriented
Strategies agreement(MOSS). Export had become a political issue between Japan and
the U.S. The new policy required companies to report all of their import and localization
volumes since 1986. Japanese companies thus started reporting to JAMA, who rolled
up the data and totaled the fixed purchased volumes from the U.S.
In 1995, Obisan was re-assigned again – this time to Canada, where he worked with the
Pacific Automotive Cooperative (PAC). This was a joint venture composed of Japanese
automakers, (including Honda, Toyota, Nissan, and Matshida), consisting of 32
shareholders. This cooperative was established to meet political objectives for
production in North America. (The cooperative was started originally in 1982 when
Honda began to produce in the U.S., and who was joined by Nissan and Toyota in
1984).
The Cooperative is led by a different member every year – Honda had the second
president. Matsuda was the first, followed by Honda and then Toyota. The 5th
president was Obisan, whose tenure was until March of the next year.
By 1984, there were many Japanese contacts in the US, but no Canadian plants.
Because the government was frustrated by the lack of investment in Canada, the
cooperative was started. This was problematic, as the size of the market was very small
(only 10% of the North American market) and could not justify a plant. However, Honda
started a factory in Canada in 1986, followed by Toyota in 1988. Suzuki than came in
with a 50/50 Joint Venture with Toyota building SUV’s. The name of this association
was CAMI-Canadian Automotive Manufacturing Initiative?). These three companies had
a substantial investment in Canada.
In 1995 when Obisan was assigned to PAC, his objective was to attempt to develop
industrial collaboration to help Canadian suppliers become more competitive. He
subsequently visited many Canadian suppliers, and during this time the business of
these suppliers with Honda North American increased significantly. Toyota also had an
expansion in 1994, and doubled their production in Canada to 200,000 vehicles. Honda
had another expansion in Fall 97.. At that point, he realized that the PAC activity was no
longer necessary, as over 700,000 automobiles (including CAMI) are produced annually
in North America. He proposed to JAMA to phase out the role of PAC, and the
shareholders of Honda agreed. Subsequently, the company was closed in June.
Because the CAMI objectives were met, Obisan left in June 1997.
When asked about Canadian supplier quality, he said that he believes their quality is as
good as US suppliers. For instance, Magma is a large Canadian supplier with excellent
quality. Also, there is really no border between Canada and the US – over 80% of
Canadian product is exported to the US. For instance, Honda of Canada produces
200,000 units per year, but total domestic sales in Canada annually is only 150,000. In
the past, there were some significant reductions in employees in Canadian plants that
resulted in some strikes, that this has now been resolved.
Historical Context – Honda’s Global Expansion
Obi’s experience with Honda is all part of Honda’s globalization efforts. Before entering
the automotive market in 1964, Honda dominated the motorcycle market (#1 worldwide)
and exported motorcycles all over the world. In 1972, it established Honda International
Purchasing, in order to import more parts into Japan. In 1977, the export of automotive
components from the US to Japan began.
Honda was a leader in developing motor scooters, and tried to change the image of
motorcycles as a safe means of transportation. Mr. Obi was first assigned to the export
division of the motorcycle operation by Mr. Itchita Honda, the company’s founder. In
1977, he was assigned to Los Angeles (as a young bachelor!). At that time, his focus
was to try to sell to young people, and Honda sponsored such events as the Academy
Awards and the Rose Bowl Parade.
The sales office had a total of 5 Japanese people selling the smaller size motorcycles.
These people had some international backgrounds, as purchasing desperately needed
people with international experience. Because Obisan fit into this category, he worked in
purchasing from that point forward. Even today, purchasing still has needs for people
with international backgrounds. They are building new plants in Brazil, India, and China,
and need people who can communicate accurately with suppliers.
Suppliers initially did not like selling to Honda. The first set of suppliers provided
carpeting for interiors. The production sizes changed frequently (red, blue, and black).
At that time, they purchased up to 6 months ahead and ordered by estimates. This often
resulted in large safety stock, which did not allow much flexibility. (Japanese suppliers
on the other hand were considered very flexble. This is still a handicap anytime global
sourcing is carried out). Today, they continue to import leather for seats that is already
cut to Honda’s specification by US suppliers. This continues to be a high demand item,
and when the cut and dyed seats aren’t used, overstocks occur.
Honda’s culture had always emphasized globalization. This dates back to the
motorcycle operations, where the investment was not as large. Motorcycle production
can be localized more easily (and cheaply) than automotive production. Motorcycle
stamping and injection equipment is not as large, and can be started up easily for local
production overseas. Even today, Honda has motorcycle plants in over 50 countries,
including Saudi Arabia, Turkey, Pakistan, and Latin America. These are often referred
to as “knock-down operations”, because they can be established with relatively little
investment. Because it was expanding to so many different countries, Honda, needed to
send people in to monitor quality. Overtime as more and more people worked overseas,
Honda cultivated an international background. (Conversely, Nissan and Toyota primarily
exported vehicles, and did not develop this international culture). Thus from its origins,
Mr. Honda emphasized an international viewpoint (see Corporate Profile, p. 3).
