Analytical Essay: Purchasing Issues in Honda's Corporate Structure

References Case Article

Honda Motor Company Ltd. is a Japanese multinational corporation that was established in 1948 by Soichiro Honda, who oversaw the expansion of manufacturing motorized bicycles, motorcycles and multinational automobiles. Honda was the first Japanese automaker to create and build engines and transmissions in the U.S. as well as the first to export U.S.-built cars to overseas markets in 1987. Even though Honda operates in 150 countries, the Honda headquarters is in Minato, Tokyo, Japan. Honda currently employs 215,638 people globally, 27,000 of those are in employed in the U.S. Honda currently operates 12 State-of-the-art U.S. Manufacturing plants and 14 Research and Development facilities across the US under the President of Honda R&D Americas, Inc: Frank Paluch. Honda also operates 27 global R&D centers throughout the world including the countries of, Japan, China, Asia, Europe & South America. When it comes to customer satisfaction, Honda has ruled the Fobes List many years over, currently ranking #28: World’s most valuable brands, #36: Top regarded company 2019, #31 in Sales, #100 in Profit. Honda is a family household name when it comes to reliable vehicles worldwide, they had about 5.3 million automobile sales in the 2019 fiscal year. Our case article highlights the beginning of Honda and Japans investments in the U.S. automobile industries from interviews of Mr. Obisan, who worked for Honda (starting in1962) and published the book “Two Decades” focusing on the process of Keiretsu, suppliers and Hondas comprehensive approach to the Honda slogan “The Power of Dreams”.

What is Honda's problem, and how do they want to mediate it? Honda's problem began with wanting to expand its brand around the world. However, in doing so it would require domestic suppliers in the regions they set up shop. Honda's policy and commitment to long term relationships criticized as being 'too loyal,' and Honda will go to 'ridiculous lengths' to maintain a supplier relationship before severing ties. Honda considered the following: quality, cost, and delivery criteria are the most important criteria to maintain supplier. They are always looking for better suppliers who can produce parts locally — looking to supply change management for a single sourcing supplier or dual sourcing supplier to avoid delay of supplies. Also, ask questions like, 'Do suppliers meet at least 1-2 times per year, where they present quality and cost reduction awards to suppliers?'. All the while, making a global supplier very efficient in research & development, equally competitive across multiple global locations, equally proficient in cost and quality.

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Honda does build long-term relationship with its suppliers, but not use the form of institutional mechanism, for example family relationships and supplier association. In the purchasing activities, Honda intervenes directly in the activities carried out by its component makers. For a number of components Honda arranges the purchase of the raw materials two or three tiers back along the supply chain, which enable the suppliers gain advantage of price and quality, on the other hand, Honda often dispatched experts to support the suppliers and solve the problems relating with components delivery and quality. This kind of partnership assures continues supply of materials at a reasonable cost and involves the supplier to materials innovation and improvement which will facilitate the organization to produce products with variety. A striking point is the reconciliation with multiple and single resourcing strategy. For example, Honda purchases two different types of seats for one automobile model from supplier A and supplier B separately. This method enables Honda to gain the advantages of single supplier, (for example, deliveries can be scheduled easily, long-time partnership can be established), and multiple supplier, a flexibility of volume, the risk of a disrupted supply, better service and price. By using a Single-Sourcing method Honda is able to ensure that the contract lasts the life of the vehicle but there may not be enough capacity. Honda can also use a Dual-Sourcing method when a delivery problem arises and although it is not the preferred method it is necessary to have to ensure that any delays are avoided. To ensure that problems are kept to a minimum with suppliers, it is recommended to have a meeting with them 1 to 2 times a year at minimum. By holding these meetings, the party’s involved will be able to communicate with each other and strengthen their business relationship.

How does Mr. Honda’s history with suppliers relate to Honda’s current supply management strategy?

The current supply management strategy reflects Honda's long-term goal of manufacturing products where they sold, and its corollary goal of buying parts where it manufactured vehicles (MacDuffie).

1. Increased local content is mainly due to purchases Honda makes from many of the over Japanese automobile supplier firms that established during the second part of the 1980s.
2. Focusing on four regional markets - has allowed Honda to develop strong sales, research and development, and manufacturing operations in each region - to ensure that the product mix in each region is appropriate to the needs of the region. Using the United States market as an example, “Honda’s commitment to global trade and the positive benefits that result for U.S. jobs, suppliers, consumers and exports.”
3. Developed a comprehensive approach to teaching the principles of lean production suppliers.
4. Uses the Japanese Concept Of Keiretsu The Article states, “Mr. Obi provided the viewers with a book that was recently published by the Japanese Automobile Manufacturers Association (JAMA) called “ Two Decades…”” Which involves a close-knit network of commitment to localize production, vendors that continuously learn, improve, and prosper along with their parent companies. If cost negotiations stagnate, Honda, send in its engineers to help the supplier find a way to meet the cost target while maintaining acceptable profit margins.
5. Suppliers are involved in the development process to the extent that asked and invited to submit suggestions about how specific designs could be made better, faster, with less weight, or less expensively. Today, purchasing by the Honda research and development department. Negotiation and purchasing are key elements in ensuring the lowest price and quality. However, communication with supplier can make cost lower along with shorter production time.

1. Why is purchasing so important at Honda?

The International Purchasing Division of Honda Corporation has full responsibility for coordination between Honda and its overseas plants. Honda's purchasing department carries out the localization strategy.

This Strategy Involves

• Finding and qualifying local suppliers
• Developing a second source when volume doubles, or when quality or on-time delivery problems occur
• In situations in which the goals or the philosophies of the Honda and the supplier are mismatched, Honda will respect its contract to do business with the supplier.

