Executive Summary The Tombow Pencil Co. established in the early 20th Centaury has survived many difficult times in Japanese history, including the Second World War, numerous recessions and fundamental technological changes affecting its market. However, profits have declined and remained low during the 1990’s despite efforts to modernise.
In reviewing this case it is tempting to view its current methods as inefficient, with an over-reliance on many subcontractors, with the temptation of following a Western European/USA model of centralising production and driving tighter Arms Length Contractual Relations (ACR) to drive efficiency and reduce costs. However, the business system operating in the region is of great importance. There are many deeply rooted cultural influences which can affect the attitudes towards business, but by accepting and embracing the local business culture a smoother more successful and ultimately less risky path to success may be possible.
In this analysis, the fundamental Japanese principles of the Keiretsu, the close knit knowledge sharing manufacturing network, is seen as the main focus for improving the future prosperity of the company and its suppliers. Table of contents IntroductionPage 4 Analysis of Tombow SubcontractingPage 5 The Changing Business EnvironmentPage 7 Distribution ChannelsPage 8 The Need for ChangePage 10 Lessons from International Business Systems The Western ApproachPage 12 The Japanese Business System and CulturePage 13
ConclusionPage 14 Reference ListPage 15 Appendix 1 – History (taken from case study)Page 16 Appendix 2 – Tombow Case Study Exhibit 2-BPage 17 Introduction The Tombow Pencil Co. Ltd is a Japanese writing instrument manufacturer, enjoying sales in 1990 of 16,133 M Yen. Its largest competitor is Mitsubishi, with sales of over 41 M Yen. It is clear however that Mitsubishi are outperforming them in terms of profits, with Tombow demonstrating a worrying trend of increasing sales but reducing profits and margins in recent years
Analysis of Tombow Subcontracting The supply network is set up such that Tombow is the core firm having established bilateral relationships with subcontractors. Some of Tombows subcontractors have in turn engaged with further subcontractors. The advantage of this set up is that Tombow does not need to perform all tasks but instead can delegate tasks to the subcontractors. The disadvantage is the extensive management that is needed to control the firms and to assign the tasks, e. g. staff of 5 members has to coordinate 35 component vendors and 11 assembly subcontractors. Application of such a coordination process is complicated and might lead to some important tasks being overlooked. An advantage is that there is a team dedicated to trouble shooting technical problems all be it one that is limited in scope. In the true sense of the Japanese business system, Tombow is lacking in the influence and scope of its consulting functionality for knowledge acquisition, storage and diffusion within the supplier network (Dyer and Nobeoka) (1).
Applying a consulting team to the 7 cooperative factories and its subcontractors may help to increase productivity as the cooperative factories are working independently from each other. Taking the assumption that they are in competition with each other it would be counterproductive to bring them into direct contact with each other. From this perspective, having bilateral relationships established between the subcontractors and their subcontractors at an operational level is the right choice, but enhanced with top senior management contact between the key subcontractors and Tombow itself.
Two of the 6 vendors for Object EO production present more than 2/3rd of the Object EO’s costs. The company Nagano is located at a distance from the Tombow factory which will make trouble shooting and learning more difficult as no ad hoc meetings could be easily performed to solve upcoming problems and a learning transfer from Tombow to the subcontractor on a daily basis. In the Keiretsu system none of the network members should have critical importance (Lincoln) (3), but within Tombow system for OE, 2/3rd of the costs are shared between the two key subcontractors.
Both supplier’s have long term relationships with the company and are probably unchallenged by potential competition, and this could be one of the reasons for reduced profitability. Introducing the threat of other competitors may help to improve the profitability again, levering the Obligational contractual relationship (OCR) (Sako) (2) and acting as a reminder of what that obligation means in terms of productivity, design and cost improvements for the good of the wider network.
Sako defines OCR as a relationship that “involves an economic contract covering the production and trading of goods and services. But it is embedded in more particularistic social relations between trading partners who entertain a sense of mutual trust” Tombow asks potential suppliers for cost estimates of initial volumes, and those would then get repeated orders when the products succeed in the market. There is no indication that the contract terms get renegotiated based on sales volume.