In 1963, Honda sponsored the Grand Prix Motorcycle Championship. In 1963, it was the
#1 producer of motorcycles in the world.
As an interesting sidenote, although Mr. Honda passed away in 1990, hiw son is not in
senior management. Unlike other major companies such as Toyota and Nissan where
senior managers appoint their sons to important positions, this was an important
decision on his part that influenced the corporate culture. Mr. Honda’s presence is still
very influential in the company.
While working in Swindon, UK from the late 1970s until 1989, Obisan visited many
suppliers in the UK and France, Italy, and Spain. He also has experience working in the
US to get US suppliers up to the quality levels required by Honda. He notes that the first
Honda cars sold in the US were not good. It was also very difficult to find parts for the
smaller Honda cars such as the Accord, as US cars at the time were very big. For
instance, GM and Ford had big parts, such as alternators, etc. Standard items such as
glass, headlamps, and carpet were relatively easy to buy in the US.
In Europe in 1987, smaller cars were very popular, and this was good for Honda, as
small cars were its strength. However, fit and finish were important Honda
characteristics, and European supplier standards needed to be improved to Honda’s
standards. Many of the European suppliers were used to supplying Rover, VW, etc.,
whereas Honda had more stringent requirements. At that time, Honda also had a joint
venture with Rover, and was providing Rover with Honda designs and helping them
produce vehicles. The Honda Civic was thus produced at a Rover plant under a
licensing agreement, but the Civic produced by Rover used parts provided by local UK
suppliers. For instance, power steering units were purchased from TRW, and brakes
were purchased from Lucas. This was surprising to Obisan, since some parts were not
available in the US (wiper motors), but had been already localized in the UK. (It was
also interesting to note that the Rover vehicles often sold better than the Honda vehicles
in the UK!) Many of the US suppliers could not be used for UK vehicles, since the US
parts were too big and heavy and were aimed for the larger US market vehicles.
Many of the drawings for the Honda vehicles had to be modified by Honda R&D to meet
local government regulations and requirements. Anytime a specification was changed, it
became very expensive. Because Honda’s unique features required a new tooling, etc.,
Honda tried to utilize European components and modify them to meet Honda’s
requirements. Thus, Honda started with a very high localized European content from the
beginning (80%)! This was not a legal requirements, but essentially constituted a
“European-made car”. The reasoning was also that if the domestic content was this
high, European countries would more easily accept the new Honda Civic. In
comparison, Nissan was in the UK earlier, but had lower domestic content. Honda
started engine production in Swindon in order to sell directly to Rover (1.6 liter aluminum
engine). This included the transmission unit, etc. Obisan believes that engine
production localization is critical to global automotive growth. They also restructured a
body assembly plant, since Honda Engineering utilized larger dies and its unique
assembly line composed of welding robot technology. The assembly line in the Rover
plant was essentially a replication of the Japanese line! Today, some Rover cars still
have Honda engines, but the majority of them now have their own engines (since being
purchased by BMW!) Production in the Swindon plant began in 1982. However, major
supplier selection decisions were made from 1977 onward.
Essentially, Honda provided Rover with both the product (car design) and process
(Honda engineering) technology, and Rover then built the vehicles!!
The major reason why this partnership was formed was because of Rover’s extensive
sales network. The Rover-built Hondas (designed by Honda) thus sold better than the
Honda-built Hondas. Obisan mentioned that if Honda had purchased Rover, which had
a very old traditional plant and low operating efficiencies, they would have had to
downsize and reengineer the entire corporation. Honda was not in a financial position to
be able to purchase Rover at that time. When British Aerospace made the decision to
sell Rover, they broke the condition agreed upon originally that they would hold the
company for at least five years during the period of the partnership. Once the company
was sold to BMW, they had to break the relationship, and all efforts to standardize parts
between the two companies was stopped.
Honda International Purchasing Division
At Honda, all domestic buyers are responsible for both domestic suppliers and overseas
purchasing. The IPD is responsible for coordination between Honda Corporation and its
overseas plant. When Honda launches a new model, the purchasing activity actually
starts two years before the release of the vehicle. It is at this time that the quality, cost,
and delivery criteria are evaluated. Obisan was assigned to the UK before the plant
opened, and was responsible for recommending suppliers to R&D.
In developing local suppliers (no matter what country – US, UK, or Brazil), Obisan notes
that the same basic approach is used globally. This consists of using existing drawings
for the models to be built at the new plant(never use new drawings!), and try to get the
best available alternative from a domestic supplier. In approaching the new supplier with
the “old blueprints”, quality and engineering capability are the most important criteria to
consider (although the lowest price of course plays a role). Once a potential supplier is
selected, Quality and R&D people visit all potential suppliers, and a final decision is
reached.
When a new drawing is issued, quotes from 2,3, or 4 suppliers may be obtained, than a
final quote based on a more refined drawing is asked for, followed by final supplier
selection. In attracting good suppliers, it is emphasized that they also get the
opportunity to buy the part from a Honda parts dealer, study it, and come to us and see if
you can produce it. In this manner, Honda is always looking for better suppliers who can
produce parts locally!
