Car companies have often led the way in developing innovative purchasing techniques. Given the value and complexity of a typical OEM’s purchasing, which involves thousands of dollars and thousands of components for an average passenger car, this is hardly surprising. Honda America Manufacturing is no exception, spending $3.5 billion on parts each year to produce more than 500,000 Civics and Accords.

The effectiveness of Honda’s purchasing is evident from its success in the highly competitive US market, where its locally built cars have won a 5.2 percent market share only 12 years after startup. (Vehicles imported from Canada and Japan add a further 3.4 percent share.) Honda achieves its success by implementing a wide range of purchasing best practices.

Five fundamental areas

Honda performs well all the main sourcing tasks that any company faces, but it has made particular strides in five key areas. The theme of its success in each one is "making it look easy" by investing resources to make both its own and its suppliers’ lives less difficult. It tackles purchasing effectiveness first, knowing that efficiency will then follow, rather than rushing to squeeze efficiency out of the system at the expense of long-term overall effectiveness. This is not to say that Honda is an "easy" buyer: in fact, suppliers find it one of the most demanding carmakers. But it does go out of its way to remove value-destroying obstacles that block effective supply.

1. The make/buy policy. Honda builds suppliers’ trust (and thus their willingness to reinvest in the relationship) by maintaining a clear and unwavering vertical integration policy. Safety-related components, those that the ultimate customer sees, hears, or feels, and systems where Honda holds a long-term proprietary advantage (such as engines) are tightly controlled by the company via in-house production or closely related supplier firms (often set up as joint ventures). This policy is followed rigorously: "We do not make what we buy; we do not buy what we make."

2. Supplier selection. When selecting suppliers as partners in the complex automotive product development process, Honda uses unique methods that help secure the smoothest possible functioning of this joint effort. Suppliers are selected not on the basis of existing product superiority, but for their ability to work effectively with Honda in developing future high-quality parts. Thus, the key sourcing criteria are: (1) attitude (for example, genuine enthusiasm about working with Honda); (2) quality of product and delivery; (3) development capability (for example, special processing skills and in-house tooling or equipment capacity); and (4) cost transparency (100 percent "open books" to avoid damaging bickering over margins and costs). Price per se is not initially a criterion.

3. Supplier feedback. Honda provides suppliers with helpful feedback on the quality of their products. It favors direct-from-the-field communications to its supply base, since this reduces the confusion inherent in the usual feedback process, where the OEM hoards field data for use as a weapon against suppliers, generating mutual mistrust. Instead, Honda simply passes all field warranty claims directly to the responsible party for resolution, whether it is a dealership, Honda Engineering, the supplier, or Honda America Manufacturing. Suppliers thus have the chance to learn directly about specific problems and how to correct them, rather than having to rely on Honda to diagnose faults accurately. With critical parts, every single field failure is shipped to the relevant supplier for analysis and remedy. (This warranty feedback system is, of course, supplemented by the kind of formal supplier scoring and reward system familiar to many firms.)

4. Supplier development. Here again, Honda prefers a direct, proactive approach over the usual practice of haranguing unsatisfactory suppliers about their performance. Since 1989, "BP" (best practice) teams of two to three Honda employees representing several key functions have been going into the field to work hand in hand with struggling suppliers to improve their products and processes. Honda funds the BP team and expects the supplier to contribute its own people. Identified savings are shared equally—unless the supplier is in financial trouble, in which case it may receive the bulk of the benefit. In six years, the BP teams have executed more than 75 projects, achieved average manufacturing cost reductions of 7 percent, and won productivity gains of 48 percent.

5. Stable production schedule. Finally, but perhaps most importantly, Honda supports its suppliers by strenuously pursuing a stable production schedule. Monthly releases of production plans for the next two months are closely adhered to, and Honda pays suppliers generous penalties if actual volumes deviate from forecast by more than 10 percent either way. It also pays compensation for unexpected shifts in mix, which can be as disruptive as volume fluctuations. Honda stabilizes its schedule through discipline, 60-car batch sizes, and a strict limit on vehicle options. Colors apart, 1994 Accords came in only three variants (DX, LX, and EX), each offering only a bodystyle choice, manual or automatic transmission, and a single "with or without" major feature choice (for example, ABS or leather interior). This minimal range is in stark contrast with the thousands of possible combinations offered on most other cars sold in the United States, and significantly reduces supplier complexity and cost.