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.

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.

SUMMARY OF THE "HARNESSING THE POWER OF SUPPLY CHAINS" WORKSHOP

Couple of months ago I attended a one-day workshop organised by ECI (European Construction Institute) to discuss how the three key actors in EPCM (Engineering Procurement and Construction Management) supply-chains (clients, contractors and specialist subcontractors) can work together to improve overall supply chain performance, productivity, relationships and value aspects of their inter-firm supply chain engagement. The workshop was attended by 26 delegates where equal number of professionals from client, contractor and sub-contractor groups were present. Majority of attendees were senior level executives, regional/company directors who had a background in Petrochemical, Oil and Gas, Nuclear and Energy Industry operations.

After introductory speech by Clive Winkler of ECI, the workshop kicked-off with a number of presentations about how to improve productivity and gaining competitive advantage through better aligned supply chains.  Chris Bird who is the Operations Director of Endeavour Energy started the presentations by discussing how to reduce risk and cost over-runs in projects and improve value through good working relationships in supply-chains. Steven Johnson who is Supply Chain Manager of AMEC Europe gave insights into AMEC’s approach to engaging with their selected suppliers and getting them involved earlier in the project and the benefits they derived from such good practices such as reduced workload in engineering and procurement, added-value, reduced risk and end-user satisfaction. Mark Armstrong gave his viewpoints on subcontractor productivity improvement areas, underlining wide range of factors that drive productivity for his team at Tolent Construction. Another subcontractor presentation was delivered by Darren Smith of Zenith Structural Access Solutions who shared their approach to building and maintaining trust-based relationships with their customers. Last presentation of the day was given by Harry Peers Steelwork Ltd’s David J Perkins who outlined how they respond to customer requirements through the use of better specification, Building Information Modelling and modular off-site construction techniques.

The second half of the workshop involved an interactive exercise between the delegates in the client, contractor and specialist subcontractors groups where each group discussed their most important priorities in terms of risk management, contract arrangement and relationships. In general, the delegates in the contractor and client groups had a less agreement amongst themselves on what their priorities should be. This was probably due to the fact every client and contractor organisation employed a unique approach to their operations and supply chain engagement strategy. Also, as argued by the delegates, majority of supply chain engagement strategy were dependant on the contextual factors such as the type of the project, stage of the project and complexity of the project.

Contractors' priorities for their clients generally revolved around meeting the performance targets of projects; setting up better cash-flow mechanisms for payments; building reputation with clients for repeat business. With regards to their downstream supply chains contractors pointed to the need for integrated teams; collaborative relationship and company culture; better in-house capability and post-completion support.

Clients on the other hand demanded safety, quality and environmental aspects of projects to be met and complied fully by the contractors and subcontractors. The technical experience and expertise of two groups of supply chains (contractor and downstream supply chains), partnering with selected suppliers, management structure of firms and collaborative approach to projects were the highest priorities for the delegates in the client group.

The delegates in the specialist sub-contractor group had a more united view on what their priorities are and what they expected from their clients and contractors. Early involvement, environment and safety concerns of projects and complying with certain quality standards were on the agenda of many delegates. There was a lot of emphasis and demand for contractors to honour their agreed payment terms on time and without any unfair encounters.

In summary, the discussion by the delegates in client, contractor and specialist subcontractor groups indicates that there are different priorities for supply chain engagement amongst these three groups. This was also reflected within each group where delegates had a different approach for engaging with their upstream and downstream supply chain firms. Although delegates agree that there needs to be a common understanding and agreement on project goals, the inter-group discussion by the delegates reveal that each group has different agenda inherently embedded into their own business goals and strategies. This suggests a serious issue with alignment of supply chains as it would be very difficult to integrate and unite supply chains if each group has a diverse set of priorities. Perhaps a discussion on what are the commercial, social and technical mechanisms that drive supply chain integration is one of the questions that could be explored in future workshops?

SUPPLY CHAIN INTERFACE MANAGEMENT IN CONSTRUCTION PROJECTS

In my previous post I introduced the theory of interfaces in construction supply chains. In this post I will introduce the key supply chain interfaces and briefly explain 'interface management' during a project's life-cycle.