1. Providing feedback to suppliers regularly to help them to understand, control, and to improve their performance in terms of component deliveries to Honda.
2. Financial condition and cost structure involve relationships that link banks, manufacturers, suppliers, and distributors with the Japanese government.
3. Purchasing Operations procure the parts used, conduct quality and cost management, and are also involved in promoting the development of new technologies.
4. Along with Q (quality), C (cost), D (delivery), and D (development), Purchasing has added M (management) and E (the environment) to supplier evaluations and are advancing the procurement of parts that consider the environment.6) Purchasing results in lower cost, higher quality, and more reliable sources of supply.

3. How does purchasing rank in the corporate structure at Honda?

Purchasing ranks highly in the corporate structure at Honda. It is in charge of local purchasing which decides the local suppliers as well as the global sources. It also has the option of adding a second source of supply. The adding of a second source is done in case of delivery problems occur. For example, orders are based on forecasting. A dual source may involve a local Japanese supplier and an overseas supplier manufacturing the same part. This is done to avoid supply shortage problems as well as the delivery problems. Having strong relationships with local and global suppliers is key to bringing a product together. Honda is very critical when choosing the right suppliers and also having great communication between them. Honda and its suppliers meet twice and year. These discussion’s majorly focusses on opportunities for commodity and standardization, co-ordination with marketing’s export strategy, new product planning, cost management, and technology transfer issues within the supply base. Having this in place ensures that every entity in the supply chain is in the know which creates strong partnerships amongst the organizations involved.

4. How is Honda organized globally? How does this help/hinder the purchasing function at Honda?

Honda Organized Globally

1. Leading automotive exporter
2. Localization of production
3. Sensitive to international requirements
4. Taking advantages / creating opportunities with Government intervention
5. Partnership with competitors (sharing of product & process engineering)
6. Maintaining relationships with suppliers
7. Virtually live in suppliers' facilities

Help/hinder the purchasing function at Honda

1. Create buying & selling power
2. Neutralizing the effect of currency rate
3. Legalized contract & strategy through Market Oriented Strategies agreement (MOSS)
4. Get to share same suppliers from the competitors
5. Assurance of quality & services

5. What are the key elements of Honda’s supplier evaluation policy? How does it differ from others (e.g. the Big Three)?

1. Honda handles responsiveness & involvement of suppliers at early stage of product development. Whereas other companies maintain partnerships to control the entire supply chain.
2. The supplier evaluation is handled by Honda R&D while other companies evaluate if they should continue to assemble their own products or if they can outsource production entirely.
3. Honda recognizes supplier’s existing customers and the product supplied. Many other companies reduced their number of suppliers and/or chose specific suppliers to stay in long-term contracts with.
4. In order to commit to top excellence, Honda visits their top & low tier suppliers/vendors while other companies encourage their top-tier vendors to manage their lower tiers.
5. Efficient in R&D
6. Equally competitive at any-and-all global locations
7. Honda is always equally proficient in cost & quality the produce at all the plants, whereas other companies drive for the immediate benefits of low wage costs, therefore outweighing the long-term benefits of investing in quality and relationships.

6. What is Honda’s policy on new product development and supplier involvement? How does it differ from other automotive companies?

In 1986, MOSS- Market Oriented Strategies agreement was initiated and created for the Japanese and American governments, which required companies to report and of their import and localization volumes within that year 1986.

In 1995 PAC (the re-assigned Pacific Automotive Cooperative) This new policy and joint venture which included Japanese Automakers and 32 shareholders to meet political objections and production for North America, thus attempting to collaborate in industrial cooperation to help Canadian Suppliers become involved and competitive.

How does it differ from other automotive companies?

1. Hondas quality designs follow what consumers want, all while Honda keeps and maintains their own new quality designs.
2. Honda saves consumption energy but improves in high quality performance, unlike other competitors. Low consumption energy is a very valuable advantage over other competitors.
3. Honda created a unique feature that required “new tooling, etc.” for the Honda Civic in Europe, with European components they were able to create and constitute a “European-made car”. Seeing that the components were made from European components, European countries accepted this car more readily. Unlike one of Hondas competitors, Nissan who was in the UK and had lower domestic content.
4. Honda created a body assembly plant which composed of welding robot technology at a Rover plant in Europe. This was the first ever plat in Europe that was essentially a replication of the Japanese line.

7. Does Honda support local sourcing from domestic suppliers? What are the advantages / disadvantages of this approach?

Yes, Honda does support local sourcing from domestic suppliers.

The advantages are as follows:

1. Kaizen is easy to implement in domestic suppliers due to the locality and the fact that it will eliminate many unnecessary costs.
2. Domestic suppliers better understand customer culture and market trends
3. “Think global, act local”

The disadvantages are as follows

1. Not all domestic suppliers may be able to provide the specific raw material necessary
2. Not every country has the same taste as others.
3. Domestic suppliers may only supply to domestic markets
4. Differing designs between domestic and global may be an issue

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?

Although Honda’s policy has faced criticism, I do not see there being an issue in them having a long-term relationship with their supplier. Their profits do not seem to be affected nor do their levels of production. Criticism will always come from anybody who does not see eye-to-eye and does not always prompt change. Honda is always looking for a supplier who can produce parts locally. On top of that, the most important criteria that Honda looks for when picking a supplier is one that can meet their levels of quality, cost, and delivery.

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?

Advantages of Keiretsu:

1. The mutual stockholding among the group members improves their stability
2. Helps transfer technology
3. Organization of overall business procedures

Disadvantages of Keiretsu:

1. Reacts slowly to outside events
2. Local levels of content remain low