Single/Dual Sourcing
Honda suppliers are always subject to competition. In most cases, a parts contract will
last for the life of the vehicle (4 years), with each part being single sourced. The new
Accord has just been launched, and the next vehicle in the pipeline is the Civic 2001
model change. Dual sourcing is used in some cases when delivery problems occur.
Because orders are based on forecasts, a dual source may involve using a Japanese
supplier and an overseas supplier to produce the same part. This is to avoid a potential
situation where there may not be enough capacity with a single supplier. A good
example of this is the headlamp. The exterior of the headlamp is similar for the French
and Japanese supplier, but the reflection mechanism is different in the interior. The
French model uses a higher grade material, so the item is dual sourced. The headlamps
are essentially interchangeable, but differ slightly in their structure.
Recently, Renault came to benchmark Honda. By comparison, Renault in France have
30 suppliers with guaranteed contracts, all of which are “preferred”! The difference,
however, is that these 30 suppliers have no competition from other suppliers, and are
guaranteed continual contracts with Renault. In contrast, Honda’s suppliers are always
open to competition, and there is no guarantee of future business.
For almost all international sourcing, a Japanese supplier is available as a backup in
case of a production problem. Dual sourcing is not preferred by Honda, but it is almost
mandatory in Japan because they cannot risk delivery problems. A Honda production
line in Japan must be kept running, because there is no layoff system. In the US, it is
easier to shut down a line if necessary.
Recently, a Toyota brake supplier (Aicheingiki) had a fire. This was the only supplier
possessing the fine machining capabilities necessary to produce the part. Their entire
inventory, tooling, and machining operations were burned up. Despite the fact that it
was a single source, Toyota only experienced a four day shutdown. How? Other
suppliers help out, including one of Honda’s brake suppliers. This illustrates the degree
of cooperation, even between competing suppliers.
For domestic (i.e. Japanese) production, very few international supplier supply Japanese
production. Almost all are Japanese suppliers. Perhaps only 5% of the parts are
sourced internationally. This is in part to the weak yen. In other cases, Honda will try to
capitalize on other large auto manufacturers’ supply base. For instance, GM purchases
huge quantities – can Honda capitalize off this by buying from the same supplier(s)? To
some extent, as Honda’s volumes have increased, they have become more important
customers to their suppliers.
Suppliers’ Design Capabilities
Gradually, suppliers are having greater influence on Honda designs. To some extent,
this input has been limited because adding extra special unique features tends to
increase cost per unit. In the UK, Obisan fought with Honda Japan because he wished
to alter the Honda specification (this is still a problem in the US today). Today, Honda
Japan is more willing to change a specification in order to reduce cost and/or weight.
For instance, engineers are now trying to use more plastic and less metal in the
manesium steering wheel aperture core. Responsiveness of suppliers is criticaly
important in the early stages of the product development process. Honda tries to
encourage suppliers’ suggestions early before finalizing drawings, particularly in the area
of cost reduction and quality improvement. This is to encourage propositions to reduce
cost and machining. That is one reason why top management has decided that
purchasing should be at Honda R&D (this decision was made in 1991. Prior to that time,
Purchasing used to be in downtown Tokyo in Headquarters). Today, both R&D and
purchasing people will visit suppliers in the assessment stage of new product
development. This interface between R&D and purchasing is deemed critical. Although
each party may recommend diferent suppliers (purchasing emphasizing price then
quality), a joint meeting is held to determine the final selection. This strategy was so
successful that Nissan followed suit. Their purchasing group used to be in Ginza, but is
now located in their R&D Center in South Tokyo. A major barrier that continues to exist
is that the elderly people are well-situated in terms of their housing, and are reluctant to
move to a new location to facilitate co-location.
Supplier Selection Process (New Country)
In choosing new suppliers (e.g. for Swindon, UK), the following criteria are used:
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Who are their existing customers (e.g. Nissan, VW), Toyota) that indicates existing
capabilities in the areas of technology and cost? Having some of these customers
indicates some competency.
What kinds of products are being supplied to these other assemblers?
What kinds of parts are you making and what new technology are you expecting to
develop in two years’ time that is different from existing models?
On initial visits, part-level information is collected. Obisan emphasizes that you must
visit the supplier to understand them! Things to look for include:
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Evidence of continuous improvement and environmental activities
Kaizen activities on the shop floor
Machine efficiency (For example, Canadian suppliers used very old machines, and
needed to invest. This resulted in fewer workers and improved productivity.)
Kyoryoku Kai (Cooperative Associations)
Honda is not as interested in these organizations as other major automakers in Japan,
and therefore does not utilize them. This is because they respect suppliers’
independence, and wish to free them from obligatory membership in an association.
Unlike Toyota and Nissan, Honda wants suppliers to be free from ties. However, they
do have supplier meetings at least 1-2 times per year, where they present quality and
cost reduction awards to suppliers.
