Network sourcing: A discussion of causality within the buyer-supplier relationship

Pergamon European Journal of Purchasing & Supply Management Vol 2, No I, pp. 7-20, 1996

Copyright © 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved

0969-7012/96 $15.00 + 0.00 0969-7012(95)000013-5

Network sourcing

A discussion of causality within the buyer-supplier relationship

Peter Hines Cardiff Business School, University of Wales College of Cardiff, Aberconway Building, Colum Drive, Cardiff CF1 3EU, UK

Several models of world-class buyer-supplier relationships have been developed over the last two decades. The network sourcing model seeks to extend this knowledge base. It can additionally be used to help unravel the complex web of interconnected causality factors that are responsible for creating these world-class buyer-supplier relationships. The results of this show that the key causal factors are supplier coordination and supplier development. An analysis of the three major mechanisms found in Japan for undertaking this type of activity is undertaken, together with the development of a practical implementation methodology for the most important one.

Keywords: network, sourcing, causality, Japanese

The purposes of this article are threefold. It attempts briefly to summarize a new explanatory model of best- practice buyer-supplier relationships called network sourcing. This model will be of use to academics as a reference point. Second, it seeks to unravel the complex interrelationships of the factors within this model and provide an explanation of which factors are primarily causes of highly effective relationships and which are primarily effects. This will be of benefit to academics as well as practitioners, in helping them to understand what to do first in developing world-class relationships. Third, the paper develops a practical implementation route for practitioners to follow in their efforts to develop a Western version of the highly effective network sourcing model.

Literature review

The strategic importance of buyer and supplier working together within an ongoing relationship has been recog- nized by both practitioners and academics only very recently. With few exceptions (such as Blois, 1972) it was not until the 1980s that the true strategic value of buyer-supplier relationships was being discussed in any depth. Amongst the first to do this were the writers associated with the Industrial Marketing and Purchasing (IMP) Group (Ford, 1980).

A further key text in the development of strategic intercompany relationship literature was Beyond Negotiation by Carlisle and Parker (1989). This book moved the focus from a traditional win-lose relationship based on the location of power between the bargaining positions of the two parties to a scenario where a win-win relationship can be created. In a similar vein, Ellram (1991, p 2) has defined this as

an agreement between a buyer and a seller that involves a commitment over an extended time period, and includes the sharing of information along with a sharing of the risks and rewards of the relationship.

A further development of this theme is that of supply chain management (Macbeth et al 1989) and pipeline management (Farmer and Ploos van Amstel, 1990). Both of these areas take the relationship further, towards both end-consumers and raw material sources, and are primarily concerned with optimizing the complete value chain. Sako (1992) brought together a number of different aspects of relationship strategy based on comparative research between Japan and the UK. The focus of her thesis revolved around trust and the achievement of mutual benefit through long-term relationships.

More recently, Lamming (1993) introduced the lean supply model, which is designed to capture the present

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position of the leading manufacturing and assembly companies in the automotive industry and, like the work of Sako, draws heavily on the recent Japanese experience. Within the lean supply model, Lamming showed that it is not the individual abilities or strategies of buyer or seller but the mutual relationship between the two that is the key to their joint strategy.

It will be useful to generalize the literature into three categories, each of which has differing views of how beneficial buyer-supplier relationships are brought about. The first of these is what may be termed the Trust School. Work falling broadly within this area would include Sako's OCR-ACR spectrum of indebt- edness (Sako, 1992), Dore's relationship contracting (Dore, 1987) and Hirschman's voice/exit (Hirschman, 1970). Although there are certainly some differences between these works, a view emerges from them that the causal features of the type of beneficial relationship suggested are due to a complex mix of social and moral norms, with technological, economic and government policies also of some importance. There is therefore some suggestion that such approaches may be more difficult, or even impossible, given the set of external and internal factors in the Western world.

The second view would be the Partnership School, which would include Partnership Sourcing Limited (1992), Macbeth and Ferguson (1994), Ellram (1991) and Carlisle and Parker (1989). The view within this school of thought is that relationships should be developed on a basis of partnership on a one-to-one basis with individual strategic suppliers. This primarily British school plays down the potential problems of cultural specificity in following an approach designed to form relationships of the type exhibited in Japan.

The third grouping of views could be labelled the Japanese School, which includes the work of Ikeda and his model for the international transfer of the Japanese-type subcontracting system (Ikeda, 1990; quoted in Hines, 1994). In addition, the historical modelling of the Japanese system by Nishiguchi (1994) and the development of the American Keiretsu (Butt and Doyle, 1993) fall into this category, as does the lean supply model of Lamming (1993) and the network sourcing model discussed below. These works suggest that although conditions are different in the West, a somewhat modified or developed Japanese-style approach can be translated to Europe or America. The detailed routes to developing the desired buyer-supplier relationship differ slightly between these authors, although all stress the importance of supplier grading, supplier coordination and development at least at some points in the change process.

An overview of network sourcing

The network sourcing model is summarized in Table 1, and can be seen to fall broadly into the Japanese

Table 1 Network sourcing overview

1 A tiered supply structure with a heavy reliance on small firms. 2 A small number of direct suppliers with individual part

numbers sourced from one supplier but within a competitive dual sourcing environment.

