Remarks for Larry Jutte Senior Vice President, Honda of America Mfg., Inc. (Part 1 of 2)

8/6/2004 10:26:43 PM

Management Briefing Seminar

We are invited to participate in a number of forums that focus on purchasing issues. And we come to these meetings with the same spirit that we bring to our relationships with suppliers. We are here to share what we know ... and listen and learn from the knowledge base and experiences of others.

As an industry ... and as individual companies ... we face many challenges. But let me begin by suggesting that we keep these challenges in perspective. Viewed historically, even with a slight dip in overall industry sales, we are still in an era of record high auto sales. Sales have never been this high, for this long. Certainly, Honda has enjoyed record sales for seven consecutive years.

Having said that, I want to emphasize that Honda has always prepared as if there is a "perfect storm" brewing out there. That means focusing on the customer ... and always remaining lean ... always flexible ... and always a little conservative in terms of the risks we choose to take. We won't change this approach.

But that doesn't mean we will stand still. In just over one month, Honda of America Manufacturing will mark the 25 th anniversary of the first Honda product to roll off one of our assembly lines in Ohio. And we are planning a nice celebration. But from a business standpoint ... rather than look back ... we are focusing on the next 25 years. Today, I want to explain how we plan to advance by creating new value for the customer. And based on some of the lessons we have learned over the years, I want to offer some views on what suppliers and OEMs should be looking to achieve to maintain strong relationships.

I don't use the word - relationship - lightly. I think it precisely defines what is required to have a mutually satisfying and successful experience. Whether you are talking about two people or two companies, entering into a relationship is one of the biggest decisions you can make. You must take time to get to know one another and make sure you share the same values. It requires open and honest communication. And it can't be one-sided ... there must be real commitment from both sides. Well ... I'm not Dr. Phil ... but I hope you get the point.

Honda's 25 years of manufacturing leadership in North America now includes 12 plants. But, in 1979 ... we didn't have much in the way of existing relationships with domestic suppliers. Starting production from scratch in America also meant beginning our domestic parts sourcing efforts from virtually nothing.

I say nothing ... and that is true with respect to parts and materials. But we did begin with something more important in my view. We started with a very clear and strong corporate philosophy. A set of principles of what matters to Honda ... principles that guided the process of establishing production operations here ... and that represent the values we bring to every supplier relationship we enter.

This begins with a focus on the customer. The genesis of Honda's 25 anniversary was our belief in "building products close to the customer." But the operative word is not "building" - rather, it is "customer." Everyone talks about the customer. But our basic belief at Honda is that we cannot be satisfied until our customer is satisfied through the life of their experience with our product.

When it comes to how we operate as a company - at the core is something we call "Respect for the individual." Working together in an environment where challenging issues must be resolved every day requires open and honest communication. Respect for the individual is what makes this possible. It is the foundation for teamwork at Honda.

We also believe in the importance of going "to the spot" ... this means getting out of the office ... and going to the assembly line or a supplier's facility to determine the root cause of a problem, before coming up with a solution. No matter what your title, knowledge at the spot is what empowers you to make a decision.

Another important value of Honda is that we are never satisfied with the way things are ... we always challenge ourselves to create new value for the customer. The decision to build products in America is a good example of this "challenging spirit." New challenges that focus and motivate everyone in the company - help Honda create new things for the customer.

Look ... I don't want to preach. But my point in reviewing these elements of Honda's corporate culture is to emphasize that if you are going to have a relationship with someone, you must understand the values that guide their business. And you should understand your own values. Then, consider where matches exist with your partner ... or where gaps exist that need attention.

This is exactly how Honda approached the startup of local manufacturing 25 years ago. We began by trying to identify suppliers in North America that matched our core values. In the early '80s, we were a newcomer ... with new ideas ... facing a very mature automotive supply base. Some thought Honda's value system was more than challenging ... they thought it was unreasonable. There is no question that we were demanding about quality, cost and delivery ... and we wanted to know a heckuva lot more about a supplier's business than most other auto companies at that time.

In our view, we weren't just buying parts. We wanted collaborative relationships ... with a sharing of responsibilities ... and transparency in terms of exchanging information. From the beginning, we have been insistent about our basic objectives of Q-C-D - or quality, cost and on-time delivery. Over the past two decades, this has evolved to include requirements that suppliers play an even more important role in developing parts through early involvement -- and that they effectively manage every aspect of their business.

But we have a clear vision that guides our purchasing efforts ... to develop and manage a competitive and stable supply base for Honda's manufacturing facilities throughout North America. In the early '80s, after starting up in Ohio, our production volume was low ... and our main focus was on finding suppliers that could make the same parts that were being sourced in Japan ... primarily raw materials and larger parts that were more expensive and challenging to ship.

As local auto production accelerated, we were primarily focused on two models ... Accord and Civic. Full model changes for these two models provided new suppliers with opportunities ... and also new challenges. But when suppliers experienced difficulty in meeting our standards, we didn't end our relationship with them. We wanted to help them succeed ... and to see that our relationship succeeds. So, Honda experts went to suppliers for weeks at a time - to help find weaknesses and improve their production characteristics.