Depending on type, nature and sourcing of a project most construction projects go through a linear or concurrent phases of brief, design, procurement, construction and operations.  The number of suppliers involved at each phase depends on the contractors' capacity to source them internally but generally in-sourcing only accounts up to 10% of projects' activities; hence around 90% of projects are outsourced from specialist subcontractors and suppliers.  In terms of firm-to-firm interactions, the number of project stakeholders involved in a project increase as project design and production information becomes finalised and concrete. Construction stage is probably the busiest stage where many firms are involved for practical completion of the project.  It is where many activities are executed on site in a simultaneous and concurrent process. Once the construction stage is over few firms engage with the operations or facilities management of the project. It is also worth to note that due to interdependencies, some supplier engagement may halt at a stage and resume later on when the specific conditions are formed or established. For example, a subcontractor may get involved in the design stage and wait for the project to progress to a certain stage to carry out its activities.

Figure:Timeline of supplier involvement in construction projects

In terms of managing the relationships with suppliers, one of the primary tasks of a contractor firm is to identify the key/critical suppliers in the execution of a project. For example, depending on the attributes of the project, the outcome of risk management strategy can give an indication to manage it's relationship with a mechanical subcontractor. Managing the relationship with a subcontractor, in turn, requires identification of interfaces with that subcontractor. Once these key interfaces are determined appropriate relationship management procedures can be applied for the relationship. Just to re-iterate, these interfaces can vary at different project stages, between organisational units/disciplines/teams and processes. Below diagram shows some of the areas of concern for interface management at different project stages. I will write more about this in my future posts..

TRUST IN CONSTRUCTION SUPPLY CHAINS

It is widely accepted within the domain of inter-firm relationships 'trust' is the single most important ingredient for non-adversarial, mutually beneficial, long-term and collaborative firm-firm (and individual-firm) relationships. Despite being recognised as the cornerstone of any interaction process, establishment, development and maintenance of trust based relationships is commonly neglected and often abused in the construction industry. In terms of its main function, trust has three primary roles: it’s a (i) ‘social mechanism’ that works outside formal arrangements; (ii) ‘lubricant’ that enables smoother flow of information, products and services; (iii) ‘glue’ that holds people and organisations together and creates synergy.

The importance of this crucial relationship attribute is well recognised in other industries. For example in aerospace industry it is considered to be the sine qua non of any business transaction. The previous CEO of Boeing has emphasized the necessity of trust-based relationships in his following speech:

“The magic word is ‘trust.’ As a substitute for trying to control a myriad of actions through detailed contracts, constant oversight, and the threat of litigation or dismissal, elevating the level of trust within an organization is the most powerful means in the world of raising performance. Nothing - and I mean nothing - is more conducive to "better, faster, cheaper" than a high level of openness and trust between people in disparate jobs and locations who are working together toward a common end.”

However, the short timeline of relationships, existence of uncertainty in construction projects, opportunistic behaviour and low-profit margins are some of the reasons for lack of trust in construction supply chains. The difficulty of defining, measuring and analysing 'trust' further complicates the subject. For example trust is a multi-dimension- e.g.: the ESPIO dimensions of trust (Economic trust, Social trust, Psychological trust, Inter-personal trust, Organisational trust)- multi-perspective (i.e. can be different in the eyes of the trustee and trustor) and dynamic construct which can be unique for every situation.

In construction projects relationships generally start with low level of trust (or distrust). As time passes, depending on the success/failure of the interaction, trust can be built or distrust persists. The red, blue and green lines in below Figure illustrate this. The black line represents the desired level of trust in, across and beyond a single construction project.

Figure 1 Development of trust in construction projects

Previously I carried out a short review of trust in construction supply chains where I found that this critical relationship attribute is not paid enough attention by the industry or academia. Further to the reasons I outlined above, I think the main barrier that stands in the way of researchers is the abstract nature of the topic. The main concentration in the construction research and the focus construction companies is usually on the development of tangible, physical and real entities of construction projects. Soft and abstract things such as trust and knowledge development etc. generally given less focus. I expect this challenge to be slowly eroded as we are currently changing the way we design, build and work. The shift, in terms of processes, technology and business, creates a very difficult environment to work in the same way as we did previously. As change is inevitable, those who adapt to change will be the winners in today's world. I think construction industry needs to realise this first. I am sure academia can generate the necessary theoretical foundation of the concept if they received support from the industry.   Without industry's support research will stay largely anecdotal and abstract which will not help its conceptual and practical development. In my opinion these two aspects need to go hand-in-hand to make progress.

There are lots of opportunities waiting to be explored in this area. I will talk more about some of these specific opportunities in my future posts.

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.