The Rediscovery of Keiretsu: Vertically Integrated Partnerships with Your Supply Base
As we have entered the realm of friction-based supplier relationships, the time has come to reinvigorate leading practices from Keiretsu through an improved alignment and external vertical integration with your critical suppliers, says Tyler Higgins, Managing Director of AArete.
As AArete prepares to attend the upcoming SIG Technology Summit, April 16-19 in Amelia Island, Florida I wanted you to consider the volatile commodity market and economic environment of the past few years that has pitted suppliers and companies against each other. Against all odds, businesses achieved record profits and rapid growth unlike any other time in history. Suppliers followed suit and pushed through 10%, 20%, 50% cost increases to businesses. Now as uncertainty is once again upon us, strategic sourcing teams and suppliers are on opposite sides, it has eroded the concept of having suppliers as your true “partners” and rendered the sourcing function as a more tactical operation.
The Japanese pioneered the concept of Keiretsu. Keiretsu is a concept about establishing interlocking business relationships including cross-company shareholdings. This concept peaked in the late 1980s at the Japanese automakers which were heavily reliant on a consolidated set of partners to deliver a high-quality product at a price point that allowed both business and supplier to sustain success.
As we have entered the realm of friction-based supplier relationships, the time has come to reinvigorate leading practices from Keiretsu through an improved alignment and external vertical integration with your critical suppliers. Japanese leaders for many years quietly turned their supplier relationships into a tool for innovating faster while radically cutting costs – a concept that today’s climate desperately needs.
The 2023 supplier relationship needs to change, and procurement teams can learn from the following three aspects of Keiretsu to deliver a competitive advantage in their approach to supplier and cost management.
Re-Establish Close Association with Critical Suppliers
Keiretsu died when strict contract relationships and rapid cost cutting tactics took over the management of supplier relationships. The transition stemmed from concerns around monopolistic tendencies, but also a shift of business focus on maximizing short term profits. Even in modern supplier relationships, there is still value in ensuring a strong and aligned association with your most critical suppliers. Today’s typical relationship is structured behind a heavily negotiated contract, but the economic climate has put pressure on what needs to be governed by a contract versus what should be governed by sensibility. Moving into 2023, procurement leaders need to reassert relationships that are built upon trust, cooperation, and support from suppliers – all key pillars of Keiretsu. Leaders need to focus on elimination of ambiguous or vague contract relationships and move to an open environment of shared information that can identify cost reduction opportunities while supporting the profitability of both businesses. Lastly, identifying those business critical suppliers and conducting regular monthly summits focused around innovation and the management of costs. Sometimes the best ideas come from your most trusted partners.
The Whole Costs Less than the Sum of Its Parts
Toyota enacted a cost competitiveness strategy at the turn of the 21st century focused on pushing suppliers to provide sophisticated components, rather than just individual parts. As we scale this idea to indirect categories and regular business relationships, the pillar of helping your suppliers innovate to help you innovate is more vital than it ever has been. The time has come to not just push your suppliers for more, but also, collaborate with them. Share your strategy. Identify where they have underutilized capabilities and maximize the value from each relationship. The natural outcome will be a supplier consolidation effort, but the primary outcome will be lower costs and improved quality of product. Critical knowledge exists with your partners, the time has come to leverage that knowledge and execute upon your goals together.
For example, instead of continuing to buy the same MRO supplies from your top distribution partner; collaborate with them to understand substitute products which maintain or improve current quality at a lower cost. You can also leverage supplier value add programs such as vendor managed inventory to streamline delivery of parts and reduce overhead costs. In an inflationary market this can oftentimes offset index fueled price increases and ensure the right parts are available when needed to maximize the life cycle of your assets and maintain your target uptime metrics.
Suppliers Must Evolve
Today’s world is full of rapidly evolving technological advances and process efficiencies that enable your business to innovate, but also allows your suppliers to innovate alongside you. Moving into a more trusting partnership model, you can establish actual continuous improvement goals pushing your suppliers to evolve. While continuous improvement is a common contractual clause, it is rarely acted upon and rarely leads to value creation. The time has come to realign your business partnerships around targeted evolution and reinvention.
The new vertical integration partnership will establish a framework for you to enrich your relationship with suppliers and align around mutual long-term benefits. Those businesses that had elements of Keiretsu pillars within their procurement process weathered the supply chain disruptions of the past two years seamlessly and the deep mutual loyalty that can exist will ensure resiliency and consistency. Without trust, suppliers may be reluctant to give you indicators of what challenges may be on the horizon, but following the key pillars of vertical supplier integration, you will enable a leading procurement organization.
In the interest of “Keiretsu” and the concept of forging interlocking business relationships, AArete’s Strategic Cost Reduction team would love to meet you at the SIG Technology Summit next month. Will you be there? We partner closely with clients to identify opportunities to maximize value from your supply base. While some teams rely heavily on RFPs and aggressive contracting, we build on the foundations of establishing trusting and collaborative partnerships and empower that with years of market intelligence. Our team will ensure you realize significant hard dollar cost savings while your internal stakeholders will realize maximum value from key suppliers.