Akinori Hyodo, former Factory Manager, Toyota HiAce Factory | #AskSensei Event 8 Summary
Good supplier relationship management is crucial for the success of a business and lean sensei Akinori Hyodo argues that Toyota’s corporate strength is built upon the strong capabilities of its suppliers. We discuss the importance of supplier development and how to establish and maintain a strong relationship with suppliers.
Importance of Supplier Development
Today we will be discussing the importance of supplier development. First of all, why is supplier development necessary? The reason behind this is that when you have an industrial structure where a main customer or a parent company is situated at the top with their suppliers sitting underneath them, the company at the top won’t be able to establish itself as a successful business without the support of those suppliers sitting underneath them.
Those suppliers supply their products to their parent company. The company adds value by assembling them and then sells the finished products to their customers and end users.
The basic premise is that the parent company runs its business based on the proposition that they can provide their customers the best quality products at the best possible price to be competitive. Because of this, the parent company expects its suppliers to provide them with the best quality products at a low cost as well.
Under such circumstances, things are going to be fine for the parent company as long as all of its suppliers are at a mature level with high capabilities such that they are able to provide high quality products at a low cost. However, realistically speaking, this won’t be the case across the whole supply chain. This is why assistance needs to be provided to suppliers by their parent company. The parent company wants to lift the capabilities of their suppliers when they lack capabilities.
Let’s take the case where a supplier provides poor quality materials to its parent company and the company assembles those poor quality materials into their final products and sells them to their end users. When there is a quality claim that comes back from their end users, obviously the supplier has some responsibility for this. However, the claim basically sits with the parent company, therefore, it’s in their best interest to prevent this type of poor quality material coming through to their level before their products are handed over to their end users. Therefore, parent companies always want their suppliers to be providing them with good quality products.
Speaking from a bigger perspective, the relationship that exists between a parent company and its suppliers is essential to achieve good monozukuri (manufacturing). If one or the other lacks in good capabilities, the basic premise of good production won’t be achieved. And, if a parent company goes out of business due to having quality issues and high prices, this will also be a problem for its suppliers as they won’t be able to survive as an entity without having the parent company as their customer. In the same light, if suppliers don’t survive as an entity, the parent company is going to have a hole in their supply chain and will struggle to keep their production running.
Therefore, increasing the capability of suppliers is going to be of strong interest and benefit to the parent company. Just as developing your people’s skills and capabilities is important for your company’s success, you need to help your suppliers to develop their capabilities as well. Therefore, you need to be looking for points of weakness within your suppliers and working together with them to help lift their capabilities up to a high level so that you will have strong suppliers you can depend on.
If you look at Toyota Motor Corporation from this perspective, you can see why the company is a strong entity. Not only the company itself has a solid foundation and high-level capabilities, they also have very strong suppliers sitting underneath them. Their corporate strength reflects the strength of their suppliers. Their consideration isn’t just of the parent entity, but also extended to the whole Toyota group. Toyota has an approach to lift every entity in the group. Therefore, Toyota treats their suppliers as very important parts of their business.
Toyota believes in the idea that unless there are strong suppliers within their group, Toyota can’t be as strong as it could be. With this in mind, there is a section within the enterprise that looks after their suppliers and the improvement of their capabilities.
I trust that most companies out there, if not all, also have a department or section that oversees their supplier relationship. Companies in Japan often refer to that area of an organization as the Purchasing or Procurement Department. I want you to reflect on the specific role and responsibility of that section of your organization. Their role isn’t just to say to their suppliers, “okay, you need to reduce the price of your product by this amount by next year, otherwise, we won’t be able to deal with you.” That is not the role of the Purchasing Department. Of course, there is an expectation for cost reduction anywhere across the Toyota group too. But, what is incorporated in the Purchasing Department role is a responsibility to help suppliers achieve those cost savings, and they do that through supplying information, guidance, mentoring etc. This is part of the package that Toyota’s Purchasing Department uses in their relationship with their suppliers.
