Short Cuts: B2B in Japan Gets Net-Worked

Below, we take a look at how EDI implementation has transformed -- and continues to transform -- the way businesses do business with each other in Japan. We go from the automobile to the bookselling to the apparel industries. In each case, intricate business relationships and methods -- many of which will strike Western readers as downright bizarre but that have worked well -- are being replaced by EDI and similar e-commerce technologies.

Carmakers in Japan, like Toyota and Honda, won their market positions over the past decades in part by developing highly efficient, geographically clustered supplier networks. Toyota's factories and suppliers, for instance, are nearly all located within an hour's drive of Nagoya city, allowing suppliers to deliver requested parts to a factory going one way and carry new orders heading the other. This is called the kanban system, because the pieces of paper used for ordering parts are called kanban. Of course, eventually Toyota started faxing and emailing the orders instead of physically delivering them, resulting in what's called the e-kanban system.

It's very efficient, but it doesn't help the carmaker get optimal prices. Mix this in with advances in networking technology and the competitive pressures brought on by rapid globalization and you have the elements needed to bust up an automotive keiretsu. After all, why should a carmaker order parts from a supplier just because it's within a 2-hour drive when, using a leased-line EDI network, it can order parts just as quickly, and for half the price, from a supplier 100 miles away?

Since EDI systems are proprietary in nature, however, each of the 13 major carmakers has a different system in place -- a nightmare for parts suppliers. Denso, the nation's largest parts supplier, does business with all 13, so it has to deal with 13 different computer systems and 13 different leased lines. Insanity. And Denso is not alone. A typical major supplier is, on average, doing business with three carmakers.

To eliminate such inefficiency, the country's two big industry associations - the Japan Automobile Manufacturers Association (JAMA) and the Japan Auto Parts Industries Association (JAPIA) -- are jointly promoting standardization. The first step in their quest is the JNX, or the Japanese Automotive Network Exchange, which will standardize information-exchange among all suppliers and carmakers in Japan. JNX goes commercial this summer at the earliest, and currently 25 suppliers and eight carmakers are giving it a test drive.

The next step is called GNX -- same idea, global in scope. The standard behind this plan is the United Nation's EDIFACT -- a sort of international version of what EDI is evolving into -- and Toyota, Nissan, and Honda are working to make their languages comply with it. Toyota's Yasuhiko Kuranaga, general manager of e-commerce promotion, predicts advanced automakers in Japan will be using the standard as early as next year.

Big changes, then, are afoot in the way B2B is done in Japan's auto industry. In the case of Toyota, the network of suppliers using a compatible system of data interchange will go from companies within an hour's drive of its factories (the kanban system) to those within Japan (JNX) to those almost anywhere on the planet (GNX).

It's a win-win: The competition among suppliers leads to lower prices for Toyota, and suppliers like Denso save money by having just one computer system and one leased line. Industry associations estimate that each major supplier will reduce costs by ¥4.1 million annually by using JNX. Of course, suppliers will also have to compete more vigorously. Hiroyuki Nishimura, an Andersen Consulting analyst, foresees one result of this being an increase in M&As among suppliers, especially smaller ones.

When it comes to implementing EDI, the bookselling industry comes in last place, or pretty near it. And in Japan some pretty quirky things go on in this business: Under what's called the saihan system, booksellers are not permitted to -- brace yourself for this -- discount books. (What's even more astonishing is that the same law behind this -- designed to protect copyright holders -- applies to sales of newspapers, CDs, music tapes, and magazines, which helps explain the high prices for those items.) And in Japan, unsold books are simply returned to the publisher. Furthermore, nearly 70 percent of all the books circulated pass through just two wholesalers, Nippon Shuppan Hanbai and Tohan.

So it was big news last year when the book chain Bunkyodo and Kadokawa Shoten Publishing introduced an EDI system. Bunkyodo has established a network -- Big Net -- through which it exchanges sales data with 34 major publishers. The EDI system lets Bunkyodo and its partners partially bypass the commission-demanding wholesalers, and senior VP Fujio Shimazaki says the company is waiting for 33 more publishers to sign up.

One big advantage with EDI for Bunkyodo is that it's more likely to get the number of books it requests from publishers. In Japan, publishers bear all the inventory risks -- what Hiromasa Honma of the Japan Book Publishing Association calls the industry's worst problem - and have no way of knowing how many books have been sold. They're often reluctant, then, to grant a bookseller's request for more copies. So if a store foresees strong demand for a title and requests 20 books, it might only get two.

