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Tesi di dottorato di ricerca in:
Economia e finanza nel governo dellimpresa

XVI Ciclo
UNIVERSITA DEGLI STUDI DI ROMA
LA SAPIENZA
Novembre 2003
From Business System to Supply Chain and Production in

Japan
by
Gandolfo Dominici
Gandolfo Dominici Tutti i diritti sono riservati.
Contents:
Acknowledgments
Abstract
Introduction
Part I.a The unique Japanese business environment.
I.b. The history of the Japanese business system from zaibatsus to keiretsus.
I.c. The role of the Japanese government and the Kanryo.
Id. The Keiretsu.
I.e. The financial system.
I.f. The Japanese labor market.
I.g. The education system.
I.h. Jinmyaku: The importance of interdependence and relations for business.
I.i. The management style.
Part II.a. Total Quality Management
II.b. The history of Total Quality.
II.c. The commitment of Total Quality in the kaisha and with suppliers.
II.d. Kaizen: Continuous Improvement.
Part III.a. The general JIT theory.
III.b. Toyotas JIT-Kanban.
III.b.2. Types of Kanbans and Kanban rules.
III.b.3. The general method for the determination of the number of
Kanbans.
III.b.4. Smoothing of Production.
III.b.5. Reduction of Lead Time.
III.b.6. Standardization of Jobs, Multifunctional Workers and
autonomation.
III.b.7. The roots of Toyotas JIT in the Japanese business and social
environment.
III.b.8. The evolution of the Toyota Production System (TPS).
III.c. Production planning.
Part IV.a. Relations with suppliers.
IV.b. The informations towards vendors at Toyota.
IV.c. Supplier selection, development and governance.
Part V.a. Case study: Quality through SCM at Asahi Breweries.
Part V.b. Japans Seafood Supply Chain and the implementation of EDI systems.
Conclusion
References
Acknowledgements
I would like to thank the following for their support in the development of this research:
-
The Faculty of Economics of the University of Nagasaki and all the staff who gave
me the opportunity to come to Japan as visiting research scholar. Thanks in
particular to Professor Toshio Sugihara, dean of the faculty and my tutor for the
research for the guidance in the study of the Just in Time system; thanks also to
professor Haruno Morinaga for the help with translations and the support for
organizing my travels in Japan and to professor Celia Lopez Umali for introducing
me to the Faculty.
Asahi Breweries Ltd for their collaboration with my research and for allowing me to
visit their facility of Ibaraki. In particular to Mr. Kazuhiko Nomura (who guided me
during the visit), Mr. Nishide Ryu and Mr. Eiichi Kawahara managers of SCM
Headquarters and to Mr. Kyoshi Takahashi manager of Ibaraki logistic center.
The Faculty of Software and Information Science of the Iwate Prefectural
University and in particular to professor Mitsumasa Sugawara, Dr. Takeo Takeno
and Dr. Toshifumi Uetake for their contribution regarding the case study of the
supply chain of seafood in Japan.
The scholarship program of the PhD program of Economia e Finanza per il
Governo dellImpresa of the University of Rome La Sapienza for their
sponsorship of my period of research abroad.
My family for their financial and moral support during the period of my stay in
Japan.
ABSTRACT:
The Japanese business environment has been studied for many years by researchers and
business operators from all over the world. The Japanese culture created a business
climate that is different from other industrialized economies. Gerlach defined the
Japanese economy as alliance capitalism1, an expression, which better than others,
represents the relational nature of the Japanese society and business system. It is not by
chance that the manufacturing and management techniques, later defined as lean2 by
MIT authors, were born and raised in Japan. In this dissertation I will attempt to explain
why and how these approaches are linked with the Japanese culture and the Japanese
business environment. In order to understand the Japanese supply chain we first have to
understand what Japanese do in their factories and how they do it. One of the main
reasons of failure of foreign businesses in Japan has been their lack of understanding of
the Japanese system. Production and business environment should not be considered
two separate fields of study and research, and this is especially true when discussing
about Japan.
Japanese management techniques were developed before the 1990`s and their successes
have been driven by a rapid and fast growth of the whole country-system; now, in a
period of relative crisis, these techniques are still effective and implemented.
The aim of this research is to analyze the JIT in Japan, considering the uniqueness of its
business system, focusing on the interrelations between culture, business system and
production. Starting from the systemical and institutional aspects of Japanese business
and by analyzing the Toyota Production System, I will demonstrate the relations
between the business system and the organization of production and of the supply chain
in Japan.
Gerlach M.L., Alliance Capitalism, the social organization of Japanese business, University of
California Press, 1997.

2
The term lean was created in the mid 1980s by John Krafcik a MIT masters student of the IMVP
(International Motor Vehicle Program) who worked at NUMMI, the Toyota-GM manufacturing joint
venture. This term was introduced in the management terminology by Womack, Jones and Roos in the
book The Machine that Changed the World edited by Rawson Associates in 1990 which collected the
results of the 5 years analysis and benchmarking of IMVP and outlined the main feature of the Japanese
lean approach in contrast with the Western mass production.
INTRODUCTION
For many years the Japanese manufacturing Just in Time systems (Toyotas
JIT-Kanban in particular) have been admired, impressing observers from all around the
world with their measures of quality, reliability, and efficiency.
More than ten years have passed since the beginning of the Japanese crisis in the 1990s.
Though Japan, throughout and despite its recession, maintains the worlds second
highest GDP ($ 3,978,782 millions in 2002), which alone represents two thirds of the
whole Asian GDP. In the past year (August 2002-August2003) the Japanese GDP grew
of 2.1% with an increase in the industrial production of 2.8% in June 2003 compared to
the same month of the preceding year3
As noticed by Porter4: Conventional wisdom attributes the lion s share of Japan s
postwar competitive success to the actions of its government: to the set of economic
policies so prominently associated with Japan that they are universally known as the
Japanese government model. But conventional wisdom is wrong . However, the reality
is different, after the beginning of the recession the stronger industries like automobile,
motorcycle and game software, which can successfully compete at the international
level, are those who didnt benefit from the government policies. Thus, it is evident that
the success of the Japanese management was not an effect of the protection by the
government.
Japanese companies are still very competitive and able to gain even larger market shares
in many mature industries. Nowadays Japan represents an even more interesting market
than it did in the past. Before the 1980`s Japans market was almost legally closed but
now the government, in the face of crisis, and pushed by international trade agreements
especially with USA, has lifted many of the trade barriers that limited Japanese foreign
trade in the past. It has now begun a process of deregulation thus creating new
possibilities for foreign companies to trade and invest in Japan. However, even after all
the trade and bureaucratic barriers have been taken away, foreign firms still find it
difficult to break into the market. The reason for this lays mainly in the mistake of not
considering two primary elements5: the complex and unwieldy nature of the system
3
The Economist, Japan`s economy, on the rebound? , page 12 and 72 issue August 30th-Septmber 5th
2003.
4
Michael E. Porter, H. Takeuchi & M. Sakakibara, Can Japan Compete? , page 19, PALGRAVE,
2000.
5
Czinkota M. R. & Woronoff J.,
Unlocking Japan s markets: seizing marketing and distribution
itself and the special relationships that arose between various agents in the distribution
process .
Kokusaika (Internationalization) is now the main worry of Japanese policy makers, not
only in business but also in education; the number of English mother tongue language
teachers hired in schools and sponsored by government funds is a sign of this process.
The actual business reality in Japan is still unique but is more comparable to the western
business realities now than it was during the boom of Japanese economy.
The uniqueness of the Japanese business environment is governed by cultural factors
that determine the way the Japanese supply chain is organized and managed. The
organization of the supply chain is strictly determined by the manufacturing system in a
cause effect circle. All these aspects are deeply linked to each other.
The common Japanese expression The client is God is also conceptually linked to the
principle of Pull Production of JIT and of
Customer Satisfaction of TQM.
The philosophy of JIT is not only a manufacturing technique but also finds its roots in
Japanese business culture. Walking in the morning along the streets of Hamanomachi
(The downtown of Nagasaki) on my way to the university, I noticed how before opening
time every day, every shop had a small truck unloading small packages of goods. I
asked an English speaking shop holder about this and he told me that they make orders
every day for the quantities sold during the day before. This is because small shops in
Japan do not usually have a warehouse and are supplied daily by the wholesalers. The
implementation of such a supply system, where also small shops have exactly the
quantity of goods required by costumers with a basic stock, was not voluntarily
implemented but was created by the same needs and uses that made Toyota create and
develop the JIT manufacturing. The just in time philosophy is not only a theory of
production but is permeated in the business culture of Japan.
It has been estimated6 that about 70% of the production cost for Japans manufactured
goods has been supplied by external vendors, while, in the same period, in the USA the
percentage was around 30%. This percentage grows to 80% in the automobile sector, in
contrast with the 50-60% in the United States, Germany and France7. Such a wide
outsourcing requires a strong link with suppliers.
As will be illustrated in the part about general theory, if the suppliers do not develop a
JIT system that is compatible with the standards of the main company, the Just In Time
opportunities in today s Japan , Probus Pub. Co, 1991

6
7
Japan s subcontractors: The buck stops here , Focus Japan, JETRO, 1978
Odaka K., Ono K. and Adachi F., The Automobile Industry in Japan: A Study of Ancillary Firm
Development , Kinokuniya, 1988.
would be impossible with several line stopping problems and delays. Suppliers must be
considered as part of the organization in order to be able to develop an effective JIT
system. Realities like the Keiretsu or the Suppliers Associations can create strong
links and increase the reliability of vendors. For vendors (usually small firms) this
system is convenient because it guarantees stability and reduces the price competition.
For the main company, this is the basis for making a JIT system run smoothly.
This thesis was written during a six months period at the Faculty of Economics of the
University of Nagasaki.
Part one describes the history and the unique features of the Japanese business system,
focusing on the diversities with the West while demonstrating the kind of relations
between companies and institutions in the country.
Part two outlines Total Quality Management in Japan, with its implications on corporate
philosophy and on the management of relations with suppliers.
In the third part I will illustrate the most important Production approaches with special
focus on the Toyota Production System (TPS), explaining the general features of the
Just in Time production and SCM philosophy.
Part four I will describe the nature and management of relations with suppliers and their
selection criteria in the framework of the Japanese management practices and JIT.
The case study of Asahi Breweries Ltd, the first beer producer in Japan, will provide an
example of SCM and TQM integration. The supply chain and information systems of
Japans fisheries will also be examined.
Part I.a. The unique Japanese business environment

In order to better understand the Japanese supply chain it is important to understand the
relational nature of the Japanese business system.
Business system, in this work, is considered as the system of networks of formal and
informal relations including the institutional, the managerial, and the social system. The
managerial system inside the firm and the institutional system outside are
interconnected by the social system (which includes elements of both) to determine the
whole business system. According to the Network approach of Wellman and
Berkowitz8, the specific composition of ties among the business actors of the system
determines substantial features of an economys whole organization thus also its
performance.
A Managerial system, as defined by Gullien9, is the particular method of organizing,
managing, and controlling the firms, which is established in a particular context.
The way to analyze business systems has been studied since the 1950s, trying to find a
scheme that could identify general features in order to classify the different managerial
systems according to a common logic. Among the main theories in the management
literature there are:
-
The model of Economic development 10 is a macro economic model based on

management trends rather than on the study of the managerial practices at micro
economic level. It is based on the assumption that the industrialization process of
nations evolves by steps with every step having its own managerial system.
Although this approach could be effective in describing managerial systems in
similar cultural contexts, it cannot be useful to evaluate realities far from the cultural
and institutional point of view. This is because it doesnt consider all the variables
that play a key role in the determination of the managerial system and ignores the
cultural and environmental factors.
Wellman B. & Berkowitz S.D., Social structures: A Network Approach, Cambridge University Press,
1987.
9
10
M.F.Gullien, Models of Management , The University of Chicago Press, 1994

Harbison F. & Meyers C.,
Management in the Industrial World: an International Study ,
McGraw-Hill, 1959
The Contingency theory11 affirms that the formal organization structure is a

dependent variable defined by the environmental variables of technology, scale and
uncertainty. This theory had a merit of understanding the dependence of the internal
organizational structure from the external environment but failed to consider all the
factors implied.
The Environmental model12 points not just to economic but also political, legal,
cultural and educational factors as responsible for the determination of the
managerial system. This model considers many factors but (like the Contingency
theory) but is limited by a static approach that considers the external factors as
given.
The Systemic approaches13, consider the firm a dynamic entity in osmotic relation
with its external environment. Furthermore, it gives a relevant emphasis also to
another factor: the managerial philosophy. This entails that the behavior and
opinion of managers about the stakeholders determines the strategies and the
directive choices of the firm while interacting and modifying the external
macro-system.
The Viable Systemic Approach 14, following a cybernetic point of view applied to
management studies. It considers the firm as a living entity in relation and
interacting with the external super-systems. According to this approach the system
is viable only if it can survive in a specific environment tending to achieve its
objectives while being connected with super-systems and sub-systems from which
and to which, it takes and supplies directions and rules. The one-to-one inter-relation
with its environment becomes a fundamental aspect for the existence of the
firm-system itself.
11
Lawrence P.R. & Lorsch J.W.,
Organization and Environment: Managing Differentiation and
Integration , Harvard University Press, 1967

12
Farmer R.N. & Richman B.M., Comparative Management and Economic Progress , Irwin, 1965
13
Negandhi A.R. & Prasad S.B., Comparative Management , Appleton-Century-Crofts, 1971
14
See:
-
Beer S., Diagnosi e Progettazioni Organizzative: Principi Cibernetici , Isedi, 1991
Golinelli G.M.,
Approccio Sistemico al Governo dell Impresa: l Impresa Sistema Vitale ,
Vo.1, CEDAM, 2000
The Social system is the system of social, cultural and institutional conventions that
constitute the external environment. Monden talking about JIT also refers to a more
specific Social production system as the social system supporting the production
system. The Japanese business environment is deeply different, not only to the western,
but also to other Asian environments.
As noted by Monden15: The foundation of JIT production system is backed by social
and institutional conditions peculiar to Japan. And also: But management does not
always view the whole of environmental conditions surrounding companies as given
factors. Environmental conditions are controllable and can be thought of as decision
(endogenous) variables. The institutional, social and management systems create the
framework for the development of the inter-corporate alliance network , which
characterizes the Japanese supply chain.
Several authors 16 underlined the importance of environmental factors in order to
comprehend a system, like that in Japan, which is radically different from our schemes.
It would be, in effect, impossible to understand the Japanese economy, management,
and market without first knowing and understanding the society by which they were
generated; gaining an insight into these cultural and historical influences is the first step
to understand the Japanese business relations and practices. As outlined by Okimoto and
Rohlen17: The emphasis on organizational networks and human relationships, based
on structural interdependence, is so strong that Japanese capitalism might perhaps be
called `relational capitalism`, in contrast to the American model of `transactional
capitalism` which gives greater weight to the `invisible hand` of the market .
Awareness of the anthropological and historical reasons of the Japanese way (as well
as other environmental, institutional and cultural factors) is fundamental to understand
not only the market and the business behavior but also the production techniques that
relay on such cultural differences. This part of the dissertation analyzes some of the
most relevant aspects of social and business context that characterize the uniqueness of
the Japanese scenario.
15
Monden Y., Toyota Production System , EMP, 1998,page 336
16
see among the others:

-
Hamada Tomoko, American Enterprise in Japan , State University of New York Press, 1991
Melville Ian, Marketing in Japan , Butterworth Heinemann, 1999
Morgan J.C. & Morgan J.J. Cracking the Japanese Market: strategies of success in the new
global economy , Maxwell Macmillan International, 1991
17
Okimoto D.I. & Rohlen T.P., Inside the Japanese System: Readings on Contemporary Society and
Political Economy , Stanford University Press, 1988, page 16.
10
I.b. The history of the Japanese business system: from zaibatsus to keiretsus
The Japanese business system has evolved from a thousand years of history and
customs that delineate the manners of treating inferiors and superiors, younger and elder
and in the business field, workers, co-workers, clients and suppliers. Like underlined by
Morgan18: A key is community, Ningen kankei, human relations, is the heart of the
society which is Japan. Commonality is a large component of Ningen kankei . The
corporative nature of Japanese business roots from the fourteenth century with guilds
and craft associations called Za . Za controlled business activities within the goods
and service market with the support from patrons that, at that time, were the religious
elite and aristocracy. These patrons received an honorarium to protect the interests of
the members of Za by restricting the competition and preserving the status quo of the
market. In the mid-sixteenth century the daimyo (local lords) started opposing this
practice implementing a policy called raku-za (open guilds) in order to increase
wealth through incrementing trade. In the same period two of Japan`s most famous
unifiers, Oda Nobunaga and Toyotomi Hideyoshi extended the policy of raku-za to
the whole of Japan. During the Tokugawa shogun (1603-1868) the associational practice
was reborn and in place of the Za arose the Kabunakama , derived from kabu
meaning share or stock. At this time each member then had a share of the guild. Once
again the government tried to stop this practice by sanctioning the Kabunakama system
until 1851 when the system was reinstated again. During the Tokugawa shogunate
Japan was an almost completely closed country. The people were not allowed to leave
the country unauthorized and foreigners were not allowed to enter, with exception of
few limited areas like the Dejima Island in Nagasaki. This policy was the result of the
threat of destabilization by the western missionaries and ended with several rebellions
against the shogunate like the one of Shimabara in Kyushu (1637-1638). Through this
period Japan developed its own unique style in society and business, which can still be
found nowadays.
The complete isolation of Japan ended in 1853 with the arrival of the American fleet
under the command of Matthew Perry. Perry delivered an ultimatum to the Japanese
government giving them one year to reconsider their no-trade policy or face American
military force. Threatened with the superior gun power of the USA, the Japanese
establishment surrendered and agreed to open the country. This signed the end of the
shogun era.
18
Morgan J.C. & Morgan J.J. Cracking the Japanese Market: strategies of success in the new global
economy , 1991.
11
After a period of social crisis in 1868 a new era began in Japan known as the Meiji
Period . Throughout this time the government embarked on a project of drastic
modernization, and partial westernization, of the country.
The Meiji government invested directly in transportation infrastructures and in new
industries like textiles, cement, weapons and glass. In 1881, insufficient profitability of
the governments investments led the Minister of Finance to admit that the government
didnt have the skills to manage business with profit. As a consequence, the Minister
decided to denationalize national companies, saying19: The state should be involved
with education, armament and police, rather than with trade and industry, since it can t
compete in shrewdness, foresight, and enterprise with people who are motivated by
immediate self-interest . The denationalization of state-owned industries was the
starting point for the raise of Japanese capitalism with the birth of huge family-owned
corporations: the Zaibatsu . The Japanese practice of business association raised again.
Zaibatsu represented the Japanese corporate groups that, in part, already existed in the
Tokugawa period. Their influence grew further in the period from 1881 to the World
War II. Zaibatsu is derived from the combination of two Japanese words: zai meaning
finance and batsu meaning clan. To understand their nature it is important to examine
the most important of these financial clans :
-
Mitsui was founded by Mitsui Hachirobei Takatoshi who in 1673 established shops
in Kyoto and Edo (now Tokyo) selling high quality kimonos. These stores were the
predecessors of the Mitsukoshi store one of the most prestigious department stores
in Japan. The Mitsui family established money-changing shops and started carrying
out exchange operations for the Tokugawa shogunate. Mitsui was converting taxes,
which were paid in rice in that period, into money for the government. Furthermore,
it was selling the rise collected as taxes in Osaka. In order to transfer the money
Mitsui was collecting the promissory notes given by Edo and Kyotos merchants to
Osaka transferring these notes to Edo. Mitsui didnt take any commission fee from
the government for this operation but was earning huge profits by administering and
using the currency for months In effect, this was for Mitsui the equivalent of a huge
interest-free loan that it could lend with interest to borrowers. When the Tokugawa
shogunate was overthrown, Mitsui was selected by the new Meiji government to
provide financial services and handle the creation of a new currency. Moreover,
Mitsui was also elected to initiate the creation of a central bank of Japan. In 1876
Mitsui established the Mitsui Bank.
19
The Rise of Modern Japan , W.G. Beasley, 1990, Tuttle, London.
12
Mitsubishi: was founded by Iwasaki Yataro in the southern prefecture of Kochi (at
that time Tosa). Iwasaki was a member of the Kanryo, the Japanese elite
bureaucracy. He worked for the financial agency of the samurai-controlled region
charged with promoting the sale of domain products and the purchasing of ships and
weapons from foreign merchants through the open sea port of Dejima in Nagasaki.
With the Meiji revolution the financial agency managed by Iwasaki was transformed
into a private business under his management. In 1872 the company was named
Mitsukawa (three rivers) as three of the directors had the kanji ideogram kawa
(Japanese for river) in their family names. When in 1873 Iwasaki became director of
the company he renamed it Mitsubishi (three diamonds); Yataro Iwasaki, chose the
three-diamond mark as the emblem for his company because it was suggestive of
the three-leaf crest of the Tosa Clan, Yataro's first employer, and also of the three
stacked rhombuses of the Iwasaki family crest. Mitsubishi gained favor with the
Meiji government, when in 1874 the government required its aid in the provision of
transfer of Japanese troops for the invasion of Taiwan, being the national shipping
company unable to supply the transport. Thereafter, Mitsubishi gained the backing
of the government and obtained many benefits in the privatization after 1881. This
led to the purchase, at a favorable price, of Nagasaki Shipyard, now part of
Mitsubishi Heavy industries, and two failing banks, founding the Tokyo-Mitsubishi
Bank.
Sumitomo enterprise had its origins in mining and smelting. Soga Riemon founded
the first refinery in 1590. When the eldest son of Soga married the daughter of
Sumitomo, a wealthy pharmacist, he adopted the Sumitomo surname. The
Sumitomo Company was one of the companies allowed by the shogun to trade
copper. In 1690 the Sumitomo family bought the Besshi Copper Mine. When the
Tokugawa shogunate was overthrown the Sumitomo experienced huge financial
troubles loosing all the loans made to the government. However thanks to the ability
of Hiroise Giemon, it was able to negotiate the ownership of the Besshi mine and
arriving still in wealth to the 20th century.
Yasuda was founded at the end of the Tokugawa shogunate by Yasuda Zenjiro who
started making his own money changing business at the age of 25 after working
several years as an employee in a money changing company. Like other political
banker/merchants, Yasuda handled tax collections and profited from the delay
between collection and return to the government. Yasuda bought depreciated paper
13
money that had been issued by the new Meiji regime. When the government made
the paper money convertible in gold Yasuda made a fortune. He founded the Third
National Bank in 1876. He was assassinated in 1921 after refusing to make a
donation to the nationalists. Its name remains nowadays on some financial and
insurance institutions as the Yasuda Mutual Life Insurance Co. founded in 1880. The
core of the Yasuda zaibatsu, the Yasuda Bank, was forced by the US forces after
World War II to change its name into Fuji Bank. Today Yasuda zaibatsu companies
belong to the Fuyo keiretsu.
During the pre World War II years through a troubled (due partly to the samurai view
that mercantilism was a profane activity), but profitable relation with the militaries, we
could see the raise of new zaibatsus like the Nippon Sangyo which in 1933 established
an automobile division that will later become one of the most famous post-World War II
firms: Nissan motor.
Before World War II, the Meiji government copied the corporate system of the West.
Capital and labor were separated, there were owners and laborers. After World War II
the Japanese capitalism changed in many aspects. In the tumult of the post-World War II
Japan, almost everybody was jobless, factories had been destroyed by American
bombings, money had become worthless (with inflation over 100% a year) and
capitalist groups sold out. The only things that remained were the engineers who had the
knowledge of the technology used to build airplanes, tanks and warships; the managers
of the pre-war zaibatsu and a motivated workforce. In other words, there were plenty of
human resources but there was no money.
The new born enterprises started producing necessities such as clothing and rice. They
welcomed skilled workers paying them, in most cases, with food instead of money since
money was almost worthless because of inflation. As Kenichi Ohmae20 noticed: In a
way these embryonic companies were more like communes than corporations. People
shared their lives, hardship, and toil. If anyone tried- and someone did- to organize and
run a company in the old way, seeking to exploit the hungry laborers, strikes would
break out. Not surprisingly, at this time the Japanese chose-though not for long- to live
under a socialist government . Some of these commune-enterprises had success and
reinvested their profits in further productive capacity and paying wages to the commune
residents who thus became salaried workers.
From this village commune enterprise derives the Japanese concept of corporation
that is deeply different from the Western corporate conception. The western corporation
20
Kenichi Ohmae, The Mind of the Strategist: the art of Japanese business , McGraw Hill, 1982
14
concept sees the stockholders as the owners of the company and the employees as a
production factor. However, in the Japanese eyes the Kaisha (Company in Japanese) is
an assembly of people working for the common success. Employees are considered like
members of the organization and not like a mere production factor. Furthermore,
stockholders are considered like moneylenders. In Japanese rhetoric the kaisha belongs
to the workers not to the stockholders.
Kaishain (employees in Japanese) are involved for better or worse in the success or
failure of their company. Since the employees are the owners of the company they
accept the risks of failure as well as they benefit of the success of their company.
Nowadays, because of the recession, many companies, banks in particular, were able to
reduce wages of employees blaming the financial troubles with almost no complaint
from the workers. Such a policy in a European country would probably have resulted in
a series of strikes and union troubles, but this doesnt happen in Japan.
The union system is another particular aspect of Japanese capitalism, which dates back
to the post World War II period with the raise of: the company unions. Before any
national party or national union was able to organize, the commune-enterprise
workers had already organized small company unions in order to better communicate
with the management and share the profits fairly. These company unions remain in the
Japanese system and have great power (specifically in big companies) in the decision
process but seldom generate big conflicts in order to preserve the company to which
they belong.
Throughout the post-war period Japanese became persevering savers. However, at that
time the destiny of most enterprises was highly uncertain so the savers didnt want to
invest directly in private business. They putt their trust and savings in the banks and it
was thanks to the banks that corporations with dynamic growth plans borrowed the
money without the need to keep the stocks price high in order to satisfy the
stockholders. The salaried workers of commune-enterprise deposited their savings in
the banks; banks lent the money to corporations and manager-ruled corporations
invested in growth rather than taking short-term profits.
The Japanese economic miracle was due to the combination of high and easy use of
debt for business expansion and very low profit margins in the short period with
emphasis in acquiring larger market shares. Corporate executives were able to focus
their efforts on the 3 P`s: Production, Product, and People without worrying about the
4th P: short term Profit. In this partnership between management-ruled corporations
and banks we can find the seeds that will give birth to the Keiretsu .
After World War II with the American occupation, the GHQ formed the Holding
Company Liquidation Commission (HCLC) to manage the dissolution of the zaibatsu
15
control centers. The HCLC liquidated the shares of the zaibatsu in several years. This
liquidation didnt have any other effect than to change the ownership of the zaibatsus.
Before the end of the occupation in 1952, 70% of the shares were in the hands of about
10% of the shareholders21 with the original companies that bought back about 75% of
the shares 22 . Individual share ownership was supplanted by ownership by other
companies and banks, with a wide use of cross-shareholding among collaborative firms.
Therefore, creating the basis for the raise of the nowadays` Keiretsu.
The Japanese capitalism, even after loosing its family-based characteristic, reformed its
original shape with the substitution of the zaibatsu with the keiretsu. The keiretsu is
very similar to the zaibatsu being a network of relations between corporate members
coming together as interdependent units. However, the pre-war zaibatsus were family
holding companies controlling the majority of the shares, while keiretsus are composed
of public corporations usually without significant individual family shareholders.
Nevertheless, some of the largest keiretsus such as Mitsui, Mitsubishi, and Sumitomo,
as we will see in the next paragraph, are direct descendants of the pre-war zaibatsus.
The most significant change made was the replacement of the zaibatsu families, in their
role of leadership and control, by professional management. Holdings, made illegal by
the antimonopoly law, disappeared, shifting the links between member firms on
cross-sharing and personal relation ( president s clubs ).
Despite of new antimonopoly law introduced in the Japanese legal system by Americans,
the tendency to engage in cooperative business deeply rooted in seven hundreds years of
associational business kicked in again.
21
See:
-
Morikawa Hidemasa, Zaibatsu: The Rise and Fall of Family Enterprise Groups in Japan,
University of Tokyo Press, 1992.
22
Nakamura T., The Postwar Japanese Economy, University of Tokyo Press, 1981.
J.C. Morgan & J.J.Morgan, Cracking the Japanese Market: strategies of success in the new global
economy , Free Press, 1991.
16
I.c. The role of the Japanese government: the Kanryo

