10 RULES OF JAPANESE KEIRETSU CONCEPT FOR IMPROVING RELATIONSHIPS WITH SUPPLIERS

The Japanese automotive industry has benefited significantly from the 'Keiretsu' concept which Toyota is praised to be the inventor and leader in demonstrating the effective execution of the concept.  In a recent article by Harvard Business Review, the 'New, Improved Keiretsu' has been described as the most appropriate approach for reduction of costs and becoming globally competitive which has become a significant factor in today's turbulent financial markets.

The traditional Keiretsu concept is a type of relationship; between a buyer (Original Equipment Manufacturers in the case of automotive industry) and its key suppliers, on the basis of an obligational commitment between firms. High levels of trust and goodwill are the most important attributes that define relationships rooted in the concept.

By the new, improved Keiretsu, the article refers to the re-configuration the relationship strategy, strongly emphasizing cost-reduction for globally competitive supply chains.  In short, the article describes 10 rules for effective practice of the Keiretsu concept, which are;

1. Think short-term and long-term at the same when building relationships with suppliers;
2. Become globally cost-competitive by working on the basis of mutual-advantage;
3. Engage with suppliers early in the product development process;
4. Share benefits;
5. Know your suppliers, their processes and work places.  Establish Joint Ventures for key/critical items/commodities/services;
6. Develop trust, cooperation, goodwill and support;
7. Balance explicit and implicit communication with suppliers to avoid miscommunication and mistrust;
8. Know why you are doing business with a particular supplier. Develop a portfolio of suppliers with regards to their performance in:
• quality,
• cost,
• delivery,
• people,
• development,
9. Identify root causes of problems and do not just terminate and switch to another firm; 
10. Build personal relationships at all levels.

The Japanese Keiretsu concept would be a very good model for improving the transactional, short-term and adversarial relationships in the construction industry, however due to many differences in construction industry markets, projects and firms it is very hard to adopt this concept to construction supply chain relationships (See Figure below).

Besides the cultural differences between countries (the conduct of engaging in transactions is very different in the West compared to Japan), construction supply chains are generally characterised by lack of trust which is at the heart of the Keiretsu concept.  Without the trust and goodwill of parties engaging in relationship development process it would be extremely difficult to build long-term, collaborative and sustainable relationships within and between construction supply chains.

There are only a handful of studies which look into how to develop and maintain trust in construction supply chain relationships but more research is needed to investigate the ways in which trust can be built between firms.  Future studies should look at identifying trust from every angle possible in order to understand how to bring the Keiretsu concept to construction supply chains.  Hence the reason why it is very important to study TRUST from ESPIO (Economic, Social, Psychological, Inter-personal and Organisational) dimensions (which I introduced in my previous post, click to read)  for building appropriate trust development strategies for a mutually trusting relationships in construction supply chains.

THEORIES IN SUPPLY CHAIN MANAGEMENT LITERATURE

When doing any scientific research it is crucial to understand the theoretical foundations of the subject being investigated. In this post I will briefly introduce some of the theories applied to SCM which are borrowed from fields such as accounting, management, economics, sociology and engineering.  Majority of the theories that are currently explored in SCM literature has existed for a long time so they are actually older than the SCM concept itself.  These theories are; the Transaction Cost Economics Theory, Network Perspective, Social Network Theory, Resource Based View, Principle-Agent Theory, Game Theory, Systems Theory and Strategic Choice Theory.

Following bullet points briefly outline each of these theories:

• Transaction Cost Economics: The main question that TCE tries to answer is why firms exist? In SCM context, TCE aims to reduce the costs associated with carrying out a transaction when deciding whether to make-or-buy. There are three attributes which influence a firm's decision to make or buy: frequency of transaction, asset specificity and degree of uncertainty associated with a transaction. In general TCE theory argues that different control and governance mechanisms should be employed to mitigate the risk of opportunistic behaviour of supply chain firms when outsourcing.
• Network Perspective: NT argues that firms rely not only on their relationship with direct partners but with the extended network of relationships with supply chain firms. It argues that competitive advantage can only be achieved through efficiently and effectively orchestrated network of supply chains. Therefore the focus of the NT is to develop long-term, trust based relationship between supply chain firms in supply networks. 
• Social Network Theory: The SNT looks at the behavioural and social aspects of many different relationship types, including firm-firm, individual-firm and individual-individual relationships. It helps to analyse these relationships from different perspectives such as technical, financial and social elements. (Stephen Pryke's Book on "Social Network Analysis in Construction" is a good read for those interested in SNT in construction.)
• Resource Based View: RBV believes that a firm's resources and capabilities are its most important assets so the primary concern of RBS is about obtaining access to another firm's core competencies to gain competitive advantage. RBV is one of the most adopted theories in SCM literature.
• Principle-Agent Theory: PAT is concerned with the governance and control mechanism structure of firms to mitigate the chances of opportunism, conflicting interests and information asymmetry between the Principle (delegating authority) and the Agent. Contracts are used as governance and control mechanisms whilst incentives are provided for meeting the minimum expected standards of the Principle.
• Game Theory: GT is a strategic decision making theory which looks at the conflicting and cooperative behaviours of two intelligent and rational decision makers (supply chain firms in our case) for different scenarios (i.e.: win-win, win-lose, lose-win and lose-lose) to help with the strategic decision making.
• Systems Theory: ST brings together various components of a complex supply chain (that is the human, capital, information, materials and financial resources etc.) to form a subsystem which is then part of a larger system of supply chains or network. The theory argues that for a holistic perspective ST must be employed to understand the internal and external factors that shape an organisation's supply chain performance. 
• Strategic Choice Theory: SCT is a relatively less explored theory due to difficulty and limitations in implementation. The main focus of the SCT is to address strategic issues and political forces related to supply chains as a whole in contrast to functional approach regarding individual supply chain firms. 

Of course the above mentioned theories are not the only theories in SCM literature and there are many  more theories applied to SCM context.  There has been interesting debate on whether SCM should build a unified, single theory of its own or adopt theories from other disciplines (See For example [1], [2] and [3]). The problem with multiplicity of theories is that it makes it very difficult for defining, implementing and studying SCM from a single point of view. Nevertheless each of the above theories have a different aim in management and structure of supply chains so each gives a unique perspective of the SCM phenomenon. This is why there is no unified theory of SCM and there should not be. Because SCM is so broad and complex it should be split into smaller parts such as Operational SCM, Strategic SCM, Organisational SCM and Project Specific SCM. I will try and explain each of these elements in my future blog posts.



Notes:

[1] Chicksand, D., Watson, G., Walker, H., Radnor, Z., and Johnston, R., 2012. Theoretical perspectives in purchasing and supply chain management: an analysis of the literature. Supply Chain Management: An International Journa, 17 (4), 454–472.

[2] Halldorsson, A., Kotzab, H., Mikkola, J.H., and Skjøtt-Larsen, T., 2007. Complementary theories to supply chain management. Supply Chain Management: An International Journal, 12 (4), 284–296.

[3] Naslund, D. and Williamson, S., 2010. What is Management in Supply Chain Management ? - A Critical Review of Definitions, Frameworks and Terminology. Journal of Management Policy and Practice, 11 (4), 11–28.