Tombow would not benefit from continuous improvement, economy of learning or economy of scale which also is to disadvantage of the network. The physical flow of object EO may not be optimal from a process flow perspective because inventory is building up in the Tombow stock room which is just an intermediate stock. That is ineffective as the products remain for a longer time period within the production process, leading to a reduced capital turnover rate. This demonstrates a need to look more carefully at embracing aspects of lean and just in time Japanese methodologies.
Kantoh expresses that it is engaged with three other important customers, the sharing of this information in itself indicates some degree of a culture of information sharing with Tombow, although the resultant reasoning that Kantoh requires 3 month lead time does not indicate close ties binding Tombow and Kantoh together. From an OCR system perspective (Sako) (2) this is an indication that interdependence is missing, hence the buyer relies more on the supplier than vice versa which adds business risk.
Also shorter time demands can never be fulfilled without larger preproduction leading to higher stocking, and Kantoh themselves may be missing out on knowledge sharing throughout the network which may help them with their other key customers as described by Dyer and Nobeoka (1) The Changing Business Environment Tombow appears to comply with many of the expectations of the Japanese business system, having created the basis a Keiretsu (Lincoln) (3) a network of independently managed firms maintaining close and stable business ties.
It is evident that the current “Keiretsu” has formed over many decades. As already discussed, such networks rely on OCR. Looking at the performance of Tombow in recent years, there is a question of how effective this particular Keiretsu is performing and reacting to the market changes. As Lincoln (3) suggested, organisations may continue long after they have ceased to perform useful functions in any technical or economic sense. Lots of organisations were key to Japan’s early industrialization, but are outlived.
Inertial forces cause evolutionary trajectories to be path dependent, bound to courses of development that early choices set in motion and are unresponsive to current conditions. There is certainly evidence in the text for this sense of group thinking and inertia within the Tombow case study. Many of Tombow core suppliers have been in place for decades, with little evidence of changes in working methods and structures. It can be said that the organisational structure of the network for Tombow is the right fit for the Japanese business system, but through the lack of inertia has not achieved fit and flexibility (Ghosal) (4),
Whilst the company appears to have reacted well to the Ballpoint revolution of the 1960’s and the move into mechanical pencils, marker pens and roller ball during the ‘70s and 80’s, it is in the 1990’s that this inertia becomes apparent, indicated by reduced profits, high inventory and a paradoxical inability to maintain supply to its sales agents and customers. During this time there have been several gradual incremental changes to the market environment as demonstrated by the critical time line below Distribution Channels
Tombow traditional distribution network has consisted of a vast number of stores, office and school supplies. To ensure shops were kept well stocked MOQ’s of distributors and manufacturers were kept down with full returns rights. Tombow routed products through wholesalers & 38 local offices. Sales incentives were offered to encourage retailers and agents to concentrate on their products. Retailers would carry a few different brands to offer a broad range. Local branches stock accounted for 15-30% of SKU’s but also create an environment where stock outs are avoided only by costly inter branch transfers.
The changes in the market give clues on why this situation exists The 1990’s saw changes in the market structure with larger stores squeezing out smaller, wanting individual packaging to enhance sales presentation, introducing better more sophisticated buyers squeezing more features and lower prices. Convenience stores become a player for individual needs, larger stores more orientated towards the gift market. Corporate ‘freebies’ and giveaways becomes a market, handled by sales reps as special projects tailoring specification (name printing – even colour) on EO for MOQ of 30,000 units.
The number of customised sales is unknown. This suggests a process that has not been revised to cope with the changing nature of demand, although it is apparent that this change in the market dynamic has been recognised by local branch managers and personnel. They are able to see the increasing speed of change, and have developed their own ways of supporting this business, when the core Tombow Keiretsu can not, by unilaterally outsourcing the name printing to local suppliers. Agents recognising an expanding market are soliciting new enquiries and often asking “is there anything new? ”
The market has gone through big changes, whilst recognised by Tombow, particularly at the agent and local office levels, have not been reflected in the infrastructure and business strategy, specifically:- •Recognising the increasing impact of large stores and reduction in the thousands of small outlet market •Fashion is now a key driver requiring rapid, low cost and continual new product development to meet the latest fads in the market •Increasing market for corporate and marketing give-aways – something recognised by the agents and local offices who are “working around” the unresponsive core business by using local contractors o print company names etc. With regard to the product mix, Exhibit 2-B In the case study material (appendix 2) indicates the standard pencil production in Japan has nearly halved between 1960 and 1989, the fountain pen market is now 1/5th but with dramatic growth in the Ballpoint and steady growth in mechanical pencil and marker pen markets. However, the domestic market for standard pencils does appear to remain an important part of the domestic market contributing 15% of sales. The need for Change
There are a number of changes which could be made, considering the Japanese horizontal Keiretsu (Lincoln) (3) environment in which Tombow operates. However some changes may not meet the urgent requirements due to network issues, such as supplier power within Tombow. It was noted, for example, the creation of the dedicated pencil line in Shinshiro took 10 years, which suggests the decision making and action process can be lengthy. As with many Keiretsu, it is unclear if any of the subcontractors, such as Kantoh or Nagano, have any stake in the Tombow business.