The recent history of Japanese government intervention in the economy began in the
early post-World War II, with the objective to achieve economic recovery and industrial
development. In that period the government sponsored and encouraged aggressive
investments in strategic industrial sectors. An example of this is the Steel is the nation
campaign, in the 1950s, thanks to which Japan was able to produce high quality steel at
the lowest prices in the world. This steel has been the underlying force for further
development in other industries like shipbuilding, automobiles, machine tools, and steel
structures.
The Japanese economic policies are operated and decided by the three main economic
ministries: the METI (Minister of Economy, Trade and Industry) once called MITI
(Ministry of International Trade and Industry), the MFA (Ministry of Foreign Affairs),
the Bank of Japan and the MOF (Ministry of Finance). Of these Ministries the METI is
the one that plays the most important role as chief formulator of industrial policies. The
METI is the center of a system of networks through which Japanese institutions
cooperate to guide the industrial initiatives. This web of connections and subsidies as
been called by the press and by many authors Japan Inc..
The high rank bureaucrats who belong to these ministries are called the Kanryo.
Kanryo is the elite class among the officials at national level in Japan. They usually
graduated from the most prestigious universities in Japan and passed the first level
examination for the National Civil Service. This elite makes very fast careers in the
ranks of bureaucracy in a path nicknamed the bullet train course. In the MOF
(ministry of Finance) they become chief of tax bureau in their late twenties while most
of their subordinates are more than fifty years old.
When members of Kanryo are in a meeting with presidents of big companies they are
treated like seniors and age has no significance. When Kanryo is concerned the Asian
tradition of giving more importance to the elders is put aside. This privilege originates
from the Confucian influence upon Japans traditional society. Before the Meiji
restoration, the Japanese society was divided in four classes under the emperor: samurai,
farmer, craftsman, and merchant, in that order of official importance. In such a
hierarchical society the government represented the emperor and his officers must have
high consideration and respect. The influence of this tradition can still be found in some
aspects of the modern Japanese society in the connection between members of the same
vertical rank like: university students of the same university, presidents of companies or
same year entrants in the bureaucracy.
The links among the Japanese government and the private sector are also tightened by
17
the practice of Amakudari . Amakudari literally means descendent from heaven and
traditionally was a metaphor coming from the myth of deities descending from heaven
to create the Japanese archipelago. Nowadays it refers to acquirement of lucrative
high-level posts after quitting the government agency. Bureaucrats belonging to Kanryo
do not usually end their working career in the public sector but they retire early to work
in those companies or organization that have been sponsored or regulated by the
government agency to which they belonged. The word amakudari, descending from
heaven, shows the consideration given to high level bureaucrats: the government
agencies are heaven while the private sector is lesser in spite of the wage.
The reason why the Kanryo bureaucrats accept the amakudari is merely economic, after
some years in the private sector they can retire with golden pensions and it is this way
that private companies pay back the government officers for any protection received.
This practice can be very useful for the private companies, in the relation based
Japanese capitalism since former bureaucrats, with their connections to the government,
can be a valuable asset for the company.
Kanryo bureaucrats, and thus the governmental agencies, traditionally consider the
protection and development of the industry under their jurisdiction as their most
important task. For example in 1954 there were over 100 producers of motorcycles in
Japan, today they are just four. These incorporations happened under the guidance of the
MITI (now METI) with the aim, through economies of scale, to make the Japanese
motorcycle industry more competitive at the international level. Thanks also to these
integrations (in sectors where international competition was strong), now around 80%
of the global market of motorcycles belongs to the four Japanese manufacturers with
Honda leading at no.1 spot23. The guide of government varied in the past:
-
23
Financing industries directly with financial measures

Influencing private investment by signaling the industry as important for the nation
Sponsoring R&D projects
Giving tax incentives to export
Establishing administrative guidance and extensive regulation requirements in
order to protect the market
Restricting direct foreign investments
Allowing large mergers with lax antitrust enforcement
Controlling the financial markets with regulations in order to make more difficult
speculations and takeovers.
Carter William, Japanese Industry , ASK Co. Ltd, 2001
18
This system makes it difficult for foreign firms to enter in Japan and to compete on
equal basis with Japanese counterparts.
Although some authors (Johnson, Ohmae) state how the governments industrial policy
made the Japanese Miracle in the post-World War II period, this seems not to be true
now that the Japanese economy is the second in the world. As noticed by Porter24:
some of these networks became the Achilles` heel for industries such as
consumer-packaged goods, prepared foods, and apparel in the long run, virtually
precluding them from becoming competitive in international markets.
In these years the role of the government is the subject of a large debate. Government
rule is no longer seen as infallible and government guidance has been blamed for
several failures. Japanese companies that have become global corporations feel that
government intervention is now a problem, as observed by Ikuta25: MITI`s status
within the Japanese government is considered to have declined in recent years; the
industries that have been under MITI`s nurture and care have grown so strong that they
no longer require MITI`s help.
The leaders of Japanese multinational corporations believe that Japans licensing
regulation is unacceptable worldwide and they are worried about the consequences
abroad. It is understood that increasing market shares abroad while keeping Japans
protective system can cause trade disputes. The most competitive industries no longer
need to have a wall to protect them.
Moreover, industrialists agree that gradually dismantling, or at least downsizing the role
of government agencies, are essential in order to make room for new businesses in the
domestic market as an attempt to contrast the recession. As Melville26 notes: By 1998
only about 7% of Japan s GDP was related to imports, one of the few countries with a
figure in single digits and the lowest figure among industrialized nations . Thanks to
the gradual reduction of the role of Kanryo, and to the attempt to let more foreign
businesses get a foothold in the market in order to fight the recession, Japan is now
more open than in the past. Despite this there is still room for further change. Japan
entered in the 21st century with a difficult agenda that includes: internationalization
(Kokusaika), and elimination of the excessive bureaucratic regulation and restrictions.
24
M. E.Porter, H.Takeuchi & M.Sakakibara; Can Japan Compete? PALGRAVE, New York, 2000,
page 21
25
T.Ikuta, Kanryo: Japan`s Hidden Government, NHK publishing, 1995
26
I.Melville, Marketing in Japan , Butterworth-Heinemann, 1999
19
I.d. The Keiretsu

First in the form of zaibatsu, later of keiretsu, corporate grouping have always been a
distinctive part of Japans business scene. Keiretsu means: line of connections and is
defined by a group of corporations with a set of relationships and links (of business and
social nature) with a common will to prosper through mutual help and combination of
their resources. Keiretsus can be classified according to their structures and to the nature
of the main company into the following:
Vertical keiretsus (figure.1) are so called cause of their hierarchical structure. They are
composed of several subsidiaries, subcontractors and affiliates and ultimately dominated
by a major manufacturing or trading company. The head companies of vertical keiretsus
often also belong to a horizontal keiretsu.
Figure 1. Simplified structure of Vertical Manufacturing Keiretsu
Sub-supplier
Sub-supplier
Sub-supplier
Sub-supplier
Direct
Affiliated
Supplier
Direct
Affiliated
Supplier
Sub-supplier
Direct
Affiliated
Supplier
Sub-supplier
Sub-supplier
Sub-supplier
Direct
Affiliated
Supplier
Manufacturing
Main
Company
Direct
Affiliated
Supplier
Sub-supplier
Direct
Affiliated
Supplier
Sub-supplier
Sub-supplier
Sub-supplier
Direct
Affiliated
Supplier
Direct
Affiliated
Supplier
Sub-supplier
Sub-supplier
Sub-supplier
Sub-supplier
The lower position firms are suppliers (in the case of manufacturing companies) or
wholesalers (in the case of distribution companies). The vertical keiretsu can be also
called Enterprise Keiretsu as a consequence of the leading role of a commercial or
manufacturing company. The big manufacturers who belong to a horizontal keiretsu
have their own vertical keiretsu and works like the core of the vertical network in a
particular business sector. The forms of enterprise affiliation inside the vertical keiretsu
20
have been identified and categorized by Okumura27 as follows:

-
Vertical affiliation in production;

Horizontal affiliation for market share expansion, sales network expansion,
diversification, and overseas advance.
In the vertical keiretsu the links of ownership control are stronger than in the horizontal
keiretsu; major manufacturing companies control a large number of subsidiaries (more
than 51% of shares), affiliates (less than 50% of shares) and subcontractors (which
depend on the main company for most of their production).
Among the biggest vertical Keiretsu there is the Toyota Motor keiretsu. Toyota has a
supply and distribution keiretsu vertically and also a horizontal keiretsu. The vertical
supply keiretsu has ten first-level subcontractors that are all big companies listed in the
First Section of the Tokyo Stock Exchange. Among these is the Toyoda Automatic
Loom Works from which Toyota Motor originated in 1933. Toyotas horizontal keiretsu
has ties with Daihatsu, Hino, Chyoda Fire & Marine Insurance, Towa Real Estate, and
with the groups sole trader Tsusho Toyota.
Not only manufacturers form vertical keiretsu but also the Sogo Shosha (general
trading companies) usually have their own vertical keiretsu using their prominent role in
the commercial intermediary activity. The sogo shosha control a large share of Japan`s
international trade, in 1995 the 9 larger sogo shosha controlled about 50% of the
international trade of Japan28. To be referred to as a sogo shosha a company must:
-
Handle a diverse product range;

Manage a large share of the countrys trade;
Have a wide international network.
Thanks to these characteristics the sogo shosha had an important role in keeping the
trade balance of Japan with foreign countries positive. The sogo allow also small
Japanese companies to export safely abroad, reducing the informative asymmetries and
lending money at low interest rate to small businesses. At the same time they are useful
in their role of trust and finance brokers. For those selling to buyers with questionable
credit standing, the sogo shosha are in the position to ask for a guarantee or a sponsor
while manufacturers alone may be too small to do so. Dealing with a sogo shosha can
27
Okumura H., The Closed Nature of Japanese Intercorporate Relations , Japan Echo, 1983
28
Camera di Commercio Italiana in Giappone, Il Giappone a portata di mano , Etas, 2002.
21
bring also financial benefits. It has high credit rate from the banking system and can
delay the payments, thus financing the small firms trading with them.
After the collapse of the bubble economy and the consequent reduction of the trade
handled, the sogo shosha focused of telecommunications and investments in Asia.
Horizontal keiretsus (figure.2) are those who include ties with different corporations in
a wide range of business sectors.
Figure 2. Simplified structure of horizontal banking keiretsu
They are centered on a main bank because they have their historical origin in the
acquisition of shares from old zaibatsus by the banks in the post-World War II period.
There are 8 big horizontal keiretsus nowadays in Japan; six of these keiretsus are called
the Big Six (Mitsubishi, Mitsui, Sumitomo, DKB, Fuyo, and Sanwa). They can be
distinguished by their origin in Bank Keiretsu and Ex-Zaibatsu Keiretsu29. The
Ex-Zaibatsu Group includes the descendants of the pre-war zaibatsus. The ex-zaibatsus
are three of the big six keiretsus, these are: Mitsui, Mitsubishi, and Sumitomo.
The bank keiretsu consists of a group of major companies to which a bank lends money
and of which it owns shares. The biggest bank keiretsus are: Fuyo, Sanwa, and DKB. In
the recent years these horizontal keiretsus had to cope with huge changes due to the
29
Clark Rodney, The Japanese Company, Yale University Press, 1979
22
restructuring of the Japanese financial system. The four so-called megabank groups
were formed in 2000-02: in September 2000 Mizuho Financial Group was born as a
result of the consolidation of the operations of The Dai-Ichi Kangyo Bank Limited, The
Fuji Bank Limited, and The Industrial Bank of Japan Limited forming the worlds
largest bank. In April 2001 the merger of Sakura Bank and Sumitomo Bank created the
SMBC (Sumitomo Mitsui Banking Corporation). In the same month (April 2001)
MTFG (Mitsubishi Tokyo Financial Group) was formed by the merger of the Bank of
Tokyo-Mitsubishi, Mitsubishi Trust & Banking Corporation and Nippon Trust Bank.
Finally in January 2002 UFJ Bank Limited, now one of the four leading financial
groups in Japan, was formed through the merger of The Sanwa Bank, Limited and The
Tokai Bank, Limited. These four huge mergers changed the traditional financial and
corporate asset of Japanese industry in less than 2 years.
As seen in the preceding paragraphs, Japans economic miracle was dependent upon the
business correlation between banks and corporations. This system is beneficial for the
banks for the reason that the grouping of unrelated firms into a keiretsu minimizes risk.
For member firms it is convenient because being in the keiretsu they can obtain higher
debt capacity and lower interests rates due to the security portfolio of the bank. In spite
of this, it is a mistake to consider the bank-keiretsu as a mere network based on
ownership and financial links. In the 1980s, with the liberalization of the capital market,
companies switched away from banks in satisfying their financial needs moving to
capital markets with bonds and securities. The relation bank-industry is now more
flexible with less dependence upon borrowed capital.
Another distinctive feature of the keiretsu is the: Cross-shareholding , this entails that
the shares are owned by fellow businesses rather than by external investors.
Cross-shareholding gives the keiretsu two kinds of advantage:
1. Businesses who maintain long term trade relations with a firm are more interested
in long term performance and growth of the firm while individuals tend to care only
about short term capital gains and dividends;
2. Cross-shareholding inside the keiretsu drastically reduces the risk of external
takeovers, in many cases takeovers have been avoided by the intervention of other
keiretsu participants; as happened for Nagasakiya, a clothing chain store belonging
to DKB keiretsu that was saved from the takeover of Shuwa by the intervention of
three DKB real estate companies that bought back almost all the shares of
Nagasakiya held by Shuwa30.
30
Dodwell, Industrial Grouping in Japan, 1994.
23
The Japanese system has been traditionally a Managerial Capitalism . As

Nishiyama 31 noticed: The large businesses in Japan are controlled via the position
and dominance of the management workers their management objective is the
perpetuation of the firm as a communal body. Nishiyama cites evidence for the
statement that corporate control in the Japanese keiretsu is not based just on ownership.
He outlined how the key stockholders of member companies are banks (with the legal
limit of 5%) and life insurance companies (for which the limit is 10%) of the keiretsu,
and the major owners of the banks are the life insurance companies. However, life
insurance companies in Japan are mutual insurance companies, which means an
association of insurance holders funded by the accumulation of premiums paid by
insurance holders, which in a keiretsu are mainly the keiretsu`s members. In such a
network of business links it seems nearly impossible to distinguish who is the owner.
This characteristic stems from the antimonopoly law, introduced during the American
occupation, which prohibited the existence of a central ad hoc coordinating body. As a
consequence the keiretsu-group decisions are taken by the shacho-kai or presidents
club of each keiretsu. The heads of the companies (president and chairman or, in some
cases, only president) belonging to the keiretsu usually meet once a month. The name of
these presidents clubs is given (in most cases) by the day of the week they meet, for
example: Nimokukai (Second Thursday Club) for Mitsui, Kinyokai (Friday Club)
for Mitsubishi, Sansuikai (3rd Wednesday Club) for Sanwa, Sankinkai (3rd Friday
Club) for DKB32. Officially they meet for social purposes, but it is not possible to know
what they discuss in reality since the meetings are closed and note taking is forbidden.
These meetings are the core of the strategic decisions of the keiretsu relational groups.
As described by Lincoln, Gerlach & Ahmadjian33: These complex inter-firm networks
reveal the embeddedness of the Japanese economy: the infusion of market exchange
with rich social relations of a noneconomic nature .
The vertical keiretsu has often been subject of criticism, especially by foreign
companies eager to operate in the Japanese market, because of its exclusive nature. The
USA once again played a key role in opening Japan with the Structural Impediment
31
The structure of Managerial Control: Who Owns and Controls Japanese Businesses
in The
Anatomy of Japanese Business, Sato & Yasuho Hoshino M.E. Sharpe, Nishiyama, 1984
32
K. Miyashita & D. Russel, Keiretsu: Inside the Hidden Japanese Conglomerates , McGraw Hill,
1996
33
Lincoln J.R, Gerlach M.L. & Ahmadjian C.L., Keiretsu Networks and Corporate Performance in
Japan , American Sociological Review no.61 page 67-88, 1996
24
Initiative (SII), a 1989 trade agreement between Japan and the United States.
Thereafter, Japan agreed to open their distribution system and foreign retailers entered
in Japan. In 1995 car part talks between USA and Japan ended, with a partial opening in
the very lucrative Japanese auto industry. These and other trade agreements have been
necessary because of the pressure of foreign multinationals that were unable to find easy
access to the Japanese distribution.
It is not the legal pattern that determines the Japanese business behavior, but the point is
that keiretsu firms have good reasons to buy from fellow members. Although it is not
forbidden to buy from an external supplier to the keiretsu if he can provide a better price
and quality, trust and reliability remain the most important assets of inter-firms relations
in Japan. The Japanese lean production system needs a strong link with suppliers. The
benefit of this system can easily overcome the benefits of a lower price of purchase.
Since the end of the bubble years, many big horizontal keiretsus began to suffer a
structural crisis. During the bubble years the huge capital gains coming from real estate
investments made managers lose their sense of the value of money. Furthermore,
keiretsu kept on diversifying in order to gain market shares without the need to care
about profits. When the bubble of real estate ended, many keiretsus found themselves in
trouble because of the low level of their ROE.
Main banks of the group have to deal with the low profits of the firms they are linked
and low capital ratios are crimping their ability to lend to fellow firms. Mitsubishi
keiretsu, for example, is facing a deep crisis with 13 of its core members having (in
2000) a combined debt of $132 billion and just $58 billion in shareholders equity; Kirin
brewery (the Mitsubishi beer maker) lost its leadership in the beer market that is now of
Asahi Breweries34.
The links between banks and manufacturing firms that made the success of keiretsus
and of the Japanese system, allowing companies to focus on growth rather than profit, is
now one of the main reasons for their crisis. In the past, analysts from all over the world
had suggested that the days of keiretsu were coming to an end because the exclusivity of
their business relations were thought to be against market forces and thus destined to be
defeated. Nowadays, with the financial reforms and other liberalizations taking place in
Japan, this argument is showing up again on the business press and in research. Some
researchers, especially in Japan, have recognized the strong points of the keiretsu and
their deep relation with the Japanese way of business and are reluctant in forecasting its
demise. Other authors, mainly from the USA, view the keiretsu as a market
imperfection that has no longer reason to exist in a global economy. Some studies also
34
B.Bremmer & E. Thornton, Mitsubishi: Fall of a Keiretsu , in Business week, March 15, 1999)
25
affirms that the keiretsu lacks of economic substance35.