3 High degrees of asset specificity among suppliers and risk sharing between customer and supplier alike.

4 A maximum buy strategy by each company within the semi- permanent supplier network, but a maximum make strategy within these trusted networks.

5 A high degree of bilateral design, employing the skills and knowledge of both customer and supplier alike.

6 A high degree of supplier innovation in both new products and processes.

7 Close, long-term relations between network members, involving a high level of trust, openness and profit sharing.

8 The use of rigorous supplier grading systems increasingly giving way to supplier self-certification.

9 A high level of supplier coordination by the customer company at each level of the tiered supply structure.

10 A significant effort made by customers at each of these levels to develop their suppliers.

School of thought discussed above. (A more detailed discussion is found in Hines, 1994.) The model itself is based primarily on the author's research work over the last four years in Japan. The types of close, long-term relationship that have resulted from network sourcing have delivered considerable competitive advantage for buyer and supplier alike (see for instance Hines, 1994; Nishiguchi, 1994). This advantage is exhibited within the cost (reduction), quality, delivery and new product development processes.

A review of causality

In reviewing the way that UK firms have approached the creation of close or partnership-style relationships, the author has been disturbed that in many cases there appears to be little attempt by firms to put hard work in over a period of time, to create a firm bedrock upon which to build a lasting relationship. Instead, in far too many instances, the buyer and supplier 'partners' have simply decided that they now have a partnership, and have thus cherry-picked the best parts of the network sourcing model without really changing the underlying relationship (see for instance Southey, 1993). The author believes this is partly due to an incomplete understanding of the Partnership School philosophy, and partly due to potential problems in the causal relationships that this school uses to underpin its work, with the creation of partnership coming before the creation of the relationship itself.

As a result, this article seeks to test the various interactions between the various factors within network sourcing to see what it is necessary to do first to bring about the desired relationship. This is done on the basis of detailed observations, in the automotive, electronics and capital equipment industries, of how existing buyer-supplier relationships came about. This

Supplier Tiering

Supplier Few Development Suppliers

Bilateral Design

Supplier C o o r d i n a t i o ~

Supplier \ ] Grading ~ l

Close High Trust Relations

Supplier Innovation

High Asset Specificity

Low Value Added

Figure 1 Network sourcing causality links

Network sourcing

testing has been undertaken in Japan, where such relationships are at their most advanced and are seen to yield significant benefits for both buyers and suppliers in the industries in which they are employed. This will therefore help to answer questions about the route to implementation that is most appropriate in the West.

This information has been obtained through over 50 semi-structured interviews with Japanese companies, over 20 semi-structured interviews with Japanese academics, and questionnaire data from nearly 40 Japanese companies.

A new model (Figure 1) has been developed to describe which factors have a significant role in helping to bring about other factors within the network sourcing model. Figure 1 describes how the major causality flows operate between the ten key characteristics of the network sourcing model.

In order to do this, the ten features of network sourcing have been positioned in a clockface formation. After this, and on the basis of a detailed knowledge of how network sourcing has developed in Japan, arrows are drawn as appropriate between factors. In this way, for example, if 'supplier tiering' has had a significant role in bringing about fewer suppliers, as appears to be the case, an arrow is drawn from the former to the latter. In the same way a decision is made whether supplier tiering has been instrumental in bringing about the other eight factors. If the answer is 'yes', a line with an appropriate arrow is drawn. In a similar way the same exercise is repeated for each factor to see if it has had a major bearing on the development of other factors, with lines and arrows drawn as appropriate.

As can be seen from this model there is a range of causality flows:

• where causality flows from one characteristic to another without a corresponding reverse flow;

• where causality flows from one characteristic to another with an equal and opposite flow; and

• where there is little or no apparent causality flow.

Analysis of these major flows shows that there are 21 of the first type of causality flow and two of the second type, with the remainder being of the third type. It is apparent that where there is a causal interrelationship in almost all cases the causality is unidirectional. As an example, 'Supplier development' clearly can be seen to influence 'Suppliers' innovative ability' positively, but 'Supplier innovation' has no effect on 'Supplier development activities'.

In order to extend and clarify these causal flows, the network sourcing causality matrix has been developed (Figure 2). In this figure, the causalities between each characteristic and the others are displayed in a matrix format. Thus the first row of the diagram ('Supplier tiering') describes which of the other characteristics has a causal effect upon supplier tiering. Thus if a factor in a vertical column has a causal impact on a factor in a horizontal row, a flow is depicted by a circle in the intersecting matrix point. In this way major causality can be observed from both 'Low added value ratio' and 'Supplier coordination' to 'Supplier tiering'.