Creating Competition – Core Competencies
The most important principle is to create competition in the supply base. Thus, even inhouse suppliers face competition. For example on an instrument panel that was
traditionally produced in-house, Honda R&D designed it and purchasing got a good
quotation from an outside supplier. The inhouse people could not compete with this
proposal, so some portion of the business was allocated to the external supplier, and the
in-house process was expected to face this competition and find ways to reduce their
costs.
Investment
Honda invests about 20% of their capital in suppliers’ subsidiaries. For example, Kikuchi
represents a minor investment by Honda, who has a small share of the company. (Mr.
Morita was the purchasing manager in Ohio, and is now at Kikuchi helping to manage
them. This is an interesting point: Honda encourages their managers to go to work for
their suppliers in some cases, so they can better diffuse Honda’s working philosophies).
Honda Engineering will in some cases help suppliers with robot design, tool design,
welding, and injection, and may help with investments. Finally, Honda R&D may aid in
product design work.
Honda de Mexico
Honda of Mexico has been producing motorcycles for a long time, and has only recently
begun auto production for sale to the Mexican market. This is a fairly small market, and
the vehicles are not sold for export. Volumes are currently limited to less than 500
vehicles per month. This is a “knock-down” operation: parts are imported from the
Marysville plant and US supply base (no local suppliers) and assembled in the facility.
Honda moves a lot of its old tooling from Marysville which has reached its end of life to
this plant for aftermarket supply, then may re-export the parts for the replacement
market. Exchange rates continue to be a problem in this market.
Honda-Brazil
This facility began production of the Civic in October 97. Many parts are exported from
the Ohio plant. There are some Brazilian suppliers, including TRW which has a plant
there and is involved in some technology transfer. This is a very small market, and the
peso devaluation makes it very difficult to do business. However, Honda wants to
maintain a presence, as this is a very big future market.
Global Suppliers
A big question that arises as Honda continues to expand its operations is who will
become the global suppliers in the US/Japan/Europe, as well as in the future (Brazil,
Mexico, etc.)? Obisan notes that different regions are competitive in different areas.
An ideal global supplier is:
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Very efficient in R&D
Equally competitive across multiple global locations
Equally proficient in cost, quality, etc.
Unfortunately, there are very few cases of truly global suppliers. For instance, R&D is
very efficient in Japanese suppliers, but these same suppliers may not be effective at
R&D in a different location. Thus, it is very seldom that they find a supplier that can
supply multiple locations, yet locating these suppliers is one of Honda’s most important
development strategies. Finding good suppliers to serve both the US and Japan is not a
problem: few suppliers, however, have truly global capabilities.
How to Develop Global Suppliers:
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Requires intensive negotiation and joint understanding and commitment at the top
management level in the supplier
Requires participation by top management within Honda
Requires a common investment for multiple locations, (e.g. Siemens supplies airbag
control units to Honda’s plants in both the Europe and the US, in order to minimize
the investment in tooling. However, the control units are actually produced by the
supplier’s Mexican plant! Since the units are small, they can easily be shipped to
both the US and Europe
If a supplier is competitive in multiple markets, Honda will use them. This is a very
rare situation.
Competition is always emphasized. If a supplier already provides Honda with parts
in, say, the US, they certainly have a leg up over other suppliers in being considered
for supplying Honda’s new facility. This is because they already know what our
expectations are.
Honda places great value on a supplier’s ability to improve. If a supplier experiences
defects, but immediately takes countermeasures to prevent it from happening again,
this is considered a “plus” by Honda.
Interview with Mr. Morita, and Mr. Mark Ehrlich (Honda of America)
Cross-fertilization of Honda Employees Worldwide
Mark Ehrlich is a Honda employee who spent two years in the US with HAM before
coming to Japan. He has already spent 15 months in Japan: 4 in procurement, and 2 in
new model costing (involving detailed monitoring and coordination of new model costs
and minor model changes). He is one of six people from Marysville purchasing involved
in Honda’s liaison initiative. This initiative was started to help integrate North American
(Marysville) and other locations with Japan. Employees live in Japan, and are expected
to:
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Spend time learning about Honda Motor and about Japanese purchasing systems
Support the business plan that Honda of America has developed
Support the development activities of North American suppliers
Monitor design activities of Honda R&D from prototype through mass production
Learn Japanese to facilitate communication with HAM
He is one of six purchasing people from the US in Japan. Five of the people are
responsible for 1 commodity area (Mark’s is machined products: e ngines,
transmissions, and all interior plastic products), and one person is responsible for new
model costs. Other commodities include electrical, stamped body parts, etc. The new
model cost person (Ed Baumgartner) involves the coordination of costs related to new
models and changes, as well as full model changes.
A typical liaison visit for a HAM purchasing person is two years in Japan. The
prerequisite to becoming a liaison is to study the Japanese language for six months
(twice a week, two hours per class). The same schedule is maintained once the
individual arrives in Japan. The Japanese language in a business setting is very
important. Mark emphasizes that it is very important to study the Japanese language, in
order to understand the way the Japanese do business, maintain relationships, and
discuss drawings. American families will typically accompany the liaison to Japan.