When in the 1990s the mutual shareholding between members of horizontal keiretsus
went below 30 percent, and the main banks held less than the legal limit of 5% of the
stock of any member company, it looked to western eyes (and not only) like the
dissolution of the keiretsu system but that was not the case of Japan. In the year 199936
the share of Japanese economy of the Big Six Horizontal keiretsus alone was a total of
13% with sales for around 176 trillions of Yen (about 1,530,000 millions dollars) and a
share of employment of 4% (about 1,660,000 employees).
Keiretsus are still a strong reality in Japan but they are now more open then they were in
the years of the Japanese miracle. As we will see in the section regarding the impact of
JIT on the supply chain, without these links between companies the JIT-Kanban system
would not be possible. My opinion is that we should consider that the Japanese system
is traditionally a managerial capitalism where corporate control is not based only on
ownership but on business relations and mutual interests. Even if the Japanese system is
gradually transforming itself due to the deregulation process, it will take time before
such a cultural aspect will be changed completely.
Figure 3. Role of the Big Six in Japans Economy, March 31, 1999
Mitsui Mitsubishi
Sumitomo Fuyo
Sanwa
Dai-Ichi Total
Cross-Shareholding
15.8%
26.0%
20.8%
19.4%
15.1%
12.1%
Group Lending
20.6%
19.4%
20.4%
16.3%
18.6%
15.3%
Employees (thousands)
260
230
140
280
350
400
1660
Share of Employment
0.6%
0.5%
0.3%
0.7%
0.9%
1.0%
4%
29
25
18
27
31
46
176
2.1%
1.8%
1.4%
2.0%
2.3%
3.4%
13%
Sales (Triilions Yen)

Share of Economy
source: Toyo Keizai Shinposha, Kigyo Keiretsu Soran, Tokyo, 2000
35
See: Miwa Y. & Ramseyer J.M., The Fable of Keiretsu , in Journal of Economics and Management
Strategy vol.11 page 169-224, MIT Press, 2002

36
Toyo Keizai Shinposha, Kigyo Keiretsu Soran , Tokyo, 2000
26
I.e. The financial system:

The Japanese financial system is a bank-centered system which shows similarities
with the Italian or the German system with several peculiarities. The relations among
enterprises and banks in Japan are stronger than in most western countries,
characterized by main bank links, and in several cases ties arising from the bank being
in the same keiretsu as the firm.
The financial institutions in Japan, under the guidance of the MOF (Ministry of
Finance) and the Bank of Japan (Central Bank), belong to the following categories:
-
City Banks:
Even if in the recent years they gradually disappeared due to the financial reform and
the merger into giant financial groups (The Big Four), they had an important role in
the period between the end of World War II and the collapse of the bubble economy.
The city banks were established after the Meiji Restoration. Dai-Ichi Kangyo was
established in 1872 as Dai-Ichi Kokuristu (First National Bank). Most of the other
city banks were created by zaibatsus; e.g. Mitsui Bank (1876), Fuji Bank (1880),
Mitsubishi Bank (1880) and Sumitomo Bank (1895). City banks collected savings and
used them to supply medium-term financing for business, industry and agriculture.).
The role of City banks in the Japanese economy was that of intermediaries between
the government and businesses in order to nurture targeted business areas.
The Big Four:

Are born from the merger of the largest city banks in 2000-02, which compete
globally with foreign financial groups. They are:
1. Mizuho Financial Group born as a result of the consolidation of the operations
of The Dai-Ichi Kangyo Bank Limited, The Fuji Bank Limited, and The
Industrial Bank of Japan Limited in September 2000, is the worlds largest
bank;
2. SMBC (Sumitomo Mitsui Banking Corporation.), created in April 2001 by the
merger of Sakura Bank and Sumitomo Bank;
3. MTFG (Mitsubishi Tokyo Financial Group) made up by the merger of the
Bank of Tokyo-Mitsubishi, Mitsubishi Trust & Banking Corporation and
Nippon Trust Bank in April 2001;
4. UFJ Bank Limited was formed through the merger of The Sanwa Bank,
27
Limited and The Tokai Bank, Limited in January 2002.
Regional Banks:
About two thirds of the lending of these banks is done within the prefecture in
which they are located.
Cooperative banks:
Also called Norinchukin Banks, are farm and fishery cooperatives employees
owned.
Security Firms:
In the late 1980's the Big Four security firms (Nomura, Daiwa, Nikko and
Yamaichi) had market values that were greater than most banks. The security firm
of Yamaichi collapsed in November of 1997 and filed for bankruptcy in June of
1999. In 1998 Nikko Securities was acquired by City group and subsequently
became part of Nikko Salomon Smith Barney.
Japan Post37 (former Postal Savings Bureau):

A savings bank operated by the postal service through its 24,752(as of April 2003)
post offices can be considered Japans biggest saving bank.
An important aspect of the Japanese financial system is the role of the Main Bank .
The main bank (which in the bank keiretsu normally is the core bank) is the bank from
which a firm borrows most of the money. It is usually also one of the firms main
shareholders within the limit imposed by the law. Even if the bank has a limit in the
possibility of directly holding shares of other companies, other members of the group
can hold shares at the request of the bank, representing the banks interests. The
relationship between the firm and the main bank implies that:
-
37
The main bank serves like a form of corporate governance taking the responsibility
of monitoring the firm;
In times of distress the main bank has the power to change the board of directors of
the firm.
The Japan Postal Saving Bureau has been reorganized and changed its name in Japan
Post in April 2003.
28
During the 1980s and the early 1990s many authors found significant benefits in the
Japanese bank-firm affiliations due to the reduction of agency costs and informative
asymmetries38. Banks financing firms, which belong to their same keiretsu, having thus
business, shareholding, and managerial links with their clients can have more
information about those firms than do external monitors. From the point of view of the
firm borrowing from a main bank or a bank belonging to the same keiretsu ensures to
the firm backup financing in the eventuality of financial troubles as well as the
possibility to maintain safely a higher ratio of bank debt relatively to their total asset.
But not all observers and authors agree with the benefits of the corporate links
especially in a period of crisis. According with a recent study of Peek & Rosengren39
one of the difficulties in implementing major banking restructuring has been the
network of corporate links that makes lenders and associated companies support firms
that otherwise would have been out of the business arena. A key driver of lending to
troubled firms has been the strength of corporate affiliations. Lenders without such
affiliations are much less disposed to allocate additional credit to deeply troubled firms.
Although strong corporate affiliations pushed the economy during the boom times by
making credit more available and investments less responsive to internal cash flows,
these same affiliations are responsible for the ever-greening of bad loans by the main
banks and might prevent the economic recovery.
The Japanese financial system is currently undergoing a major transformation. The
Japanese banking system has suffered from serious problems with non-performing loans
since the early 1990s, when the Japanese stock market and real estate market both
crashed. A result was the immense banking crisis in the Japanese economy. This crisis
has included the first significant Japanese bank failures since the end of the U.S.
occupation of Japan. In late 1996 the Japanese government inaugurated its Big Bang
of financial deregulation designed to create a free, fair, and open financial market.
The government embarked on a major cure of the banking system, including making
available some Yen 60 trillion (approximately USD 500 billion) of government funds to
recapitalize fifteen major banks, and cancel the bad loans of nationalized or bankrupt
banks. The Ministry of Finance (MOF), which dominated the Japanese financial
system policy since the post-war period, has been deprived of most of its former
regulatory powers. The ratio of bad loans to the loan balance is now still about 9 percent,
38
Hoshi T., Kashyap A., Scharfstein D., The Role of Banks in Reducing the Costs of Financial Distress
in Japan , in Journal of Financial Economics no.27 page 67-88, 1990

39
Peek J. & Rosengren E.S., Unnatural Selection: Perverse Incentives and Misallocation of Credit in
Japan , National Bureau of Economic Research, April 2003
29
and the ratio to nominal GDP has exceeded 8 percent40.
I.f. The Japanese labor market:

One of the most important factors typifying the Japanese business system is the labor
market. The Japanese labor market was (and still is in big companies), traditionally,
characterized by:
-
Life employment;
Seniority-plus-merit wage and promotion;
Company unions.
Life employment means that an employee joins a firm after leaving school or university
and belongs to that firm until retirement. This conception became part of the business
environment during the industrialization of Japan when the labor market was
characterized by scarcity of skilled labor and difficulty to secure workers. This policy of
labor market was able to reduce the cost of employment through the benefit and promise
of lifetime employment. Hence, in exchange for flexibility of jobs the management
gives the workers employment security.
The kaisha (Japanese for firm) is seen as the family of the worker, a group he joins for
most of his life and of which he shares success and failures. Also this concept of
family-company is rooted in the traditional Japanese culture. The family as we consider
it in the West, didnt exist in ancient Japan. The traditional Japanese family was called
ie (same ideogram but different meaning of the modern term kazoku corresponding to
the concept of western family) and was based on practical and contractual concerns.
When the ie needed to have new members, or a new heir, then a new member could
be easily adopted to fit into a functional practical position 41 . Japanese kaishain
(employee), in most cases, are still now considered similar to members of an enlarged
family rather than employees. The company is not a plain property of shareholders but a
community in which regular workers are treated as members. If a western blue-collar
worker is asked about his job, he usually answers with his job category. If the same
question is posed to a Japanese he will reply with the company name and not the job
40
As of March 2002 according to data of Bank of Japan and Cabinet Office.
41
See: Nakane C. & Oishi S., Tokugawa Japan , University of Tokyo Press, 1990
30
category, whatever is his hierarchical level in the company. For Japanese people the
company name is more important than the job title. By giving the company name they
are stating which community they belong to and they are proud of the name of their
company. The community to which they belong is more important than what they do.
This implies that the worker at any level has a bigger responsibility and shares the
destiny of its family-company both in good and bad times. Unlike Italy, where life
employment is imposed by the law with the art. 18 of the Statute of Laborers, in Japan
the life employment is more a management practice to win the loyalty of the worker
rather than an obligation imposed by the law.
Japanese rhetoric holds the result of the group is more important than the result of the
individual in the never-ending quest of harmony ( wa ) of the group. The Japanese
worker is not concerned only with his task but with the overall result of the company to
which he belongs all his life.
Japanese companies place great importance on the employees ability to work
harmoniously with other workers. To be part of the group it is necessary that every
worker knows and understands the tasks of other co-workers that belong to the group.
Both the blue collar and white collar workers do not stay in the same task for all their
working life but change tasks horizontally several times, consequently establishing an
awareness of several production processes. This scheme is made possible by two other
traditional characteristics of the Japanese labor market: the seniority-plus-merit wage or
nenko (rather than the task related wage) and the single company unions (rather than
national unions).
The seniority-plus-merit wage is determined by the years of service in the firm and/or
the university where the employee gained his degree plus, later in the career, the merits
of the worker and not the specific task. A blue-collar worker is not in the same job for
all his life, and doesnt receive the salary according to the difficulty or the skills
required for a specific type of job as decided by a categorys national union. Even if
employees remain at the same position level, they can benefit from relevant raises in
their wage.
With enterprise unions, wages and work conditions are negotiated within the company.
The enterprise unions include all employees of the company with no differentiation as
to skill and job category, blue-collars or white-collars. The union is not an entity
separated from the kaisha or in conflict with it. When an employee is advanced to a
managerial position, he ceases being an associate of the union. On average about one
in six of the top executives have been executives of the companys union42.
42
Abegglen J. & Stalk G.J., Kaisha: The Japanese Corporation , Basic Books, 1985
31
Union-company relations tend to develop more pragmatically according to the nature

and the reality of the firm. This aspect has played a key role in the implementation of
JIT systems in Japan.
Labor disputes do happen in Japan but strikes are shorter. Therefore, fewer days are lost.
As demonstrated by a survey of Keizai Koho Center in 1995, in Japan only about
73,000 days of work were lost due to labor disputes, while in the same year in the
United States the figure was of 5,711,000 and in Italy of 909,000 days.
The linking of the fortune of the union with the one of the kaisha reduces the extent to
which the union is prepared to risk damaging the economic situation of the company.
The wa (harmony) philosophy shows its dominance in Japanese social and business
culture also in the most conflicting issues.
Since the collapse of the economic bubble in the early 1990s, the traditional labor
system based on loyalty and relations showed its limit in lack of flexibility in
responding adaptively to rapidly changing markets. As stated by Sato43 in order to keep
the lifetime employment system, large companies are increasingly choosing to transfer
their core employees to their affiliates and subsidiaries. As a consequence, the practice
of life employment within a single corporation is slowly giving way to the practice of
life employment within a group. At the same time the crisis made difficult to keep the
seniority based wage system.
To invent a new Japanese style management system that can be effective in the new
global arena it is necessary to reform the employment and the salary system, as agreed
by most managers and researchers nowadays. One of the Top managers that in these
years showed the way in Japan is the Brazilian, Carlos Ghosn, CEO of Nissan since
1999. Ghosn took Nissan from the brink of ruin and made it again a profitable
corporation in just two years reconsidering many of the management practices of the
Japanese car manufacturer, especially in the human resources. Ghosn believes that the
strength of Japan is its human resources, though he radically changed the way of
managing those resources. Ghosns policy of human resource management includes
changing of retribution and promotion system, judging and rewarding employees not on
the basis of the University that they graduated from or their age, but rather on their
performance and contribution to the company. As Ghosn44 noted: It is not by chance
that this small country that was devastated by the Second World War and has no natural
43
Sato H.,
Human resource management system in large firms: the case of white-collars graduate
employees , in Japan Labour and Management in Transition: diversity, flexibility and participation ,
Routledge, 1997
44
Al-Jamie A., Breaking the glass ceiling , on Tokyo Journal, vol.22 no. 248, Autumn 2003
32
resources became the second largest economy in the world. Japan s past success is
largely due to Japan s most valuable asset: its human resources and also: Fairness is
important. You should be fair to performance not to people. Being fair to people
independent to contribution is not motivating. Why would an employee want to take a
risk and put forth additional effort if they are going to be treated exactly like others who
were unwilling to take that risk or put forth the extra effort?
At the same time, as a survey 45 showed last year, the labor ethics among young
Japanese is changing since the end of the bubble economy, Young Japanese people
have been more motivated to start new businesses rather than opting to work in large
established companies or in the public sector . Part time employment, especially for
women, has become more and more frequent as an alternative to full-time and not just
for peaks like in the past. During my stay in Japan I had the chance to visit the logistic
center of FANCL cosmetics in Yokohama. I was surprised to see the high number of
women working there (unusual in Japan), The manager 46 stated that in the logistic
center around 70% of workers are women and most of them are part time employees.
Even the best and brightest Japanese university graduates, who used to head big
manufacturing or export companies or become members of the Kanryo, are often
saying no to a life employment with an uncertain future. It is now common for them to
quit their established posts for better wages in other companies or start a business after
some years of work in a company. Many companies now adopt also a yearly contract
system of salaries (nempo-sei) similar to those in use in the United States.
In other words, the Japanese labor market is changing. The new Japanese labor market
need not copy the European or the American system, but will need to build a new
Japanese style system that can fit both the Japanese culture and respond efficiently to
the new global economy.
45
Global Entrepreneurship Monitor, sponsored by London School of Economics, Babson College and
Japan Keio University, 2002

46
My thanks to Chikahisa Okada, General Manager and Junko Maesako of the Logistic Division of
FANCL in Yokohama for the visit to the facility.
33
I.g. The education system:

Fundamentally, the Japanese education system is composed of 6 years of elementary
school, 3 years of junior high school, 3 years of senior high school, 4 years of
undergraduate and 5 years of postgraduate courses. There is also kindergarten before the
elementary school; college of technology of 5 years after finishing junior high school;
and junior colleges of 2 years after senior high school.
Every child enters elementary school at the age of six, and nine years of education up
until the end of junior high school are compulsory. Entrance to university is the hardest
task in all the education career of a student. Admission tests in the most prestigious
universities are incredibly hard, but once admitted graduation is almost automatic with a
very small percentage of students who will not graduate or who quit.
At first sight, the Japanese education system seems very similar to the traditional
European approach of more then 50 years ago. Students wear uniforms, sit silently and
take notes while a teacher lectures on a subject, pausing only to start homework and to
sign attendance. Discussion is usually disregarded. Lectures are based almost entirely
on the textbook and there is little deviation from it. Knowledge is primarily obtained
through memorization and method-based problem solving. It is surprising that with such
an old fashioned system students are able to stay awake in class and be motivated
enough to learn at a rate that ranks Japan in the top ten countries of the world for
science and math.
On closer examination other influences are recognized which play an important role in
the classroom. Students are pushed to almost unbelievable levels of tolerance and
endurance needed to pass the University entrance exams. This is possible, thanks to the
strong fortification of traditional Japanese thinking in the educational system itself.
Unlike most western approaches, the Japanese system spends a great deal of emphasis
in activities outside of the classroom.
Teacher-student relations, group-structured student groups, and school events serve to
shape the student with a sense of ethics and commitment to learn and to excel at school
transcending individual needs. It is this drive, carefully nurtured by the educational
system, that allows students to accept 8-hour a day study sessions and continue to face
the pile of homework, plus sometimes several club activities and keiko goto (private
lessons).
There is a big difference between Japanese and Western teachers residing in their task in
their respective educational systems. In most western countries, there is little interaction
between students and teachers outside of the classroom. Teachers are considered regular
government workers who work standard hours and go home when classes are over.
34
Teaching is simply a job. In Japan, it's something more.

Teachers are considered with a high degree of respect, being addressed with the
honorific "sensei", a title which of all other professions only doctors and politicians also
have. They are expected to be better than the average person, adhering to higher codes
of conduct and excelling beyond the standard in their respective fields. Education is
considered the cornerstone of success in Japanese society, thus the role of teacher is
considered to be one of the main factors in the future of students. As elevated members
of society, they command immediate respect even outside of a classroom and are always
addressed with the polite "keigo" language that is reserved only for superiors and elders.
Responsibilities of a teacher are also great, they have to prepare students not only
academically, but also they have to build up the students' sense of ethics, nurturing their
ability to work with others, and making sure they stay out of trouble, during and out of
school hours. Often in case of emergencies, after family members, they are the next in
line to be contacted. Teachers are encouraged to become very close to their students and
to know everything about their lives. This commitment by teachers and the trust that
society gives them are extremely important to classroom dynamics.
With the teacher being the class leader, students give the teacher the mandate to carry
out lessons and to direct group-building activities like class projects and cooperative
events with little disruption and rebelliousness.
In Japan, the school system has the merit of passing the group harmony attitude on to
the young generations. Children dress in uniforms and march together into the
classrooms like small soldiers. Pupils since the age of six are taught to live in group and
to achieve in group. Teachers teach them that to achieve they must work hard and
together. As stated by Ohmae47: This cultural upbringing is the mainspring of the
workaholic nature of the Japanese .
Since the Japanese education system stresses group harmony, it inhibits the glorification
of outstanding pupils. The first must use their intelligence to help the last in order to
make the group function and evolve. The same kind of attitude is appreciated in
Japanese corporate executives. From this attitude come most of the typical features of
the Japanese management approaches.
47
Ohmae Kenichi, The Mind of the Strategist, the art of Japanese business , McGraw-Hill, 1982.
35
I.h. Jinmyaku : the importance of interdependence and relations for business

Jinmyaku can be translated as personal contacts that in the social-oriented
Japanese business system have a very particular relevance. One of the basic differences
between Japanese and Westerners in business is the division between work time and
leisure time. Western workers, habitually, clearly separate the private life from the
professional life. However, in Japan social life is often part of the job life.
Managers and executive of companies belonging to the same keiretsu are encouraged to
have informal relations, going to drink, play golf and doing other leisure activities
together.
The networking starts at school and continues at university. Former scholars of the same
university create a network that will be very useful to them in their future working
career. As a consequence of lifetime employment, friends are often other employees or
managers of the same company or of other companies with which the company does
business. In Japan, each person and company operates an extensive network of
Jinmyaku. The more contacts a manger has, the stronger his jinmyaku is. Their value to
the company is dependent on their jinmyaku. The Japanese practice of moving staff
every two or three years means the staff continually extends their personal and company
networks.
The jinmyaku are often closely linked through cross-share holdings, information
networks and history inside the keiretsu which thus can be seen as a company s
jinmyaku being a network of contacts and business relations. In the vertical keiretsu
the main company in some cases promotes these relations with executive and managers
of suppliers companies as a corporate policy. Also the practice of amakudari (see
earlier) is related with jinmyaku since the main benefit for the companies hiring former
Kanryo officers is the acquisition of their personal networks.
I.i. The management style

The leadership process in Japan is based on the search for consensus. The ringisho
decision-making process aims to build consensus by allowing all the management to
express opinions about the plans under deliberation. In many Japanese companies
decisions are made not only by the top executives but also by the involvement of
middle-management. The proposal can also be made by the staff, who has direct contact
with clients, after being filtered by the section chief. Unofficial groups within the
36
official organization structure promote discussions that operate as the starting point for
decision-making.
The concept of harmony of the group pervades the management style. Top down
decisions are not usually appreciated in Japan. In Japanese firms when a decision is
made about a new proposal the decision-making is not only conducted by the top
executives but also involve the middle management. In several cases the staff that is
directly implied with the clients or the production problems makes proposals. In the
decision-making the proposer tries to obtain the nemawashi (obtaining the agreement
in advance), clarifying the proposal to those who are likely to oppose it in order to get
their agreement. The nemawashi is usually done in informal meetings in order to show
respect and get the cooperation of potential opponents. This style of making proposals is
important to enhance cooperation and harmony. Even if the proposal fails the proponent
has no direct responsibility, since it has been done with the agreement of all. Top down
decision-making could brake the harmony of the group and create conflicts and is
ultimately limited.
This down to top decision-making is typical of the Japanese management style.
Quality circles and Total Quality Management also promote consensus building. The
formal and informal participatory management plays an important role in the companys
capacity to establish quality and gradual innovation (kaizen).
37
Part II.a. Total Quality Management

According to ISO 840248, quality management can be defined as follows: All activities
of the overall management function that determine the quality policy, objectives and
responsibilities, and implement them by means such as quality planning, quality control,
quality assurance and quality improvement within the quality system .
Total Quality Management can be defined as, A management philosophy for
continuously improving overall business performance based on leadership, supplier
quality management, vision and plan statement, evaluation, process control and
improvement, product design, quality system improvement, employee participation,
recognition and reward, education and training, and focus on customer satisfaction
Quality and reliability are two attributes required for all Japanese products. The effect
of Total Quality Management is in the DNA of every big Japanese manufacturer and
impacts with the characteristics of the business system and of the supply chain.
II.b. The history of Total Quality

The quality movement in Japan originated in 1946 with the U.S. Occupation Force's
mission to restore and reorganize Japan's communications equipment industry. General
Douglas MacArthur aimed to develop public education through the radio. Homer
Sarasohn was recruited to organize the attempt by renovating and installing equipment,
supplying materials and components, resuming facilities, establishing the Equipment
Test Laboratory, and setting new and higher quality standards for products. Sarasohn
recommended individuals for company presidencies, like Koji Kobayashi of NEC, and
he established education for Japan's top executives in the management of quality.
Moreover, before Sarasohn returned to the United States, he recommended W. Edwards
Deming to provide a seminar in Japan on Statistical Quality Control (SQC)49.
Deming provided the basis for a 30-day seminar sponsored by the Union of Japanese
Scientists and Engineers (JUSE) and presented the criteria for Japan's eminent Deming
48
ISO 8402, Quality Management and Quality Assurance, Vocabulary, International Organization for
Standardization, 1994.
49
Tsurumi Yoshi, "An Interview with Homer M. Sarasohn: The Unsung American Hero of Japan's Total
Quality Control System." In Pacific Basin Quarterly, Winter/Spring: 1-5, 1990.
38
Prize. Deming was awarded by the Prime Minister with the Second Order of the Sacred
Treasure for his contribution to Japan's re-industrialization.
In the same period the concept of Total Quality was introduced by Armand V.
Feigenbaum 50 who defined it as: An effective system for integrating the quality
development, quality maintenance and quality improvement efforts of various groups in
an organisation, so as to enable production and service at the most economical levels
which allow for full customer satisfaction .
Deming developed and structured the concept of quality inside the firm. W.E. Deming
stated that quality begins with top management and represents a strategic activity.
Demings philosophy affirms that quality and productivity increase as process
variability decreases. Based on his work with Japanese managers and experts,
Deming51 outlined 14 steps that managers in every kind of organization can take to
implement a quality program:
1. Create constancy of purpose for improvement of product and service. Constancy of
purpose involves: innovation, investment in research and education, continuous
improvement of product and service, maintenance of equipment, and furniture;
2. Adopt the new philosophy. Management must go through a deep transformation and
start to believe in quality products and services;
3. Cease dependence on mass inspection. Inspect products and services just enough to
be able to identify ways to improve the process;
4. Ending awarding business on price. The cheapest products are not always the
highest quality; select supplier according to their record of improvement and then make
a long-term commitment with them;
5. Improve constantly the system of production and service. Improvement is not a
one-time effort; management has the responsibility to lead the organization into the
practice of continual improvement of quality and productivity;
50
The first edition of the book: Total Quality Control
written by Dr. Armand V. Feigenbaun, was
published in 1951
51
- Walton M., "The Deming management method., Perigee, 1986
Deming W. E., "Out of the crisis. , M.I.T Center for Advanced Engineering Study, 1986
39
6. Institute training on the job. Workers need to know how to do their jobs properly
even if they need to learn new skills;
7. Institute leadership. Managers have the responsibility to discover the obstacles that
prevent staff from being satisfied of what they do;
8. Drive out fear. Workers often fear retaliation if they cause troubles at work.
Managers need to create an environment where workers can express concerns with
confidence;
9. Break down barriers between departments. Teamwork should be promoted by
helping staff in different departments to work together. Nurturing interrelationships
among departments promotes higher quality decision-making;
10. Eliminate slogans and exhortations, for the workforce. The use of slogans alone,
without an investigation of the workplace, can be offensive to workers because they
mean that a better job could be done. Managers need to learn effective ways of
motivating people in their organizations;
11. Eliminate numerical quotas. Quotas obstruct quality leaving no room for
improvement. Workers need the necessary flexibility in order to give to customers the
level of service they require;
12. Give workers pride and feedback about how they are doing their jobs;
13. Institute a program of education and self-improvement. With continuous
improvement, job descriptions will change. Thus, employees need to be educated and
retrained so they will become successful at new job tasks;
14. Take action to accomplish the transformation. Management must work as a team to
carry out the previous 13 steps.
In 1954, another American Dr. Joseph M. Juran extended quality management from the
factory to the whole organization. He underlined the importance of systems thinking
that begins with product designs, testing, appropriate equipment operations, and proper
process feedback. Juran's seminar also became a part of JUSE's educational programs.
Juran made possible the move to TQC (Total Quality Control) in Japanese industry. He
40
tried to get organisations to move away from the traditional manufacturing-based view
of quality as conformance to specification to a more user-based approach, for which
he created the phrase Fitness for Use. He underlined how a dangerous product could
conform to specification but would not be fit for use.
Juran was not only concerned with management activities and the responsibility for
quality, but also investigated the waves of individual workers and studied the motivation
and involvement of the work force in quality improvement activities. He introduced:
company-wide activities, education in quality control and promotion of quality
management principles.
A further development in total quality doctrine took place by 1968 with the studies of
Kaoru Ishikawa, another of the fathers of Total Quality in Japan, who outlined the
elements of total quality52:
-
Quality comes first, before short-term profits

The customer comes first, before the producer
Customers are the next process with no organizational barriers
Decisions are based on facts and data
Management is participatory and respectful of all workers
Cross-functional committees covering product planning, product design, production
planning, purchasing, manufacturing, sales, and distribution drive management.
Ishikawa created what are known as quality circles and cause-and-effect diagrams. He
claimed that there had been a period of exaggerated emphasis on statistical quality
control, which made implementation of quality too complex.
Furthermore, the consequential standardisation of products and processes and the
creation of strict specification of standards became an encumber that made change
difficult and people feel bordered by excessive regulations. For Ishikawa worker
participation was the key to the successful implementation of Total Quality
Management. Quality circles were an important vehicle to achieve this.
A further important contribution to the development of the Total Quality Management
doctrine was given by Genichi Taguchi53. He was concerned with engineering in quality
52
See:
- Ishikawa Kaoru, Guide to Quality Control. Asian Productivity Organization, 1982
- Ishikawa Kaoru, What Is Total Quality Control? The Japanese Way , Englewood Cliffs, 1985
53
In 1989 Genichi Taguchi was awarded with the M.I.T.I. Purple Ribbon from the Emperor of Japan for
his contribution to Japanese industrial standards. He is director of the Japan Industrial Technology
41
through the optimisation of product design combined with statistical methods of quality
control. According to Taguchi54: Quality is a virtue of design. The robustness of
products is more a function of good design than of on-line control, however stringent, of
manufacturing processes . Taguchi developed a distillation mechanism for setting the
right target for design through which the engineers experimentation should pass55. He
also encouraged interactive team meetings between workers and managers to criticise
and develop product design. Taguchis Quality Loss Function (QLF) included factors
such as costs of warranty, customer complaints, and loss of customer goodwill.
Another quality guru, Philip B. Crosby56 outlined Zero Defects as not only a
motivational program for employees but also as a management standard, focusing on
the quality message to the management. He created important quality tools including,
the cost of quality measures, the management maturity grid and formulated a 14
points program for quality improvement.
Crosby estimated the average cost of quality for most companies between 15% and 20%
of sales57. The cost of quality measure was useful to show managers the extent of the
quality problem and the opportunity of quality improvement.
The Management Maturity Grid was used for self-assessment and identified five
degrees of quality awareness:
-
Uncertainty, when the quality is not yet recognized as a management tool;

Awakening, when the company recognized the importance of quality without taking
actions;
Enlightenment, when the management begins to implement a quality program.
Wisdom, when prevention is working well, problems are identified in advance and
corrective actions are pursued;
Certainty, when quality actions become an essential part of the company and
problems occur infrequently.
Transfer Association and executive director of the American Supplier Institute.