Bunkyodo has gotten around this problem by using EDI to share its sales data directly with publishers, who, armed with info, are more likely to grant its requests. Publishers are so pleased with the system that some even prepare digital summaries of their newly published books for Bunkyodo to use for its Web store, J-Book, where sales are booming.

All this has been a bit much for Nippon Shuppan and Tohan, the two big wholesalers. Tohan, for its part, has responded by entering the retail business. Teaming up with Softbank and 7-Eleven, Tohan now sells its 100,000-plus book titles over a site called e-Shopping Books. Site visitors can pick up their purchases at a nearby 7-Eleven.

And both Nippon Shuppan, the second-biggest wholesaler, and Osaka-ya, the third-largest, plan on providing platforms for supporting virtual booksellers. These systems will allow just about anyone to be-come an online bookseller.

Meanwhile, all the major bookstore chains, like Kinokuniya, are also now online -- once the high-tech ball gets rolling, it's hard to stop it. The question is the speed at which the ball rolls. Honma notes that only 850 of the approximately 7,000 publishers in Japan have PCs and Net access, but he's convinced Internet EDI owns the future.

EDI is also making inroads into the apparel industry, where IT implementation has been delayed due to complicated relationships between clothing makers and suppliers (textile, dyeing, weaving, et cetera).

This industry has long maintained a maker-oriented business model: Apparel makers traditionally start working for the new season's designs about a year ahead of time and present their new products to retailers about six months in advance. They then take orders from the retailers and go off to produce and deliver the product.

World Co. -- now a leading apparel maker -- decided to do things differently. Seeing how consumer demand was increasingly fickle and how hard it was to guess what would be popular a year out, the company decided the information was flowing the wrong way. Taking advantage of the fact that it was both an apparel maker and a retail outlet, it started doing things opposite. In 1993, it introduced point-of-sale systems into each of its retail shops, and had them send back sales data to headquarters every day.

Now, each Monday, HQ holds a meeting to analyze the data and decide which designs will sell well over the next few weeks. They then place the orders with the factories, which produce and deliver the clothes within three weeks. Thanks to more efficient data exchange, the company went from a production cycle of one year to a few weeks.

"We couldn't continue with our conventional way because consumers have a greater variety of demands and their taste changes more quickly," says Kazuyo Yata, a company representative. "With the new system, we can offer more attractive clothes to our customers. Factories will benefit because we can sell more by doing so."

Another apparel maker, Onward Kashiyama, has also implemented data-interchange technology to shorten its production time. The firm introduced Internet-connected CAD/CAM systems into five factories, allowing them to exchange pattern designs instantaneously. It also rolled out a system that lets it see sample designs on TV screens. Thanks to such efforts, 40 percent of the clothing from Onward is produced during the season -- not before it.

Yasuyuki Sasaki, an analyst at Merrill Lynch, says that any firm can introduce EDI technology -- but that its success depends on the firm's management philosophy and policy. Both Onward and World Co., for example, have clear-cut, Western management policies, so EDI worked out for them. Sasaki believes, however, that if a firm introduces such technology while maintaining a traditional Japanese business philosophy, things won't go so smoothly.

It will be interesting to see, then, how smaller Japanese companies adapt to e-commerce -- it is they, after all, not the big firms, who are behind.

In the automobile industry, the big 13 carmakers are exchanging data via EDI with their first-tier (or direct) suppliers. For the most part, however, EDI has not been introduced between the first-tier and second-tier suppliers. And maybe no third- or fourth-tier players are using EDI.

Parts supplier Denso is now taking the next step: It's beginning to implement EDI systems with its own, smaller suppliers -- it has about 600 -- in accordance with their size and technical savvy. So far the company has established EDI through leased lines with its 50 largest suppliers, and is planning to exchange data through the Internet (less expensive than leased lines) with the 300 next-smaller firms.

As for the smallest 250, communication will probably remain through fax and phone. "We can't force them to do it," points out Hisatsugu Inukai, deputy director of the information systems department of JAMA.

But those smaller suppliers will have to do e-commerce, just to keep up with the times. Then again, why worry? If any group has proven its ability to adapt, it's the Japanese.