What is ‘keiretsu’ and why does it matter for supply chains?

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There are numerous Japanese business terms that have made their way into the common English business lexicon. Kaizen and the 5S’s (seiton, seiri, seisou, seiketsu and shitsuke) are just a few. One that you may not be completely familiar with is ‘keiretsu’. While it doesn’t receive the same coverage as Kaizen, this practice carries significant supply chain implications.

Keiretsu occurs when a set of businesses with interlocking interests take a financial share in one another.

This practice, which is akin to a large buying organisation owning significant shares in one of its suppliers (and vice versa), is very common throughout the Japanese economy (particularly in the automotive industry). As multinational firms continue to drive towards vertical integration, we are starting to see more it in the West as well.

The successes

The interlocking structure of keiretsu is held up as one of the key factors that contributed to the immense success of Japanese carmakers through the 90’s. It was thought that by taking a financial interest in their suppliers (and by offering suppliers shares in their own business), Japanese car makers were able to diffuse the traditionally antagonistic nature of buyers/supplier relationships, allowing the two organisations to more readily reach mutually beneficial outcomes.

Acceptance in the West

Broadly speaking, the idea of keiretsu hasn’t sat well in American business circles. This is due in some part to the sense of xenophobia the term instils. Keiretsu was perceived by many in the US as a ploy by the Japanese to protect their own business interests from American competition, by only doing business with people they know.

Despite this reluctance, as western business leaders saw keiretsu succeed, they started to emulate it. In a 1997 article in The New Yorker magazine, Ken Auletta went to great lengths to point out how keiretsu practices had become common at many of the worlds leading media organisations (including Disney, Time Warner, Microsoft, NBC and News Corp).

Undoing keiretsu

Like many business mantras it appears that while keiretsu helped to solve a great number of business problems, the business practice is also responsible for creating its fair share of issues.

Concerned with some of the inefficiencies that accompany the keiretsu business practice, Toyota this year elected to unwind some of these entangled business relationships.

In April, the automaker took the bold step of instilling a former Toyota executive, Yasumori Ihara, as the CEO of one of one of its leading suppliers (and keiretsu partner) Aisin Seiki Co.

Ihara’s job… To undo some of the keiretsu practices that had formed between the two organisations.

It was feared that the close relationship that had formed between the two businesses had created lethargy in the supply market meaning that neither business was functioning optimally. Toyota was not driving the most out its supply base and Aisin’s overly comfortable relationship with the automaker meant the firm was not pursuing contracts with other car manufacturers as actively as it might.

Ihara was put in charge of the supplier and told to make the business more competitive or face losing Toyota’s business. The new CEO has also been challenged with selling Aisin’s parts into other automakers.

No silver bullet

This isn’t the first time procurement teams have reached a similar stalemate. The keiretsu vs. traditional supplier relationship discussion sounds a lot like the cost vs. value or innovation vs. price debates we often hear.

Perhaps what is most important to take away from these issues and debates is the fact that there is no silver bullet for managing a supply chain. The issues are layered; to think that a single business methodology can solve all procurement challenges is to grossly underestimate the complexities that lie with modern day supply chains. The challenge is to find a balance between co-operation, innovation and cost.

So the next time you hear of a new business methodology that’s set to change procurement for ever, I would suggest you take it with a grain of salt (or perhaps a sip of sake…)