54
Taguchi Genichi & Don Clausing, Robust Quality , Harvard Business Review, page 66, January
February 1990.
55
See: Taguchi Genichi, The System of Experimental Design , ASI Press, 1987
56
Philip B. Crosby started his career as quality inspector. He worked for several companies and became
vice president of ITT. In 1979 he left ITT to found Philip Crosby Associates Inc. and the Crosby
Quality College.
57
Crosby P.B. Quality is Free , McGraw Hill, 1979
42
After the company understands its position in the management maturity greed, the 14
steps quality program can help to achieve quality improvement.
Crosbys 14 steps of quality are as follows:
1. Establish management commitment; convincing the top management about the need
for quality improvement and making it clear for the entire company. This step implies a
written quality policy;
2. Form interdepartmental quality teams; management should form a team of
department and areas heads to supervise quality improvement;
3. Establish quality measurement; specific quality measurement for every activity must
be implemented in order to outline the areas needing improvement;
4. Evaluate cost of quality; the controllers office should make an estimate of the costs
of quality to identify areas where quality improvements are needed;
5. Rise quality awareness among employees; the supervisors should carry the message
of the importance of product conformance to all workers, also using education programs
and media as films, booklets and posters;
6. Instigate corrective action; opportunities of improvement rising from points 3 and 4
and from suggestions of employees should be taken to the supervisor level and, if
possible, solved there or carried up when necessary;
7. Ad Hoc committee for the zero defects programme; this committee should be formed
with members of the quality improvement team and begin to plan a zero defects
program that can fit to the corporate culture;
8. Supervisor training; all levels of mangement should be trained about the quality
program;
9. Schedule a zero defects day; a zero defects day should be scheduled to send the
message to employees that the company has new performance standards;
10. Employee goal setting; every employees should set its own goals and tell them to
their supervisor who will hold meeting to discuss the achievement of those goals;
11. Error cause removal; workers should be encouraged to communicate rapidly to the
supervisors about any problem that prevents them to achieve their performance goals;
12. Recognition for meeting and exceeding goals; public, explicit, non-financial
appreciation should be awarded to those who reach their goal or perform outstandingly;
13. Establish quality councils; quality councils between quality professionals and team
leaders should be taken regularly in order to share experiences and find solutions to
problems;
14. Do it over again; the program from point 1 to 13 must be repeated in order to give
more emphasis to the quality process and to renew the commitment of all employees.
43
As one can see every one of the above mentioned quality gurus gave important
inputs to the doctrine of quality, contributing to build the modern conceptual structure of
Total Quality Management.
II.c. The commitment of Total Quality in the kaisha and with suppliers.
Total Quality Management is a managerial philosophy, concerned with meeting the
desires and expectations of customers. It aims to move away from the view of quality as
merely an operation tool and tries to re-focus upon the whole organization as a unit of
quality. Total involvement means everybodys responsibility and every employee is
focused on reducing the cost of quality while continuously improving to achieve this
crosswise the organization. TQM can be considered as a logical extension of quality
control. Initially quality was achieved only by inspection. Quality control created the
systematic approach to not only detecting, but also managing quality problems. Quality
assurance widened the responsibility to include functions other than direct operations.
The development of the concept of quality can be showed as in figure four:
Figure 4. The expansion of Quality concept
The first step of quality is inspection, with the inspection quality is limited to the
detection of defects and their rectification. A further development of quality brings to
44
Quality Control, where the emphasis is still only on product performance, quality
standards are fixed and statistical methods are implemented (Statistical Quality Control)
to control the process. Furthermore, Quality assurance shifts the focus from the control
of the product to the control of the process, so that preventive maintenance of
equipment becomes a tool for keeping quality constant. Moreover, quality is planned
considering the costs of quality and using problem solving techniques.
Cosby58 outlined how earlier quality was a concept that was mainly associated with
products and finished goods. While today the concept has a much wider meaning
involving also material management and supply chain management. Since quality is
something that must be in accordance with predetermined demands and has to be
achieved via prevention, not via control or sorting out.
The cost of not offering the right quality can be of two kinds:
The costs of preventing errors, tied to the process, which produce the product or
service and used to improve it;
The measures to reduce the effects when an error has occurred: like for example the
costs of express deliveries when the original delivery is delayed, the cost to produce
replacement products, and the costs of compensation for product errors, lost sales
and goodwill losses.
While the first kind of costs can be viewed as constructive, as they strengthen the
companys long-term competitive situation. The second kind of costs is unconstructive
and must be reduced in order to preserve the companys competitiveness.
With Total Quality Management quality is considered at all the levels of the
organization, all the operations are involved, suppliers and customers become also
involved in the quality strategy.
When Total Quality is applied in the company it is important to include it in the
companys philosophy or vision. A corporate philosophy describes how a firm wants to
be seen in its chosen business. It describes standards, values, and beliefs; it is the
advertisement of the will to implement a policy. Thanks to the corporate philosophy all
employees are able to realize how they can contribute to the aims of the company. A
statement of values and behavior is a powerful motivating force that can be used to
drive a process of change forward59. The intent of a vision statement is to communicate
58
Crosby P.B. Quality is Free , McGraw Hill, 1979
59
Kanji, G.K. and Asher, M., Total Quality Management Process: A Systematic Approach , Advances
in Total Quality Management Series, 1993
45
the firms values, aspirations and purpose, so that employees can make decisions that
are consistent with and supportive of these objectives 60 . An effective corporate
philosophy statement must be written using language that can motivate employees to
high levels of performance and encourage their commitment.
In the past one of the differences between Japanese and Western companies was that
firms in the West did not officially express their corporate principles in a written
document. However, in Japan it has always been common for the kaisha to write a
formal: Corporate Statement of Principles and Values . No doubt having roots in the
Japanese cultural attribute of wishing unity of purpose for all the members of the
group61. In the West the development of a written company vision containing the
company philosophy is largely due to the introduction of Total Quality Management.
Even if company philosophy already existed in Japan, the introduction of quality
management brought deep changes in the Japanese corporate philosophies. Old
Japanese corporate philosophies were based on family-oriented values of Confucianism.
An example is the Mitsui corporate philosophy that affirmed that employees should:
ensure the prosperity of descendants by working hard and giving thanks to our
ancestors 62.
In the 1970s Japanese companies introduced the concept of quality in their corporate
philosophies. One example of corporate philosophy focused on quality is the one of
Riken Forge Co., Ltd who states: To ensure profits that will increase the happiness of
employees. To ensure high-quality, low cost products in quantity, so as to build the
confidence of customers .
Many modern Japanese corporate philosophies extend the concept of quality not only to
employees and customers but also to the environment and to all the society, as in the
case of Asahi Breweries that with its new corporate philosophy established in 1998
affirms: The Asahi Breweries Group aims to satisfy customers with the highest levels
of quality and integrity, while contributing to the promotion of healthy living and the
enrichment of the society worldwide .
Or Toyota with its five points philosophy:
1-Respect for the Law: Toyota Industries is determined to comply with the letter and
spirit of the law, in Japan and overseas, and to be fair and transparent in all its
dealings.
60
Meredith, J.R. & Shafer, S.M., Operations Management for MBAs , John Wiley & Sons, Inc., 1999.
61
And 62 Ozawa Masayoshi, Total Quality Control and Management: The Japanese Approach , JUSE
Press, 1988.
46
2-Respect for others: Toyota Industries is respectful of the people, culture, and tradition
of each region and country in which it operates. It also works to promote economic
growth and prosperity in those countries.
3-Respect for the Natural Environment: Through its corporate activities, Toyota
Industries works to contribute to regional living conditions and social prosperity and,
as well, strives to offer products and services that are clean, safe, and of high quality.
4-Respect for Customers: Toyota Industries conducts intensive product research and
forward-looking development activities to create new value for its customers.
5-Respect for Employees: Toyota Industries nurtures the inventiveness and other
abilities of its employees. It seeks to create a climate of cooperation, so that employees
and the Company can realize their full potential.
The most powerful aspect of Total Quality Management is the concept of the internal
customer and supplier. This means everyone is a customer within the organization,
consuming and supplying goods to others. By reducing the borders between internal and
external, everyone becomes responsible for the needs of the external customer. Each
operation is responsible for internal customer/supplier relationships within the system.
In such a system is natural that all the actors of the supply chain are involved in the
philosophy and the job of the organization as well as any other part of the organization
itself.
In the JIT production the interdependence of buyers and suppliers is very strong with
the supplier becoming an extension of the buyers organization. As highlighted by the
extensive literature review by Anderson et al. 63 external cooperation between the
company and its suppliers has intrinsic value in the just-in-time purchasing systems.
According to Hackman and Wageman64, developing partnerships with suppliers is one
of the major Total Quality Management implementation practices. Deming65 outlined
how working together with suppliers, considering them as partners in a long-term
relationship of loyalty and trust helps to improve the quality of incoming materials and
decrease costs.
Supplier quality management can be defined as the series of supplier-related quality
63
Anderson, J.C., Rungtusanatham, M. and Schroeder, R.G.,
A Theory of quality management
underlying the Deming management method , Academy of Management Review, Vol. 19 No. 3, page
472-509, 1994
64
Hackman, J.R. and Wageman, R., Total quality management: Empirical, conceptual, and practical
issues , Administrative Science Quarterly, Vol. 40, page 309-342, June, 1995
65
and 66 Deming W. E., Out of the Crisis: Quality, Productivity and Competitive Position, Cambridge
University Press, 1982
47
management practices aimed to improve vendors quality and reliability of products and
services supplied.
According to Deming66 and Ishikawa67 companies must select their suppliers on the
basis of quality, rather than only on cost, price has no meaning without evaluating the
quality of the materials purchased. If quality is not evaluated business practice brings to
purchase from the lowest bidder, unavoidably resulting in low quality and high cost.
Companies must shift the focus from minimizing the purchasing cost of materials to
minimizing the average total cost for inspection of incoming materials. What one firm
buys from another is not just material but something more valuable, engineering and
capability. Juran and Gryna68 outline that the buyer must add to the purchasing price the
entire range of quality costs such as:
-
Incoming inspections
Materials review
Production delays
Internal failure
Extra inventories costs
Downtime
External failure costs.
Once these elements are measured and considered, as part of the total cost of material
the lowest purchasing price does not always result in the lowest total cost.
Incoming flow control is very important for supplier quality management. A criterion
for approval of raw materials, parts, and components must be strictly applied
establishing specifications and standards and getting detailed information about
suppliers quality. It is also important to create a feedback system in order to give
feedback to suppliers about their product performance, so that, in case of non positive
feedback, they can take actions for improving their quality.
The aim of suppliers quality management is to meet the needs of the firm with a
minimum of incoming inspection or later corrective action69. Supervision of suppliers
can be done in several ways:
67
Ishikawa Kaoru, What Is Total Quality Control? The Japanese Way , Englewood Cliffs, 1985
68
Juran, J.M. & Gryna, F.M., Quality Planning and Analysis , 3rd edition, McGraw Hill, 1993
69
See: - Feigenbaum, A.V., Total Quality Control , 3rd edition, McGraw-Hill, 1991. And - Juran, J.M.
& Gryna, F.M., Quality Planning and Analysis , 3rd edition, McGraw Hill, 1993
48
Product inspection,
Meetings with suppliers to review quality status
Audits of elements of the supplier,
Witnessing of specific operations or tests
As we will see in Part IV the selection of suppliers has particular aspects related with
the Japanese business practices and the supply chain management.
II.d. Kaizen: Continuous Improvements

The Japanese word kaizen means continuous improvements. This term refers not only
to the company but also, more generically, to all aspects of life and is deeply entrenched
in Japanese culture. As described by Maasaki Imai70: The kaizen philosophy assumes
that our way of life be it our working life, our social life, or our home life should
focus on constant improvement efforts.
The three golden rules of kaizen in the company are:
1. Housekeeping
2. Elimination of waste (muda in Japanese)
3. Standardization
Housekeeping means to keep the workplace and ourselves clean. This concept implies
self-discipline of all the employees. According to kaizen philosophy without
self-discipline and control of ourselves it is not possible to control and produce good
quality.
Housekeeping is taught to Japanese from school since in Japan there are no school
custodians, instead, at the end of each day, teachers, students, and administrators all
work together to clean classrooms, hallways, special work areas, and restrooms.
The five steps of workplace housekeeping are:
70
Maasaki Imai,
Gemba Kaizen, a Commonsense, Low-Cost Approach to Management , McGraw Hill
Trade, 1997.
49
1. Seiri (sort): to separate unnecessary things from necessary ones and reject the
latter;
2. Seiton (straighten): to order carefully and efficiently all the objects not rejected
by Seiri;
3. Seiso (scrub): to keep all the machines and the environment clean;
4. Seiketsu (systematize): to practice continuously the above 3 S and extend the
concept of cleanliness to oneself;
5. Shitsuke (standardize): to improve the self discipline and be used to always
follow the standards of the 5S.
Elimination of waste (muda in Japanese) refers to all the waste in the company such as:
excessive resources, overproduction, excessive inventory, unuseful tasks, waiting time,
waste in transportation, etc. The elimination of waste is one the first concerns of every
JIT production system and will be examined in Part III.
Standardization is an integrant part of kaizen and is necessary for the implementation of
TQM and JIT. To be able to notice problems the manager needs to find them out. To do
this a standard procedure must be fixed in order to be able to recognize the problems.
Once the problem is solved the new procedure must be standardized according to the
SDCA showed in figure five:
Figure 5. Sdca cycle
Act
Check
Standardize
Do
First it is necessary to set a standard for the operation, then when the operation is done,
the supervisor performs his check and, if a problem has occurred or if a better solution
is found for improvement, he acts modifying the standard.
50
Imai71 outlined how the kaizen philosophy explains the way innovation is introduced in
the Japanese kaisha. Innovation, normally, is obtained gradually with small continuous
steps generating continuous small changes, rather than with one single big, sudden, and
radical innovation.
Kaizen philosophy represents a basic cultural factor for many Japanese approaches,
such as:
-
Total Quality Management (TQM)

Toyota Just in Time production system
Total Productive Maintenance
Policy deployment
Suggestion system
Small group activities
Looking at the implementation of the most famous Japanese management practices such
as Just in Time and Total Quality Management it can be noted how:
-
They were developed gradually following the kaizen approach;

They were also implemented gradually according to kaizen philosophy;
The kaizen (continuous improvement) is a fundamental factor of these systems.
From the elements noticed above it is evident that kaizen is a cultural factor permeated
in several aspects of Japanese management and production practices.
71
Maasaki Imai ,Gemba Kaizen, a Commonsense, Low-Cost Approach to Management, McGraw Hill Trade, 1997
51
Part III.a. The general JIT theory

This part of the dissertation will analyze the main supply chain techniques, adopted in
Japan and abroad, for Just In Time production and supply.
The main purpose of Just in Time systems is to produce and supply the quantity needed,
at the time and in the place needed. The elimination of waste of all kinds (time, stock,
etc.) is the way Just in Time systems plan to achieve these goals. The elimination of
waste has to be achieved not only by cost reduction but also through productivity
improvement, as shown by figure six:
Figure.6. The goal of JIT production
COST REDUCTION
GOAL
ELIMINATION OF WASTE
PROFIT
PRODUCTIVITY IMPROVEMENT
Monden classifies waste in four levels. From the primary waste derives secondary waste
and so on, until the fourth level of waste (Monden Y., 1998), as shown in figure seven:
Figure.7. The four levels of waste
1st Waste
Excessive production resources
2nd Waste
Overproduction
3rd Waste
Excessive inventory
4th Waste
Unnecessary Capital Investment
52
The first waste is the existence of excessive production resources, which are excessive
workforce, excessive facilities and excessive inventory of materials.
Excessive workforce leads to unnecessary personnel costs, excessive facilities to
unnecessary depreciation costs, and excessive inventory of materials to unnecessary
holding costs. Moreover, holding excessive workforce, excessive inventory or excessive
facilities can lead the management to make the mistake of fully using those resources
when it is not needed by the market. This brings to the secondary waste:
overproduction.
Overproduction happens when the factory continues working even when it is not
required by the market. The factory should produce for selling not for stocking.
Overproduction causes the third kind of waste: excessive inventory of finished goods. As
outlined by the Theory of Constraints 72 : ...excessive inventories - particularly
work-in-process inventories - are an operating liability . The main cultural revolution
of JIT production has been to consider excess of resources (particularly of inventory)
not an asset but a liability. Superfluous inventory generates the need for more manpower,
more equipment, and more floor space to store and manage it. These extra jobs will
make overproduction almost invisible thus increasing waste. Furthermore, excess of
work in process inventory is responsible for the increase in cycle time and lead-time.
Furthermore, excessive inventory produces the forth kind of waste: unnecessary capital
investment. Unnecessary capital investment can bring to several costs such as:
-
Cost of hiring workers to carry and move the inventory;

Cost of managing inventory;
Cost of building new warehouses.
According to Monden, management must focus on the primary wastes to avoid the
others, being these the generating factor of other wastes.
One of the main achievements of JIT systems is the reduction of work in process
inventory. Work in process inventory (WIP) creates several problem of flexibility in the
production line. It increases cycle and lead time and causes delays in the response to the
needs of the market73.
72
See Noreen E.W., Smith D.A., and MacKey J.T., Theory of Constraints and Its Implications for
Management Accounting, North River Press, 1995, page 10

73
Nevertheless it is important to underline that the aim of Just in Time is not to eliminate inventory,
but just to eliminate the unnecessary inventory. Every JIT system requires a certain amount of
inventory and of WIP inventory; these quantities of stock are not unnecessary or excessive but
53
A simplified analogy can help to clarify this concept. Lets suppose to have a convoy of
ships (symbolizing the manufacturing plant) that has to sail in line towards a common
destination, as shown by figure eight:
Figure 8. Convoy analogy
FINISHED
GOODS
RAW
MATERIALS
WORK IN PROCESS
INVENTORY
In figure eight the ships represent the production resources, the size of the ship shows
their production capacity (cruising speed). We can consider the first row of ships as
receiving raw materials. The production resources (ships) process raw materials (sail)
according to their speed. Work in process inventory is the distance between the first ship
and the last one. The last ship is the one that ends the cruising (the last to arrive at
destination). In our analogy the output of the last ship are finished goods (the arrival of
the convoy). When the convoy starts cruising the ships are tightly close and the Work in
process is low. However, after a few miles of cruising the distance between the ships
increases and keeps growing as the cruise continues.
Producing WIP inventory means wasting resources that should be used to become
throughput for the market instead of becoming a cost staying inside the factory. What
can we do to reduce the distance between the ships (WIP)?
A solution could be the one of figure nine in a fleet, but not in a factory. In a factory the
layout of resources cannot be changed because every process is dependent by the
preceding one(s).
necessary to avoid line stops, thus bigger wastes.
54
Figure 9. Convoy analogy, a solution not easily applicable to the factory line:
FINISHED
GOODS
RAW
MATERIALS
WORK IN PROCESS
INVENTORY
Restructuring a production line in such a way would be highly expensive and not
always possible. The processes in a factory are interdependent thus it is not feasible to
change the order in the production line. What can be done is to implement a signal
system that dictates the right speed of production to all the production resources.
In order to limit the WIP in the production line, Henry Ford developed the assembly line
in order to tie the production resources with ropes (called conveyor belts). Instead of
Fords conveyor belts, Just in Time production systems use information-signal systems
in order to link the production speed to the demand. In the convoys analogy the signal
system can be represented by a drum that gives the rhythm to the production line. If the
rhythm of the drummer is given as an average of the speed of the ships, then the space
between the ships of the convoy can spread. Goldratt74 explains how this phenomenon
is caused by the combination of dependent events (activities that must be done
following a given sequence) and statistical fluctuations. Statistical fluctuation is the
unpredicted statistical variance of the demand of a specific component within the line,
while dependent events are a system of activities linked to each other, being the output
of each element of the system linked to the output of preceding and following elements.
Some processes are slower than others (like the ships in the convoy), thus the
combination of these two elements makes the WIP bigger than the average of the
statistical fluctuations. This happens because the interdependency of processes with
slower elements in the system avoids faster fluctuations that could compensate the
74
Goldratt Eliyahu M. & Fox J., The Goal, A Process of Ongoing Improvement , Norton River Press,
1992.
55
slower fluctuations stabilizing the average. The maximum output with dependency is
given by the slowest element of the system thus the drummer rhythm must be
synchronized with the speed of the slowest element (slowest ship). This can be done
with production planning considering the bottleneck (slower ship).
Figure 10. Convoy analogy, information-signal system:
FINISHED
GOODS
Signal system
RAW
MATERIALS
W ORK IN PROCESS
INVENTORY
In the convoy the fastest ship must not sail at the maximum of its speed (a production
resource must not produce at the maximum of its capacity) but has to follow the speed
of the drum.
Push production approach makes the speed of production be decided by the input of raw
materials and uses all the production resources at its maximum.
Figure 11. Push system
Input of Resources
Throughput
Utilizing all the resources without following the demand generates overproduction and
excessive inventory. In our convoys analogy it would be like setting the rhythm of the
drum according to the input of raw material and utilizing every ship at its maximum
56
speed.
In JIT pull systems the drum is held by the demand as showed in the figure twelve:
Figure 12. Pull system
Input of Resources
Throughput
The advantages and disadvantages of push and pull systems are described by
Karmarkar75:
-
Pull systems are less expensive because they dont need heavy computerization
(software and hardware). Their merit is to leave control and responsibility at the
line level while presenting attractive incentives for lead time management.
Push systems are good for material planning and coordination. Thanks to
centralized control they grant focus on inter-functional communication and data
management. Moreover, they are good at computing quantities for work releases
by interpreting forecasts into discrete product orders. On the other hand these
systems have problems of timing caused by the lack of dependable feedback
based on the output of the system.
The Toyota Production System (TPS) combines these two methods using the MRP
system for forecasting and the Kanban (pull) for the fine-tuning within the forecasted
period. MRP can be seen as a Pull system in the long term, but it is a push system within
the time period of forecasting.
The following paragraphs analyze the JIT systems with particular focus on the Toyota
Production System.
75
Karmarkar Uday, Getting Control of Just-in-Time , Harvard Business Review, Sept-Oct 1989.
57
III.b. The Toyota Production System (TPS)