With regard to the specific role of the Manager of Toyota’s Purchasing Department, they have responsibility for managing their relationship with the hundreds of suppliers that support their operations. Although the manager can’t visit every single one of their suppliers annually, they do visit their main suppliers at least once or twice each year in order to see the operations of those suppliers with their own eyes. And, the employees sitting underneath the manager will follow up on specific issues identified to make sure things are progressing to a plan that has been established. That’s how they operate to fulfill the role and responsibilities of the Purchasing Department.
If a quality issue is identified and/or a claim or complaint comes through from an end-user etc., there is a follow-up from Toyota to those suppliers to check the specific cause of the issue and they will provide guidance to them and work with them until the identified issues are fully addressed. Toyota has an approach of continually following up and supporting their suppliers. The approach is that when they recognize good things, they pat them on the back, and when points to be improved are identified, they provide them with recommendations and help them move in the right direction. They maintain and continue this type of relationship with their suppliers over an extended period of time to improve the capabilities of their suppliers.
In closing, I want to reiterate the point that unless you have good suppliers with strong capabilities, you as a customer and a parent organization receiving their products and service won’t be able to operate as a strong entity.
How can we evaluate a supplier in order to know its level regarding lean, quality assurance and quality control?
The fact that they are a supplier to you or not shouldn’t have anything to do with how you would evaluate them. You would use the same evaluation method you use internally within your organization to evaluate your suppliers in terms of QA, QC and lean.
With regard to quality, firstly, you don’t want to put your customers and end-users in a position where they receive a poor quality or service. To prevent this from happening, you would have indicators around quality concerns in place and track the number of customer claims, other quality issues, etc.
If you keep your suppliers out of this picture for the moment and just take a look within your own company, you have a supplier-customer relationship within your own company. Your upstream processes are supplying products or parts to your downstream processes, therefore, the upstream process can be referred to as a supplier and the downstream as a customer. You are most likely to have indicators around the quality of the products at each stage across your own organization’s processes. So, if you can reflect on how you are managing quality within your own company, this will give you some hints as to how you can approach your suppliers.
If a defect occurs, what kind of system do you have within your own organization to deal with the defect? Who would be contacted? Who has responsibility? What countermeasures will be implemented by when? Different levels and departments within your organization would be tracking these indicators and a system should already have been put in place to be able to follow up on these issues.
Another important point to note is that, when it comes to quality, one individual within an organization cannot change quality for the company. You need awareness around quality within everybody in your company in order to make that change.
Any quality department or section of an organization needs to come up with a policy around all of the aforementioned points each year to improve the quality situation within the organization. They need to discuss with each area of the business as to what they need to do to take steps to reach those targets.
What I go back to often in answering these questions is the direction coming down from the very top of the organization. If lower areas of the organization are considering and evaluating the quality coming from suppliers, the top of the organization is not doing part of their job properly. This direction really needs to be coming right down from the top of the organization.
In closing, I also wish to stress the importance of not only setting the roles and responsibilities of the quality department and section within the organization properly, but also gaining an understanding from each manager and leader as to how their roles and responsibilities sit within the context of the whole system and how their department can contribute to the overall company objectives.
There is probably a lot more to talk about on this topic, but I will leave it there for now.
What approach do you recommend for introducing lean to suppliers?
This approach I am about to suggest is not limited to just introducing lean but can be used when introducing any ideas in general.
First of all, it is important to change the thinking of the top person within your supplier. Those who oversee the supplier relationship management within a parent organization – such as those who are in the Purchasing Department as I talked about earlier – need to talk with the top management of their suppliers and be working with them to develop and change the way they think about their business. They need to help those top management to understand their current situations and convince them that lean is the way for them to go forward. The key message that need to convey to their supplier is that they can improve their business by changing the way they manage it. Therefore, it is important to provide help to the top person within the supplier to understand what their current situation is and what their present capabilities are and what potential results they can achieve to improve their own business through applying lean.
Obviously, another approach you could take with your supplier is to start at the bottom of their organization to create some improvement activities and move things upwards along from there. But, in my very strong opinion, this is not the best way to do it. By far the fastest way to create change is to start from the top of the organization.
