How Chrysler Created an American Keiretsu

IDEAS AT WORK cult tbat some executives wonder Chrysler transplanted whether the Japanese partnership Japanese-style supplier model can or even should be transplanted to the United States, where relations to the competitive competitive, contractual, arm's- length relationships between manu- soil of the United States. facturers and their suppliers have long been the norm. They rightly point out that the partnerships among the members of a Japanese keiretsu grew out of cultural and his- torical experiences that are very dif- ferent from tbose that shaped U.S. How Chrysler Created industries and companies. One U.S. manufacturer, however, has shown that it is possible to make an American Keiretsu the transition. This company is Chrysler Corporation. Its experience demonstrates not only that a modi- by Jeffrey H. Dyer fied form of the keiretsu model can work in tbe United States but also that the benefits can be enormous. Borrowing from Japanese prac- was relatively easy because it did not Since 1989, Chrysler has shrunk tices, U.S. manufacturers have cut require altering the nature of their its production supplier base from their production and component relationship with suppliers. The tra- 2,500 companies to 1,140 and has costs dramatically in the last decade ditional adversarial relationship re- fundamentally changed tbe way it by overhauling their supplier bases. mained: Manufacturers continued works with those that remain. In- They bave radically pruned the to design products largely without stead of forcing suppliers to win ranks of their suppliers and given input from suppliers, to pick suppli- its business anew every two years, more work to the survivors in return ers on the basis of price through a Chrysler now gives most of tbem for lower prices. And by getting their competitive bidding process, and to business for the life of a model and remaining suppliers to deliver parts dictate the detailed terms of the con- beyond; excruciatingly detailed con- just in time and to take responsibil- tract. They continued to expect sup- tracts have given way to oral agree- ity for quality, they have managed pliers to do as they were told and not ments. Instead of relying solely on to slash inventories, reduce defects, much more. its own engineers to create tbe con- and greatly improve the efficiency of In sharp contrast, the second cept for a new car and tben to design their own production lines. stage-involving suppliers in prod- all the car's components, Chrysler Now many manufacturers are uct development and process im- now involves suppliers deeply. And striving to wring even greater bene- provement-requires radically chang- instead of Chrysler dictating prices fits from their suppliers. They would ing tbe nature of tbe relationship. to suppliers, regardless of whether It requires a bona fide partnership, the prices are realistic or fair, the like to involve suppliers much more two sides now strive together to find deeply in product development and in which there is an unimpeded two- ways to lower the costs of making to enlist them in the drive for con- way flow of ideas. Although many cars and to share the savings. tinual improvements of production managers now talk about their de- processes. The prizes they are seek- sire to turn their suppliers into ing: ever more innovative products, partners, the fact of the matter is Jeffrey H. Dyer is the Stanley Gold- ever faster product development, that actually doing it-after decades stein Term Assistant Professor of and ever lower costs. of exploiting suppliers by pitting one Management at the University of But as many managers now real- against the other-is exceedingly Pennsylvania's Wharton School in ize, accomplishing tbe first stage difficult. Indeed, the task is so diffi- Philadelphia. 42 PHOTOS: CHRYSLER CORPORATION ARCHIVES IDEAS AT WORK The results have been astounding. vehicle engineering; Glenn Gardner, Company. One factor that Chrysler The time Chrysler needs to develop LH program manager; and Tbomas studied was supplier relations. a new vehicle is approaching 160 Stallkamp, head of purchasing, Honda was organized into product weeks, down from an average of 234 planted the seeds and then nurtured development teams composed of in- weeks during the 1980s. The cost Chrysler's keiretsu. By benchmark- dividuals from all key functions, all of developing a new vehicle has ing competitors, listening to suppli- of whom had eradle-to-grave respon- plunged an estimated 20% to 40% ers, and experimenting with ideas sibility for the development of a ve- during the last decade to less than $1 and programs, they gradually de- hicle. The teams included suppliers' billion for the Cirrus/Stratus, intro- veloped a vision of tbe changes engineers, who had responsibility duced this year. And, at the same that Chrysler needed time, Chrysler has managed to pro- to make. They came duce one consumer hit after an- to realize tbat those other - including the Neon, the changes required trans- Dodge Ram truck, the Cirrus/Stra- forming both tbe pro- tus, and the new minivan [sold as cess of choosing and the Town &. Country, Dodge Cara- working with suppli- van, and Plymouth Voyager). As a ers and the personal result, Chrysler's profit per vehicle relationships between has jumped from an average of $250 Chrysler's staff and its in the 1980s to a record (for all U.S. suppliers. They came to understand automakers) of $2,110 in 1994. (See that people-both at Chrysler and in for both the design and manufacture the insert "How Supplier Partner- suppliers' organizations-must have of a particular component or system. ships Helped Revive Chrysler.") a common vision of how to collabo- Executives from Chrysler thought rate to ereate value jointly. They initially that Honda's practices were Of course, Chrysler's astounding came to recognize that trust in rela- interesting but completely foreign to comeback is hardly news anymore. tionships will take root only if both Chrysler, which was organized hy But surprisingly, one crucial aspect parties share in the rewards and not function and which developed prod- of tbe story has been overlooked: ex- just the risks. And ultimately they ucts in a traditional sequential actly bow the company managed to process that did not routinely in- transform its contentious relation- incorporated those realizations into volve suppliers. Chrysler's engineers ships with its suppliers. Believing tbe fabric of tbe company's manage- designed components, and suppliers that Chrysler's turnaround might ment systems. built them. Whereas Honda selected hold lessons for other U.S. manu- To be candid, the steps that suppliers tbat had a history of good facturers, I undertook a three-year Chrysler took were not always hy relations witb the company and a study of the company's revival. design. But tbrough trial and error, track record for delivering quality From 1993 to 1996, I interviewed the automaker has managed to de- products and meeting cost targets, 13 executives at Chrysler and also velop supplier management prac- Chrysler selected suppliers that 33 of the company's suppliers, and tices that are a model of cooperation could build components at tbe low- analyzed thousands of pages of and efficiency. est possible cost. ¡Buyers bad to ob- Chrysler's documents. tain quotations from at least three From this work emerged a blue- The Impetus for Change suppliers.) A supplier's track record print of the steps that other compa- In the mid-1980s, as part of an ef- for performanee and quality was rel- nies might take to huild their own fort to improve its competitiveness, atively unimportant. As a conse- American keiretsus, providing that Chrysler conducted an extensive quence, tbe typical relationship he- those steps are accompanied by benchmarking study of product de- tween Chrysler and its suppliers was the exemplary management-or, velopment and manufacturing at characterized hy mutual distrust more accurately, the exemplary Honda Motor Company, which was and suspicion. leadership-that Chrysler's execu- then expanding its manufacturing Honda's approach suddenly tives displayed. Four men in particu- and sales presence in the United looked less foreign after Chrysler ac- lar-Robert Lutz, Chrysler's presi- States faster than either Toyota Mo- quired the American Motors Corpo- dent; François Castaing, the head of tor Corporation or Nissan Motor continued on page 46 HARVARD BUSINESS REVIEW fuly-August 1996 43 IDEAS AT WORK How Supplier Partnerships Helped Revive Chrysler Parttierships with suppliers ding, negotiating contracts, and and development (ER&.D), which have helped Chrysler improve hringing suppliers on board and consists of the costs associated performance significantly hy up to speed. After selecting sup- with designing and engineering a speeding up product develop- pliers, Chrysler would have to new vehicle; tools, such as dies ment, lowering development spend additional time responding and molds; facilities, such as new costs, and reducing procurement to problems they encountered conveyors, presses, and welding costs, thereby contributing to in- when trying to manufacture a lines in the plant; and preproduc- creases in Chrysler's market part they usually had not de- tion and launch (PP&L) expenses, share and profitahility. signed. Often suppliers did not such as training and manufac- Shortening the Product Devel- even know they had won the turing preparation. For a typical opment Cycle. Company docu- husiness until 75 to 100 weeks Chrysler program, roughly 15% ments indicate that Chrysler has hefore volume production. Under to 20% of total costs are in reduced the amount of time it the new system, suppliers he- ER&D, 40% to 45% are in tools, takes to develop a new vehicle come involved at the conceptual 25% to 30% are in facilities, and from 234 weeks (the average 5% to 10% are in PP&L.

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