Today, our associates still support suppliers. But, now they are looking at company characteristics, in addition to production characteristics ... assessing weaknesses that might be reflected in a supplier's performance ... and supporting countermeasure activities. Few suppliers will let you do this if they think you are just coming in to beat them up over price or quality. But sharing insights so that both Honda and the supplier benefit - builds trust ... respect ... and a spirit of cooperation for the future.

Perhaps the most profound impact on the scope of our local parts sourcing activities, however, has been the growth of Honda's local R&D activities in America. In fact, today, a large part of our North American Purchasing operation is physically located in the same building as Honda R&D Americas Ohio Center - which reflects both the close, collaborative relationship we have with our R&D operations and the importance of suppliers to our product development efforts.

New model development in Ohio began to have an impact in the early '90s with derivative models like the Accord Wagon and Civic Coupe ... and shifted into high gear with the development of exclusive models like the Acura MDX and TL and Honda Pilot and Element. This has meant an increased requirement for extensive qualification and development of suppliers for all processes and components. This includes a growing number of strategic alliances with suppliers on new technology.

Now, we have entered an era of increased autonomy in North American Purchasing. We have established a base of suppliers that compete for Honda business largely against each other - rather than with suppliers in Japan. Certainly, with global models like Civic - which is produced in more than a dozen nations - we place a higher priority on global sourcing. But for models developed in North America - including the upcoming Honda SUT - we look primarily to our suppliers in North America to compete for that business.

Last year, Honda purchased approximately $13 billion in parts and materials from more than 600 suppliers in North America. But while new model launches and expansion of North American capacity to 1.4 million units continues to increase the dollars we spend - note that our base of suppliers is not growing at the same rate. In fact, it has stabilized. That doesn't mean that a supplier who is not currently selling parts to Honda has missed the opportunity. But it does mean that they must come to us with a unique value proposition.

Atlantic Tool & Die, based in Strongsville, Ohio, is a good example of a supplier that has consistently responded to challenges incumbent with our business. Their start with Honda was rather typical in that we began discussions in 1986 - and they started supplying us with small stampings two years later. Nothing about Atlantic stood out from other stamping companies in terms of their technological capabilities. But we recognized something in the spirit of this company. Their management philosophy matched ours.

When our relationship began, I know they were surprised with how much time Honda management and staff spent in their facility. But Atlantic's management has been equal to the task ... always involved ... going to the spot on the shop floor ... and knowledgeable about their operations.

Atlantic has consistently added value to our business. Prior to working with Honda, their business was limited to stampings. Recognizing the priority we place on added value, they saw an opportunity in our rapid expansion in the late '80s. After just one full year with Honda ... and with no promises of additional business ... they invested in a major expansion of their original plant to handle weldments and assembly work. It was a big step for a small company. But it tripled their employment in just four years and led to a second plant in Ohio.

Two years ago, we challenged our supplier network to become more globally competitive. That doesn't mean everyone needs to look to Asia as a supply source. But it is difficult for small stamped parts to achieve global competitiveness in North America. Atlantic has made an ongoing commitment in this area. In fact, through our International Parts Center in Ohio, Atlantic parts are exported to Honda plants overseas. They now export more parts than were originally supplied to us. And this helped turn a company we came to know as a small Ohio tool shop ... into a global player.

Atlantic also took initiative to bring value to Honda in new model activity. Last fall, they began operations at a brand new facility in Alabama serving our plant in Lincoln. And they are currently in the process of launching some 25 new part numbers for the all-new Odyssey that goes into mass production next week. Earlier I explained how we support our suppliers by troubleshooting inside their facilities. This includes during the new model process ... where we conduct New Model Reviews that analyze a supplier's readiness for mass production.

For instance, despite our solid relationship with Atlantic, Honda associates have been in their Alabama plant, observing trial runs with mass production tooling. Together, we have determined countermeasures for areas of concern. Importantly, this process is addressing issues that otherwise could have occurred during mass production. This is another example of how going to the spot and working together are ongoing activities of a healthy relationship.

But the key is that Atlantic has done the basic things very well. Like many firsttime suppliers, initially they were challenged by our quality expectations. But it only seemed to motivate them. In just their second year with Honda, they earned a quality award. And they have earned enough of them now that I am almost tired of visiting their plant for awards presentations.

Atlantic has now grown from $7 million dollars in sales, with one Ohio plant and a handful of part numbers ... to $70 million in sales, with four U.S. plants, and more than 250 individual part numbers directly to Honda or to our Tier 1 suppliers. Most of these are value-added parts and assemblies. And they continue to look at new ways to add value. Five years ago, they began investing in proprietary indie sensor technology that reduced stamping errors by 90 percent in just the first year. This is another sign that they are poised to jump on new opportunities by keeping up with our expectations and goals.

And Honda's expectations keep going higher. We are committed to creating new value for our customers. This has profound implications both for our products and the operations that produce them. From a manufacturing perspective, we have set our sights on the next 25 years in North America. And this means even higher levels of quality, efficiency and flexibility.

(Continued in part 2)