Japanese manufacturers re-building after the Second World War faced big problems of
material and financial resources. These problems were very different from those of their
Western counterparts. These circumstances led to the development of new, lower cost,
manufacturing practices. A disciplined, process-focused production system known as
the "Toyota Production System", or "lean production" was created to adapt to those
conditions. The objective of this system was to minimize the consumption of resources
that added no value to a product.
The famous Toyota production system traces its roots in the late 1940s and early 1950s
when Taichi Ohno, manufacturing engineer of Toyota developed a pull system with
the kanban cards inside Toyotas factories in order to control the production flow
between processes and realize the Just in Time system. Like Ohno himself pointed out:
it was simply a matter of chance that the Japanese market was small and companies
wanted to produce a variety of models but were unable to afford large supplies of parts
or specialized assembly lines before the 1960s. Yet it still required deliberate planning
to modify equipment and job routines, mix assembly runs, and manufacture parts in
smaller lots for different vehicles 76.
A single vehicle contains thousands of parts, which have to be processed and assembled
in a precise order. Since the beginning of the automobile industry, one of the major
concerns of manufacturing engineers was to be able to synchronize the supply of
materials and semi-finished products with the production process. This in order to
smooth the production line and avoid breaking in the line process. Before Taichi Ohno
Toyota, as well as all the other car manufacturers, adopted the Ford system using
buffers between each process of the line. When a problem occurred in the production
line, workers were able to use extra components from stock to avoid stopping the line.
The system was a push system and the quantity of buffer stocks was decided ex ante
by production managers taking into consideration the trade off between the cost of
holding extra inventory and the benefit of preventing line stoppages.
Keeping the smoothing of the line with buffer of a few hours required a very precise
control over all the phases of the production line. This encouraged production mangers
to keep buffers of big size. Later in the 1960s even with the help of computer systems it
was not easy to prevent the accumulation of work in process inventory because of the
combination of statistical fluctuations and dependent events (as described in the
76
From an interview reported by Michael A. Cusumano in The Japanese automobile industry:
technology and management at Nissan and Toyota , Harvard University Press, 1985, page 285
58
previous paragraph). As pointed out by Cusumano77: In 1948, Toyota began deviating

from the most fundamental manufacturing technique in the American automobile
industry: It decided not to push materials and components but to have final assembly
lines pull them through the system .
Ohno noticed how with the ordinary push systems it was difficult to promptly adapt to
changes because of problems in the production line and fluctuations in the demand. As a
consequence the factory had to hold excessive WIP inventory among all processes to
avoid the problem of recalculating and changing each production schedule frequently.
He felt the need to find a system that, within the planned monthly schedule, would be
able to easily adapt to the fluctuations without recalculating and changing each
production schedule repeatedly.
Ohno created the JIT-Kanban empirically, introducing the system gradually at Toyota.
As stated by the same Ohno78: Our approach has been to investigate one by one the
causes of various unnecessaries in manufacturing operations and to devise methods
for their solution, often by trial and error .
The concept of pull production in Toyotas system goes together with the use of the
kanban. Kanban is a Japanese term meaning signal card. A kanban is a paper (or
sometimes a metal tag) attached to every box of materials or components signaling the
exact quantity required by the subsequent process to every process along the production
line. The kanban is sent through the processes in the line, and to suppliers connecting
them to each other and regulating production, supply and conveyance process.
Figure 13. Coordination via kanban
Production-ordering Kanban
Preceding Process
(producing )
77
Withdrawal Kanban
Store
(part )
Subsequent Process
(producing A)
Cusumano Michael A., The Japanese automobile industry: technology and management at Nissan
and Toyota , pg. 265 Harvard University Press, 1985

78
Foreword to the first edition of Monden Y., Toyota Production System: An Integrated Approach to
Just-IN-Time 3rd edition, pg. xiii Engineering & Management Press, 1998.
59
Figure thirteen gives a simplified description of the way kanbans are used to connect
different process within the line. As we can see there are two main kinds of kanban:
-
The withdrawal kanban: used to withdraw materials and components from the store;
The production-ordering kanban: used to order to the preceding process to produce
the parts withdrawn with the withdrawal kanban.
Assuming that the factory produces the product A, and to make it the subsequent
process (assembly line) needs the semi-finished product produced by the preceding
process. Parts are stocked in the store between the two processes and production
ordering kanbans are attached to them. The carrier of the subsequent process will go to
the store with withdrawal kanbans and take as many boxes as the kanbans, then take
them back to the line with the withdrawal kanbans attached to the boxes withdrawn. The
worker will also detach from the boxes the production kanbans that will be taken by the
preceding process to produce as many boxes as indicated by the number of
production-ordering kanbans. When the production of by the preceding process is
finished the boxes with the production Kanban will be in the store again.
The JIT-Kanban is a pull system, the operators produce according to the quantities
required on the basis of actual usage by the subsequent process.
At the beginning, Toyota used the kanban to cut costs and control machine utilization.
Later Toyota became able to use this system not simply to manage costs and flows but
also to recognize impediments in the flow and implement continuous improvement
(Kaizen).
The JIT-Kanban system, if successfully implemented, can bring several kinds of
benefits to the manufacturing company, some typical of all the JIT systems, some
specific of the JIT-Kanban, such as:
-
Reduction of inventory;
Improvement of flow;
Prevention of overproduction;
Transfer of control at the operation level, delegating responsibility to line workers;
Better control thanks to the capability to create visual scheduling and management
of the process;
Quick response to demand fluctuations;
Reduction of the risk of inventory obsolescence;
Improvement of the ability to manage the supply chain;
60
Quick and precise informations;

Transfer of information along the production line at low cost.
It is important to notice how in TPS the kanban system represents only a simple, but
effective, tool for the Just In Time information system .The kanban alone doesnt make
the TPS that needs to be also supported by the following requirements:
-
Smoothing of production;
Reduction of lead time;
Standardization of tasks and multifunctional workers;
Quality control and improvement activities;
Autonomation (Jidoka);
Design of machine layout.
These requirements are linked with the characteristics of Japanese business system.
III.b.2. Types of Kanbans and Kanban rules

There are several kinds of kanbans depending on the reason they are used, as showed by
figure fourteen:
Figure 14. The main types of kanban
The two most used kinds of kanban are the withdrawal kanban and the production
ordering kanban.
61
Production ordering kanbans indicate the exact quantity of product to be produced by

the preceding process. For those components which need lot production (such as
diecasting and forging) a triangular kanban is attached to the box of the lot at the level
of the Reorder Point. When the withdrawals reach the level of the triangular kanban
the production order is sent to the preceding process to start the production of the lot.
Figure fifteen illustrates this:
Figure 15. Triangular Kanban
TRIAN GU LAR
KAN BAN
LOT
REORDER
The Withdrawal kanban indicates the type and the quantity of components that the
subsequent process must withdraw from the preceding process. For withdrawals from
suppliers a supplier kanban is used, which includes the details about the product, the
delivery time and the quantity to be withdrawn.
Other special types of kanbans are:
-
Express Kanban; is used in extraordinary situations when there is a shortage of

some component;
Emergency Kanban; is used for problems due to defective parts or machine

failures;
Tunnel Kanban; is issued for a group of processes that are so physically close and
interconnected that there is no need to exchange kanbans between them and thus a
single kanban is used;
Electric Kanban; is also called Full-work System, it is not a kanban in the original
meaning of the word, it refers to the electronic data exchanged between completely
automated production processes which is based on the same principles of the kanban
62
system.
To be managed correctly, the kanban information system for Toyotas JIT must follow
the following rules:
1. The subsequent process must withdraw from the preceding process the necessary
parts in the necessary quantities at the necessary time.
This is the general rule of JIT systems applied to the production line. In other words the
kanban is able to limit the total inventory in the process by acting as an authorization to
produce inventory.
To be effective this rule implies the following sub-rules:
o Any withdrawal without a kanban must not be allowed;
o Any withdrawal that of a quantity that is different than the number of
kanbans must be prohibited;
o Every physical part must have a kanban attached to it.
2. The preceding process must produce in the quantities withdrawn by the subsequent
process.
The implementation of this rule entails the following sub-rules:
o Production larger than the number of kanbans is forbidden;
o If several kinds of parts have to be produced, their production must follow
the original sequence in which each kanban has been delivered.
3. Defective products must never be conveyed to the subsequent process
This goal can be achieved thanks to the delegation of responsibility for quality to the
individual line worker. This is at the basis of the requirement-concept of
Autonomation (Jidoka).
4. Efforts have to be done in order to minimize the number of kanbans
The total number of kanbans corresponds to the total inventory as a consequence of the
fact that a kanban must be attached to every physical component. Unnecessary
inventory is not an asset but a waste for JIT systems. Therefore it has to be reduced
through efforts to minimize the number of kanbans. Once the appropriate number of
kanbans is decided, it is normally kept constant. The number of kanbans is inversely
63
proportional to the lot size and the lead-time. Keeping the number of kanbans constant
means that the responsible manager has to take decisions in order to reduce the
lead-time or the lot size in case of unexpected increase of demand. If this is not possible,
the problem will immediately show up because the kanban system immediately
visualizes, with line-stops or overtime, where the difficulty is. At Toyota the decision
about the necessary number of kanbans (thus of WIP inventory) is delegated to the
supervisor of each process. The supervisor will be awarded if able to reduce the number
of kanbans. This reduction is possible thanks to the cut of lot and/or lead time. This
responsibility is delegated to supervisors because they are in a favorable position to
notice problems immediately and if needed increase the number of kanbans.
5. Kanban should be used as fine tuning for small fluctuations in demand.
In a push system a sudden fluctuation of demand requires a time interval (usually of one
week) to revise the production schedules and re-synchronize all the production
processes. The monthly production plan must not be followed during the day. Daily
production is pulled from the final assembly line (where the demand requirements for
the day are displayed on a computer) to all the other preceding production processes via
kanbans. Of course if fluctuations of demand are very large, it will be necessary to
revise the monthly schedule and consequently to change the number of Kanbans.
According to Monden 79 , Toyota estimated that kanbans fine tuning capacity is
enough to handle variations of demand of about 10% of the monthly production without
modifying the master schedule and the number of kanbans.
III.b.3. Smoothing of Production

Production smoothing is the adaptation of production to the variability of demand in
order to minimize the quantity variance in the production line.
The smoothing of production in Toyotas JIT-Kanban system is obtained in two phases:
79
Smoothing of the Total Production Quantity;
Each models quantity productions smoothing.
Monden Y.,
Toyota Production System: An Integrated Approach to Just-IN-Time
Engineering & Management Press, 1998
3rd edition,
64
Total production quantity smoothing aims to reduce variance between two following
time periods by forecasting peaks and valleys in the demand in order to avoid waste in
the entire production system. Every month the Master Production plan gives the
monthly quantitative of production according to the demand forecasted. The Material
Requirement Plan is made according to the bills of materials of the Master Schedule
(using MRP calculation) and then sent to other Toyota facilities or to vendors. To fix the
daily production schedule the quantities forecasted are divided by the number of
operating days of the month. Demand of goods is not constant during the month. If no
other action is taken, demand fluctuations in a system of dependent events80 would
carry to an excessive accumulation of WIP inventory even in a well balanced production
process.
Uneven periods of demand create waste in case of occurrence of a period of shortage in
demand. This happens because the production line will continue to produce according to
the original set up plan if no adjustment is made. The kanban system operates the fine
tuning of production within the month.
Considering the analogy of the previous paragraph, the monthly Master Production Plan
sets the rhythm of the drum according to the forecasted demand, while the kanban
system allows the demand to hold the drum, pulling the production through the line
according to the effective demand and avoiding extra-production. In occasion, for
example, of a daily decrease of demand (compared to the demand forecasted in the
Master Production Schedule), the kanban system avoids overproduction. This because,
in such a situation, the preceding process will not receive kanbans according to the plan
but according to the effective demand avoiding the production of unneeded extra parts.
The Master Production Plan has to synchronize all the processes, balancing them so that
every preceding process finishes at the same speed within the cycle time.
The Cycle time is the time interval within which the production line needs to produce
one product or one part. It can be calculated as follows:
OPERATING DAILY HOURS

CYCLE TIME
=
REQUIRED DAILY OUTPUT
An example of a Master Production Plan is given in figure sixteen:

80
See introduction to part III.
65
Figure 16. Example of a Master Production Plan

APRIL
DATE
Planned Production Quantity
Number of workers assigned to the line
Number of workers working at the line
Line stop (min.)
Cycle time (sec.\unit)
1
2
3
4
5
6
7
8
350 340 340 340 340 340 340 340
64 64 64 64 64 64 64 64
62 62 63 63 63 63 63 63
88 80 53 53 53 53 53 53
165 169 169 169 169 169 169 169
18
350
64
61
90
165
19
20
350 305
64
54
62
51
87
83
121 188,9
21
300
54
52
80
192
As we can see in this example, the cycle time is calculated dividing the working time
per day (480 minutes X 2 shifts = 960 minutes) by the planned daily production in the
final assembly line (350 in April the 1st):
960/350 = 2.74 minutes/unit = 165 sec/unit.
The paragraph about the MRP system will analyze more deeply the MRP technique
used to develop the Master Production Plan.
When an increase in demand happens, it is possible to hire part time workers and/or
multifunctional workers; a worker usually handling more machines will handle a
smaller number of machines thus reducing cycle time.
In the case of decrease of demand, the solutions adopted by Toyota can vary among the
following:
-
Decrease overtime;
Make training to workers;
Do maintenance;
Transfer multifunctional workers to other lines.
It can be noticed how the multifunctional worker is one of the main elements for the
flexibility of Toyotas JIT system.
The production of automobiles is assorted and each car type has several models, colors
and specifications. The quantity of finished products stored would be huge if each
production line were to produce only one model each day and then another model the
day after and so on. It is necessary to prevent the preceding process from making
components for the other models, when it is not required.
Therefore, smoothing of each model s production quantity determines the proper
production sequence for the Mixed-Model assembly line. The aim of the smoothing of
each models production quantity is to make the production line produce the right mix
of models minimizing the idle time and avoiding overproduction.
30
305
54
52
84
189
66
Moreover, it is necessary to determine the right sequence schedule of finished products

smoothing the production quantity of each model. The following simplified example
can clarify this point:
Example 1
Lets suppose that the factory has to produce 8,000 cars per month.
Of which:
4,000 type A
2,000 type B
2,000 type C
In 20 working days per month;
With only one shift of 8 hours of work per day (480 minutes);
The daily required production for all models will be:
8,000 / 20 = 400
Of which:
For type A: 4,000 / 20 = 200
For type B: 2500 / 20 = 100
For type C: 2500 / 20 = 100
Average cycle time is given by diving 480 minutes by the production volume, as
follows:
480 minutes
CYCLE TIME =
1 min.12 sec.
400 cars
The time a type A is required (cycle time of type A) is:
480 minutes
Time a type A is required
= 2 min. 24 sec.
=
200 type A
Comparing the cycle time of type A with the average cycle time we have:
67
Time that can be used to produce another car
CYCLE TIME (1 min. 12 sec sec.)
2 min 24 sec.
( Cycle Time of Type A)
The maximum time before a type A is required by the market is 2 minutes and 24
seconds, while the average cycle time (time necessary to produce a car) is 1 minute and
12 seconds. Consequently, before a type A is required the line can be used to produce
another car.
Taking into account the time a type B and a type C are required to be produced:
480 minutes
Time a type B is required
= 4 min. 48 sec.
=
100 type B
480 minutes
Time a type C is required
= 4 min. 48 sec.
=
100 type C
After comparing the cycle time of type B and C with the average cycle time we have:
CYCLE TIME (1 min, 12 sec.)
Time that can be used to produce other models of car
4 min. 48 sec.
Within the time a type B or C is required by the market it is possible to produce other 3
cars (total of four within the cycle time of type B or C).
68
According to these considerations the mix of models of the production schedule in order
to achieve the smoothing of each models production quantity will be:
FINAL PRODUCTION SCHEDULE
TYPE A
TYPE B
2 MIN. 24 SEC.
TYPE A
4 MIN. 48 SEC.
C ycle tim e of B and C
C ycle tim e of A
TYPE C
2 MIN. 24 SEC.
C ycle tim e of A
Production smoothing is not achieved only by choosing the appropriate production

schedule but it is necessary also to extend the control to all the line in order to:
-
Smooth the total assembly time of each process;

Keep the rate of consumption of parts constant within the line.
To be able to level the total assembly time of each process it is necessary to check if
some product has a lead-time81 that is longer than the programmed cycle time. Indeed
one of the requirements to achieve production smoothing is that the lead-time must be
shorter than the cycle time, as explained by the following formula:
max
lead time
Q i T il
C
i=1
n
Qi
i=1
81
See Part III.b.4
69
Where:
Qi = planned quantity of the product Xi (i= 1
Til = operation time per unit of product Xi;
C = Cycle Time.
n);
If a product requires a lead-time that is longer than the cycle time then it will be
necessary to carry out efforts to reduce the lead-time. This problem can be solved with
the development of heuristic programs for the assembly line model-mix sequencing82.
According to Monden83 the Toyota Co. considers that, for the operation of the JIT
system, to keep the rate of consumption of parts constant within the line is more
important than smoothing the total production quantity, Although this first goal...
(referring to smoothing the total assembly time of each process) ...is also considered in
Toyota s sequencing program, it is incorporated in the solution algorithm which mainly
considers the second goal 84 (to keep the rate of consumption of parts constant within
the line).
The main goal of Toyotas sequencing method for smoothed production is to level the
total assembly time of each process keeping the consumption speed for each part as
regular as possible. This can be obtained by minimizing the spread between the average
consumption speed and the effective consumption speed.
This goal of the model can be depicted as in figure eighteen:
82
See among the others:

-
Ding, F. Y. and Cheng, L., "An Effective Mixed-Model Assembly Line Sequencing Heuristic for
Just-in-Time Production Systems," Journal of Operations Management, 11 ,pp. 45-50, 1993.
Okamura, K. and Yamashina, H., "A Heuristic Algorithm for the Assembly Line Model-Mix
Sequencing Problem to Minimize the Risk of Stopping the Conveyer," International Journal of
Production Research, 17,3 ,pp. 233-247, 1979
Sumichrast, R. T. and Russell, R. S., "Evaluating Mixed-Model Assembly Line Sequencing

Heuristics for Just-in-Time Production systems," Journal of Operations Management, 9, 3, pp.
371-390, 1990.
83
&
84
Monden Y., Toyota Production System: An Integrated Approach to Just-IN-Time 3rd edition,
Engineering & Management Press, 1998, page 254.
70
Figure 17. Keeping the rate of each parts consumption constant within the line
Quantity of the part
(Q ; R j)
Rj
A jn
N
spread to be minimized
Rj
Q
x
Rj / Q
0
Q
Number of orders of products
Where:
Ajn = Total necessary quantity of needed to produce the sequence order from 1 to Nth;
Rj / Q = Average needed quantity of for each unit of product;
Rj = Total needed quantity of to produce all product Ai;
(N x Rj) / Q = Average needed quantity of to produce N units of product A;
Q = Total production quantity for all products Ai.
To minimize the distance between Ajn (total necessary quantity of needed to produce
the sequence order from 1 to Nth) and (N x Rj) / Q (total needed quantity of to produce
all product Ai), Toyota uses a mathematical algorithm called Goal Chasing Method .
This method evolved in the simplified algorithm called Goal Chasing II and in the
new method called by Monden Goals-Coordinating Method managed by artificial
intelligence within factories.
The application of these mathematical algorithms in the factories needs a certain degree
of flexibility. This flexibility is given by a number of specific characteristics of the
Japanese industrial environment such as: multipurpose machinery, flexibility and
reliability of suppliers and multifunctional workers.
71
III.b.4. The general method for the determination of the number of kanbans
As a consequence of kanban rules number 1 and 2, examined in the paragraph III.b.2,
the total work in process inventory is equal to:
Total number of kanbans
Containers = inventory
The general formula for the determination of the number of kanbans is:
Average daily demand x Lead time + safety coefficient
Number of kanban cards =
Container capacity
The top part of the equation refers to the lot size (or level of inventory) that will support
production. The bottom part of the equation is the minimum order quantity, which is
decided by the size of the package of materials or parts.
As described by Monden85, the determination of the reorder lot size and consequently of
the number of kanbans depends on the inventory system.
At Toyota there are two types of inventory systems:
-
The constant quantity, non constant cycle system;

The constant cycle non constant quantity system.
The constant quantity non-constant cycle system is the one most commonly used in
Toyotas plants. It is used when the total lead-time86 is short, the work cell is flexible87,
and/or the demand for the good is relatively constant.
A flexible work-cell is a cell that can adapt to changes, modifying the cycle time by
adding or subtracting workers. With the constant quantity non-constant cycle inventory
method the lot size (thus the number of kanbans applying the kanban formula above) is
determined as shown in figure eighteen:
85
Monden Yausuhiro, Toyota Production System: An Integrated Approach to Just-IN-Time 3rd edition,
Engineering & Management Press, 1998, chapter 18, pages 279-290.

86
Total lead time is the total time between the decision to place a replenishment order and its
availability for use.

87
A work cell is a work unit larger than an individual machine or workstation but smaller than the usual
department. An ideal cell manufactures a narrow range of highly similar products.
72
Figure 18. Lot size under constant quantity inventory method
The lead-time is given by: processing time + waiting time +conveyance time + kanban
collecting time.
Demand in this case is forecasted monthly and, for the period considered, the average
73
demand is simply calculated as a ratio of the monthly demand. Consumption rate (Q) is
considered constant within the period. Replenishment lot size must be calculated
according to the lead-time (that indicates the minimum time between the recognition of
the need for an order and the receipt of the goods). Nevertheless, in reality the demand
is not smooth and there are fluctuations. For this reason it is necessary to adjust the
reorder point according to the standard deviation (s) calculating and adding the safety
stock (s). The safety stock is the extra stock necessary to face unforecasted variations
of demand and prevent line stops. In case of unforecasted variations of demand the
cycle time can be changed within the period through multifunctional workers and
machine layout. The kanban system operates the fine-tuning of the
production-conveyance system within a margin of 10%.
When the nature of the process requires it, the length of conveyance time is long (as
happens with many suppliers), and/or the market demands the goods irregularly, the
work cell is not flexible, When the work-cell is not flexible the constant cycle
non-constant quantity withdrawal method is used. With this method the cycle time do
not vary but the withdrawn quality can change. As a consequence it is possible to have a
certain extra inventory or order placed but not received.
The daily demand is the result of the demand forecast88 for the period considered using
the MRP89 program. In order to minimize the extra inventory, the demand forecast must
be repeated and adapted for each period. Therefore the number of kanbans must be
adjusted90. This is done by MRP calculation with the help of computer systems and
revised by the supervisors of each work-cell, who are responsible for the final decision
about the number of kanbans.
88
For an analytical analysis of demand forecasting see:

Zipkin P.H., Foundations of Inventory Control, McGraw Hill, 2000.
89
See paragraph III.c. for more detail about MRP.
90
For methodologies of dynamical adjustment of number of kanbans see among the others:
Rees L.P, Philipoom P.R., Taylor B.W. III, and Huang P.Y., Dynamically Adjusting the Number of
Kanbans in a Just in Time Production System Using Estimated Values of Leadtime , in IIE Trans.
No.19, 1987, page 199-207.
Sugihara Toshio & Tsubone H., Demand Forecasting System adopting to market movements for
Supply Chain Planning , proceedings of the 6th International Symposium of Logistic, 2001, page
113-116.
74
III.b.5. Reduction of Lead Time.