As a result the following suggestions revolve around group work and collective learning. In order to advance some of these decisions we have listed the decisions in order of importance with an explanation. Develop more production sharing knowledge and learning with existing major suppliers, particularly those which have substantial impacts on the costs and lead times, such as Kantoh and Nagano. This would entail bringing the six Tombow manufacturing groups together as well as the main sub-contractors and departmental managers from sales and logistics to learn from each other’s experience and tacit know-how to develop methods and tools.
The benefit is such that many new ideas and developments will occur to reduce cost, improve quality and speed up production times. The resultant buy-in from staff will create more commitment & problem solving ability from those involved as the problems become joint and shared problems rather than departmental problems. Risks include subcontractors being provided a free-ride, whilst their input is low or non-existent into the process. There is also a risk of the intellectual capital being developed, shared amongst other customers (as Tombow competitors).
These can be mitigated by the creation of rules and the threat of contract loss. In addition to the above we would re-focus the Research and Development team to work with the above learning group on ideas to reduce cost and manufacturing lead times. The major change here is the R&D team will be working more closely within the network of suppliers and sub-contractors in developing materials and tools to reduce cost from the product lines & hence improving profitability. The risk of this is the sharing of intellectual property, which can be mitigated, with sufficient contracts.
However the above changes are structural and further production improvements will result from the team-working and supplier partnerships formed. More explicit improvements the above teams will confirm and assist with are: 1. Relocate the manufacturing and/or assembly from Nagano into one central location local to the plant. This could include supply side logistics, where Nagano is responsible for ensuring stock of product never falls below a minimum level (Kanban) and moving the assembly process in house. This may involve bringing Nagano assembly closer or within the plant.
This would reduce lead times as the assembled parts would not need to go back to Nagano & then to Tombow. 2. Have component deliveries from Kantoh delivered directly to Nagano, rather than delivered to Tombow stockroom. This would speed up the process as unnecessary handling is not required. 3. Change the shift system from one to three shifts in order to maximize machine utilization and reduce lead times. The risk to this is an increase in costs and upheaval, as potential bottlenecks occur, where staff potentially become idle. 4. Identifying the largest branches and combining them with smaller branch ffices to reduce staff numbers (such as support and logistics staff) and warehouse locations and in turn reducing the levels of inventory and stock-outs. This would also reduce the inter-branch transfers when stock-outs occur. The risks to this are that the necessary sales data is unavailable in order to make the correct changes required. Lessons from International Business Systems – The Western Approach M. Porter (1980) (5) claims that a successful purchasing strategy for managing suppliers in Europe and in the US should employ the following approaches: . Spread Purchases. Purchases of an item can be spread among alternate suppliers in such a way as to improve the firm’s bargaining position. The business given to each individual supplier must be large enough to cause the supplier concern over losing it – spreading purchases too widely does not take advantage of structural bargaining position. However, purchasing everything from one supplier may yield that supplier too much of an opportunity to exercise power of build switching costs. 2. Avoiding Switching Costs.
Avoiding switching costs means resisting the temptation to become too depend on a supplier for engineering assistance; insuring that employees are not co-opted; avoiding suppliers’ efforts to create a custom-variety of custom-engineered application without a clear cost justification that outweighs possible future exercise of leverage. 3. Help Qualify Alternate Sources. It may be necessary to encourage alternate sources to enter the business, through funding development contracts and contracts for a small part of purchases.