In order to extend and fine tune this analysis, in addition to major causality flows (shown with a black circle), minor causality flows are shown (with a white

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B S F H L B S C S S u e i o i u 1 u u pw wl opp

a s ~ S V t i e ~ i u A a e e i i e p s 1 r r H e e r p s u a i r r

l e e 1 I T i t n ~ G C i e A D n r o e r S d e o T a o r s p d s v r d r i e e i a u i d n c d g t s n i g i n i t g n

f R o a i a n R t c t e i i i 1 o t o a n y t

i o n s

S Factor A u p Affected

1~ By Sum i e of r

Factor Bs D e v

e 1 o

P m e n t

EFFECT

SCORE

C/E

SCORE

CAUSE/

E F F E C T

SCORE

A Supplier Tiering O • O O • O 10 (2) Few Supplier • • O O • O 12 (4) High Asset Specificity O O • O • O • 13 (4) Low Value Added • • • O O • • 17 (7) Bilateral D e s i g n O O O • O O • O 12 0

Supplier Innovation • O O O O O • 11 (2) C l o s e High Trust O O • • • O O • • 19 (10) Relations Supplier Grading O • • 7 (2) Supplier Coordination O O 2 21 Supplier Development O O O O O • 8 10 Fac t or B Affects Sum of FactorA's 8 8 9 10 12 9 9 5 23 18 CAUSE SCORE

F i g u r e 2 Network sourcing causality matrix

• Strong Cause (3 points) O Weak Cause (1 point)

circle). As a result, for instance, 'Supplier t iering' is caused to a limited degree by 'Few suppliers ' as well as a n u m b e r of o ther characteristics.

The next stage of the analysis seeks to put a weight- ing against these s t rong and weak causa t ion flows. In the case o f a s t rong cause 3 points are given, and in the case of a weak flow 1 point is awarded. As a result it is possible to es t imate the total degree to which any one fac tor is af fec ted by o ther factors by summing the scores in the individual rows. Thus for suppl ier tiering, with two s t rong causes (2 × 3 points) and four weak causes (4 × 1), the total measure of the degree to which it is a f fec ted by all o the r factors is 10 points ( 2 x 3 + 4 x 1).

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In a similar way it is possible to es t imate the total degree to which a fac tor inf luences o the r factors. This is done by summing the scores in a column. Thus for the co lumn adjacent to 'Suppl ie r t ier ing' , with two s t rong causes (2 × 3 points) and two weak causes (2 × 1), the total measure of the degree to which it affects o ther factors is 8 points (2 × 3 + 2 × 1). This mul t ipl icat ion and summing process has been r epea t ed for each row (effect scores) and co lumn (cause scores).

In order to find out which characteristics are net causes and which are net effects it is possible to deduct the effect score f rom the cause score for each factor. This net score is depicted in the last co lumn of the

Table 2 Network sourcing causality scores

Cause C/E score

Supplier coordination 21 Supplier development 10

Bilateral design 0 Supplier innovation (2) Supplier tiering (2) Supplier grading (2) High asset specificity (4) Few suppliers (4)

Primarily causes

Mixed cause and effect

Low added value ratio (7) Close high trust relations (10) ~ Primarily effects

table, labelled 'Cause/effect score (C/E score)'. This gives a measure of whether, on balance, factors are net causes or effects within network sourcing. In order to clarify these net points scores this summary information has been portrayed in Table 2.

Although care clearly needs to be taken when drawing inferences from this analysis, a clustering of the net scores reveals that there are three clearly defin- able types of characteristics within network sourcing:

• factors that are primarily causes; • factors that are primarily effects; and • factors that are mixed cause and effect, with the

'effect' possibly slightly more important.

There are two characteristics that can be seen to be predominantly 'cause' factors: supplier coordination and supplier development. Even allowing for the degree of subjectivity in the analysis it is clear that supplier coordination is by far the major causation factor, with supplier development also playing an important role. It is interesting to note that these two areas - involving considerable investment in time and effort, particularly on the part of the customer - are still extremely rare in the UK, as highlighted by the lack of literature on these topics. In addition, where exhibited within network sourcing they are a clear sign from customer to supplier that the former is 'investing' in the supplier with a view to repayment with future reduced intercompany (buyer-supplier) and intracom- pany (supplier) waste.

The second clustering of characteristics are 'Low added value ratio' and 'Close high trust relations', both of which can be seen to be primarily effects of other factors. Again it is interesting to note that these effect characteristics are the very ones most frequently chosen by UK companies wishing to implement, or cause, a 'partnership'-style relationship. The fact that a large percentage of these UK buyer-supplier 'partnerships' are little more than cosmetic window dressing is therefore not surprising.

Network sourcing

The third cluster of characteristics comprises the remainder, which are a mix of cause and effect. These characteristics are: 'Bilateral design', 'Supplier innovation', 'Supplier tiering', 'Supplier grading', 'High asset specificity' and 'Few suppliers'. In the light of the relatively small points difference between these factors it would be wrong to read too much into their relative importance as causes within this list: suffice it to say that they all have a significant impact on causing the type of 'partnership' relationships so desired by many UK companies.

D i s c u s s i o n o f the causal i ty analys is

The causality analysis undertaken has resulted in what may appear to be a rather clear-cut outcome, with supplier coordination and development as the key causal factors to be employed, using a range of techniques such as supplier grading and bilateral design leading to high bought-in content and close long-term relationships. The evidence from Japan certainly supports this finding.

However, although this picture may be true in overview, it undoubtedly hides many ambiguities. For instance, low value added ratios and bilateral design are shown in Figure 2 to have some role in bringing about supplier coordination. In addition, no less than six factors have some causal impact on supplier development, including close high trust relationships, a factor that on balance has been demonstrated to be the ultimate outcome within network sourcing. More apparent ambiguities are present when it is considered that high trust relationships have a limited causal effect on six factors and a major causal impact on high asset specificity. Thus we are faced with a 'chicken and egg' situation. This is especially so at the detailed level, where all of the factors are undoubtedly very closely associated with each other.

