Spring 2012
We asked veteran former Honda exec and book buddy Dave Nelson (and former Chairman of 34k-member Institute for Supply Management) what he thought were the reasons why Honda consistently delivers higher profit margins than Toyota. Could it be that Honda BP beats TPS?As Senior VP, Nelson was the first American on the Honda of America Board of Directors. At Honda purchasing is a strategic function and during the last three years of his tenure as head of purchasing, the VP's of Finance, HR, Corporate Communications, Government Relations and Legal reported to him for a total combined spend of $8 billion. Today direct purchases alone in North America, including the new plant under construction for the Fit sub-compact, plus two factories located about 150 miles east, add up to approximately $16B, with total costs $20B. In addition to purchasing for Honda's American plants, Nelson was project leader for the $1.2 billion/yr two-door Civic start-up in Thailand.
Good news for American manufacturing
As soon as the new Fit Mexico plant is complete, there will be 33,000 Honda Associates in North America. The new facility, costing $800M, will boost Honda's capital investment in North America to $21 billion. Ohio, says Nelson is making a variety of other plant and equipment investments totaling more than $500M and by the spring of 2014 production capacity in North America is projected to reach 1.87 million vehicles. Here's where Nelson’s strategic sourcing interests are piqued, "More than 85% of the vehicles sold in North America are manufactured in North America. In fact, Honda will soon be building the Acura NSX super sports car, plus other Acura models and Accords, Civics, CRVs, Hybrids, as well as the small Fit. So the whole range of vehicle products will be built in North America."
One of the statistics he cited may shock you.
What does this mean for suppliers in The Americas? Nothing but good news because the numbers don't lie. Honda of America (Canada, US and Mexico plants) has more than 600 direct suppliers making up the 1.87M vehicles. This is another overt clue as why Honda's profit margins are driven by strategic sourcing. How unusual does it seem among giant corporations to find 600 direct (parts, assemblies, raw, etc) suppliers responsible for $16B in vehicle sales? We’re talking about hundreds of suppliers, not thousands.
Nelson reinforces these numbers, "There are two main reasons why Honda is as competitive and as profitable as they are. One is the Honda Philosophy that empowers all their employees as mentioned in the Industry Week lead feature celebrating Honda's 30th anniversary.
The other reason is the inclusive relationships with their strategic suppliers in which these suppliers are literally considered extensions of Honda. In-house costs are about 25% of the cost of a vehicle, while outside purchased costs represent 75%, which means that both the Honda associates and Honda suppliers are what make this automotive company so competitive. Honda's strategic suppliers provide more than 90% of the cost of the parts that Honda buys."
What does it take to be a Honda Strategic Supplier?
The following is Nelson's partial list of requirements:
1. To have an open book arrangement with Honda in which Honda Purchasing has access to all the supplier's financials. "This means," says Nelson, "that Honda purchasing has access to all the records of the supplier, including what they pay for their raw materials, how much they pay their workers, what their profits are and basically a total open book to all the company’s records. The supplier agrees to sell the parts to Honda at those cost standards." This Open Book concept was shocking when first introduced to suppliers who were producing for The Big Three in Detroit, but eventually, as information technology has enabled more accurate costing approaches, Open Book has lost much of its fear factor. "The Honda buyers often know more accurately what the supplier's parts cost are than the suppliers do. If on rare occasion the Honda buyer makes a mistake, and after the supplier starts making the parts he feels the price Honda set is too low, the supplier advises Honda. Honda immediately sends a BP (the Honda production system featured in the book Powered by Honda by Nelson, Mayo and Moody) Engineer to the supplier and if that engineer cannot arrange the manufacturing process to make the parts for what the Honda buyer set, Honda will change the price to the correct level.
According to Nelson, this is a rare occurrence, "While I was VP, about three hundred new models of vehicles, engines, transmissions and various assemblies were introduced, and not one time were the target costs set at the beginning of the product development cycle ever exceeded, nor did we ever miss a production start (SOP) date. Honda Purchasing, Honda engineers and the supplier's Engineers work as a team to achieve the target costs and SOP date, often set three years before the start of production. Once the products are in production, on-going continuous improvements made by suppliers that reduce cost are shared with the supplier, significantly improving their margins." Another good reason for beleaguered suppliers to carefully select their customers!
In fact some execs say that Honda purchasing associates know their suppliers' costs better than the suppliers do.
2. To agree to welcome Honda's BP teams (lean supplier development teams) to help optimize manufacturing and business processes.
3. To agree to participate in Honda training as necessary. Corporate training programs include leadership, finance, how to create effective employee suggestion systems, how to develop Quality Circles in which a small team works together using a formal process to improve the process, the tooling, the machine lay out and a variety of ways to make numerous improvements to the manufacturing and business processes.
4. To agree to a top management business meeting once a year where 1) the goals and results of the previous year is reviewed, 2) the current year-to-date goals and results are reviewed, and 3) their next three years’ goals are reviewed. About fifty elements are reviewed in a very formal setting.
5. Agree to develop new models from the earliest development stages together with Honda engineers, giving multiple suggestions on how to improve the parts functionally and improve costs compared to the previous models.
6. To be 100% quality and 100% delivery, because to shut down a line for lack of parts costs Honda out of pocket costs of many thousands of dollars per minute. (Note: outside estimates for line-down situations at the time of Powered by Honda publication stood at $26,000 per minute.)
7. To practice "Continuous Improvement" in all their manufacturing and business processes
In return for agreement to partner with Honda on these requirements, Honda would commit to maintain them as a supplier and award them new business as it becomes available. "Almost 100% of the original suppliers selected in late 1980's are still Honda suppliers today," says Nelson.
Honda's impact on the supply management and manufacturing landscape
Fortunately for supply management and manufacturing professions, the visibility, responsibility, power and IT tools used to manage global supply networks have risen in the thirty years since Honda's arrival in The Americas. For Nelson, heading up procurement was an especially positive challenge, "For me the biggest reward has been watching my direct reports over the years become the EVP, SVP and VPs of Supply Management in over 20 majors, including Whirlpool, Nissan, Rolls-Royce Airplane Engine, Eaton Corp, Cardinal Health, Sara Lee, Bank of America, Delta Airlines, Takata, University of Chicago Medical Center, Kohler, Harley Davidson and others as well as TRW, Honda of America, Honda Worldwide, Deere and Delphi." We've come a long way.
Patricia E. Moody
Blue Heron Journal
Copyright 2012 All Rights Reserved
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