Once the visit is over, the individual is expected to return to the US and expand the
viewpoints of individuals working in the US facility. This is considered a very enjoyable
experience.
Improving Communication between Honda in the Four Major Trade Zones
Japanese associates do the same type of liaison, and visit the US. Mr. Toshihiko Morita
was in the US from 1990 to 1994, and was involved in the development of the Japanese
car and the North America Accord, Civic, and Acura. In developing a “world car”, he
noted that a major challenge involved how to improve communication between the
different groups across the different Honda locations in Japan, Europe, US, and Asia.
Although Honda has an international purchasing ofice, its power is limited, and greater
communication is needed across the different production locations. The biggest
challenge is how to improve communication and develop relationships across
Honda in the four trade zones. This includes:
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How to share Honda’s strategy with supplier’s worldwide
How to transfer knowledge across Honda
How to develop supplier capabilities worldwide
The World Car – Global Planning Strategy
Each country car is current developed in Japan. The basic concept is the same, and is
then modified by local regulations. In addition, a Four Region Meeting is held quarterly,
with representatives from Japan, the Americas, Europe, and Asia. At this meeting,
planning involves a general strategy to deal with companies that Honda intends to do
business with. For example, the relationship with a Japanese supplier may be “more
mature” than a relationship with the same supplier in the US or Asia; at the meeting,
executives discuss how to ensure that the “child” companies can develop to the level of
the “parent” effectively and efficiently. In most cases, Japanese suppliers are wellintegrated and do not require development. The problem becomes how to transfer this
situation to North America, Europe, etc.
At HAM, the BP strategy seeks to improve performance continually. The process helps
develop a strategy for a next major new model (Accord) that is better that that developed
for the previous new model. Although the local situation is important, the problem must
be addressed at a higher level in order to fix major problems and/or change the plan if
necessary. This often requires that Honda GT (Honda R&D, which includes Purchasing,
Engineering, Design, and Testing, all located in one building) become involved.
Suppliers’ relationships with Honda is a key factor. Purchasing should be buying from
the best in the world, or must explain how and why they will be doing so.
As Mr. Morita says: “The challenge becomes how to develop a relationship with those
suppliers that we believe to be at the top. Honda places value on maintaining
relationships, so we do not enter into them lightly. Because we value them, it is our
responsibility to make our relationships better and ensure that things improve and
mature over time! To do so, we may send people who virtually “live” in suppliers’
facilities!”
At the Global Top Management Meeting, the purpose is to develop a Total Business
Strategy. This meeting is held one or two times per year, in various locations.
Global Supply Chain Organization
The global organization is structured in the following manner:
Top Management Meeting
(1-2 times per year)
Purpose: Total Business
Strategy Meeting
Honda Motor
(Japan)
1,100,000 units
Supplier
Development
Group
Honda America Mfg.
(HAM)
Honda of Canada Mfg.
(HCM)
850,000 units
Supplier
Development
Group
Honda UK Mfg.
(HUM) - Swindon
150,000 units
Mexico
Brazil
-
Supplier
Development
Group (new)
Procurement Quarterly Meeting
Commonality issues
Export Strategy
Accord/Civic Meeting
Cost Management
Technology Transfer
Turkey
HCMT (Thailand)
10,000 units
Supplier
Development
Group (future)
India
Phillippines
Other
On a regular basis, all of the procurement groups meet at a quarterly meeting to discuss
integrated global purchasing strategy. At this meeting, the discussion focuses on
opportunities for commonality and standardization, coordination with marketing’s export
strategy, new product planning, cost management, and technology transfer issues within
the supply base.
An important part of this strategy meeting also focuses on development of a truly “global”
supply base. The following illustration depicts how Honda establishes global supplier
capabilities.
Honda Motor
(Japan)
1,100,000 units
A1
B1
Honda America Mfg.
(HAM)
Honda of Canada Mfg.
(HCM)
850,000 units
A2
B2
C1
Honda UK Mfg.
(HUM) - Swindon
150,000 units
A3
D1
HCMT (Thailand)
10,000 units
A4
Suppose that a supplier (“A”) has plants and/or affiliations located in different regions of
the globe. (This is a very common situation for first tier automotive suppliers). For
instance, suppose that A1 is the best in terms of performance, and is located in Japan.
Another supplier plant, A2 , is located in North America, and a third, A3 , is located in
Europe. The supplier may also be asked to startup a plant in Thailand to supply future
production there. Each of these locations produces the same family of components.
Through the quarterly procurement meeting, Honda can compare A’s performance
across different locations. Procurement managers may share insights and compare A’s
management styles, productivity, etc. across locations. They can also openly discuss
technology issues with the supplier’s engineers at the A1 location, and expect them to tr
ansfer knowledge with the different divisions abroad. For instance, Honda may deal with
the supplier in developing the technology in at the A1 location, and then expect A to take
their practices across A2, A3 , and develop a new supply point at A4 ! They may then
transfer the technology horizontally across subsidiaries in the U.S., thus spreading their
cutting-edge technology globally across all of Honda’s platforms. This may require that
Honda be actively involved in helping the supplier to diffuse this knowledge.