This leads to two major conclusions. First, that to attempt to emulate a network sourcing position, companies need to include plans for each of the elements of network sourcing within their strategy. Second, although the overview would suggest that supplier coordination, through the use of the various techniques, leads to high trust relations, in reality there is a much more complex web of interrelationships that need to be borne in mind in implementation.

We may now consider whether these findings lend support or not to the three schools of relationship thought outlined above. As the data for the analysis have been gathered in Japan from a relatively homoge- neous cultural, environmental and industry-specific research base, they do not necessarily give support or otherwise to the Trust School of thought on the factors influencing the resulting relationship. They do, however, raise some questions on whether writers in the Partnership School have not missed some vital elements in their approach, and in particular whether

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they are trying to create partnerships by developing the effects of the relationship they require rather than the causes. The analysis would appear broadly to support the Japanese School in terms of a wider- ranging approach to the creation of world-class relationships, and in particular the key role for supplier coordination and supplier development.

Coordination and development methods

In the light of this preliminary analysis it would appear that greater attention should be paid in particular to supplier coordination and development. In order to help the reader in understanding these areas, it will be useful to give a definition of both of these factors (as stated in Hines 1994, p 7):

Supplier coordination refers to the activities made by a customer to mould their suppliers into a common way of working, so that competitive advantage can be gained, particularly by removing intercompany waste. This type of coordination would involve areas such as: working to common quality standards, using the same paperwork system, shared transport and employing intercompany communication methods such as EDI. Supplier development refers to the activities made by a customer to help improve the strategies, tools and techniques employed by suppliers to improve their competitive advantage, particularly by removing intra- company waste. This type of development would include the dissemination of customer strategies, so that suppliers could plan their processes more effectively, as well as the customer offering specific assistance to the suppliers in areas such as factory layout, set-up time reduction and the operation of internal kanban systems.

To achieve a lean supplier network both of these activities must be under taken simultaneously. In the West, the best organizations generally endeavour only to address one or other of these areas, with the majority of firms failing to address either. Comment ing on both of these areas, Christopher (1992, p 207) has noted:

There are many advantages to taking a proactive approach to supplier development.., many companies are finding that an increasingly valuable source of innovation is the supplier - either for product innovation or process innovation. These companies are finding that by getting suppliers involved in the product development process at an early stage a new perspective is introduced which frequently leads to innovative solutions... Supplier development should also extend to analysing how the vendor's own systems and procedures can be streamlined and integrated more closely with the customer's. Bearing in mind the fact that competitive advantage is increasingly a function of supply chain efficiency and effectiveness it will be apparent that the greater the collaboration, at all levels, between supplier a n d customer, the greater the likelihood that an advantage can be gained.

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Table 3 Techniques used by leading American companies to motivate suppliers to implement a JIT system

Formal quantitative rating systems n = 43 Open and frequent communications n = 13 Supplier performance reviews n = 9 Long-term relationships n = 7 Stressing future benefits n = 5 Competition n = 4 Other n = 5 No comment/none n = 7

Source: Adapted from Giunipero (1990)

As noted above, serious a t t e m p t s at wide-scale supplier development are relatively uncommon in the West. For instance, a survey of 93 leading companies in the USA carried out by Giunipero (1990) and summarized in Table 3 found that few of the firms did more than rate the existing systems of their suppliers when they required the latter to implement a J IT system. As a result, the rapid development of such J IT systems would appear to be rather unlikely, and so the competit ive advantage available f rom them will conse- quently be slow to be achieved.

There appear to be three major reasons for this lack of supplier coordinat ion and deve lopment outside Japan. The first is that there is a lack of literature suggesting that such work should be undertaken. Second, there is a scarcity of Western exemplars to be followed. The third reason is that, with a very few exceptions, there is an absence of knowledge about how to go about such developments and in part icular the strategies and techniques to be used. This paper (and other work by the author) seeks to address each of these areas (Hines, 1994; Hines and Rich, 1994).

The control and development of the supplier network is one of the most important tasks within Japanese manufacturing companies. This task is carried out by widespread intercompany cooperat ion and communication. Comment ing on the need to coordinate information flows, Minato (1991, p 108) concludes:

In order to maintain this close, organic linkage between core firm and subcontractor, a great deal of communication, coordination, and guidance must take place between parties. Naturally, maintaining this information flow involves large costs. If steps were not taken to reduce these communication costs, they would eventually increase to the point where the system would break down, preventing the kind of superior Japanese international competitiveness we see today.

In Japan the level of skills and strategies, as well as use of tools and techniques, is remarkably uniform today across the large assemblers such as Toyota and Nissan and both their direct and lower-tier suppliers. Thus Bruck (1988, p 152) comments:

Particularly in the automobile industry, the common standards of the giant factory and the local 50 man plant were what impressed us most in our entire study.

The question that remains is: how did the manufacturers in Japan manage to achieve the levels of cooperation, coordination and communicat ion with their suppliers and how did they achieve the impressive intercompany development that has provided them with such a significant competi t ive advantage?