Responding to the variability of the market and smoothing of production requires high
levels of flexibility. Short lead-time is essential to obtain the flexibility to quickly
respond to the requests of the market and the benefit of the stability of smoothed
production. As pointed out by Monden91: The Japanese JIT production system is aimed
at flexible adaptation to fluctuations in demand quantity and variety in the market. Here
the term flexible means with short production lead time
There are many definitions of lead-time depending on the components included in the
definition (process lead time, lead time to the market, etc.).
At Toyota they consider the production lead time as follows:
Figure 19. Production Lead Time.
Total Processing Time
Queue Time setup time
Run time
waiting time Moving time
preceding process
subsequent process
Production lead time

Hence the lead time is considered to include:
-
The waiting time before processing (queue time);

The total processing time that is the processing time (run time) plus the time
necessary for setup;
The waiting time after processing that is the time the processed parts wait before
being moved;
The time they take to be conveyed to the following process.
These parts can be summarized in 3 categories on which is possible to achieve

improvements:
91
Monden 1998, pag.116, op.cit.
75
1. Production time for the supply lot to each process;

2. Waiting time between processes;
3. Conveyance time between processes.
Thanks to the reduction of lead-time Toyotas JIT tends to achieve the Ikko Nagashi
or single-unit production and conveyance. Single-unit production is not possible in all
processes. Nonetheless it is always possible to make efforts in order to reduce the batch
size. To achieve the single-unit production, or the small lot production, it is necessary
for suppliers to adopt the same production system. This allows suppliers to be
synchronized with the main factory and avoids the burden of accumulation of inventory
otherwise necessary to satisfy the supply requirements of the main factory.
The concept of single unit production and conveyance is in contrast with the EOQ
(Economic Order Quantity) model.
Economic order quantity (EOQ) is a method to determine the most convenient order
size for inventory and to minimize the total ordering and carrying costs. It focuses on
the trade-off between the ordering cost and the inventory holding cost. This means
operating a decision of convenience between small lots purchased often or large lots
purchased less frequently. Wilsons formula on which the model is based can be
depicted as in figure 20:
76
Figure 20. Economic Order Quantity
W ilso n 's fo rm u la a n d it's g ra p h ic r ep rese n ta tio n

2 Co x D
EOQ =
Ch
Co = o r d e r i n g Co s t
D = D em a n d
Ch = H o l d i n g Co s t
COST
T otal Cost
O r d e r C ost
H old ing Cost
EOQ
O R D ER Q U AN T I T Y
There are many hypothesis involved in Wilsons formula. These hypotheses limit the
applicability of the EOQ model:
-
The demand for the period is predictable and constant in time;

Logistic ties, which impact on the batch size, are not considered (packing, transport,
etc.);
All costs are given and constant in time. In particular: the unit price and the unit cost
of transport are considered as independent from the produced or purchased
quantities;
The time of supply and production is considered equal to 0, thus the hypothesis is
that the ordered quantities are given as immediately available;
The produced or purchased quantities are conveyed at once;
Costs linked to eventual breakings of stock are not considered;
The goods are not perishable.
77
Even though more recent EOQ computer programs attempt to eliminate some of these
restrictive hypothesis, many of these limits still persist.
EOQ can be considered as a comparison between two accounting costs. For this reason
it has been criticized by a substantial part of the JIT literature (American92 in particular)
which showed how EOQ focuses on costs instead of flexibility to the market and
possibility to achieve profit.
In spite of this, EOQ is one of the most used methods to determine the batch size of
supply in many business realities where the relations with suppliers are not stable
enough to implement a JIT system.
In the 1950s Toyotas chief engineers examined the accounting assumptions behind the
EOQ model, and found that it was possible to efficiently implement a different method.
The factory could become more flexible and reduce the economic lot size. Large lot
sizes slow down a pull system. With large lots the system cannot adjust promptly to
changing demand. Furthermore, it creates lumpy demand throughout the production
system. Toyota engineers redesigned car models that allowed the standardization of the
tooling for production processes as paint spraying and welding. Toyota was one of the
first companies to employ flexible robotic systems for these tasks. Some of the changes
were as simple as standardizing the hole sizes used to hang parts on hooks. In order to
standardize assembly phases and tools, the number and types of ties were reduced. In
some cases the same subassemblies could be used in several models.
In the EOQ model the price and the sales are independent of time requirements, the
competition on delivery time is not considered as well as the accumulation of WIP
inventory. On the contrary, Toyota JIT focuses on flexibility, speed to the market and
reduction of WIP.
To reduce the production lead-time it is necessary to intervene on each of its
components. Setup reduction is a very important part of Toyotas JIT production system.
Often it is not possible to simply lower the lot size because of the problems concerned
with machine capacity. In these cases the solution is to decrease setup times. The
technique for the reduction of the set up time was developed in the 1950s, by Shigeo
Shingo93. Shigeo Shingo was a consultant hired in 1955 by Toyota to systemically study
die setup, further reduce changeover times and teach these techniques to suppliers. His
philosophy was that all stamping dies could be changed over in less than 10 minutes.
Shigeo Shingo determined that the most critical setup operation was the change of
92
See for example: Goldratt Eliyahu M., Theory of Constraints , Norton River Press, 1990
93
Shigeo Shingo, A Study of the Toyota Production System from an Industrial Engineering Viewpoint ,
Productivity Press; Revised edition ,1989
78
stamping dies used for body parts. Habitually, these were fixed by hand, with crowbars
and wrenches. It sometimes took several days to install a large die set with acceptable
quality.
Shigeo Shingo implemented a method called The Single Minute Exchange of Die or
SMED. At the same time, quality of the stampings was standardized, reducing the skill
required for the change. The residual time was used to look for hand tools, and move
dies. Moving the new die in place while the line was still operating with the help of
dedicated tool-racks shortened die change times to about 40 seconds. Dies were
changed in a flow through the factory, as a new product began flowing. The set up time
is the part of the production lead-time where Toyota made the greatest improvements.
As noted by Ohno94: Prior to 1955, Toyota needed from 2 to 3 hours to change
stamping dies [...] Toyota cut this to 15 minutes by 1962 and to as little as 3 minutes by
1971 . These improvements resulted in a drastic reduction of batch size and
consequently of WIP inventory.
SMED with very simple tools changed the way of managing not only the die exchange
but also all the setup activities.
The main principle of this approach was to separate the setup in two parts:
-
Internal setup: done by the worker when the machine is still;

External setup: done in advance or during the time the machine is operating.
The method is implemented in 3 steps:

-
Separating internal setup and external setup as it exists;

Converting internal setup into external setup;
Streamlining all aspects of the setup operation.
Another factor of the lead time, the waiting time, can be reduced by:
-
94
Single part conveyance for big lots: when the waiting time is caused by a big lot in
the preceding process, then the conveyance must be minimized even if smaller than
the lot;
Mutual relief movement: when a part is completed by a worker the part must be
handed to the following worker. If the following worker is late in completing his
Ohno Taiichi,
Toyota seisan houshiki
(The Toyota production system), Dayamondo, 1978, page
70-72.
79
part, then the preceding worker must setup and work at the following machine to
help the worker that is delayed.
One of the parts of the lead-time where Toyota achieved considerable improvements is
the "conveyance time".
Conveyance time can be reduced with:
-
Quick conveyance;
Machine layout.
Both the above objectives can be better implemented with modular cell manufacturing,
which organizes machinery so that products can be manufactured in a continuous flow95.
In the typical production system machines are grouped by function and parts move from
a function to another and from one part of the factory to another, resulting in long
waiting times between procedures.
In the TPS, Kanban controlled production and the kanban itself must be able to flow
smoothly through processes. It needs efficient logistics systems and process oriented
plant layouts in order to work properly. Modular cell manufacturing re-engineers the
production line so that products can flow smoothly through all the line, parts do not idle
waiting to be worked on, and forklift trucks do not need to travel kilometres to move
parts and materials from one part to another of the plant. Modular cell manufacturing
can be realized by implementing U-shaped processing lines, which integrate the
manufacturing process into a continuous flow and increase supply accessibility to the
lines96.
95
Kupanhy & Lumbidi., Classification of JIT techniques and their implications, Industrial Engineering,
vol.27 no.2, 1995, page 62

96
For a better analysis of the U-Turn layout see: Monden Yausuhiro, Toyota Production System: An
Integrated Approach to Just-IN-Time 3rd edition, EMP, 1998.
80
III.b.6. Standardization of jobs, Multifunctional Workers and Autonomation

The human element in the organization is one of the most important factors for the
successful implementation of Just In Time. Demand variability, cellular manufacturing,
production leveling, mixed-model sequencing, teamwork, empowerment, as well as
other JIT and TQM concepts, and techniques call for flexible and multifunctional
employees. The worker needs to be able to manage more than one machine at a time. He
needs to move continuously to other machining centers or assembly lines, participate
actively to teamwork and other support activities. Managers and supervisors, on the
other hand, lead a team or group of teams, direct the continuous improvement process,
and participate as catalyst, technical expert, project manager, technical advisor, tutor,
and motivator.
Employees must understand what is required from them and why their actions are
important for the long-run health of the company97.
To achieve this, special focus must be given to training and to creating a cooperative
environment inside the factory. Training methods used for workers at Toyota include
on-the-job training plans as well as classroom studies. A cooperative environment is one
of the main factors for a successful JIT system98.
In a JIT environment employees must be able to work together 99 to participate
effectively. The cooperative philosophy is one of the main reasons why Just In Time
has been more easily and effectively implemented in Japan than in any other country in
the world.
As showed in Part I.g., the Japanese education system gives particular emphasis to the
concept of group and cooperation through an awarding system that rewards the results
of the group more than the individual performance. Also in JIT particular importance is
placed on teamwork in order to make employees move away from ingrained
individualistic attitudes towards a team focus. In a considerable part of the literature, the
importance of teamwork is heavily stressed100. Moreover, the flexibility of workers is a
97
Oliver, N., Human Factors in the Implementation of Just-In-Time Production. , International Journal
of Operations and Production Management 10, no. 4, 1990, page 3240

98
Gupta M., Mahoney M.J., Holladay H., The Human Factor in JIT Implementation, A Case Study of
Ambrake Corporation , Production and Inventory Management Journal, 4th quarter, page: 29-33, 2000.
99
Fielding, L., M. Gupta, L. Miller, and B. Pitts., Maintaining a Competitive Advantage in the 1990s: A
Case Study of Hillerich and Bradsby Company, Inc. , International Journal of Sports Management 9, no.
3, 1995, page 249262
100
81
leading part of JIT manufacturing. Schroeder101 defines Just-in-Time as the elimination

of waste in the production process by utilizing the full capability of the workers.
Employing multi-functional workers is one of the key elements of Human Resource
Management in order to enhance quality and to make the operating process more
flexible. Operating processes can be more easily changed to meet demand requirements
while reducing feelings of worker alienation, boredom and ergonomic problems102.
Flexibility of tasks gives workers the occasion to accept more job responsibility while
increasing their feelings of value for the whole company. This makes it possible to
achieve the goals of reduction of lead time and smoothing of production.
To implement the multifunctional worker, it is important to standardize all the tasks. As
outlined by Spear and Bowen103: Toyota managers recognize that the devil is in the
details; that s why they ensure that all work is highly specified as to content, sequence,
timing, and outcome.
The specified order of the operations task for each worker is called at Toyota, standard
operations routine and is set by the supervisor.
Thanks to the standardization of jobs it is possible to switch worker among the various
tasks after a proper training. The benefits of this human resource practice are:
-
Multi-function workers can better participate to the production and reduce the
alienation of factory workers;
The multi-process knowledge of multifunctional workers increases the effectiveness
of teamwork and kaizen;
Multi-functional workers can be shifted to various operations, thus making the
lead-time more flexible and adaptable to the changes of demand (avoiding to
increase the number of Kanbans);
Multi-functional workers make the Single Unit Production System possible
because through new implemented workplace a single worker can follow the
Im J.H., S.J. Hartman & P.J. Bondi.,
How Do JIT Systems Affect HRM? , Production and
Inventory Management Journal 35, no. 1, 1994

-
Oliver, N., Human Factors in the Implementation of Just-In-Time Production. , International

Journal of Operations and Production Management 10, no. 4, 1990, page 3240
101
Schroeder, R.G. Operations Management , McGraw-Hill, 2000.
102
Deshpande, S.P. & D.Y. Golhar. HRM Practices in Unionized and Non-unionized Canadian JIT
Manufacturing Firms , Production and Inventory Management Journal 36, no.1, 1995, page: 1518.
103
Spear S. & Bowen H.K., Decoding the DNA of the Toyota Production System , Harvard Business
Review, September-October 1999, page 98.
82
production of one item along all the line.

The multifunction worker handles several machines of different production processes.
Working at each process he proceeds when he finishes the given task within the
specified cycle time. Consequently the introduction in the following process of each
unit follows the completion of another unit. This kind of production can help to achieve
the ideal one-piece production and conveyance (ikko nagashi) with all the benefits
already examined in paragraph III.b.5. The concepts of cooperation and multifunctional
worker are common both to Just In Time and Total Quality control doctrine. These
concepts also imply giving more responsibility to the worker. Therefore, the worker
controls volume, quality and, in some cases, financial performance104.
Autonomation (or Jidoka in Japanese) is one of the pillars of the Toyota Production
System. Jidoka in Japanese has two different meanings because it can be written with
different kanji:
: with the meaning of automatic machine process;
: with the meaning of self control of defects by a machine but with the help of
a human mind working.
The word Jidoka is composed of three Japanese kanji105 characters JI-DO-KA (
) that have the same sound but a different meaning, since they are written with a
different middle ideogram or kanji (
instead of ), than the word meaning simply
"automation" (
). The English translation Autonomation (or "autonomous
106
operation)
was coined to convey the meaning of "automation with a human element,"
because the middle kanji for DO ( ) has the meaning of human being.
Jidoka is the concept of adding an element of human judgement to automated
equipment. With Autonomation, the equipment becomes able to discriminate against
104
Heiko, L.
The Conceptual Foundations of Just-In-Time.
Proceedings of the International
Conference on Just-in-Time Manufacturing Systems: Operational Planning and Control Issues, edited by
A. Satir, 1991.
105
Kanji are the Japanese ideograms imported from China and Korea around the 3rd and 4th centuries AD.
An Ideogram (kanji) in Japanese can have different pronunciations and
same meaning or same
pronunciation but different meaning . Every kanji has its own meaning but words in Japanese can be
made by the union of different kanji.
106
And 107 Monden Yausuhiro, Toyota Production System: An Integrated Approach to Just-IN-Time
3rd edition, Engineering & Management Press, 1998.
83
improper quality, and the automated process becomes more reliable. Autonomation is
the result of the evolution of Quality Control. With Jidoka there is no need for high
numbers of inspectors since the control and the responsibility for quality is shifted to the
manufacturing worker. Statistical inspections are still done at Toyota but the
management doesnt rely only on them107.
III.b.7. Toyota JIT and the Japanese business environment

The Toyota JIT-Kanban is more than a mere production technique that plans deliveries
and inventory control. Moreover, implementation of a successful Kanban system is
reliant on specific cultural aspects observed only in Japan.
In general, Kanban process components are easily exportable techniques, and Toyota
has always been incredibly open in communicating its practices. Nevertheless, the
complete process itself has been rarely successfully adopted outside Japan108 . The
reason for this lays in the cultural and social roots of the Toyota-JIT system, and, in turn,
in Japans social and cultural environment.
The concept of the Toyota JIT system was created starting from the shop floor, by close
interaction between the work force and the management, and furthermore, concerns
both suppliers and customers. These interactions were possible thanks to the peculiar
characteristics of Japans environment.
The Japanese Kanban process is more than mere fine-tuning of production and supplier
scheduling system. It is also linked with human relations, hence with socio-cultural
factors. The effectiveness of Toyotas JIT system is not sorely attributed to the Kanban,
which simply serves as a sub-process in the Japanese JIT-Kanban management system.
In my opinion it is not by chance that the JIT-Kanban was born, and had the largest and
most effective implementation in Japan. Several social, cultural and institutional factors,
typical of the Japanese business and social environment helped to create, develop and
implement the JIT-Kanban in Japan. These include, amongst the others: the education
system, the keiretsu, the labour ethic, the company unions and the management style.
The relations between the JIT-Kanban concepts and the social- business environment
are represented schematically in Figure 21:
108
Spear S. & Bowen H.K., Decoding the DNA of the Toyota Production System , Harvard Business
Review, page 95-106, September-October 1999.
84
Figure 21. Relations between the Japanese environment and JIT-Kanban
85
In figure 21 the relations are divided in three levels:

1. The first level includes the most relevant and typical factors of the business,
social, and cultural environment in Japan;
2. The second level takes in consideration the relevant consequences for JIT of the
factors in level one;
3. The third level includes some of the key management practices and techniques
of Toyotas JIT-Kanban system.
The black arrows show the interrelations among the same level, red arrows between
the elements of the 1st and the 2nd level and purple arrows between the elements of 2nd
and the 3rd level.
At the first level there is the financial system which is linked with the keiretsu. The
Jinmyaku (building of relations) is another relevant factor of keiretsu which is
primarily based on relations and alliances rather than on ownership. Keiretsu and
Jinmyaku contribute to establish long-term relations with suppliers. As noted by
several authors 109 , the keiretsu system nurtured many of the successful Japanese
practices thanks to the stability ensured by loyal suppliers and customers. As will be
better analysed in part IV, long-term relationships with vendors permit the transfer of
technology which enables them to adopt the same JIT system of the main company.
Therefore, kanbans can circulate not only inside the company but all along the supply
chain. In such an environment stock levels can be kept at a minimum and the kanban
system can work at its optimum. At the first level of figure 21, the education system
and the management style both exist, playing their respective roles in kaizen
philosophy. The education system is responsible for teaching children and students the
value of kaizen. Concepts of kaizen like the 5S of housekeeping are taught in the
classrooms being part of the Japanese educational culture as well as the orientation
109

-
Morgan J.C. & Morgan J.J. Cracking the Japanese Market: strategies of success in the new
global economy , Maxwell Macmillan International, 1991.
Kensy R.,
Keiretzu Economy-New Economy? Japan's Multinational Enterprises from a
Postmodern Perspective , Palgrave Macmillan, 2001.

-
Anderson, J.C., Rungtusanatham, M. and Schroeder, R.G., A Theory of quality management

underlying the Deming management method , Academy of Management Review, Vol. 19 No. 3,
1994, page 472-509.
86
towards group work. Management concepts like nemawashi (obtaining agreement in

advance) contribute to creation and maintenance of a non-conflictual work
environment, necessary for the implementation of kaizen within the company.
Labor ethics and corporate unions make it possible to have a flexible work force.
Furthermore, in exchange for flexibility, workers are habitually and significantly
involved in the product they manufacture. Most companies using the JIT-Kanban
system also provide lifetime employment110.
In level two of the figure there are the four relevant consequences of the social
environment. These are long-term relations with suppliers, keiretsu, kaizen, and
flexible work force.
The main techniques and practices for the implementation of the JIT-Kanban system
are included in level three. These embrace smoothing of production, reduction of batch
size, multifunctional workers, jidoka and TQM.
If suppliers are not able to assure in time delivery of materials, the company has to
carry higher levels of stock in order to reduce the risk of unscheduled interruptions of
the production line. This scenario is avoided by establishing long-term relations with
suppliers within the JIT framework.
Long term relations are conceptually linked to the orientation towards the group. In
Japan the supplier (and for the supplier the main company) in a JIT system is seen like
a member of the group with several activities to develop these ties such as suppliers
associations, informal meetings with managers and/or education activities for
suppliers employees. This relationship with suppliers creates the condition of
reliability required for the smoothing of production and the reduction of batch size, all
of which are imperative factors of JIT.
In addition, multifunctional workers are necessary both to reduce the batch and lot size,
seeking to achieve the ikko nagashi (single unit production and conveyance).
The orientation towards the group is a key factor for the effective operation of
multifunctional workers and to implement TQM. The JIT-Kanban system places great
emphasis on the worker within the team framework.
TQM and Quality Circle concepts are also crucial components of the JIT-Kanban
system. Quality circles look after active meetings where employees may discuss and
find solutions to various problems. Moreover, workers are encouraged to effectively
110
See: Eaton, A. E., New production techniques, employee involvement and unions , Labor Studies
Journal, vol.20 no.3, 1995, page 19.
87
participate in continuously improving kanban processes within the kaizen concept111.

This continuous improvement (kaizen) gives the basis for the development of QC &
TQM, Jidoka (Autonomation), production smoothing, and the successful operability of
multifunctional workers.
As outlined by Prof. Fujimoto112:
] although Toyota s manufacturing system
looks as if it were deliberately designed as a competitive weapon, it was created
gradually through a complex historical process that can never be reduced to managers
rational foresight alone.
The historical process of evolutionary learning made progress through a gradual and
continuous trial and error path. The conceptual links between JIT and kaizen are the
basis of this process of evolution of the system. Kaizen is also involved in the
reduction of lead-time, necessary for production smoothing. A dirt-free and well
organized work environment (according to the 5S of kaizen) is essential in order to
rapidly move materials and parts to numerous work stations along the production line,
thus reducing conveyance time. To achieve this objective, production down time is
often dedicated to housekeeping (5S) activities. Work force flexibility permits the
hiring of multifunctional workers needed for production smoothing.
From the point of view of TQM, the multifunctional worker system brings several
advantages to the human resources management of the firm, such as:
-
Employees who operate several different tasks accumulate more human capital
because they are exposed to a wider range of experiences;
The firm itself learns more about its own employees if it can observe how they
perform at different jobs. To find the job that a worker is best at, the employer
needs to move the employee around and observe how he performs at each position;
Multiple tasks motivate employees who would otherwise become tired of always
performing the same tasks.
Firms that adopt the JIT system believe that quality leads to lower costs and that
quality can be enhanced within the kaizen outline. Jidoka (Autonomation) is by nature
111
Stainer A., Productivity management: the Japanese experience, Management Decision, vol.33
no.8, December 1995.

112
Fujimoto Takahiro, The Evolution of a Manufacturing System at Toyota , Oxford University Press,
1999, page 4.
88
an improvement activity (kaizen) involving quality control (TQM). According to the

autonomation concept, when a defective part is discovered, the line stops, and forces
urgent consideration of the problem. Investigation of its causes and the commencement
of corrective actions ensue to prevent similar defects reoccurring.
All the concepts mentioned above provide a supportive environment vital for the
application of the comprehensive JIT-Kanban process. These concepts are profoundly
entrenched in the Japanese social and business environment and it is not, therefore,
surprising that the implementation of the JIT-Kanban system can not be as successful
in other countries as it has been in Japan. Ohno correctly expressed doubts about the
possibility to export the Toyota system in different realities113:
] we have a slight
doubt whether our Just-in-time system could be applied to the foreign countries where
the business climates, industrial relations, and many other social systems are different
from ours [
. Toyotas system has been the benchmark of performance for firms in
various manufacturing areas since decades114. The problems faced to implement the
Toyota JIT system outside Japan seems to confirm the doubts of Ohno.
113
Foreword to the First Edition of: Monden Yausuhiro, Toyota Production System: An Integrated
Approach to Just-IN-Time 1st edition, IIE, 1983

114
Cusumano Michael A. & Nobeoka K., Thinking Beyond Lean: How Multi-project Management Is
Transforming Product Development at Toyota and Other Companies , Free Press, 1998
89
III.b.8. The evolution of the Toyota Production System (TPS).

The Toyota production system was developed and evolved adapting to the business
environment as a result of a trial and error process, linked to the circumstances, the
needs, and the opportunities given by the external business environment. The business
environment around the Japanese automobile industry began to change around 1990.
Toyotas JIT system was established in its complete features by the early 1980s, in a
period of rapid economic growth. However, in the early 1990s that era finished and
Toyota, as well as other Japanese manufacturers, had to face a new set of problems.
The main changes that occurred in that period were:
1. The downturn of the growth in the GDP following the collapse of the "bubble
economy" in the early 1990's, caused the decline of the automobile domestic
production as shown in figure 22:
Figure 22. Japanese Motor Vehicle Production
Production dropped constantly in the first five years of recession from 13.49 million
units in 1990 to 10.3 million in 1995 and from 1996 to 2001 it has been fluctuating at
levels which are lower than those of 1990. With the end of the bubble economy ,
90
the period of continuous market growth in the course of which the Toyota JIT was
created was definitely over;
2. Manufacturing companies had to be more prudent in the evaluation of capital
investments, in view of the fact that they could no longer finance capital investments
by simply issuing convertible bonds while stock prices were high;
3. The appreciation of the Yen made international competition harsher. Japanese
advantage in productivity was eroded by the appreciation of the Yen on the Euro-dollar
currencies;
4. The rapid aging of Japans population had important implications for savings,
investments and economic growth115. Moreover it had an important impact on the
economy and on manufacturing. The population between the age of 18 and 28 years
old (the age for recruitment in manufacturing) had a drastic decline from the year 1990
to the year 2000, as showed by figure 23:
Figure 23. Japanese population by age (18-28) 1990-1995-2000.
Age
18
19
20
21
22
23
24
25
26
27
28
Total
1990
1.705.785
1.749.680
1.839.941
1.923.430
2.030.530
2.061.385
2.021.114
1.970.628
1.906.422
1.857.127
1.813.347
20.879.389
1995
1.506.868
1.511.715
1.529.687
1.600.305
1.642.394
1.708.325
1.756.325
1.850.609
1.918.874
2.009.782
2.035.857
19.070.741
2.000
1.314.403
1.352.506
1.377.842
1.442.928
1.494.054
1.509.872
1.510.429
1.530.882
1.600.338
1.625.091
168.067
14.926.412
Source: Statistical Survey Department, Statistics Bureau, Ministry of Public Management,

Home Affairs, Posts and Telecommunications.Japan
115
OECD Economic Surveys: Japan , OECD Publications, 1997.
91
The demographic factor is responsible for relevant changes in the Japanese labour
market. With the change of the demographic situation, the average age of automobile
workers increased. Since the 1990s it became progressively more difficult to hire
enough young labour force in automobile manufacturing, this led to a severe problem
of labor shortage in the period around 1990. The reason for this phenomenon has been
not only the demographical issue but also the fact that young Japanese began to loose
interest in factory jobs. The perception of manufacturing jobs by young Japanese
people as been described with the acronym 3D, dirty, damaging, and dangerous.
Since the 1990s it has become increasingly difficult to hire workers for 3D jobs.
In order to face the problems described above it has been necessary for Toyota, as well
as for other auto companies, to adjust their assembly lines and work organization.
Toyota was the first to implement a new assembly concept aiming to achieve not only
the customers satisfaction but also the workers satisfaction. Toyota Motor Kyushu
Miyamata plant, established in 1992, was the first to implement this new assembly
concept116. The new system was created attempting to combine the strengths of the
Toyota system and a more attractive and less 3D assembly line. The new system is
composed of several subsystems:
-
Autonomous and complete assembly process;
In-line mechanical assembly automation;
Toyota Verification of Assembly Line (TVAL);
Low cost equipment for better ergonomics;
Supporting better Human Resource Management policies.
The autonomous and complete assembly process has first been implemented at
Toyota Kyushu plant and then in all new or renewed plants of Toyota. Toyotas
standard plant is usually of rectangular shape and the assembly line habitually consists
of three or four sub-lines, each about 300 meters long, connected to each other.
116
See: Fujimoto Takahiro, The Evolution of a Manufacturing System at Toyota , Oxford University
Press, 1999
92
Kyushu plant is different:

-
The plant has a square shape;

The assembly line is divided in 11 functional split lines, each about 100 meters
long 117 , created according both to the differences in parts functions and in
workers operation functions;
The split-lines are linked by buffer zones;
In each split-line the workers are grouped in Kumi of 12-20 components divided
in two or three teams of 5/6 members;
The role of the Kumi-cho (team leader) is considerably increased if compared
with the classical Toyota assembly line, with the team leader having a lot more
discretion and responsibility;
The kaizen activities are set up for each split-line.
With the splitting of the line in smaller split-lines the tasks became more meaningful
and understandable for workers than it was in a bigger, and consequently more chaotic,
assembly line. Furthermore each split line has a training corner for workers. Thanks to
these features workers are more likely to be motivated. Team leaders (Kumi-cho) are
likely to share with workers ownership consciousness of the line due to the lines
self contained character 118 . In smaller split-lines also the concept of Jidoka
(autonomation) can be better enhanced, thanks also to the larger discretion and
responsibility given to the team leader (Kumi-cho). Buffer zones between each
split-line absorb the impact of line stops of other segments with the effect of
decreasing the overall downtime119.
The in-line mechanical assembly automation is a new more flexible and more light
concept of automation. Its elements are:
-
The equipment tends to be more simple, compact and easy to maintain;

Workers and machines work together on the continuous conveyers;
Automated equipment is selected according to cost, flexibility and ergonomics
117And118
Monden Yausuhiro, Toyota Production System: An Integrated Approach to Just-IN-Time 3rd
edition, Engineering & Management Press, 1998.

