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Dyer, J. H. 1996. How Chrysler created an American keiretsu. Harvard Business Review (July-August): 42-43, 46-47, 50-56.

Summary by Melissa Dondero
Master of Accountancy Program
University of South Florida, Summer 2003

Japanese Management Main Page | Value Chain Main Page

The purpose of this article is to show how Chrysler adopted Japanese-style supplier relations and the benefits that Chrysler realized from this change.

Manufacturer-Supplier Relationships

The manufacturer-supplier relationship greatly differs between American firms and Japanese firms. In most American firms, manufacturers design products without input from suppliers. Suppliers are picked only on the basis of product cost. The relationship between American manufacturers and their suppliers can be characterized by competitive, contractual, arm’s length relationships. In contrast, Japanese firms embrace a partnership model. This model is characterized by a strong inter-locking relationship between manufacturers and their suppliers. The Japanese call this relationship keiretsu.

Why Chrysler Needed to Change

In the mid 1980’s, Chrysler’s business was sinking. Chrysler realized it needed to improve its competitiveness if it wanted to stay afloat. Chrysler decided to conduct a benchmarking study of product development and manufacturing at the successful Honda Motor Corporation. Chrysler found that Honda was organized into product development teams whereas Chrysler was organized by function. This approach looked foreign to Chrysler until they acquired the American Motors Corporation in 1987. AMC had implemented some Honda-like manufacturer-supplier practices and integrated team approach. Since AMC didn’t have many resources, they relied on suppliers to engineer and design a number of its vehicle components. AMC’s successful operations showed Chrysler that Japanese-style partnerships might be possible in an American context. Chrysler knew it needed drastic changes to survive, and decided it would transform itself into an American keiretsu.

Chrysler’s New Model

Cross-functional teams – Chrysler organized into five cross-functional vehicle-development teams to improve continuity, coordination, and trust within Chrysler and between Chrysler and its suppliers.

Presourcing and Target Costing – Chrysler now chooses suppliers early in the vehicle development stage and gives suppliers significant responsibility for designing a given component or system. This method referred to as presourcing speeds up the vehicle development process. Chrysler also adopted target costing which involves determining what price the market will pay for the vehicle and then working backwards to calculate the allowable costs for the vehicles components and systems. This new focus on cost rather than price has created a positive situation with suppliers. Manufacturers and suppliers now work hand in hand to meet common cost goals.

Total Value-Chain Improvement – Chrysler created The Supplier Cost Reduction Effort, or SCORE Program, which fosters supplier trust and motivates suppliers to communicate and actively participate in reducing system-wide costs. The SCORE program requires suppliers to suggest ideas for value-chain improvement. Chrysler makes it profitable for suppliers to participate in SCORE by sharing the dollar savings generated by adopted ideas.

Enhanced Communication and Coordination – Chrysler employs some of their supplier’s engineers who work side by side with Chrysler’s employees. This practice encourages communication and cooperation between Chrysler and its suppliers. Chrysler and its suppliers share a common e-mail system that facilitates communication. Chrysler also holds quarterly and annual meetings with its suppliers to discuss important issues.

Long-Term Commitments – Chrysler gives long-term contracts to its suppliers to earn suppliers’ trust and encourage them to invest in dedicated assets. As long as a supplier performs well and meets target costs, Chrysler will give them business forever.

Benefits of Keiretsu

Chrysler has realized many benefits by adopting the principals of Japanese keiretsus. Some benefits include a shortened product development cycle, reduced overall costs of the vehicle program, reduced procurement costs, and increased market share and profitability.

Changes in Supplier-Management Practices

The following table was adapted from page 50 and illustrates the changes Chrysler made between 1989 and 1994.

How Supplier-Management Practices at Chrysler Have Changed
Product Characteristics Relational Characteristics
1989 1994 1989 1994
Suppliers chosen by competitive bid - Low price wins - Selections after design Suppliers presourced - Cost targeted to a set price - Selection before design based on capabilities Little recognition or credit for past performance (transaction oriented) Recognition of past performance and track record (relationship oriented)
Split accountability for design, prototype, and production parts Single supplier accountable for design, prototype, and production parts No responsibility for supplier's profit margins Recognition of supplier's need to make a fair profit
Minimal supplier investment in coordination mechanisms and dedicated assets Substantial investments in coordination mechanisms and dedicated assets Little support for feedback from suppliers Feedback from suppliers encouraged
Discrete activity focus; no process for soliciting ideas or suggestions Focus on total value-chain improvement; formal process for soliciting suppliers' suggestions No guarantee of business relationship beyond the contract Expectation of business relationship beyond the contract
Simple performance evaluation Complex performance evaluation No performance expectations beyond the contract Considerable performance expectations beyond the contract
Short-term contracts Long-term contracts Adversarial, zero-sum game Cooperative and trusting, positive-sum game

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Related summaries:

Clinton, B. D. and S. C. Del Vecchio. 2002. Cosourcing in manufacturing. Journal of Cost Management (September/October): 5-12. (Summary).

Clinton, B. D. and S. C. Del Vecchio. 2002. Cosourcing in manufacturing - Just in time. Journal of Cost Management (November/December): 30-37. (Summary).

Cooper, R. and C. A. Raiborn. 1995. Finding the missing pieces in Japanese cost management systems. Advances in Management Accounting (4): 87-102. (Summary).

Crawford, R. J. 1998. Reinterpreting the Japanese economic miracle. Harvard Business Review (January-February): 179-184. (Summary).

Hayes, R. H. 1981. Why Japanese Factories Work, Harvard Business Review (July-August): 57- 66. (Summary).

Hiromoto, T. 1988. Another hidden edge: Japanese management accounting. Harvard Business Review (July-August): 22-25. (Summary).

Howell, R. and M. Sakurai. 1992. Management Accounting (and other) Lessons from the Japanese. Management Accounting (December): 28-34. (Summary).

Imai, M. 1986. Kaizen: The Key To Japan's Competitive Success. New York: McGraw-Hill Publishing Company. (Summary).

Martin, J. R. Not dated. Lean concepts and terms. Management And Accounting Web. http://maaw.info/LeanConceptsandTermsSummary.htm

Martin, J. R. Not dated. Profit Beyond Measure graphics and notes. Management And Accounting Web. http://maaw.info/ArticleSummaries/ArtSumJohnsonBromsGraphicsNotes.htm

Martin, J. R. Not dated. Supply chain arrangements. Management And Accounting Web. http://maaw.info/SupplierArrangementsSummary.htm

Martin, J. R. Not dated. What is lean accounting? Management And Accounting Web. http://maaw.info/LeanAccounting.htm

Martin, J. R., W. K. Schelb, R. C. Snyder, and J. C. Sparling. 1992. Comparing the practices of U.S. and Japanese companies: The implications for management accounting. Journal of Cost Management (Spring): 6-14. (Summary).

Porter, M. E., M. Sakakibara and H. Takeuchi. 2000. Can Japan Compete? (Perseus). (Summary).