The organization of suppliers: the kyoryoku kai

The key to this success lies largely in the formal coordination of the suppliers through the kyoryoku kai mechanism. This group activity mechanism, while not providing all the answers, is the crucial feature that encouraged closer cooperat ion and trusting relations to be fostered in Japanese manufactur ing industry. It was also important in sharing strategies between customer and suppliers and as a nexus for supplier development . In addition, the close cooperative in te rcompany scenario that it helped to foster was the ideal base for the type of one- to-one supplier deve lopment activities that the best Western firms under take with their suppliers. The difference, however, is that the Western firms have rarely created the right spirit of unity in which these developments may be seen as a positive help by suppliers ra ther than a resented interference.

The role of the kyoryoku kai in the Japanese automotive industry is summarized by Smitka (1991, pp 197-198):

Supplier cooperative associations contributed to the efficiency of the subcontracting system, and not just to the maintenance of trust. Through the supplier associations, the auto firms were able to extend the implementation of JIT (just-in-time purchasing), SPC (statistical process/quality control) and VA/VE (value analysis/value engineering) across firm boundaries. They also provided a convenient route for the auto firms to help suppliers improve their production methods and management capabilities. But the associations also became the organizational nexus for jointly coordinating the entire subcontracting system, serving as a forum for discussing corporate strategy and coordinating investment. All of this, however, required not only adaptation among firms, but also the sharing of detailed business strategy, engineering and cost information. This, too, required trust.

In terms of how this is achieved, a valuable insight is provided by Nishiguchi (1987, p 13):

Through an enormous number of meetings orches- trated by the institution - at virtually all the person- nel levels from top executives down to manual workers - exchange of information takes place between relational manufacturing units. Through 'study group' activities in particular, involving both production engineers and shopfloor managers, better

Network sourcing

or best practices are discussed, engineered, and exper- imented. Usually trainers with production engineering backgrounds from the assembler give instruction. Depending on the nature of the topic, however, suppliers' input is not unusual. There are also a number of recreational activities such as interfirm baseball or golf tournaments as part of the kyoryoku kai activities. The organization thus institutionalizes both formal and informal interaction of people in the relational manufacturing process.

The generic kyoryoku kai may be defined (Hines, 1994) as:

A mutually benefiting group of a company's most important subcontractors, brought together on a regular basis for the purpose of coordination and cooperation as well as to assist all the members to benefit from the type of development associated with large Japanese assemblers: such as kaizen, just in time, kanban, U-cell production and the achievement of zero defects.

The purpose of the groups varies be tween industrial sectors and be tween firms within these sectors. However , a summary of the main purposes is given in Table 4. The first purpose listed in the table is for the general deve lopment of suppliers in the various tools and techniques for which Japanese industry has become famous. These include: JIT, TQM, SPC, VA/VE, the use of C A D / C A M (computer -a ided des ign/computer-a ided manufacture) , the improvement of managemen t flexibility and cost reduction. The teaching of these techniques is in the long- term interest of buyer and supplier alike. In order to reduce the problems of in te rcompany coordinat ion

Table 4 Present aims and objectives of the kyoryoku kai

1 To improve the abilities and skills of suppliers particularly in terms of : JIT TQM SPC VANE CAD/CAM Management flexibility Cost reduction.

2 To produce a uniform supply system using the same types of techniques.

3 To facilitate the flow of information and strategy formulation to, from and within supplier networks.

4 To increase trust between buyer and supplier allowing for closer business relationships.

5 To keep suppliers and customers in touch with market developments and hence aid the translation of 'the voice of the customer'.

6 To enhance the reputation of the customer as someone suppliers should try to do (and increase) business with.

7 To help the smaller supplier lacking specialist trainers. 8 To increase length of relations. 9 To allow development benefits to be shared.

10 To provide an example to subcontractors on how to coordinate and develop their own suppliers.

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these training programmes are often specific to one customer and so increase the human asset specificity within the supplier.

The third listed purpose is to increase the flow of information within the association. Initially this usually involves flows from customer to suppliers. However, as groups mature the flow of information is increasingly from suppliers to customer and later between suppliers. One may consider that this type of inter-supplier exchange of information could take the form of an informal supplier union structure. Howev~er, this would be to misunderstand the purposes of the kyoryoku kai. The supplier associations are not set up for one or other party to increase their power over any other group; this is increasingly unnecessary as intercompany relations become more egalitarian in Japan.

When kyoryoku kai target the three purposes already discussed, they tend to help improve the trust between buyer and supplier even if this was not a specific objective. However, the specific increase in intercompany trust levels is often the main reason for the formation of such groups. This increased trust means that the type of one-to-one activities discussed in the following section are likely to be far more effective.

The fifth purpose is to help suppliers understand the requirements of their customers and perhaps more importantly the true requirements of the end consumers. The translation of this market information is essential to the effective delivery of new and existing products as well as suppliers' efforts at improving quality and reducing costs. This final market information therefore means that suppliers can view their internal processes in the true total quality light.

Some customers set up supplier associations because they want to be viewed as a good customer and, to some extent, suppliers in Japan are starting to select what we in the West call 'preferred customers'. This should be viewed in the light of a general shortage of employees in Japan and the development of more independent suppliers. Thus customers that can offer suppliers a better package, including employee training courses, opportunities to exchange knowledge and experiences with other good companies and a well- respected customer name to quote to other potential customers, are likely to gain this preferred customer status.

