ROLE MODEL JAPAN.

Byline: DEAN HETHINGTON

Shinkansen (Japan's bullet-train) is how economists characterized the speed of Japan's nominal gross national product (GNP) increase between 1951 and 1980 - by 73 times - its economy blowing past those of Britain, France and West Germany to find itself No 2 behind the US. A little later, praise for US Federal Reserve chairman Paul Volcker's success hiking interest rates and blocking the 'stagflation' crisis of the 1970s began to wane as the resulting seriously overvalued dollar priced US goods right out of the world marketplace. The unit had appreciated nearly 50% against the Japanese yen by 1985.

This resulted in the massive coordinated currency market interventions by France, West Germany, Japan, the United States and the United Kingdom starting late that same year to effect the depreciation of the US dollar against the Japanese yen and German Deutsche Mark pursuant to the Plaza Accord (signed in September 1985 at the Plaza Hotel in NYC).

Then follows the 1985 - 1986 'Endaka Recession' ('Nihon no endakafukyo', literally, 'recession caused by appreciation of the Japanese Yen') in Japan precipitated by the strong and relentless yen surge finally to Y=150/US$ (from an average of Y=239 per US$1 in 1985). The 1987 Louvre Accord (signed February 22, 1987, at the Louvre, in Paris, by the G6 - the above 5 countries plus Canada) was to put a stop to all that and stabilize the currency markets with a package of policies and steep US interest rate rises (from 6.50% to 9.75%) leading to the 1988 turnaround of the sliding dollar after 18 months to 2.04 DM and Y=160 yen per dollar.

The yen dollar exchange rate rose from around $.004 to just over $.007 per yen, a price inflation of 75%. Not much later, however, Monday, October 19, 1987, or 'Black Monday', the Nikkei dropped in a couple of days 21% while the Dow (Dow Jones Industrial stock average) lost $500 billion (in 1987 money) falling 22.6%. "Their agreement at the Louvre notwithstanding, the dollar sank further, interest rates jumped and stock markets crashed," said a contemporary NYT piece. (www.nytimes.com/1987/12/26).

Economists agreed it was 'fundamentally a monetary phenomenon.'

This was quite enough for the Japanese. Drawing on the unique structure of their economy and business culture, an initiatives-based Ministry of International Trade and Industry (MITI - now METI) along with JETRO (Japan External Trade Organization), a consensus emerged to underlay and empower the private sector in its pursuit of a new production global value chains and international 'trade in tasks' paradigm.

There coalesced a seriously coordinated effort among the Ministry of Foreign Affairs, MITI and JETRO offering their customary administrative guidance (gyoseishido) and significant funding to help emancipate industry in Japan from its currency exchange shackles. Foreign development assistance to emerging East Asia and SE Asia, 'seed money', was to be provided to help lay the foundation to restructure Japan's FDI and set up the necessary infrastructure for pieces of Japanese industrial production to become resident in those countries.

Perceived as a threat to the global order, the emergence of communism in Asia after WWII cut short the dismantling of the remaining zaibatsu in Japan. These mammoth vertically integrated enterprises dominated their specific market sectors, run from a holding company at the top and containing a number of industrial subsidiaries and a wholly-owned bank providing finance, they were the heart of economy Japan from the Meiji period (1868 to 1912) until WW II's end. At the beginning of WWII, the 'Big Four' zaibatsu (Mitsubishi, Sumitomo, Yasuda and Mitsui) alone directly controlled more than 30% of Japan's mining, chemical and metals industries, almost 50% of machinery and equipment, most of the foreign commercial merchant fleet and 70% of the stock exchange. (Wikipedia).

After the war, the old zaibatsu banks formed the core of new business associations called keiretsu, whose member companies hold equity stakes in each other's firms sharing voting rights and deciding policy in 'President's Assembly' (shacho-kai), regular meetings conducted confidentially among member chairmen, presidents and directors. Tradition and cultural dynamics play a pivotal role and the reputation of the group is the operative defining principle. The structure prevents takeover attempts and is key to long-term business planning. Resources from the bank and other members can be drawn on to fund lengthy development of new products and production innovation.

In these associations, the role of the bank is more than just a lender and is closely involved in assessing investment projects and offering strategic business advice jointly with the former zaibatsu captive trading companies (sogo shosha). These have brought their skills to the keiretsu coordinating production, transport and financing among the enterprises in the group. Operating in many geographical areas as intermediaries and trade credit guarantors in foreign trade, the trading companies procure raw materials and sell finished products globally.

Their mandate is to facilitate trade in every regard undertaking logistics, plant development and other services including international resource investment and exploration. The sogo shosha instituted modern risk management methods for their trading and their substantial investments in domestic and overseas industrial operations. They keep their finger on the local trade pulse for major customers (other keiretsu members), and they help set up raw material and components supply networks.

With the keiretsu structure, there is less pressure for management to achieve short term benchmarks, and they can keep their focus on long-term strategic growth. This horizontal linkage of corporate groups around a core bank and trading company through cross long-term equity ownership of production facilities, strategies can be coordinated through layers of companies, including transactions in intermediate component parts among members, leading to the emergence of 'vertical keiretsu' which link component suppliers, manufacturers and distributors in an industry. During the period of Japan's industrial consolidation, highly efficient production methodologies were characterized by rapid productivity growth and meticulous attention to quality design and quality control.

