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MANAGEMENT AND ACCOUNTING WEB |
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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 |
The purpose of this article is to show how Chrysler adopted Japanese-style supplier relations and the benefits that Chrysler realized from this change.
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.
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
· 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.
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.
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PrOCESS cHARACTERISTICS |
rELATIONAL
cHARACTERISTICS |
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1989 |
1994 |
1989 |
1994 |
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Suppliers chosen by competitive bid -Low price wins -Selection after design |
Suppliers presourced -Cost targeted to a set price -Selection before design, based on capabilities |
Littler recognition or credit for past performance (transaction oriented) |
Recognition of past performance and track record (relationship orientation) |
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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 suppliers’ need to make a fair profit |
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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 |
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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 |
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Simple performance evaluation |
Complex performance evaluation |
No performance expectations beyond the contract |
Considerable performance expectations beyond the contract |
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Short-term contracts |
Long-term contracts |
Adversarial, zero-sum game |
Cooperative and trusting, positive-sum game |
* Adapted from Dyer page 50.
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