Kyoryoku kai are sometimes set up for the purpose of developing smaller rather than larger suppliers (in terms of purchase spend). This situation is more common in the electronics industries than in the automotive sector. The reason for this is that large suppliers supplying goods such as silicon chips may be part of major groups such as Hitachi or Matsushita. As a result their development has often been taken care of by corporate activities. In contrast, small subcon- tract manufacturers frequently possess neither the expertise nor the trainers to improve their general

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ability levels. As a result, customer companies will often concentrate their efforts on these small companies, as the benefits are likely to be better than those achieved through the development of multinational satellite factories.

Another primary role of the kyoryoku kai is as a means of increasing long-term relations. This happens because a customer that invests in its suppliers in terms of offering free-of-charge development assistance is going to be loath to move away from the developed supplier and lose its investment. The supplier therefore has the confidence not only to invest in general in the expectation of future business, but also to invest in a high asset specificity in the clear knowledge of shared long-term rewards. As a result, 'supplier hopping' is far less common within network sourcing, as it is not in the interest of buyer or seller.

As can be seen from the foregoing, the kyoryoku kai is a powerful mechanism for sharing the fruits of development between buyer and supplier. This sharing covers knowledge, strategies, skills and techniques as well as profits. In contrast, under the Western market system such sharing between companies is almost unheard of, as information in an intercompany scenario is regarded by many as a source of power and a way of winning over a trading partner in negotia- tions.

The last major purpose of supplier associations in Japan is to provide a ready mechanism for teaching suppliers how to improve the relations with their sources as well as cascading supplier development to the lower tiers of the supplier network. It is therefore a way of showing suppliers how to unlock further hidden competitive advantages from their own suppliers.

The benefits of kyoryoku kai are felt by customer and supplier alike. As a result of the work of many such groups within the whole network of supply, benefits, especially in terms of improved quality and reduced cost, may also be felt by the end-consumer. Thus a virtuous circle of increased sales and further quality and cost reduction takes place, resulting in the successful situation now seen in the Japanese discrete parts industry today.

The kyoryoku kai, although the most important mechanism for supplier coordination and development, is not the only approach used by the Japanese. However, it is as a result of the high level of trust and mutuality created by such supplier associations that the other mechanisms can function as effectively as they do. There are two other important mechanisms in this process that will be discussed below. These are the cross-transfer of staff and one-to-one consulting assistance.

Cross-transfer of staff The temporary or permanent exchange of staff between customers and suppliers helps to cement

Network sourcing

Business group integration

.•. Watching brier 3

Resident engineers

¢'7. Watching ~_ brier )

release 3m heaven 6. Shortage

of staff

Figure 3 Major intercompany exchange mechanism used in Japan

relationships and provide the coordination benefits that the rotation of staff between departments achieves within Japanese companies. The major reasons for employee exchange are shown diagrammatically in Figure 3.

Business group integration. The first area involves the transfer of employees between companies within the same business group. This mechanism helps all group companies to maintain common policies and act as a coherent whole. They will be able to work with rules and regulations flexibly as long as they fully understand the often unwritten philosophy and principles behind these rules. As this process of enculturization is a lengthy one, only middle-aged and older employees are normally transferred in this way.

Strengthening of management. This type of transfer takes place between customer and supplier companies, and is most common where there are equity links between them. The purpose of this transfer is to improve the performance of the supplier by sending the customer's middle or senior staff to take up senior appointments within the supplier's organization. This system may also provide the opportunity for more promotions than would be the case in the usually rather fiat Japanese organizational structures.

The staff are sent in the first place to the supplier to assist in managerial guidance or more general technical assistance. The return to the customer company

would typically occur after 3-5 years, when the supplier's performance has improved. After the return to the parent company the employee is likely to maintain close links with the supplier, helping to ensure good long-term relations.

Employee release. Employee release from customer to supplier is often regarded as a safety valve for large Japanese companies, who offer lifetime employment to their employees. Older employees are often given the opportunity of moving to suppliers through the process of ama-kudari or descent from heaven. These employees may be a useful source of knowledge for the supplier about their customer as well as transferring techniques to the supplier.

Training and education. The purpose of this type of transfer is for younger employees to spend time, usually with a major customer, in order to increase their level of training and education. The timescale for these transfers can be as short as three months or as long as two years. However, at the end of this time the employee would have a greater managerial or technical ability. In addition he or she would understand in some detail how the customer operates and would have built up a network of close contacts within the customer.

Resident engineers. The role and use of resident engineers was pioneered in the automotive industry, the first recorded case being at Toyota in 1958

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P Hines

(Toyota Motor Corporation, 1987). This group is similar in many respects to those sent to customers for training and education, as they are sent for a limited time and may play a significant role in intercompany coordination. Resident engineers are sent from supplier to customer, and originate either from development or manufacturing engineering. They take up residence, for automotive firms, at the customer's premises for two to three years for development engineers and usually one year or less for manufacturing engineers. When their residence has finished they may be replaced by other engineers sent from the supplier, thus ensuring that a permanent presence is maintained.

This process helps to reduce intercompany conflict and duplicated effort, and thus helps to reduce problems late in the development cycle for customer and supplier alike. It also helps the supplier to understand the customer, and in particular helps to ensure that any problems that the customer has are quickly reported back to the supplier for rapid attention and corrective actions. These engineers can also identify kaizen activities with the customer's engineers: for instance, in the better packing of goods for delivery to the customer or in a better design for manufacturabil- ity. The joint work of the development and production engineers means that the occurrence and degree of bilateral design and collaborative manufacturing may be considerably improved.

