The Role of Global Procurement in the Value Chain

of Japanese Steel
Overview: This case study is about the vital role played by Japans global procurement and logistical strategy in that countrys road to the worlds leadership in steel exports After the World War II, Japanese steel industry rose from a state of industrial disaster to be the worlds leading exporter of steel in a period under 25 years. The value chain is an especially useful framework for cutting through the complex issues of the sources of globalization in highly competitive industries like steel in Japan. US steel firms were more highly integrated, the unique nature of Japans procurement and logistical system created significant economies of scale by virtue of industry wide cooperation and learning, and through supplier-buyer arrangements that offered all the benefits of vertical integration without its disadvantages. Timeframe: This case study is about the time frame of late 1950s to 1970s, where the role of global procurement in value chain of Japanese steel industry was studied. Environmental circumstances (PESTEL): Non availability of raw materials like iron ore, coking coal and limestone, etc. Japan imports almost all of the material inputs for making metal products, clothing, and wide range of basic food stuffs. After World War II, economic growth was badly required and steel worked as important input to industrial and infrastructural requirement. Steel exports could bring in foreign exchange for Japans growth more rapidly than textiles, clothing and variety of other light goods. Long distance of raw material countries and long distance to haul finished products. Availability of low wage labour in Japan with high motivation as compared to USA. Technological improvements were introduced by the Japan beginning from 1951 (hot rolling of silicon sheet sheets) to 1976 (bottom-blown basic oxygen). Key challenges, issues & problems: Japan imports almost all of the material inputs for making metal products. High cost of input material as it was imported from long distance countries like USA, Australia and Canada. Less labour productivity as compared to competitors (e.g. USA) Huge gap between demand for steel and available resources. The production cost for Japanese was much higher than US.

Alternatives available to resolve the challenges, issues and problems: With regard to lowering unit costs, the Japanese institutionalized coordinated procurement of raw materials by acting as a single customer in international markets, thus maximizing the industrys bargaining power. Develop an information system for procuring factor inputs in an efficient manner. Utilize imaginative innovations in procurement practices to reduce raw material costs. Harness technology to facilitate shifting sources to wherever the best bargains could be struck. Provide technical aid and capital, where necessary, for developing mineral production and to help suppliers reduce their costs through the adoption of modern technology. To procure ores with low impurity levels to forego the expense of having to remove those impurities later in the production process. Switching over to coal as a cheaper source of fuel and to conserve energy due to price rises of oil. Success stories: Japanese used both formal and informal organizational arrangements involving industry wide linkages to extend the competitive scope of steel firms. Low cost per unit of production was achieved by leveraging global sourcing options. Japan became largest exporter of steel because of optimizing its resources and taking long term actions based on its global procurement strategy. All individual buyers in Japan came at single platform and procured raw material collectively to get maximum scale of economies benefits. Also, the total cost of performing all of the activities in Japans value chain for steel became lower than that of the US. Japanese firms aggressively continued to pursue all of the cost reductions in value activities. Key learning points w.r.t. sourcing, procurement and vendor management: The principal lesson that can be learnt from Japanese steel experience is the necessity for basing competitive strategies on comprehensive understanding of the value chain of industries, especially the behavior of costs in largely undifferentiated product markets. The Japanese model is rapidly being replicated by a number of resource poor, newly industrializing countries e.g. Korea and Taiwan, whose labour costs are significantly lower than those in Japan. Economies of scale in managing supplier located in different countries and in procurement of common raw materials and sale of finished steel. The procurement and logistic principles are applicable to a wide range of industries in both highly industrialized and newly industrializing economies.