119
Kawamura T, Niimi A., Hisada N. and Kuzuhara T., Coming worker friendly factory , Toyota
Technical Review, 43, no.2, 1993, pp 86-91.
93
rather than according only to quantitative performances.

The benefits of in-line mechanical automation can be seen in terms of flexibility,
kaizen and worker satisfaction. Off-line automated machines adopted in the late 1980s
by Japanese (with large investment in CIM120technology) and Western (e.g. Fiat plant
of Cassino) automakers were out of the line and isolated from workers. Machines
that are isolated are not accepted by workers and create alienation. Workers feel
controlled by the machine rather than controlling the machine. Workers can find the
automated machines to be simple and avoid alienation with machinery incorporated in
the line and operating with workers who control them.
TVAL (Toyota Verification of Assembly Line) is a concept related to the improvement
of work conditions. TVAL is a metod which allows to calculate the workload of each
process. It is calculated according to the equation:
TVAL = 27.03 log (t) + 53.78 log M - 48.76
Where:
(t) = task duration time;
M = ratio of Electro-Motive Force measured by a special device and expressing the
work intensity for the task.
Thanks to TVAL measurement the assembly process planners at Toyota could focus on
the most physically demanding jobs and make improvements in order to develop more
friendly work conditions.
Low cost equipment for better ergonomics improved the work conditions and the work
posture of workers in the assembly line with measures such as: wooden steps with
varying heights suited to tasks performed on the car, cassette system to attach the doors,
power assisted equipment that reduce the weight of the components, floor conveyers
synchronized with car bodies, etc.
New human resource management policies include training and the professional skill
master program ranking workers by the multifunctional skills acquired in four grades:
1. Grade C: workers who have ability in performing the operations of their actual
split-line. The goal for new workers is to achieve this ranking within two years;
120
Computer Integrated Manufacturing
94
2. Grade B: workers who are able to operate in three split-lines. This level should be
achieved within 5 years;
3. Grade A: workers who are able to handle every operation in the assembly line;
4. Grade S: workers who achieved the highest skills.
95
III.c. Production planning.

As noted in the previous paragraphs, the Toyota Production System is a hybrid system
composed basically of two parts:
-
Monthly planning of the production quantities with MRP/MRPII;

Daily production with pull kanban system (Fine tuning).
Planning is done using MRP or MRPII programs. The relation between MRP and
JIT-Kanban can be described as in figure 23.
Figure 23. MRP and JIT-Kanban
inventory level determined by using MRP

CUSTOMERS
Process
A
Process
B
Process
C
VENDORS
Production routine
by Kanban (Pull)
While the MRP system decides the planned production and inventory, the kanban
system operates the fine-tuning by deciding the production routine according to
throughput.
According to the American Production and Inventory Control Society, Inc. (APICS),
MRP is a set of techniques that uses bill of material data, inventory data, and the master
production schedule to calculate materials requirements.
The fatherhood of the MRP model is usually attributed to Joseph Oirlicky121, who in the
1970s developed a program for the calculation of material requirements necessary for
specific production schedules. Other authors122 note that the logic behind MRP system
is the same as that of the CPM (Critical Path Method) technique, created in the 1950s by
the US Ministry of Defense and later upgraded by the NASA. At the beginning,
121
See: Oirlicky J., Material Requirement Planning, The New Way of Life in Production and Inventory,
McGraw Hill, 1975.

122
See: Ayres R.U., Computer Integrated Manufacturing, Volume 1: Revolution in Progress, Chapman
& Hall, 1991.
96
Oirlickys program was able to determine only the production quantities and not the
timing of production. Later the MRP system evolved with the first commercial
application of a MRP system made by IBM with the PICS (Production Information and
Control System)123.
The basic logic of the Material Requirements Planning program can be described as in
figure 24:
Figure 24.
Basic logic of MRP
CUSTOMERS
ORDERS
CAPACITY
PLANNING
DEMAND
FORECAST
MASTER
PRODUCTION
SCHEDULE
INPUTS
BILL
OF
MATERIALS
INVENTORY
DATA
MATERIAL
REQUIREMENTS
PLANNING
(MRP)
PLANNED
ORDER
RELEASES
CHANGE
NOTICES
EXCEPTIONS
REPORTS
OUTPUTS
The Master Production Schedule (MPS) is calculated according to demand (composed

of two elements: demand forecasting, and customer orders), and to the capacity of the
plant.
Demand forecast estimates the quantity of final products to be sold for each period.
The customer orders are the orders already received for the product.
123
Secchi R., Produrre e gestire informazioni per integrare la supply chain , Guerini e Associati, 2000
97
Capacity planning is necessary to assure that the planned production will be consistent
with the capacity of the plant.
Supposing that demand matches plant capacity, we could make an example with the
following requirements:
Period
Requirement
30
25
10
20
10
30
10
10
The Bill of Materials (BOM) refers to the list of materials necessary to make a part. It
explodes the product in all the components and sub-components of which it is
composed. In our simplified example:
Inventory data gives then informations about the parts already in stock, minimum lot
size for orders of each component, lead time, etc.
In the example given:
Part/
Final product
X
A
a
Inventory
Lead time
Ordering Policy
(weaks)
40
20
15
Master Schedule
Ad Hoc
Batch of 40
With these inputs it is possible to calculate the MRP worksheet for the planned order
98
releases, containing the part numbers, the number of units needed and the due date for
the job, in the way showed below:
Calculation table of X
Lead Time
Requirement
Inventory
Net Requirement
Planned order
(lead time of X= 1)
10
10
20
10
30
10
40
30
10
25
40
15
10
10
5
5
20
20
10
10
30
30
10
10
15
10
Calculation table of A
Lead Time
Requirement
Inventory
Net Requirement
Planned order
20
10
30
10
20
15
5
10
20
5
10
20
30
10
10
10
5
20
30
20
10
30
10
15
10
5
10
30
10
(lead time of A =2)

Calculation table of a
Lead Time
Requirement
Inventory
Net Requirement
Planned order
(lead time of a=1)
15
40
10
40
The lead time of X according to inventory data is 1 and the requirement is 30 units at
the 3rd period, thus since there are 40 units of product X already in inventory we do not
need to preorder X before the 3rd period (1 lead time before it is needed). The
requirement of the semi finished component A will be equal to the planned orders of the
final product X. According to the BOM we need one A to produce one X. The same
logic can be followed to calculate the orders for the other parts.
The second output of the MRP system are the change notices, used to indicate
modifications of existing jobs, their due dates and priorities. They can be of two types;
the first type is used for expediting orders (making their due date earlier) while the
second type is used for deferring orders (make their due date later). The last output is
given by the exception reports used to notify users of MRP that there are discrepancies
(such as job count differences, inventory discrepancies and defective parts) between
what is expected and what actually emerges.
99
Manufacturing Resource Planning (MRPII) represents an evolution of the MRP system.

The production planning aspects of the MRP system can be linked to other functions of
the company. As a consequence, the concept of MRP has been expanded in order to
integrate it with other activities such as: order processing, billing, shop floor scheduling
and personnel and machine utilization. MRP II grants a broad control structure that
splits the production control into a hierarchy based on time scale and product
aggregation. Thanks to this structure, the manufacturer can address the difficult task of
synchronizing and coordinating a large number of orders for many items made of a huge
number of components.
There are several types of MRP II hierarchy, but usually most of them comprise three
main parts124:
-
Long range planning;

Intermediate-range planning;
Short-term control.
Manufacturing Resource Planning (MRP II) is defined by the American Production and
Inventory Control Society (APICS) as a method for the effective planning of all the
resources of a manufacturing company. According to Higgins, Leroy and Tierney125 the
characteristics of MRP II can be summarized as follows:
-
Operation and financial system are the same;

It has simulation capabilities that enable predictions to be made beforehand;
It involves every aspect of business from planning to execution.
MRP II systems are an extension of MRP system in order to integrate and support other
activities, but the basic method applied to generate material requirements plans is the
same. In fact MRP II includes the classical MRP scheduling program as main part. But,
also includes other features such as:
124
125
See:
-
Toomey J. W., Planning for Manufacturing Excellence , Chapman & Hall, 1996.
Spearman, M. L. & Hopp, W. J., Factory Physics , Second Edition. McGraw-Hill, 2001.
Higgins P., Leroy P. and Tierney L.,
Manufacturing Planning and Control - Beyond MRP II ,
Chapman & Hall, 1996.
100
Collection of sales and customer order data;

Generates an MPS for future end product requirements;
Translates informations from the material requirements plans into particular work
schedules for single departments and machines;
Calculates departments workloads and capacity;
Produces shipping documents and invoices;
Generates management reports;
Has a feedback mechanism so that if capacity limits are exceeded, the material
requirements plans and the production schedules are revised to stay within capacity
limits.
Many Japanese companies have begun to use computerized systems, but have not
resorted to a Western style MRPII. Companies like Nissan (as noted by Cusumano126),
always relayed on computer systems for processing and conveyance127. Nissan has an
annual Production plan plus four intra-annual Production Plans following the MRPII
time hierarchy.
The production Planning System at Nissan can be schematized as shown in figure 25:
Figure 25. Production Planning System at Nissan128
Annual Production plan

W ork
Schedule
Master schedule1 (3 months)

Master schedule 2 (1 m onth)
Master schedule 3 (10 days)
Sales\Profit Plan
Actual sales
\
inventory level
Daily orders
from dealers
M aster schedule 4 (1 day)

Sequence scheduling
126
Cusumano Michael A., The Japanese automobile industry: technology and management at Nissan
and Toyota , Harvard University Press, 1985.

127
With the exception of the APM (Action Plate Method) introduced in the late 1970s with the same
functions of a Toyotas supplier kanban for those vendors that were more than 30 minutes away from the
factory.
128
As described by Monden, 1998.
101
Nissan has integrated the MRPII system into production planning processes while
making it more Japanese . Nissan combined it with radical changes in management
philosophy. in order to implement Total Quality Management and Kaizen. While
Toyota uses the MRP system for planning and the daily production routine is lead by
kanbans, several other Japanese companies like Asahi Breweries (analyzed in the case
study) use weekly material requirement plans adjusted daily by advanced IT and EDI
(Electronic Data Interchange) systems.
102
Part IV.a. Relations with suppliers.

In the mass production selection of suppliers was based on cost. The best supplier was
considered the one who was able to supply a material for a lower unitary cost for.
After the development of the lean production philosophy the system and the relationship
with suppliers changed. Firstly in Japan and then in all the companies which
implemented Japanese style production and management approaches. It is not
surprising that this change in the perspective of selection and management of suppliers
occurred in Japan where the nature of the business system and the keiretsus created a
trend towards more stable and long-term inter-company relations. Womack et al129
pointed out the distinction between mass production of the West and Japanese lean
production, in terms of supply relations and product development. Moreover, Womack
et al outlined the way by which Japanese companies and suppliers develop: a
co-operative relationship, one that is fundamentally different from the relatively
adversarial relationships between supplier and assembler in the West 130.
Fewer suppliers may be better involved in direct relationships with the assembler over
longer time periods. Suppliers are selected according to performance rather than price,
and first tier suppliers play a pivotal role in the product design process. Long-term
relations with suppliers improve cooperation, which is necessary to improve quality and
assure JIT deliveries. The stability of the relations with suppliers is important also to
assure quality. In fact the TQM approach implies several activities for the education and
development of suppliers.
When it comes to the suppliers delivery service, the main concerns for lean production
are time and place. In a lean process, the production line is often halted when the factory
doesnt get its materials at the established time. Furthermore, the supplies also have to
be in the right place. If this doesnt occur expensive express deliveries have to be used
to resolve the inconvenience.
The supply chain process must be controlled so as not to undermine the efficiency of the
system. There are several reasons why this process may not work, including: lack of
knowledge and time management and/or an organizational problem. For long term
survival a firm must learn how to handle these processes while creating value for both
129
Womack J. P., Jones D. T. and Roos D., The Machine that Changed the World , Rawson Associates,
1990.
130
Womack et al, 1990 page 148.
103
the supplier and the customer. The Just in Time system requires that the suppliers adapt
to the production system of the main company in order to make the orders (or the
kanban in the case of TPS) circulate inside the vendors production line. This ultimately
warrants deliveries of the needed quantity in the needed time and in the needed place.
The keiretsu is by nature based on long-term stable relations. The suppliers in the
framework of the manufacturing keiretsu play an important role in the implementation
and management of JIT.
On 8th September 2003, a fire broke out at the Bridgestone plant of Kuroiso in Tochigi
Prefecture. This occurred one week after a gas tank explosion at the Nippon Steal plant.
Both these accidents caused stops in the production of many car manufacturers in Japan.
Toyota motors, which buy steel sheets form the Nippon Steel plant, had to suspend its
overtime production of vehicles (about 1 and hours per day). Production was
therefore cut by six to eight percent considering Toyotas operational hours (sixteen).
This demonstrates the dependence on suppliers and the importance for the safe
operation of a JIT system to have more than one supplier for the same part.
Pat IV will analyze the relation with suppliers, as well as the criteria for their selection
in the JIT framework.
IV.b. Informations towards vendors at Toyota.

As noted earlier, the Toyota Production System (TPS) requires very close ties with
suppliers. If Toyotas suppliers do not adopt the Kanban system as a part of the TPS
they would have serious troubles managing the fluctuations of orders131. An efficient
system is dependent on:
-
Suppliers plan the production according to the plan of the main company;
The supplier kanban can circulate also inside the vendors plant to fine-tune
production.
At Toyota there are two kinds of information given to suppliers in order to produce the
right quantities for JIT:
131
Engineering & Management Press, 1998.
104
The production plan for the setup of monthly production;

The kanban or unit order table for the daily production:
By Kanban
By Unit Order Table.
The monthly production plan is relayed to the supplier within the middle of the
preceding month. With these informations the supplier can determine:
-
The cycle time for each process;

The Standard Operation Routine which allocates the workers in the right place of
the production line according to the cycle time of each process;
The number of Kanbans for sub-vendors;
The quantities to be preordered to sub-suppliers.
Daily informations indicate the actual number of units to be supplied to Toyota. These
informations can have two different forms depending on the withdrawal method used,
on the level of implementation of JIT in the vendors plant and on the distance of the
vendor from the customer factory.
From the suppliers point of view, the Supplier Kanban can be simply a withdrawal
kanban or a Production Ordering Kanban. About 50% of Toyotas suppliers are using
the supplier kanban as production ordering kanban (or in-process kanban)132.
A Unit Order Table is used when the supplier:
-
is very close;
has an improved JIT/Kanban system and short and flexible lead times;
has an advanced computer information system that can be connected with Toyota
customer factory;
delivers parts very frequently during the same day.
The Unit Order Table is a set of ordering information sent to the vendor by the Toyota
Network System for Suppliers133 (TNS-S). TNS-S relays these informations every hour
132
Engineering & Management Press, 1998.

133
Toyota Network System (TNS) is the Toyotas integrated information system consisting of the
following subsystem: TNS-D for dealers; TNS-B for body makers; TNS-S for suppliers; TNS-O for
105
for 16 hours a day for the deliveries and every four hours to the Toyota plant. Like
Toyota, many other companies use Electronic Data Interchange134 or other electronic
systems to connect with suppliers. Moreover, the TPS benefits of strong keiretsu links
with suppliers in order to have JIT deliveries and to fully implement its production
system. The Toyota vertical keiretsu is composed as shown in figure 26135:
Figure 26 The Toyota Vertical Keiretsu
overseas factories and dealers; ALC, Assembly Line Control system.

134
EDI (Electronic Data Interchange) is a standard format for exchanging business data. An EDI
message contains a string of data elements, each of which represents a singular fact, such as a price,
product model number, etc. The entire string is called a data segment. One or more data segments framed
by a header and trailer form a transaction set, which is the EDI unit of transmission (message).
135
Source: Toyo Keizai Shimposha, "Kigyo Keiretsu Soran", 2000, as reported by JEI (Japan Economic
Institute) report no.14, "The Keiretsu System: Cracking or Crumbling?", Douglas Ostrom, April 7th, 2000,
table 4.
106
Toyota Motor Corporations purchasing philosophy is founded on Purchasing Rules

coined in 1939 which state136: once nominated as Toyota suppliers, they should be
treated as part of Toyota; Toyota shall carry out business with these suppliers without
switching to others, and shall make every effort to raise the performance of these
suppliers . As noted by Dyer137 Toyota does repeat business with its suppliers 92% of
the time, while there was only a 52% chance of repeating business from GM.
Suppliers invest in specialized equipment for Toyota and let Toyota experts into their
plants to teach them the TPS, because of the reliability of the customer in a climate of
reciprocal trust thanks to long-term relations.
IV.c. Supplier Selection, Evaluation, Development and Governance.

It is also important to have appropriate quality as well as JIT deliveries. In the TQM
framework the concept of quality has a wider meaning than just quality of the supplied
product. It also includes the concept of logistic quality in order to prevent quality
problems. As outlined by Crosby138: Relations with suppliers develop over a long time
of doing business together [ ] The effect of this will be felt right through the whole
process. This is part of the prevention process . To improve the logistic system, the
company also needs to develop a system and methods to select and mange suppliers,
this resulting in the procurement function having strategic value.
Primarily the firm has to decide the extent and the activities to be outsourced. Several
factors are involved in the decision making process. These are:
-
Cost; as a consequence of their smaller size suppliers may have lower

manufacturing costs, labor restrictions and overhead expenses;
Experience and skills; developed by specialized suppliers;
Quick market response;
Risk sharing;
136
TMC, Toyota: A History of the First 50 Years , Toyota Motor Corporation, 1988.
137
Dyer J.H., Collaborative Advantage: Winning Through Extended Enterprise Supplier Networks ,
Oxford Press, 2000.

138
Crosby P.B., Quality Is Still Free: Making Quality Certain in Uncertain Times McGraw Hill, 1995,
page 54.
107
Elimination of non-core activities;

Improvement of control, focus, and professionalism;
Cash flow from sale of intellectual property.
On the other hand the risks of outsourcing are:

-
Transaction costs;
Costs of management of the supplier network;
Risk of fallibility of the supplier;
Risk of loss of know-how associated with shifting the production of components ;
Reduced control;
Loss of intellectual capital;
Excessive outsourcing can cause under-employment;
Litigation.
The decision whether to outsource the production or produce in-house is made for every
single component supplied, taking into consideration all the advantages and
disadvantages of shifting the production to a vendor.
The four main aspects of supplier management in the lean context are:
1. Supplier selection;
2. Supplier evaluation;
3. Supplier governance;
4. Supplier development.
As already discussed, in the JIT framework the price is only one of many decisive
factors when it comes to supplier selection. The selection of suppliers has to take
account of other aspects such as those described by Blumberg139:
-
Extensiveness and depth of experience;

Financial solvency;
Commitment to quality improvement and customer satisfaction;
Unique service capabilities;
139
Blumberg D.F., Strategic assessment of outsourcing and downsizing in the service market,
Managing Service Quality, Vol. 8, No. 1, MCB University Press, 1998
108
Understanding of the customers business and market;

Commitment to technological innovation;
Willingness to offer performance guarantees;
Long-term service commitment;
Availability of customer references;
Reputation;
Skill and experience of service personnel;
Full range of service portfolio.
In general we can say that suppliers are chosen for their ability to satisfy the needs for
which the firm made the outsourcing decision.
Before continuing the description of the lean approach to supplier relations, it is
important to specify that reducing the number of suppliers, in order to have less
suppliers of better quality, does not always entail that the assembler must have only one
supplier for each part. Many companies, for example Toshiba140, adopt a two vendor
policy for each outsourced part, consequently reducing the risk of fallibility of the
supplier. By adopting a two vendor policy the company is also able to compare
suppliers thereby enhancing competitiveness. As noted by Womack et al. 141 , the
frequent assumption in the West that all parts are sole-sourced in a lean-supply system is
a misunderstanding. The difference with the Western approach is that the main
company doesnt promote competition to drive prices down, but to avoid anyone
reducing quality or delivery reliability.
Once the suppliers are selected, their performances must be evaluated. At Toshiba142, for
example, the Purchasing Department arranges comparative statistics of the suppliers and
scores them according to both the quality of the vendor company and the relations with
the factory. The quality of the vendor is judged according to price, quality, delivery,
technological capability and management competence. The quality of relations is
evaluated in relation to quality and quantity of transactions, cooperativeness, and future
prospects. Figures are gathered for each product group and a score is given to each
evaluation factor. The maximum score is two hundred for the overall evaluation.
140,142
and143 As described for the Yanagicho plant (Kawasaki city) of Toshiba Co. by W. Mark Fruin in:
Knowledge Works, Managing Intellectual Capital at Toshiba , Oxford University Press, 1997.
141
Womack J. P., Jones D. T. and Roos D., The Machine that Changed the World, Rawson Associates,
1990.
109
The scoring process is summarized in figure 27143:

Figure 27. Supplier evaluation ranking at Toshiba
110
Once ranked according to the scheme above, the result is compared with those of other
vendors and categorized into five groups:
Group I
Group II
GroupIII
Group IV
Group V
Superlative suppliers that require

little or no oversight
Excellent suppliers in their field but
requiring some direction and support
Potentially good suppliers but
needing training
Suppliers who will loose the orders
if they do not start some improvement
Suppliers with whom transactions
must be reduced
All suppliers are officially informed of their ranking once a year and more often
unofficially through supplier association meetings and informal communication. Higher
ranked suppliers will receive more orders and, in turn, gain more profits. At the Toshiba
Yanagicho plant, the 20 suppliers of Group I (on a total of 92 suppliers) provided 60%
of supplies144. This ranking system has also been adopted by Toshiba in order to manage
long-term relations with its suppliers, while at the same time, retaining competition
among them.
The attribution of higher supply volumes to better suppliers follows the model
developed by Grando and Sianesi 145 . The model attributed the supply volumes
according to the vendor rating index for each group of products outsourced. The data
of vendor rating and volume of supply are schematized in a matrix in figure 28:
144
Data of 1986 from Fruin W. M., Knowledge Works, Managing Intellectual Capital at Toshiba , page
110, Oxford University Press, 1997.