Shortage of staff. The loaning of staff between companies in Japan is surprisingly common. An example was that staff from Nippon Steel were assigned to Toyota for a three-month period when the former had a shortage of orders. More commonly, staff are sent either from customer to supplier or supplier to customer when the destination company faces a shortage of workers due to increased orders, illness or general disaster such as the 1995 Kobe earth- quake. As a result of this exchange of mainly production workers there is an increased awareness of methods across the company divide. Therefore techniques learnt during these short secondments can often be employed back at the employing company, once staff are returned.

Watching brief by banks. It is quite common for banks to second employees to work in companies in which they hold equity and/or to whom they have given loans. This mechanism means that the banks can keep a close eye on the company as well as being better placed to make sensible decisions on further investment, particularly when funds are required over a prolonged period.

One-to-one developments As noted above, the close relationship created by the kyoryoku kai helps the individual one-to-one

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developments to be far more successful, and ensures that they are approached in a light of joint problem- solving, in the expectation of mutual gains. One-to- one developments might include:

• on-site training of supplier's employees; • individual suggestions given to suppliers as a result

of visits by customers, particularly after factory tours;

• technical or other forms of assistance either in managerial or engineering areas.

Within this context, individual staff from the customer's organization often play an important consulting role for the supplier. This consulting assistance is often deemed to be of far greater value to the supplier than similar assistance from third-party firms. The main reason for this is that the consultants know exactly what the demands of the customer are and can therefore address an improvement programme in a sure knowledge of the results required.

A new route to the development of network sourcing

The following section is designed to provide the reader with a model of how a supplier association can be created in a Western environment. In this context a ten-phase generic model will be discussed. It should be noted that this is not an exact formula for any one company, but rather a guiding outline that will help to ensure successful implementation.

Figure 4 is an attempt to codify a generic model for the creation of a supplier association. Its individual stages will be briefly discussed in the sections below, although a more comprehensive review can be found in Hines (1994).

(1) Benchmark present competitive position The first stage of the generic model is to understand the starting point from which a company has decided to strengthen ties further with the existing supplier base. Many models exist to find the general competitive positioning of the organization, and by their use the company concerned should be able to diagnose where it is currently seeking its competitive advantage and so make plans for its further development in the future. Such company-wide benchmarking should be accompanied by a similar benchmarking of the intercompany position with respect to suppliers, for instance, through the use of the supply chain positioning matrix (Hines, 1994). In this way the organization can assess its supply process against those of other firms and decide which policies it may usefully pursue in the short, medium and long term.

Network sourcing

Pre plan

Plan

Do

Check

Act

1. Benchmark present competitive position I 4'

2. Select appropriate coordination and development tools ] 4,

3. Gain internal acceptance and create cross-functional team I 4'

4. Select appropriate suppliers ] 4,

5. Benchmark supplier position 4'

6. Jointly target improvements I 4'

7. Focus coordination and development efforts [ 4'

8. Undertake group activities [ 4'

9. Measure improvements [ 4'

10. Refocus size of group and target areas

Figure 4 A generic model for the creation of a supplier association

(2) Select appropriate coordination and development tools

As a result of the benchmarking of the organization and its supply arrangements, the company will gain a feel for how it is strategically positioned. If there is a considerable misalignment, the company will want to reconsider its strategies in more detail, particularly in the supply area, as it may be suffer- ing from mismatch. In terms of the supplier coordination and development, the benchmarking process will help the company to identify its existing position as well as the future direction to take. A summary of these differing directions is given in Table 5. It should be noted that the adoption of a supplier association is recommended only in more advanced companies.

(3) Gain internal acceptance and create cross functional team

Once a decision has been made to organize a supplier association, it is clearly essential to gain wide support from within the organizing company. It is also important to form an implementation team that is cross-functional in nature so that the key processes that cross functional and company boundaries can adequately be addressed.

(4) Select appropriate suppliers

In order to start a supplier association it is necessary to select the inaugural membership from among the customer company's total supplier base. In general, at least at the early stages, membership should be limited to a small group of not more than 15 companies, so that the activities and membership can be kept both

Table 5 Selection of appropriate supplier coordination and development tools

Stage of strategic competitive Coordination tool positioning model reached

Stage 1: Price competition Stage 2: Quality competition

Stage 3: Close cooperation

Stage 4: Strategic partnerships

None One-to-one meetings and standard letters Yearly conferences and one-to-one meetings Supplier association

Development tool

None Quality control instructions and audit feedback One-to-one consultancy and audit problem-solving activities One-to-one and group activities within supplier association

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P Hines"

focused and manageable. This selection may be a simple process, with membership being offered to a list of so-called 'preferred suppliers' that has already been clearly established. However, if this is not the case, a number of criteria may be taken into account in making this choice. The relevant criteria may include:

• the proximity of the supplier; • the yearly cash spend with each supplier; • the degree of closeness of the existing relationship; • the degree to which suppl~rs provide unique

products and can thus be regai'ded as subcontractors;

• the degree to which the suppliers provide key parts or parts into which they have a large design input;

• the degree to which the supplier is willing to invest in people, tools, machines and factory space dedicated to their customer requirements;

• the general enthusiasm of the supplier; • the degree of progressiveness of the supplier's

management.

