Daihatsu Motor Co launched the Mira e:S minicar in 2011, and the car was a hit. A number of improvements – in manufacturing, engineering, procurement – went into the car. But the real secret to success, says Kosuke Shiramizu, Daihatsu’s chairman at the time, lay in taking something out of the company’s business model. Daihatsu shaved off roughly $1,000 in the manufacturing costs of the car by dismantling its keiretsu - an informal but close interlocking business relationship between a manufacturer and its suppliers, cemented by cross-shareholdings and personnel exchanges.Daihatsu had to find a better way to procure when it faced an austere emerging marketplace. That is exactly the condition the US, and other advanced economies, are in: austerity is the new black.
Keiretsu, pundits preached, defused adversarial relationships between assembler and supplier, allowing them to share information and create better product quality. Hence Japanese automakers were able to leap ahead. [Cause and effect are not so easily understood.]
Shiramizu says the days of the keiretsu are numbered. Companies, he says, are competing for price and value by using market mechanisms instead of relationship-based arrangements. "The Toyota way is the high-cost way,” says Shiramizu, 74, in an interview at Daihatsu headquarters in the Osaka suburb of Ikeda. “Keiretsu doesn’t work anymore. If we stick with it, Daihatsu won't survive. Toyota might face a similar fate, too."
Shiramizu, who became advisor to Daihatsu's board and technical executive after stepping down as chairman three and a half years ago, says his parts procurement reform isn’t meant to be a template for Toyota. But it is being taken seriously there, he says.
Two major shifts over the past two decades in the competitive landscape have been working against Japanese car makers and their keiretsu systems.
First, Western rivals dramatically closed the gap with the Japanese. That was partly due to the fact cars have become easier to design and manufacture, because they are less mechanical and are controlled more electronically. Competition thus shifted to who could offer more value to the customer: the highest fuel economy, the sexiest look, and the most compelling functions for the lowest price.
The other competitive shift came from the emerging world. Keiretsu worked beautifully for Toyota because an overwhelming majority of the finely engineered cars it made were sold in the high-priced developed markets of the United States, Europe and Japan. That began changing in the early 2000s, with the rise of emerging economies such as Brazil, Russia, India, China, Indonesia, South Africa and Turkey. These economies already collectively buy half of the automobiles sold worldwide today.
Daihatsu is mostly in the lower end of the market. As it began buying more components from Toyota-group suppliers such as Denso and Aisin Seiki over the years, it was also stuck with Toyota's lofty quality standards. Shiramizu says Toyota’s specs are often too high for vehicles that some Daihatsu officials describe as “sandals,” as opposed to the dress shoes that Toyota makes. “Do we need parts and cars that withstand the desert heat in Arizona?” Shiramizu asks.
Shiramizu's first move was to send agents of change into the company’s procurement office. Until then, Daihatsu's purchasing office was staffed by non-technical types with little knowledge on how components are designed and produced and, says Shiramizu, "no ability to assess true cost." Instead of attacking costs, those purchasing managers put a priority on their relationships with suppliers - getting wined and dined and showered with gifts in the process, Shiramizu says.
Shiramizu then initiated another move: abolishing the “account” system that governed procurement deals. The status quo, he says, made it almost impossible for new, non-Toyota-group suppliers to do business with Daihatsu, even when they offered better quality and price. Under the account system, only existing suppliers with Daihatsu accounts could supply parts to Daihatsu. [Sounds a bit like the "best value" focus on "proven reliability".]
It allowed Shiramizu to deploy his new procurement leaders in the hunt for lower-cost parts across Japan - and beyond to China, Indonesia and India. Inoue, who was plucked out of the production engineering division by Shiramizu, and his team focused on China. The team quickly found Chinese suppliers of windshields, mirrors, speakers, and aluminum wheels at savings up to 50 percent.
One of the team's most critical findings was not a new supplier, however. It was the discovery that some account holders were slapping a hefty margin on components they procured cheaply in China.
Daihatsu last year bought approximately 1.3 billion yen worth of aluminum wheels in China without going through middlemen. “We have too many middlemen skimming off," Shiramizu says. "Getting rid of those middlemen is the shortest cut to cost savings.”
Buying directly from those suppliers has made the job of procurement specialists more complex. They have to ensure that the logistics for parts delivery are sound, making sure equipment orders are delivered to plants on time. It's worth it, Daihatsu officials say.
The China team discovered factory hubs in the eastern China province of Zhejiang for dirt-cheap generic auto parts – or, as one Daihatsu executive puts it, “fakes.” The results have been mixed: Designs by the generic parts producers are often robust, but the production quality is unreliable, according to Daihatsu officials.
One solution being pursued now is to produce on its own many of the core, high-ticket parts Daihatsu currently buys from Toyota suppliers. Those include air-conditioning and steering systems, drive shafts and wire harnesses. “Toyota suppliers aren't going to like it,” one official says, “but our basic philosophy is to go ‘in house’ - and that means no more middlemen.
One of my takeaways from this fascinating case study is that we should not allow a fully assembled (or "bundled") product to determine if something should be made subject to "best value" rather than low price bidding.
Here, Daihatsu took the product apart, and even if it did not then acquire each part independently, it learned the true cost of the product, and that is a valuable piece of knowledge when buying in bulk, versus building in house. That's some serious market research.
An article I referenced in a recent post contained a statement by the author of it, Eric S. Crusius, that
"prior to the 1984 Competition in Contracting Act, which jumped-started best-value contracting in the federal marketplace, a common refrain heard in the federal market was “good enough for the government.” In other words, the government was content to settle for mediocrity—or worse."That's a curious turn of phrase, as pointed out by the distinguished James F. Nagle, in his treatise, "History of Government Contracting". He points out that, in the early days of US procurement, before the Civil War, the government abandoned purchasing weaponry and other things from manufacturers when it found it could make all the parts and then assemble them "in house" in US armories and ship yards. It thereby developed the specifications needed to get exactly what it wanted, both in house and from suppliers. He says,
The rigorous inspection standards gave rise to a saying still in use today but with vastly different meaning. The saying was "close enough for government work". Originally the saying was a boast by contractors to would-be commercial customers, that their products were so well manufactured that the government would accept them even with its known high standards. Unfortunately, by the middle of the twentieth century because of scandals [recounted in the book], the same saying now is used to denote a feeling by a contractor that even shoddy work will be accepted by the government.If we are ignorant of history, we are bound to repeat its mistakes. Taking the steps Daihatsu has taken are something out of the early days of US federal procurement; if they can do that and avoid the scandals Dr. Nagle described, we may go somewhere in procurement where man has gone before, but survive it with our integrity intact.