145
Grando A. & Sianesi A.,
Il Fornitore: dal prezzo alla prestazione globale , Economia &
Management , no.22, September 1991.
111
Figure 28. Vendor rating/ supply volume matrix
Supply
Volumes
C
2
Vendor Rating
The squares that compose the matrix are ordered according to the ABC logic,
expressing decreasing values of the two parameters considered. Inside the matrix the
colored squares indicate the coherence areas in which supply volumes are assigned
to the suppliers according to their performance (AA, BB, CC). The white squares are
incoherence areas, where the volumes of supply are not attributed according to
performance (CA, CB, BA, BC, AB, AC). Therefore, when a supplier is in an
incoherence area, actions should be taken to move it in a coherence area of the
matrix. If, for example, a supplier is in the square CA, the small volume of supply
assigned is not justified by its high performance in satisfying the need of the customer
company. In this case there are two possible actions: one is to try to increase the volume
of supply; the other is the gradual elimination of the supplier. In the first case the vendor
can move to square AA (arrow 1 in the picture). Nevertheless, this is not always feasible
because of the eventual limits of production capacity of the supplier. In addition, the
growth of produced quantity could cause a drop of performance. In this case, the vendor
will move to the square AC (following arrow 3 in the diagram).
Another option is to push the supplier towards its gradual elimination (following arrow
112
2) through harsher supply conditions. This last option may appear peculiar, as why
eliminate a reliable supplier even if it supplies only small quantities? However it is
coherent with the principles of lean production. According to these principles it is better
to have a small number of reliable and flexible suppliers, rather than several suppliers
even if they assure a good performance.
Another example of Japanese vendor evaluation is the Nissan Supplier Evaluation
System, otherwise known as NX96146 , which bases its decisions on the following
factors:
-
Quality, evaluated using technical measurements of asset capability in terms of part

per million defects;
Cost, with the assessment of the price according to the costs of production, and also
to the profits made by the supplier. This approach requires an open policy of the
supplier who has to open his plant to the assembler. This method prevents suppliers
from working below marginal costs - with the consequent risk of line stoppage if the
supplier fails the delivery or goes bankrupt - and promotes suppliers involvement in
production;
Delivery, in terms of the ability of the supplier to be precise and reliable and assure
deliveries in time with delays considered in hours and not days;
Design, as the ability of the supplier to propose improvement ideas for the
development of the product;
Partnership, as the ability of the vendor to integrate and develop as a collaborative
member of the supply chain.
In order to implement a more effective supplier governance, Japanese corporations

established supplier associations (Kyoryokukai in Japanese) whos aim is to develop: a
mutually benefiting group of a company s most important subcontractors, brought
together on a regular basis for the purpose of co-ordination and co-operation 147. The
supplier association can be considered as another occurrence of the Japanese
relational way to manage business.
A supplier association is a meeting to which suppliers representatives participate on a
146
See Nick Rich, Supply Chain Management: An Introduction to the Role of the Supplier Association",
Deloitte and Touche Senior Executive Series of Briefing Papers, 2003.

147
Hines P.,
Creating World Class Suppliers: Unlocking Mutual Competitive Advantage , Pitman,
1994.
113
regular basis to exchange informations, discuss and plan mutual development.

The Kyoryokukai (supplier association) aims to create the conditions for:
-
The exchange of knowledge with the supplier and between them;

The reduction of informative asymmetries in the supply chain, thus improving the
forecasting function;
The promotion of mutual study and research efforts;
The coordination of the entire supply chain process;
The promotion of common standards of supply;
The creation of relations and feelings of belonging to the same group in order to
achieve a common aim.
Inside these forums there are several sub-groups (called Jishuken in Japanese) for
the study of specific issues of mutual interest. Supplier associations participation is
voluntary after the invitation from the main company to those who are considered the
strategic suppliers (or gaichuhin in Japanese). In many cases, such as Toshiba, the main
company doesnt participate to the sub-meetings, even though it decides their schedule.
In the described structure it is evident that the improvement of the suppliers is one of
the goals for the improvement of supply chain. As defined by Sako 148: Supplier
development is a procedure by a company to help improve its existing suppliers
capabilities. More specifically, it may be interpreted as a firm s attempt to replicate
some aspects of the in-house organizational capability at its suppliers .
In Japanese-style supplier relationships a consistent set of incentives to learn and
acquire organizational capabilities from their customer companies are given to suppliers.
To enhance suppliers capabilities the assembler may send their own managers and
engineers to the suppliers plant in order to improve some aspect of production, give
assistance in the solution of a specific problem, or to provide training courses for
employees and managers.
The aim of supplier development activities is to teach both explicit and tacit knowledge.
Tacit knowledge is taught through cooperation and the implementation of kaizen
practices within the supplier firm. Explicit knowledge is learned through manuals and
education activities. This knowledge can be transferred to suppliers both through mutual
148
Sako M.,
Supplier Development at Honda, Nissan and Toyota: Comparative Case Studies of
Organizational Capability Enhancement , University of Oxford, 2002
114
learning among suppliers and direct assistance. As noted by Sako149, Toyota supplier
development is implemented both by the OMCD (Operations Management Consulting
Division) and the Purchasing Department. The OMCD employs around 50 engineers in
charge of implementing the TPS both within Toyota plants and at its core suppliers.
Overall, the same methods and procedures are applied to internal and external factories
by the same group of engineers, ultimately enhancing knowledge sharing with
suppliers and promoting their development for the benefit of the entire supply chain.
149
Sako M.,
Supplier Development at Honda, Nissan and Toyota: Comparative Case Studies of
Organizational Capability Enhancement , University of Oxford, 2002.
115
PartV.a. Case study: Quality through SCM at Asahi Breweries

Asahi Breweries Ltd was founded in 1949 and is now the largest beer producer in Japan,
with 3995 employees, a share of 47.4% of the Japanese beer market, and a total of 1094
billion Yen (about $9.3 billions) of sales in 2002.
The corporate philosophy of Asahi Breweries Group is:
The Asahi Breweries Group aims to satisfy customers with the highest levels of quality
and integrity, while contributing to the promotion of healthy living and enrichment of
society worldwide .
Integrity is pursued through efforts in SCM and logistics aimed to deliver the product
to the customer without alterations and quickly enough to keep the same standards of
quality from the factory to the final user. The promotion of healthy living represents
the efforts to preserve the environment and create a healthy image of the brand. The
new facility of Kanagawa Brewery which generates no CFCs, and recycles 100% of its
waste products, is the first step for the goal of Asahi to become a 100% waste free
producer.
Asahi Breweries core business is the production of beer, but it also produces several
other products such as sho-chu (a Japanese and Korean liquor with an expanding market
in the last years), whiskey, cocktails, soft drinks and Chilean wines (made on license for
Asahi). The Asahi Breweries Group operates also in the pharmaceutical, health
supplement and food industries through Asahi Food & Healthcare Co. Ltd.150.
The most successful product of Asahi breweries is the beer Asahi Super Dry , which is
exported all over the world and represents the key product for foreign expansion.
Asahis ability to immediately take actions to adapt to changing customer requests
entirely depends on the affiliate companies working in various industries to support
group operations. The supporting roles of these companies range from procurement,
logistics, and information systems to sales support for the restaurant industry. Asahi
Breweries belongs to the keiretsu of the Sumitomo bank (now Sumitomo Mitsui
Banking Corporation after the merger with Sakura Bank in April 2001). The Asahi
150
Asahi Food & Healthcare Co., Ltd. was established in July 2002 from the merger between Asahi Beer
Food, Ltd. and Asahi Beer Pharmaceutical Co., Ltd. The goal was to better promote the foundation of the
group Philosophy Healthy living and to create a core for these business areas. In January 2003 it was
integrated with its subsidiary, Pola Foods Inc.
116
vertical keiretsu and the main affiliates working with Asahi Breweries are showed in
figure 27:
Figure 27 Main affiliates of Asahi Breweries Ltd
Source: Asahi Breweries Ltd
These affiliates represent the Asahi Breweries vertical manufacturing keiretsu- group.
Asahi Beer Malt Ltd, which is the producer of the core product, is supported by the
other companies of the manufacturing keiretsu-group.
Asahi Business Solutions Corp. can be defined as the neural system of the group. Many
of the core management operations such as Supply Chain Management, Continuous
Replenishment Program (CRP), Electronic Data Interchange (EDI) and Knowledge
Management, rely on the latest information technologies. Asahi Business Solutions
Corp. is responsible for the development of the group-wide intelligence system, it
constructs the information infrastructure, provides Information Technology (IT)
consultation, and improves, maintains, and operates information systems. Asahi
Business Solutions proposes IT solutions not only to affiliated companies, but also to
companies outside the group.
117
It is of great importance, for the production of beer, to have a reliable supply of

aluminum cans. Asahi Breweries can vendor is an affiliate, Nippon National Seikan
Co., Ltd.
Nippon National Seikan Co., Ltd. produces the aluminum cans for canned beers and
soft drinks. Nippon National Seikan has introduced an advanced technology developed
by the American National Can Company for the production of two-piece aluminum
cans. The companys plants have a production capacity of 2,000 cans per minute, or 1.9
billion cans per year. The company has also implemented an information system that
runs 24 hours a day, in order to provide the needed quantities of aluminum cans during
summer when the demand for canned beer is at its peak. It has also established a
maintenance system that keeps track of production-related information every second.
Logistic has a key role for a brewery producer. It is of strategic importance, in order to
maintain the quality of the product for the consumer, that the supplier of logistic
services can assure a high standard of quality and in time deliveries. In the Asahi
keiretsu group the logistic services are entrusted to Asahi Logistics Co., Ltd.
Asahi Logistics Co., Ltd. was founded in March 2001 in order to establish a logistics
function based on the groups strategies. Until then four companies, Asahi Cargo
Service Ltd. of Tokyo, Nagoya, Osaka, and Kyushu, had conducted logistics operations
separately in each area. As the holding company with controlling interest in these four
enterprises, Asahi Logistics now handles strategic planning for the nationwide network
logistic system.
Asahi Beer Food Create, Ltd. is the company in charge of the restaurant business. Asahi
Beer Food Create operates about 60 restaurants throughout the main island of Japan,
primarily in Tokyo and Osaka.
Because of the nature of the product, at Asahi the management of quality is strictly
related with SCM. In the past years Asahi breweries developed a program called Asahi
Freshness Management Program which aimed to improve the quality of the product
for the customer with faster deliveries. The aim of this program was to be able to deliver
the product to the retailer within 8 days, of which 5 days from the factory to the
wholesaler and 3 days from the wholesaler to the retailer. The program reached its goals,
since nowadays at the Ibaraki Distribution Center they can assure deliveries to the
wholesalers within 3/4 days and to the retailer in 7 days. These improvements were
made possible also thanks to the full automation of the distribution centers, which are
connected through a computer system. The equipment at Asahi Ibaraki distribution
center gave great benefits in the reduction of delivery time thanks to the new automated
equipment, such as:
118
Automatic Multistoried Warehouse;

Automatic Transport Vehicles;
Stacker Crane;
Track loading Machine (with improvements in the time of loading tracks to the
extent of 5 times compared to the previous timing).
The Taikoban Guarantee System aims to ensure all-out quality control in production.
All products need the final quality guarantee before shipping. Through the systematic
introduction of this quality control system, every Asahi brewery except the new
Kanagawa Brewery is now ISO 9002-certified, (The Kanagawa Brewery is expected to
be certified in 2003.)
The Supply Chain and the production control system of Asahi is a computerized system
based on Continuous Replenishment Program (CRP) towards distributors and Electronic
Data Interchange towards suppliers. The supply chain of Asahi Breweries is showed in
Figure 28:
Figure 28. Supply Chain of Asahi Breweries
The order from the customer is introduced in the Data Base ( Unified Data Delivery
System ) becoming shared information for all the supply chain, as described in figure
29:
119
Figure 29. Unified Data Delivery System
As showed by figure 29, this system collects all the data in one database that delivers
the requested information to all the functions involved in the supply chain. In this way
knowledge about all the key functions of the company is available for accurate demand
forecasting and for suppliers. This allows to know the order quantities needed and to
adjust production. The Unified Data-Delivery System gives the informations necessary
to link market demand projections with production. Each facet of the process, such as
sales, logistics, production and procurement is thus faster in responding to the market.
In addition, Asahi implemented an IT-based knowledge management system known as
Chiebukuro or Knowledge Bank for Technology. This system, working through
in-house intranets, collects and shares information from the companys production
department, thus rationalizing decision-making and improving productivity.
The CRP program elaborates the data provided by distributors in order to:
-
Continuously update demand forecasts;

Calculate safety inventories;
Calculate replenishment amounts;
Manage product shipment.
The CRP system can be schematized like in figure 30:
120
Figure 30. Continuous Replenishment Program
The CRP determines the amount of stock in relation with sales and transmits the data for
Production planning. Afterwards, the basic order quantity is calculated according to
demand forecasting and is adjusted according to the orders received. The production
plan is updated according to these calculations in order to maintain the new levels.
The CRP calculates the basic order quantity according to the following logic:
Amount of basic orders = (L + Rt) x d + s gs
Where:
L = Lead Time
Rt = Review Time
d = Daily Demand as rate of the demand forecast
s = Safety Stock
gs = Goods already in stock
Wholesalers are linked by the agreements to purchase, when possible, the quantities
planned by the program. The total order quantity is calculated in the end, adjusting the
basic order quantity with informations about changes in the demand.
121
Communication with distribution takes place by EOS (Electric Ordering System). This
system improves the speed and the accuracy of order receiving and filling process. As
part of this process, Asahi recently introduced a web-based order receiving and filling
system to support EOS over the Internet.
The brewery receives a weekly production plan calculated according to sales (using the
data of CRP). The weekly plan is used to organize and setup the production for the
week. Moreover, produced quantities are varied daily according to the demand. The
fine-tuning is done daily through IT.
The Logistic Department Centers (two in Japan: one in Tokyo and one in Osaka) send
the orders to the brewery in order to adjust production quantities. Every day, every
facility communicates to the head quarters the manufacturing results through a system
called Ikkan . This system deals with calculating, according to the situation of demand,
the due changes of the plan for the following week. The manufacturing plan for the
week is prepared by the supply and demand meeting. Sales and promotion section,
production section, and SCM section participate to this meeting.
The shipment of finished goods is usually done directly to the wholesalers (around 90%
of production). In the last years there has been a reduction of shipments from the factory
to the Delivery Center; this due to improvements in planning of production and
development of better IT.
The process can be schematized as in figure 31:
122
Figure 31. Delivery schedule and information flows of Asahi plants
Head Quarter
Logistic
Department
Center
(2)
(1)
(4)
(3)
(a)
BREWERY
Wholesaler
(b)
Delivery
Center
( c)
flow of information
flow of products
FLOW OF INFORMATION
(1)
(2)
(3)
(4)
: Weekly Production Plan

: IKKAN System, reporting
manufacturing results daily
: Purchase orders
(by EOS, Telephone, Fax)
: Shipment Directions
FLOW OF PRODUCTS
(a)
Shipment directly to wholesaler
(b)
Inventory surplus to
the delivery center
( c)
Indierect shipment to wholesaler
Suppliers of materials receive the orders for the needed quantities by EDI (Electronic
Data Interchange) in real time and set their production according to the weekly plan. For
the selection of suppliers Asahi Breweries has recently introduced a competitive,
internet-based bidding system for raw materials. Heavy oil and imported malt are the
first two materials procured through the system, which Asahi plans to gradually expand
to other materials.
123
PartV.b.
Japans
Seafood
Supply
Chain
and
the
implementation of EDI systems.

Seafood plays a very important role in the Japanese diet. Japan is the first country for
per capita consumption of seafood with an average of 63.7 Kilograms per capita151 a
year. The growth in imported seafood volumes from 3.415 million tons in 1999 to 3.821
million tons in 2002 confirms the status of the country as a global seafood
superpower. Thanks to these large imports Japan is able to influence the course of the
world's seafood markets. Thus it is very interesting to examine Japans seafood supply
chain and the developments occurred in the last years with the spread of computer
information technology.
The seafood product has a number of typical characteristics that have a relevant impact
on the supply chain152:
-
It is not homogenous, it consists of various kinds and parts of fish;

The value of the product is highly variable, since it depends on the fishing ground,
the fishing port and the harvest time;
The products characteristics change according to the preservation style (fresh,
refrigerated, frozen);
Freshness reflects the value of the product and is highly perishable, requiring a
thoroughgoing management of freshness;
Seasonal variations in the catch of the fish generate wide fluctuations of the price of
the product.
All these characteristics of the product determine the supply chain.

Japans seafood supply chain can be described as in figure 32:
151
Source: FAO, FID/CP/ JPN, Rev. 4 ,May 2000, (http://www.fao.org/fi/fcp/en/JPN/profile.htm).
152
See: Copacino W.C., Supply Chain Management, St. Lucie Press, 1997.
124
Figure 32. Seafood supply chain
Source :
Sugawara et al. Data Transmission Code towards International EDI for Seafood Supply Chain , Proceedings of the International Conference on Supply
Chain Management and Information Systems in the Internet Age, Hong Kong, 2001, pp.167-177.
126
The seafood is delivered by the fisher to the seaside market or to the seafood processor
(for the processed seafood). From the seaside market the product is conveyed to the
wholesaler. WCMs (Wholesale Commission Merchants) buy the products in bulk from
the wholesaler and sell them to the retailers. For processed food the seafood processor
can also sell directly to the retailer.
In 1999 Japans food market faced two important legislative changes. In the same year
both the general law on wholesale and the law for food distribution systems were
modified. The previous legislation focused on the principle of justice of dealing
regardless of the efficiency of the supply chain process. With the new legislation the
principle of trading in the wholesale market was changed, stating that trading should be
carried out with justice and efficiency. This change has been a further impulse
towards the advancement in supply chain management and the introduction of modern
communication technologies.
The supply chain of seafood in Japan consists of several small firms producing parts
and processing raw materials. The small size of many of the business actors, together
with the problems linked to the characteristics of the product, require better information
systems in order to efficiently manage the supply. As outlined by Sugawara et al153: A
manager of the processed marine product industry needs to make appropriate decision
on the time and the amount of fish .
In this context EDI (Electronic Data Interchange) technology represents an important
step in order to better integrate the supply chain process.
EDI systems are assuming a growing importance for transactions all over the world.
Several standards have been created in order to establish the norms for business and
trade processes within specific industries. Moreover, different data regulation processes
have been developed for specific business applications, such as bid submitting,
awarding of orders or contracts, confirmations, completing customs or transportation
forms, billing, payment settlement, etc.
The main standards accepted in Japan are:
-
153
UN/EDIFACT (United Nations/Electronic Data Interchange for Administration,

Commerce and Transport); is applied worldwide and enables process integration
between the software programs of companies from different countries. It is a set of
Sugawara M., Takeno T. and Uetake T., An Application of the Simulation Technique to the Seafood
Manufacturing Preparation , Proceedings of the 5th International Symposium on Logistics, Japan, 2000,
pp.446-453.
127
regulations defined by the United Nations specifically developed for the electronic
data exchange;
-
Asian EDIFACT; has been developed by a board with 7 members of the largest
Asian economies (Japan, China, Singapore, Korea, Taiwan, Malaysia and India);
JAN (Japan Article Number); is the Japanese name of the EAN code, which is the
international common article code. The JAN code forms an important foundation of
the distribution information system in Japan. There are two types of JAN code, the
standard type (13-digit) and shortened type (8-digit). It is commonly used for
distribution and can effectively operate with POS (Point Of Sale).
EDI systems are having a fast development in Japan. A study of Iwate Prefectural
University154 illustrated that in the current information transfer between the wholesalers
and the WCMs there are wastes. These resulted to be caused by the manual collation
processing, which generated waste in terms of manpower and inefficient allocation. The
implementation of an EDI system in this context would bring to the reduction of
information asymmetries and speed up the supply process.
As noticed earlier, major companies introduced integrated EDI systems within their
keiretsu-group. However, the implementation of EDI systems with companies outside
the group can cause problems due to the dissimilarity among internal information
systems. EDI codes must fit the internal information system to flow smoothly through
the supply chain.
Particular problems for the implementation of EDI systems have been faced in the
processed seafood industry. This happened because in this sector the number of raw
materials and parts vary in amount, lot size, place and date of production.
The JAN standard was created to manage finished products, thus it doesnt apply
directly to raw materials and parts. For this reason it can not support successfully all the
154
In the year 2000 the Sugawara lab. of the Faculty of Software and Information Science, Iwate
Prefectural University, conducted a survey on two companies in the wholesale business and four
companies in the WCMs in Morioka (Japan) in the year 2000. The questionnaire survey regarded the
situation of the data exchange between wholesaler and WCMs.
See: Sugawara M., Kobayashi I., Takeno T., Okamaoto A., Uetake T., Data transmission code towards
international EDI for seafood supply chain``, Proceedings of the International Conference on Supply
Chain Management and Information Systems in the Internet Age, Hong Kong, 2001, pp.167-177.
128
needs of the seafood supply chain155.

156
The processed seafood industry in Japan utilizes about 65%
of all the seafood
material. It is composed of mostly small and middle size firms, who would gain a huge
competitive advantage from the introduction of an appropriate EDI system. This
especially considering that in this sector freshness is of huge importance. The actual
state of the art is that, while in the overall supply chain about 50% of orders are done by
EDI, only 17% of transactions between Distributors and Processors is done with this
system157.
From the experience of Japans seafood supply chain, the two elements that emerge are:
1. It is easier to introduce an EDI ordering system when the variety of products is
limited to a small variety and the product is not composed of many parts. Vice versa
when the product is more complex and the variety of products is wide it is very
expensive and complicated to introduce such an information system;
2. Implementation of an EDI system needs to be integrated with the internal
information system of the companies involved. For this reason it is easier to put it
into practice within a group rather than among external companies.
155
Sugawara M., Kikuchi H., Takeno T., Uetake T.,
Inter-Company Information Transmission in
Processed Seafood Supply Chain'', Proceedings of the 6th International Conference on Concurrent
Enterprising, France, 2000, pp.247-251.
156
Statistic and Information Department eds.,
Annual Statistics of Fishery Products Marketing ,
Ministry of Agriculture, Forestry and Fisheries, 1998.
129
Conclusion
The historical background of isolation created particular cultural and anthological
characteristics of Japanese people who developed a unique culture. Although Japan is
now interacting and trading in a global context, the distinctiveness of its culture still
persists, generating a complex and unique social and business environment. This
environment has been considered a strength or a weakness by western observers and
researchers.
One of the strengths engendered by the Japanese business environment is the lean
approach. The Japanese lean production represents the global benchmark in the
manufacturing sector and has done for the last decades. In supply chain and production
systems, the Japanese approach is the most effective model to follow. Thanks to these
model, also in these years of economic crisis, many Japanese industries are still top
global competitors.
This thesis showed how the Japanese environment is supportive and vital for the
application of the comprehensive JIT process. The factors who create this environment
such as the keiretsu, the Jinmyaku, the education system, the management style, the
Japanese labor unions as well as all the other peculiar realities of the Japanese business
and society, are profoundly entrenched in the Japanese culture. This dissertation
demonstrated how the lean approach was generated and evolved in the past decades
from peculiar characteristics of the Japanese social and business system and how the
culture still impacts nowadays on the implementation of the system in Japan. The links
between some of the most distinguishing elements of the Japanese environment and the
key features of the Japanese management and production techniques have been
described. It has been pointed out how it is the culture to make the implementation of
JIT systems easier in Japan. Hence, it is easy to understand why it has been not an easy
task to reproduce these systems in other countries. It has been a common mistake due to
the lack of comprehension of the features residing behind the approach, to consider JIT
as a mere technique. We saw that the lean approach is more than a mere technique, it
is a business philosophy. Furthermore, TQM is not simply a product quality check.
Neither are they mere sets of production and management techniques. Their natures are
strongly linked with the environment from which they were created.
Because of the above reasons, the implementation of this approach outside Japan has
often been problematic. A better understanding of these links is of great importance, in
order to adjust the lean approach for the effective implementation outside Japan, in
different social, cultural and busyness environments.
130
From these considerations, further research can be developed to better understand how
to adjust the lean approach for other countries, trying to create the same synergic
effects that the Japanese lean production found in its original environment.
131
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Unlocking Japan s markets: seizing marketing and distribution

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opportunities in today s Japan , Probus Pub. Co, 1991

Development , Kinokuniya, 1988.

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Part I.a. The unique Japanese business environment

The model of Economic development 10 is a macro economic model based on

M.F.Gullien, Models of Management , The University of Chicago Press, 1994

Management in the Industrial World: an International Study ,

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The Contingency theory11 affirms that the formal organization structure is a

Lawrence P.R. & Lorsch J.W.,

Organization and Environment: Managing Differentiation and

Integration , Harvard University Press, 1967

Negandhi A.R. & Prasad S.B., Comparative Management , Appleton-Century-Crofts, 1971

Beer S., Diagnosi e Progettazioni Organizzative: Principi Cibernetici , Isedi, 1991

Approccio Sistemico al Governo dell Impresa: l Impresa Sistema Vitale ,

Vo.1, CEDAM, 2000

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Monden Y., Toyota Production System , EMP, 1998,page 336

see among the others:

Melville Ian, Marketing in Japan , Butterworth Heinemann, 1999

Political Economy , Stanford University Press, 1988, page 16.

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The Rise of Modern Japan , W.G. Beasley, 1990, Tuttle, London.

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economy , Free Press, 1991.

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I.c. The role of the Japanese government: the Kanryo

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Financing industries directly with financial measures

Carter William, Japanese Industry , ASK Co. Ltd, 2001

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T.Ikuta, Kanryo: Japan`s Hidden Government, NHK publishing, 1995

I.Melville, Marketing in Japan , Butterworth-Heinemann, 1999

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I.d. The Keiretsu

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have been identified and categorized by Okumura27 as follows:

Vertical affiliation in production;

Handle a diverse product range;

Camera di Commercio Italiana in Giappone, Il Giappone a portata di mano , Etas, 2002.

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Clark Rodney, The Japanese Company, Yale University Press, 1979

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Dodwell, Industrial Grouping in Japan, 1994.

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The Japanese system has been traditionally a Managerial Capitalism . As

Japan , American Sociological Review no.61 page 67-88, 1996