This list is not designed to be exhaustive but will provide a useful guide in deciding which firms should be invited into the supplier association.

(5) Benchmark supplier position

The first activity within the association should be a benchmarking survey of the individual members, to ascertain their present strategies, skills and application of leading-edge tools and techniques. This benchmarking survey should be carried out with all the member firms including the customer. The focus of this should be similar to that undertaken in the WASA group as discussed by Hines and Rich (1994). Thus the benchmark should include a survey of:

• customer oriented deliverables; • key internal process variables; • key external process variables; and • measurement and improvement abilities.

The result of this benchmark plotting is that both buyer and supplier can see what gaps exist and can therefore make plans to actualize improvements within the association's activities or individually. Where many of the suppliers have the same problems a joint programme can be put in place to improve these areas, whether it be focused on soft cultural and human resource management issues or harder tools and techniques.

(6) Jointly target improvements

At this stage it would be all too easy to take the gap between present performance and that required by the customer and give the supplier a fixed time to close the

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gap. However, this would be too simplistic and danger- ous. There are a number of reasons for this. First, such an approach takes no account of where the customer wants the supplier to be in, for instance, 12 months' time. However, more importantly, no attention is paid to whether such an undertaking is realistic and reason- able to ask of a supplier. It also takes no account of the type of assistance that the supplier may require, nor the amount of effort that the customer or other suppliers are prepared to give. As a result, a more appropriate targeting tool is required, such as the half- life predictive metrics. This tool (as discussed in Hines, 1994) allows the supplier association members to target their improvement efforts sensibly.

(7) Focus coordination and development efforts

It is essential to fine tune the focus and direction of the group at this stage. The broad focus has already been achieved, but by a detailed mapping of the possible programmes necessary to achieve these goals, a more rounded programme can be produced. The general focus of the group between the harder process-related areas and the softer people-related areas has to be made by the supplier association members themselves. In Japan the majority of companies focus their supplier associations on the teaching of process techniques. However, arguably the most successful Japanese manufacturer, Toyota, concentrates on supplier coordination and the softer people-related issues. It appears that this focusing decision is best made on a case-by- case basis.

(8) Undertake group activities

The eighth stage, that of undertaking group activities, forms the doing stage as shown in Figure 4. The format of the activities as well as the subject matter covered by the association will vary from group to group. However, the following types of activity are common in the most successful group in Japan and the West:

• Yearly conferences are primarily used by the customer to share their future strategic direction as well as more detailed operational plans.

• At a lower level may be a seminar series involving four to six events a year. This group should include senior staff from the suppliers and be used to share information of a strategic nature with suppliers.

• At the third operational level, line staff from member firms should meet in order to understand in detail the new tools, techniques and strategies to be pursued by association members.

• A regular newsletter may be used to keep members aware of developments by the customer and the key suppliers.

• A series of visits to exemplar companies may be arranged in order to help other suppliers emulate the best practice exhibited.

• A number of more social events may be organized to help improve the informal ties between members.

While these types of event are likely to be common between all groups, each particular association is likely to have other events tailored to the member firms' individual requirements.

(9) Measure improvements

The ninth stage is the check stage, that of the measurement of individual and collective progress. This measurement should be done on a regular basis, perhaps twice yearly. It should involve a detailed one-to-one discussion between customer and supplier as to how far the latter has gone in meeting its jointly agreed target set. This may also involve the customer being made aware of the problems it is causing the supplier, which have resulted in a failure to meet the specific targets. If progress has not been as rapid as required then this regular measurement can mean that remedial plans can be put in place quickly: either on an individual basis or, if the problem is common, through the supplier association itself.

(10) Refocus size of group and target areas

As a result of the measurement carried out in the last stage a refocusing of the group can be carried out. This is the act stage as described in Figure 4. This refocusing can involve any area of group activities that would lead to increased competitive advantage. Thus a new area for development may be targeted, new criteria for measurement created or indeed the size of the group increased to take account of new suppliers. This refocusing should be carried out on a regular basis, either at every seminar meeting or perhaps every six months. Such refocusing would also include the changing requirements of the customer company or the marketplace.

Conclusion

The foregoing discussion has focused on the causality features within what has been termed here network sourcing. Network sourcing itself is a model derived from the observation of best practice buyer-supplier relationships from around the world, but particularly from Japan. It has been demonstrated that within network sourcing there was an observed degree of causality flows between factors, with supplier coordination and supplier development emerging as the criti- cal causation factors. The detailed causal relationship flows appear to describe a far more complex picture of tightly woven interrelationships. This suggests that companies following the Japanese School of thought should endeavour to consider each aspect of network sourcing in their supplier strategy, but give particular attention to supplier coordination and supplier development.

Network sourcing

The paper reviewed what these latter two factors involve and summarized the three major mechanism used by Japanese companies in these two areas, namely, the kyoryoku kai or supplier association, cross- transfer of staff and one-to-one consultancy assistance.

In order to aid the reader in understanding how such techniques can be applied in the West a dynamic model was presented for the emulat ion of the supplier association, the most important of the three supplier coordination and development tools. It is hoped that this paper will provide the basis for academic debate as well as provide a bet ter understanding of the subject and a practical approach to the achievement of network sourcing for the practitioner.

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Network sourcing: A discussion of causality within the buyer-supplier relationship

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