Plus, the relatively weak yen until 1985 made its industrial products, machinery and transport equipment export stars on world markets.

For complex production, keiretsu companies can divide up manufacturing into intermediate tasks and components sourced from association members. "Once Japanese companies started expanding abroad, they exported their vertical keiretsu method. When a large company such as Honda opens a factory in, say, Thailand, it's invariably followed by members of its own keiretsu which set up the same supply network as in Japan by opening foreign subsidiaries which simply function as their Japanese counterparts."

Japanese car companies "submit the specs (including price) for a component to contractors belonging to their own keiretsu and leave them to design it and arrange manufacturing through the lower levels" of the association. ('Keiretsu-Part Three', voluntaryistreader.wordpress.com). Characteristics of the Japanese way The basic Japanese production system is centered on variations of the classic Toyota Lean Production Method (LPM), first introduced in the 1950s and maturing in the early '70s. Originally the response to real scarcity in Japan in the '50s, LPM eliminates all unnecessary resources not adding value to the final product - it's lean.

Muda, or the elimination of waste, another critical Japanese cultural element, is at work. Kinds of waste - excessive production resources, extra steps and un-useful tasks, waiting time, waste in transportation, storage, inventory management, overproduction in one intermediate and excess inventory of finished goods - all are open to scrutiny.

Critical in all this is managers, workers and human relationships (ningen kankai). Culturally, everyone in the organization (kaisha - assembly of people working for a common purpose) is interdependent in pursuit of the common goal and in the service of the group harmony. It's less adversarial. All can express their opinions - formal and informal management procedures institutionalize key worker participation and promote consensus building in the organization-wide pursuit of kaisen - 'quality and gradual innovation'. Everyone shares in the success or failure of the mission.

Workers are trained as multifunctional adept with many machines and steps related to the single process or item - the single unit production system - ikko nagashi. His team is responsible for it. Based on team meetings and feedback, potential excess steps as well as too much intermediate component inventory storage and processing can be reduced or eliminated. Tasks are standardized to the 'standard operations routine', work specified as to content, sequence, timing and outcome.

This multi-functional worker is responsible for everything within a single process step. It reduces the boredom of repetition, and the varied experience adds to the human capital of the employee - workers are more motivated and invested in their part of the process. There's 'ownership consciousness of the line'. Most positions in Japan are life-long. Everyone within the facility is a customer or consumer of products from previous steps in the line and is a 'supplier' to the 'customer', the next step in the production process. Ultimately, the final customer purchase is the last process step with no organization barrier.

Naturally, this more organic managerial structure of give and take lends itself to quality control. Quality represents a strategic activity for Japanese industry. Japanese devotion to total quality is fortunate in a way for the world - it's become a standard or try to compete. TQM, or total quality management, continuous improvement in overall business performance and focus on complete customer satisfaction, is about reputation and is serious business in Japan - quality before short term profit and the customer before the producer.

It's hard to remember how revolutionary a lot of this was early on as so much of it has been absorbed into and become a part of what we think of today as modern industrial production and marketing. Since 'quality is a virtue of design' (early TQM pioneer, Genichi Taguchi) team meetings can criticize design - component design and process design. Robustness of a product is more a function of design than of online control. Cross-functional committees on product planning and design, production planning, purchasing, manufacturing, sales and distribution (quality circles) drive management. Average cost of quality to companies 15-20% of sales.

Japanese culture values space differently. There just isn't as much of it, and it is treasured. The story of early morning deliveries to the small Japanese neighborhood groceries in amounts based upon yesterday's sales became an inspiration. None of these small stores has any storage or warehousing and is dependent upon the deliveries for the day's inventory.

Examining resources not adding value (for LPM), space is at a premium and waste in inventory control and storage was identified early. For each step in the production process, the amount of temporary inventory was traditionally decided by the master monthly production schedule (following precursors to MRP and MRPII) using bill of material data, inventory data and the master schedule to calculate materials requirements for each step.

Between steps, small buffer stores of intermediates are there to cover fluctuations in line flow in demand or emergencies. In traditional mass assembly, however, middle managers constantly increased stores of WIP inventory to make sure they were covered.

To store and process inventory for all the successive steps 'pushed' through the system based on the monthly estimate and materials calculations alone gives rise for a need for extra space and waste in storage cost, processing and time or necessary recalculation. But how much of each intermediate is needed at the beginning of the next step and when?

Incoming flow control is important for TQM. The kanban 'pull' system finetunes supplies within the forecast period. Ultimately final assembly requirements 'pull' inventory and sub-assemblies through the production line. To synchronize supplies of materials and subassemblies with the production process, the kanban (signal card), a paper or metal tag attached to each box of materials or components, signals the exact quantity for the next process within each process step in the production line. With a 'withdrawal kanban' components are taken from temporary stores and delivered to the production step.

There, 'withdrawal kanbans' are exchanged for 'production kanbans' signaling the previous step to produce the amount withdrawn from stores. Kanbans also circulate along the production lines of offsite suppliers who then deliver the material or sub-assembly to the production step at the main factory when it's needed, or 'just-in-time' (JIT). It's all about reducing barriers to what is external and internal.

Suppliers become an extension of the buyer's organization. ('From Business System , Gandofo Domonoci (PhD Thesis), 2003, University of Nagasaki).