Supply Chain Management

Supply Chain Management Principles and practices at Honda

About Honda

Honda Motor Co. Ltd. was established in 1948 as a motorcycle manufacturer in

Hamamatsu, Japan. From this beginning, Honda has grown to become the world's largest
motorcycle producer, a title it has maintained continually since 1964.

Honda first entered the automobile market in 1963 and currently has become one of the world's
leading manufacturers. Honda also produces a variety of power products, including such items as
lawn mowers, tillers, outboard motors and generators.

These three product groups - automobiles, motorcycles, and power products - remain the pillars
of Honda's business structure today.

From its earliest days, Honda Motor Company has maintained a specific company
principle:

“Maintaining a global viewpoint, we are dedicated to supplying products of the highest quality
yet at a reasonable price for worldwide customer satisfaction.”

Honda is striving constantly for new and better technology. In its efforts to meet the changing
needs of an evolving world community, Honda needs the support of dedicated suppliers with
similar goals and demanding standards.

Purchasing Policy

Because of the established international nature of the purchasing function, Honda is committed
to maintain free trade, treating all suppliers equally regardless of size, location, or national
origin.

From this international environment, Honda has developed and maintains a basic purchasing
policy that can be described using the following principle:

“Honda will buy from the most competitive suppliers in order to fulfill customer satisfaction.”

Customer Satisfaction

This principle is based on the idea that Honda's suppliers are not simply selling their parts to us;
they are selling their parts to our customers through us. Honda expects each supplier to develop
the same commitment and dedication to customer satisfaction as they have. To accomplish
customer satisfaction, what Honda requires of suppliers is competitiveness in what they call
Q.C.D.D.M.

1. Quality

Quality is the most important factor in ensuring customer satisfaction. Honda believes quality
must be built into the product during the production process. Quality cannot be assured in the
final inspection process. It is the responsibility of each supplier and each individual worker to
ensure quality. A commitment by the supplier at every level from the top management to the
individual worker is essential to continually improve quality.

2. Cost

Competition in the parts supply industry has become very strong in recent years. Honda is
determined to provide products at competitive prices and value for the money. Suppliers are
expected to achieve target cost through their ideas, technologies, improved productivity, plus
joint efforts with Honda in VE/VA (Value Engineering/Value Analysis) activities. Honda
requires suppliers' continuous efforts to reduce cost year by year. Honda will give the suppliers
annual pricing for their raw materials so that they can able to fix the cost of each parts which
goes in to different model cars.

3. Delivery

Honda employs the just-in-time production system.

In order to respond quickly to customer's needs, it is becoming more and more critical to produce
products with the shortest possible lead-time.

Suppliers are expected to have a reliable and flexible production system, which can respond in a
relatively short lead-time, and can be synchronized with the assembly lines.

Suppliers will also benefit from just-in-time production system.

Just-in-time production reduces inventories, eliminates waste, and also improves production
efficiency.

Adopting just-in-time lean production will raise supplier's competitiveness in cost and quality.

4. Development

In responding to ever-changing customer demands, and to provide high quality yet cost
competitive products, Honda relies heavily on established suppliers as a source for development
and improvement of technology.
In the course of development, emphasis will be put on uniqueness. They believe uniqueness in
design or specification is a part of competitiveness. It is this uniqueness that makes up the
identity of their products.

Suppliers are expected to have ability to realize such demand of uniqueness through their
technology and know-how in development in a timely manner with high cost performance.

5. Management

It is important for a supplier's management team to be strongly customer-oriented and to provide

effective leadership for the entire company that expects to fulfill Q.C.D.D.

Such management effort promotes mutual trust between the supplier and Honda.

International Purchasing Operation

To facilitate ease in purchasing on a global basis, Honda has created a unique international
organization.

This organization consists of establishing local purchasing offices in locations which meet the
requirements of local manufacturing. Each office is staffed with trained purchasing professionals
who have the authority and responsibility for purchasing their own parts and materials.

At the bottom of this web page is a list of Honda's major international purchasing offices.
Suppliers are encouraged to contact these offices where close relationships can be developed,
resulting in improved communication and understanding.

As local purchasing operations continue to develop, local research and development offices are
established. 

Purchasing Process

There are several steps that must be taken when initiating a relationship with Honda. Following
these steps can make the purchasing process smoother for everyone. 

1. Initial Contact

Initial contact in the purchasing process may take place in two ways.

First, according to an established purchasing schedule, Honda may contact suppliers in various
areas to explore the potential of purchase.