A danger with this type of strategy is that Honda might become too dependent on a
single supplier of a given commodity/technology. To guard against this possibility,
Honda has established a network of suppliers that are competing against each other
globally. In the diagram above, suppose that Supplier “A” is Tokyo Seat Technologies.
(This Japanese supplier actually has some Honda engineers employed there, and
Honda has a minority financial stake in the company). In Japan, Tokyo Seat competes
against Tachess (“B1”). In the US, Tachess has a Joint Venture with JCI ( shown as B2 –
C1 ). In Europe, Tachess also had a JV with Bertron Fouray (20% ownership), which is
currently dissolved. In this manner, Tokyo Seat must face competition by independent
companies in each of the areas in which it competes, even though it is closely affiliated
with Honda.
The relationship between Honda and Tokyo Seat is a type of “keiretsu”. Honda owns
shares in Tokyo Suit. It is also commonplace for retired Honda engineers to leave the
company and go to work at Tokyo Seat, and perhaps work for any one of their locations
over the world. This further helps to transfer technology throughout the global supply b
ase. However, Honda’s keiretsu’s differ from other Japanese keiretsus, because there is
legitimate competion. In the words of Mr. Morita, “The supplier must earn the business –
it is not automatic.” Price is always the key expectation, and there is no loyalty to a
competitor who can provide the same or better performance in QCDD-M (Quality, Cost,
Delivery, Development, and Management). (It is also interesting to note that the former
President of HAM is now a supplier’s stamping plant president – this did not seem to
bother the interviewee’s at all, and was considered relatively commonplace!)
Although this is just a single commodity example, Honda’s goal is to establish an entire
network of suppliers that are competing against each other globally. A major driver for
this objective is that at procurement meetings, designers do not wish to work with five
different suppliers, but prefer to work with one and maximize the design potential across
all of Honda’s platforms globally. This helps to minimize the different modifications of its
technology required for global diffusion, yet facilitates adaptation to local market
conditions.
Global Supplier Development – The PACK Teams
Transfer of personnel also occurs in order to transfer supplier development practices. In
one case, a senior manager from HAM went to work at HUM in order to transfer supplier
development expertise to its UK location. This initiative has only just started.
The supplier development concept at Honda is defined loosely from Japanese as “a
sense of performance, which is used to help suppliers improve”. A major initiative
involves using a technique known as PACK teams. These teams are composed of
manufacturing experts who travel for extensive periods in teams, and who transfer
Honda know-how throughout its supply base. These individuals are hand-picked from
Honda Japan, and have temporary visas that allow them to travel for five months
(maximum). The team works extensively during the prototype stage in order to ensure
that the necessary quality systems are in place within the supply base. By definition,
these individuals must interact with Honda’s local Supplier Development group, in order
to find out which suppliers require immediate help. The PACK team is a major factor in
ensuring that suppliers meet timing requirements in the new product development
process, so that the supplier can easily slip into the mass production phase. The tam
also transfers knowledge from Honda'’ Japanese supply base to suppliers in North
America and worldwide. For the most part, this team has focused on transmission parts.
In transfering their knowledge, they also transfer knowledge to the local supplier
development group, who picks up the slack when the PACK team returns back to Japan.
The mother company of the supplier is expected to transfer the technology provided by
the PACK team for their similar products across other locations (accounting for local
variation). This is part of their responsibility as a Honda supplier. In cases when the
supplier is not global (e.g. BF or supplier “D”), they will send a guest engineer to Tokyo
to work with Japanese designers at Honda R&D. An on-going problem that is
encountered in this process is the poor transfer of technology across the same supplier
(same problem noted with BMW).
Purchasing Liaisons
An important task in managing this process is the management of the relationship
between the designer and the guest engineer. To achieve this, a Purchasing Liaison
Associate is assigned to monitor the relationship over time.
The purchasing liaison is a relatively new concept. Currently, it is used only by HAM
(Mark Ehrlich is the liaison for HAM serving in Japan). Next year, HUM (UK) will also
send a purchasing liaison.
The primary task of the liaison is to ensure that the supplier is properly prepared to work
with the design team at Honda R&D. For instance, they may inform the supplier “Don’t
come here and make a presentation unless you reall understand and have addressed all
of the following items: corrective action, FMEA’s, etc.” Although Honda’s R&D people
are prepared to treat suppliers healthy, it is generally a good idea to ensure that the
supplier has thought through all of the relevant issues, as well as what they want to
achieve, prior to meeting with the designers. The liaison ensures that the supplier is
ready to present to Honda, by ensuring that suppliers have done a careful self-analysis
of their capabilities, and have a clear goal for their presentation. This dramatically
increases the success rate of the supplier/designer interface.
Performance Capabilities – QCDD-M
Honda’s primary objectives are in Quality, Cost, Delivery, Development, and
Management. The last of these is considered critically important – it refers to the
management capabilities of the supplier, in terms of strategy, measurement, and
planning. It is a “soft” objective, but is one of the most important. A big part of supplier
development involves ensuring that the supplier can hit Honda’s QCDD-M targets. The
PACK team helps to transfer technology worldwide before mass production. This
enables longterm international global support. In December 1997, the PACK team
consisted of 15 people who were on temporary assignment out of the Ohio plant for 5
months.
