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.

IMPROVING SUPPLY CHAIN RELATIONSHIPS THROUGH IMPLEMENTATION OF BS 11000: COLLABORATIVE BUSINESS RELATIONSHIPS

BS 11000, I quote from British Standards Institute (BSI), is 'the world's first standard on collaborative business relationships'.  Last week BSI organised a half-day event on BS 11000 which, according to Kerry Garratt of BSI, is on the way to becoming an ISO standard (thanks to David Hawkins for the correction!)

One of the presentations which I found really interesting was Garry Phillips presentation which talked about how Skanska implemented the standard with their suppliers and Joint Venture partners on M25 and Cross Rail project. The implementation of the standard was seen as the most effective way to build and maintain long-term, trust-based collaborative relationships with their downstream suppliers as well as JV partners who are Costain, Balfour Beatty, AECOM, and Network Rail.  The intra-company change in terms of adoption of collaborative working practices was boldly emphasised in other presentations rather than the certification process which was referred to as a mere output of the collaborative practices.  David Hawkins, who is the Director of the ICW (Institute for Collaborative Working - link-), correctly stated in his speech that without this 'culture change' the adoption of the BS 11000 is simply a tick-box exercise that will only yield a certificate which is only worth the ink and paper its printed on.

According to BSI, the certification with BS 11000 provides the companies following benefits;

• Better integration and integrity of supply chains,
• A common foundation and language for inter-firm relationships,
• Improved partner selection,
• Improved risk management, confidence and consistency across current and future projects,
• Consistent and structured approach for integration of collaborative working within operational procedures, processes and systems,
• Baseline for continuous improvement,
• Independent accreditation of collaborative working attitude.

However the benefits and the impact of BS 11000 on the success of projects and B2B relationships is so extensive that it is very difficult to provide solid evidence.  From my conversations with a number of attendees I noticed that some companies were rather tentative and unconvinced about the return on investment and quantifiable benefits gained from implementing the standard.  In my opinion I do not believe that companies should be benchmarking their BS 11000 performance with other companies.  By incorporating the BS 11000 into the operations processes companies can obtain lots of direct and indirect benefits, however only those companies who are implementing the standard will be able to realise this, as every company and its inter-firm relationship is unique in its own context.

At the end of the day the success of implementing BS 11000 is determined by the fact how much is it embraced internally within the company and how much support is provided by the senior managers.  Commitment from high-level managers as well as training and support of staff on collaborative working practices is key to success.  Therefore benefits that can be derived from implementing BS 11000 would only be as effective as it's adoption within the intra-company setting.

DERIVING VALUE THROUGH MANAGEMENT OF SUPPLY CHAIN INTERFACES

When looking into Supply Chain Management one of the most difficult problems that practitioners and researchers face is the number of interlinked connections between firms, projects, markets and technologies (or systems)... There are so many variables and uncertainties in construction projects it is very hard to map the associations between vast number of supply chain firms involved in a construction project. However, in this post I will briefly discuss the importance of a management of supply chain interfaces so that more value can be derived from supply chain interaction process.

The interfaces where two or more firms come together depends on nature and type of above-mentioned factors. An interface can be between people, technologies and systems.  It is very important to identify the key interfaces as these interfaces can shape the interrelationships (at project and organisational level). Identifying the key interfaces is also important to manage them more effectively. Not all interfaces of supply chain interactions can be managed at project or organisational level . In other words in a supply chain relationship, it is not possible to manage all the entities of a relationship.  As I mentioned in the beginning, this is largely due to the fact that there are so many interlinked connections between various actors, resources and firms in construction supply chains.

To give an example, the key interface in a relatively small scale project may be the inter-personal relationships between high-level managers.  Therefore managing the inter-personal relationship may be more important and commercially beneficial for the interest of both firms. In much larger scale construction projects the key interface may be the technological integration between supply chain firms, or the interface at the construction site where multiple firms come together to physically engage with the site and construction activities.  To avoid any friction and improve inter-firm relationships, the interface between dyadic and supply-chain firms at construction site may need the majority of effort and focus... Just to remind that the key interfaces in a supply-chain interaction can be different project-to-project so priorities for  managing these interfaces can be different.  Hence identifying the key interfaces can help to improve value generation, performance in terms of cost and time, and relationship aspect of supply chain processes.