Some purchases have actually helped capitalise new sources or gone overseas to persuade foreign firms to come into the business. It may also be desirable to help new suppliers minimise their costs of becoming qualified sources. 4. Promote Standardisation. All firms in an industry may be well served by promoting standardisation of specifications in the industries from which they purchase inputs. This policy helps reduce suppliers’ product differentiation and undercuts the erection of switching costs. 5. Use of Tapered Integration.
When the volume of purchases allow it, a great deal of bargaining leverage can be gained through tapered integration, or partial integration into a particular item while buying some or even the majority of it from outside suppliers. The objective of all these approaches is to lower total long-run costs of purchasing. It should be recognised that using some of them may actually raise some aspects of narrowly defined purchasing cost. The Japanese Business System and Culture By contrast, in Japanese business culture, companies successfully use different approaches.
Dyer and Nobeoka (1) provide evidence that suppliers do learn more quickly after participating in Toyota’s knowledge-sharing network. Toyotas network has solved three fundamental dilemmas with regard to knowledge sharing by devising methods to (1) motivate members to participate and openly share valuable knowledge (while preventing undesirable spill over to competitors), (2) prevent free riders, and (3) reduce the costs associated with funding and accessing different types of valuable knowledge.
Toyota has done this by creating a strong network identity with rules for participation and entry into network. Conclusion The Keiretsu supply network of Tombow can be used to maximise the benefits of continuous improvement with out bearing significant cost or risk. OCR’s by their nature spread cost and risk out amongst those within the subcontracting network. This structure has in the past enabled Tombow to be a dynamic company bringing to the market innovative products to help combat the ballpoint revolution of the 1960’s and that of the marker pen in the 1970’s.
However, the Tombow Keiretsu now needs reviewing and strengthening to meet the needs of the current day and future challenges in a rapidly changing market, taking inspiration from the Toyota system described by Dyer and Nobeoka (1) In addition, within Tombows own manufacturing plants, we recommend changing the production system so as to shorten lead time and reduce inventory leading to increased flexibility. Removing non value added steps, reducing transportation and ensuring high machine utilisation are at the heart of the changes.
The distribution network through wholesalers and regional offices also needs attention to move to a more centralised stock location with the effect of reducing stock outs and improving customer service. This does not mean the complete closure of regional offices – sales staff and supporting administrative staff being maintained to ensure continuation of the local customer relationships, also essential in the Japanese Business System
A fundamental lesson from the Tombow case is that the socio-economic characteristics of the location of a business weigh heavily on the decision making process and it is essential to remember this when operating in global market. Reference list 1. Dyer, J. H. and Nobeoka, K. (2000), ‘Creating and Managing a High-Performance Knowledge- Sharing Network: The Toyota Case’, Strategic Management Journal, 21: 345-367. 2. Sako. M, “Price, “Quality and Trust – Inter-firm Relations in Britain and Japan” The London School of Economics and Political Science, Cambridge University Press reprint 1997 Chapter 1 . Lincoln. J, “Japans network economy pp 10-50, Cambridge University Press 2004 4. Ghosal, Nohria N “Horses for Courses: Organizational Forms for Multinational Corporations, Sloan Management review, 34:2 (1993:Winter) p. 23 5. Porter, M. E. (1980) Competitive Strategy: Techniques for analyzing industries and competitors. New York: Free Press. Other Materials viewed “The Keiretsu of Japan” http://www. sjsu. edu/faculty/watkins/keiretsu. htm Tombow Japan – http://www. tombow. om/en/company/index. html Appendix 1 History 1960’s saw the “Ballpoint revolution” all major writing instrument competitors, once separated by pencil, fountain pen, brushes, and pen points all thrown together by entering the ball point market 1970’sTombow went down the mechanical pencils, marker pens and roller ball between 1970 and 1982. They all competed in the sub Y3000 market, with Y5000+ market dominated by European/Western speciality suppliers with the exception of BIC disposables 990’sYohei Ogawa took over (Grandson of founder) – wide product range but profits remained below 1% before tax for the last 8 years. Yohei inherited a company with several distinct divisions all reporting into the CEO, Yohei restructured to one explicit goal orientation including two additional layers to bring about greater co-ordination. He worked closely with the ageing lieutenants picked by his Grandfather in the 1950’s and 60’s 1st year grappled between product managers and sales, attempting to introduce new products but hampered by portfolio product range