Moving Capacity Globally To drive improvement, Honda may introduce new business
to suppliers in order to improve them. For instance in Thailand, many of Honda’s
competitors have actually reduced their production because of the financial problems
being experienced by many suppliers. Honda views this current crisis as an opportunity
to improve the supply base, and has just begun production of the CRV in Thailand. This
makes the best of a poor opportunity: Thai suppliers get more business, and associated
support. The timing for this move was excellent, as CRV production in Japan was at
100%. To improve performance in the supply base, Honda introduced this very popular
product from Japan to Thailand in order to force suppliers to improve their capabilities in
this region of the world.
Transferring Technology Globally Between Suppliers
There is very limited transfer of technology across suppliers (in contrast to the Toyota
strategy). Part of this is because of Honda’s wish to introduce competition within the
supply base as a motivation for improvement. There is also very limited technology
transfer from Japanese to non-Japanese suppliers.
In limited situations, some technology transfer occurs. For example in welding special
materials (a zinc alloy), the volume in the UK was not high enough for a Japanese
supplier to build their own supplying plant in the UK. Honda then requested the
Japanese supplier to share limited technology transfer to a UK supplier. The UK
supplier may receive assistance in developing the welding technology from the
Japanese supplier, get the business from Honda, and then pay a royalty to the Japanese
supplier.
In another situation in the US, a major producer of casting products in Japan helped
HAM to enter into an agreement and transfer production expertise to a US supplier.
HAM coordinates the transfer. HAM thus developed a local source for the casting
through a royalty arrangement with the Japanese supplier. The tooling die was built in
Japan and shipped to the US supplier. Thus, HAM did not have to worry about the finish
of the parts, since the die was sent directly to the US supplier. HAM thus benefits from
shorter development and delivery times, quality, etc. The Japanese supplier that did the
transfer may also benefit in other ways than the royalties, in terms of establishing a
preferred relationship with Honda, which is important in gaining future business.
In rare situations, tooling in Japan will be sold to a competing supplier. However, very
limited help is provided in such cases.
Major Obstacles and Challenges in Developing a Globally Aligned Supply Base
One of the most critical challenges in deploying this strategy is getting suppliers to
develop a global competence, (one that is aligned with Honda’s global perspective).
This is not easy, as the following story illustrates.
In the previous example of the global supplier (A), HAM has been unsuccessful in
dealing with their contact at A2 . Although A1 (the mother company) has a very close
relationship with Japanese buyers at Honda Motor Company, the people working in their
A2 location may not understand A’s global strategy, and may not have a network in
place to share production technology, design, expertise, etc. globally. As a result, the
buyer working at HAM may not be happy with the results of this outcome, and may not
wish to source from A2 , as they may also not fully understand the role of the A supplier
in the Honda network. Major challenges exist in deploying this strategy:

How much has Honda done to challenge the mother supplier to transfer technology
to its children?



How to get the mother company to communicate value analysis and cost reduction
ideas to their “children”?
How to enable the global network to communicate cost reduction opportunities, yet
not use them exclusively to their advantage when they do so?
How to get Honda associates to force their local supplier (A2 in this case) to go back
to the mother company (A1 ) and get help from a guest engineer or other form of
expertise?
To some extent, these challenges will evolve as Honda continues to expand. Honda
started initially in motorcycle production, where it did and still does produce in almost
every country in the world. As it expanded into automotive, it also began to expand
sales country by country. Motorcycle production is not nearly as large or complicated an
investment as automotive (and is large a “knockdown” type of operation.) However,
many of the lessons learned in motorcycle production globally is being applied to
Honda’s automotive production expansion worldwide. Moreover, they have been down
this route before!
Honda’s Localization Strategy
The “soft” area of supplier development (ref: interview with Leon Nichols at HAM), was
established as part of supplier development because of the timing and speed of the
exodus of Japanese suppliers establishing transplants in the US. They simply needed
help understanding local conditions!
Honda has established a fixed process for localization:
 Find a local supplier (single source)
 When volume doubles, develop a second or third source
 In cases when a mismatch in the philosophies of the supplier and Honda arises,
Honda must nevertheless respect the agreement / contract to do business.
In cases when recurring problems with the supplier occurs, it becomes difficult to
consider them for future business unless the problems can be resolved. If the problems
are of a basic nature, Honda may make less of a commitment (volume-wise). If the
problems are of a fundamental nature that will not go away, (e.g. an inability to even
listen to Honda’s proposals, and not even necessarily accept them), then Honda must
consider whether they will be able to work with the supplier five years down the road. In
such cases of a fundamental mismatch which cannot be resolved, Honda will drop the
supplier, as this is a critical stumbling block.
Actual Place, Actual Part, Actual Situation
A strong focus at Honda is adjusting the relationship to accommodate the local situation.