Although we see this happening from time to time, you need to avoid the situation where the parent company takes away the fruit of their suppliers’ improvement work. Unfortunately, you see sometimes that a company suddenly decides to grab that improvement and profitability that has been generated within their suppliers away from them and say to them, “okay, we would like that profit reflected in a cost reduction of what you are charging us and thank you very much for that”. This isn’t the right approach in my opinion because you need to allow the supplier to experience the rewards of the improvement they have made and keep a lot of that for themselves. In this way, you as their customer and parent organization will also be better off with a stronger supplier sitting underneath you.
In summary, work with the highest manager within your supplier to change their way of looking at things, help them to see what their current situation is and work on the improvement with them to make changes within their own organization. It is important that you work with them through the journey particularly at the initial stage of implementing lean for them to get results on the board. And, once the improvements are achieved, make sure the actual credit of the improvements remains with the supplier. I believe this will be the way to get traction and buy-in from your suppliers.
How do you ensure that the supplier doesn’t become dependent on the customer’s expertise?
As for the relationship between the supplier and the parent company or the customer, there needs to be an understanding between both sides that the relationship must be mutually beneficial. If one side falls over and goes out of business, this is going to severely impact the other side. Therefore, it is in the best interests of both parties to see each other succeed.
This is why the parent company should want to see their suppliers thriving and succeeding. The parent company should want to assist their suppliers in developing their own people and guide them to improve by themselves in order for their suppliers to be successful.
I believe most companies out there have a procurement or purchasing department that are dealing with their suppliers on a regular basis. As mentioned earlier, in my opinion, a key role for the purchasing department should be to guide the development of their suppliers.
If the parent company sees a lack of capabilities, expertise, skills etc. in their suppliers, then they should provide them with the support they require and guide them to improve in their own right. If the parent company is too hard-handed with their approach and leave their suppliers to deal with their own issues by themselves, they may not be able to survive and could go out of business. And, when this happens, the parent company will suffer.
In the case of Toyota which has hundreds of suppliers, they work closely with their suppliers and they spend time and share their expertise to provide them with the necessary guidance.
What would you recommend to the top management of an organization that want to start implementing lean but do not have budget for either a lean department or external support?
When it comes to establishing a lean department within an organization, I don’t think it is always necessary for them to spend extra budget. If there is a strong need for this to happen, the organization can restructure itself to be able to better support this without a large budget. Obviously, it will cost you more if you want to bring new people in from outside for this to happen. But, instead, you can make your organization be able to support lean implementation by moving existing people around and by reallocating those who are more better suited in helping the organization to implement lean.
Even if you keep lean out of this discussion, when we think of a company and its existence and survival, it is imperative for the top of that organization to be looking five to ten years out into the future and structuring their organization to be able to achieve those objectives and strategies within that time line. So, if they think lean is a necessary part of the strategy, it is just another piece of the puzzle the top management needs to consider, and they need to structure the organization accordingly.
If you have middle managements and even lower parts of the organization trying to implement change, it is really difficult for those levels to be able to achieve that. At the risk of repeating myself, in order to genuinely drive change we need to start with the direction, belief and thinking at the top management level and then pass this down through the rest of the organization.
Based on my experience, I have never heard of a company in Japan that went out of business which had seriously focused on the application of lean over an extended period of time. When I say serious application, I mean that they had focused on applying lean to their business objectives in a correct manner for a sustained period of time.
As I often suspect, companies such as the one referred to in this question are probably not on a burning platform. They are probably making enough profit to get by and therefore aren’t experiencing serious difficulty as an organization. If they are on a burning platform or have a very intense desire to change their status-quo, their top management would be desperately and earnestly thinking about how they can best structure their organization to be able to improve in order to move away from that critical situation.
#AskSensei is a regularly-scheduled webinar held together with Shinka Management Senior Consultant and former Toyota HiAce Factory Manager and Director Akinori Hyodo. Each event we cover a different topic related to lean, with participants invited to put their questions to Hyodo Sensei.
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