Honda Motor Company Ltd. International Purchasing Division Questions for Discussion

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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 “cross-fertilization” 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:

  • 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:

  • 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.)

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