For example, Japanese and US buyer-supplier relationships are fundamentally different.
How should Honda modify their relationships to accommodate local conditions. In
another case in the UK, there was not enough volume for a Japanese supplier to enter
the market, yet the UK suppliers employed a different engineering approach. In order
to account for such different local situations, Honda has employed the “Gimba” or “3A”
approach: Actual Place, Actual Part, Actual Situation. This means that the actual part
produced by the actual person in the supplier’s location is “fit” onto the vehicle before
being approved for production, to ensure that it meets Honda’s requirements. This may
require repetitive changes to the part over time.
North America Production – Supply Base Growth
North American
Production
1 million new Civic
models produced – larger %
of U1 suppliers – overall
mix of transplant/domestic
balances out
Japanese “transplant”
suppliers established
Some parts of
car “offlimits”
for localization
1982
1987
1991
(160Y/$)
1994
(102Y/$)
1997
(130Y/$)
As shown in the above figure, increased local content of U1 (US, tier 1) suppliers was
implemented. In the initial stages,Honda used primarily imported Japanese supplied
parts for assembly in the US. No transmission or engine parts were done in North
America at all. Over time, a number of Japanese transplant operations were developed.
Since 1991, the number of domestic US suppliers has increased dramatically, to the
point where the total number of truly “domestic” suppliers is about 50%. (The number of
US suppliers, including transplants, is around 95%).
The priority for sourcing all new parts is as follows:
1st priority: US, Tier 1 suppliers
2nd priority: Joint ventures with US suppliers
3rd priority: Knockdowns (produced in Japan in kits for assembly in the US)
4th priority: Japanese suppliers
Although this progression may seem slow, in reality it is a major step in localization.
Especially between 1987-1991, Japanese suppliers were screened using QCCD-M
criteria and asked to establish facilities in the US. Between 1991 – 1997, US suppliers
were selected using the same set of QCCD-M criteria as Japanese suppliers. This was
a very difficult set of criteria for US suppliers to meet. For example, companies such as
Bosch and Delco developed excellent prototypes which met the standard, but when
volumes increased during the mass production stage, many defects occurred. As
Honda’s volumes continued to increased, it continued to work with large U1 suppliers for
all new business.
Visit to Moka Plant
This plant produces different types of engine values, CV joints, connecting rods, and
crankshafts using forging machinery. 200M values were produced in 1992. The plant is
20 years old, began producing exhaust componenets. Other plants include Haga (250)
Takaneazwa (200), which also produces the NSX aluminum vehicle and the electric car.
The NSX currently only sells 1 car per day, and costs 9 M yen.
Today, the Moka plant produces the Constant Velocity joint. Its unique core competence
is the ability to do forging (inside of part) with no machining (except on the outside). This
process is known as “cold forging” which is a very sophisticated technology. Moka is the
only company in the world with this technology, which was introduced at the inception of
the plant. The same technology has today been transferred to the Marysville plant,
where it is used in the Accord. However, the CV joint for the Civic is shipped from
Japan, with a second source from GKN (Automotive Institute of Canada).
The pinion gear was formerly produced here, but is now made in the US by Mascotech.
There was no official technology transfer, but Mascotech visited Moka three times to
benchmark (for one day in each case).
Most of the machine tools are Japanese. Some of the machine tools are imported from
the US, such as the “Lotoflow”.
This plant is very unusual for Japan, since is is opeating at near capacity 93 shifts + 2
Saturdays per month. This is because of the high demand for the CV joint. For the
exhaust valve and the injector valve, this plant and one outside supplier supports all the
demand for Japan. There is no US supplier of exhaust valves, but GKN. This plant is
considered very competitive vis-à-vis suppliers. For production of camshafts, they use
50000 pound presses. Moka also designs products. They are self-reliant, in that they
have about 50 design engineers working full time at the plant.
Final Metaphor
A very humorous story emerged about Mr. Morita. At one point, a concurrent
engineering project had a series of overlapping activities on a chart. As they were
looking at the chart, he walked over with a pair of scissors, cut out the middle of the
page, and put the two pieces up together. Essentially, he was saying they needed to
reduce the time for the project in half!
400 meter metaphor
Mr. Morita also discussed a metaphor that he frequently uses to emphasize the
importance of continuous improvement. Every new product cycle is like a 110 meter
hurdle race. The hurdles are the same for all of the racers, yet some are able to master
them better than others. They include things such as quality problems, lack of trust,
cycle time, FMEA’s, customer requirements, new technology, etc. The finish line
represents the product release. In every race, there is always a winner! The winner
ultimately captures market share, profits, satisfied customers, etc. Generally, the winner
is the one who is able to leap (e.g. manage) all of the hurdles and run (e.g. deploy) the
strategy quickest. However, once the race is over, the racers continue to jog around the
track getting ready for the next 110 meter race, which represents another chance to win!
Although you did not win this time around, by the time you go around the track again,
next time you may be a contender!
One way of positioning supplier development is to understand what are the “best
practices” at each of the hurdles that can turn contenders into winners. As the race
continues, priorities will shift according to the nature of the hurdle.