The second way is direct contact by a supplier to Honda. In this manner, Honda encourages
suppliers to directly contact the local purchasing office of the production site nearest to the
supplier's own location.
If there is an initial interest in the product, a meeting will be arranged between the supplier and a
Honda purchasing representative. This initial meeting will be arranged between the supplier and
a Honda purchasing representative. This initial meeting is of crucial importance to the future
relationship. This meeting should include a written overview of the supplier's operations (present
products and customers, etc.) and experience as a parts manufacturer. The sample parts and
visual aids such as videos or slides can be helpful. A confidentiality agreement will be signed by
both parties before the initial meeting.

2. Preparation Investigation of Honda Parts (Homework)

Although it is of general interest to know what parts you (the supplier) presently manufacture,
Honda is much more interested in knowing,

 Exactly what parts you (the supplier) would propose to supply to Honda

 What tentative price you (the supplier) will ask for that part.

Also, Honda wants to know,

 To what extent you (the supplier) have studied Honda parts before making the
presentation.

A thorough investigation of the part to be supplied should result in knowledge about size, weight
and how the parts affect surrounding or attached parts. With this study and effort, beneficial
discussions will transpire.

The parts that Honda is most inclined to purchase first will be those parts that have world class
competitiveness. Also important to Honda is information of suppliers' development lead-time to
help them quickly understand a part of the suppliers' development capability.

3. Quotations

After evaluating the presentation and based on the tentative target price information, Honda may
issue a drawing and the accompanying specifications for the part and request a more specific
quotation. This quotation should include first and foremost the quote as per the agreed
specification. It may also contain the supplier's own design quote and possible adaptations of
their own design to Honda's specifications. Differences in these quotes should be clearly defined.

4. Initial Plant Visit

If the initial quote is found to be competitive. Honda will arrange a visit to the company and its
operations. This initial plant visit will be made by a combination of purchasing, quality control,
and R&D personnel. The purpose of the visit is not only to inspect manufacturing processes and
quality assurance activities, but also to determine management policies and philosophies and
general conditions.
5. Prototype Development

Following a favorable visit to the supplier, Honda will ask the company to provide prototype
sample parts. Along with the samples, they ask the supplier to provide their own testing and
evaluation of the samples. The resulting data, samples, plus an outline of the production
capabilities and schedules, should also be submitted.

The lead time for this development work will probably be shorter than what many suppliers are
accustomed to or expect. This is because of Honda's policy of very rapid model changes and
accelerated development schedules in response to market changes. Several sample parts should
be prepared. This will shorten the response time if modifications of the part are required. A quick
response to such requests is very important. Both parties will need to cooperate and
communicate.

6. Testing and Evaluation

Honda will require extensive testing of parts. Results will combine the suppliers' own test data
with that of Honda R&D divisions. Honda's local capacity for testing and evaluation is
developing quickly in conjunction with manufacturing capacity. The testing process will include
many discussions between our technical staff and the supplier's technical staff.

7. Mass Production Quotation

If the results of evaluations and testing are positive, Honda will move to mass production price
negotiations. Pricing is a very critical item and is discussed continuously from the initial
meeting. At Honda it is required for suppliers to provide a detailed breakdown of the price. This
breakdown will include raw materials, labor, tooling, required packaging, and delivery expenses,
administrative expenses, and other expenses.

Honda finds the breakdown of costs is helpful in suggesting ways that suppliers can seek to
improve and thereby reduce costs.

8. Preparation for Mass Production

Honda will issue tooling orders after the successful completion of final prototype evaluations.

9. Trial Run

To confirm that the part will continue to meet requirements in volume production, the supplier
carries out trial runs under mass production conditions.

10. QAV

Once trial runs are successfully done and mass production schedules are determined, there will
be a QAV (Quality Assurance Visit) for an overall evaluation of the process.
11. Agreement

"General Agreement for Purchase of Parts" and "General Agreement for Quality Assurance" and
any other applicable agreements will be mutually signed.

12. Purchase Order

After all the necessary procedures are completed, orders are placed and mass production can
begin.

Performance Metrics Involved

An important part of supplier involves the continuous measurement, evaluation, and analysis of
supplier performance. An organization must have the tools to measure manage and develop the
performance of its supply base.

An organization must decide which performance criteria are objective (Quantitative) and which
has subjective (Qualitative), as the metrics will be different between the two. Most of the
objective quantitative variables lie within the following three categories

1. Delivery Performance
2. Quality Performance
3. Cost Reduction
 Other Metrics involved are
Perfect order fulfillment to delivery
 Delivery Performance to request date
Order management cost
Materials acquisition cost

Conclusion

As the relationships between Honda and its suppliers continue, there will be many opportunities
for growth and expansion within the Honda network.

Through Honda's commitment to purchase when they manufacture and sell their products, many
suppliers who demonstrate world competitiveness may be extended the option to export their
parts to Honda operations worldwide.

Honda encourage suppliers who understand the Honda Way and who are willing to improve
their competitiveness to contact one of Honda's purchasing offices and to take the first step
toward a partnership with Honda.