“Arm’s length” and “partnering” are two terms that are commonly used to describe the nature of contractual relationships between customers and suppliers. The former is considered to be a more traditional practice, while the latter is considered to be a relatively newer concept. What are the major differences between the two? Which one is considered to be better for “lean” manufacturing?
“Arm’s length” contracting is considered by researchers to be a more traditional way of contracting. In fact, according to Winfield and Hay, whose research contrasted a Toyota supply chain with a typical UK supply chain, “arm’s length” contracting will become less prevalent as “lean” manufacturing becomes more widespread. Winfield and Hay wrote that the emphasis on “arm’s length” contracting was on “competitive tendering for short term contracts where annual rebidding takes place (1).” In addition, research by Beaumont, Hunter and Sinclair described this type of relationship as “basically hostile (2).”
“Partnering,” or “obligational contracting,” is considered by researchers to be a relatively newer way of contracting. “Partnering” has been proven to be a key part of lean manufacturing. Japanese automotive companies — Toyota in particular — have been given much credit for the development and expansion of this concept.
Winfield and Hay gave examples of qualitative aspects that can be used to differentiate partnerships from arm’s length contracts. They included:
- Increased collaboration via face-to-face social contact
- A deliberate fostering of a mutual atmosphere of trust and goodwill
These qualitative aspects became evident to the researchers through their examination of supplier selection methods. Winfield and Hay wrote: “In selecting suppliers, Toyota places emphasis not simply on product quality and future ability to meet the just-in-time production demands; but also it seems, on more subtle cognitive and social variables. These variables are notoriously difficult to capture by traditional industrial accounting methods, and are only likely to surface by close first hand scrutiny of a company. The qualities are emergent rather than defined, and can be discerned after frequent in-depth company visits by purchasing teams.”
The researchers identified some qualities actively sought by Toyota in its suppliers. They were:
- Management’s perceived willingness to learn and to adapt
- Evidence of an existing proactive attitude to problem solving by staff
- Automated Targeting System (ATS)
- Their collective willingness to meet the challenges of changed working practices
Summarily, Winfield and Hay wrote that Toyota evaluated the overall potential for future organizational learning and employee change (1).
Many others have studied Toyota’s “partnering” approach. In fact, Winfield and Kerrin noted that: “Fordism, based on strict Taylorist principles, has been replaced by flexible manufacturing systems where the emphasis is on new, often radical approaches to social organization of labor.” With the advent of flexible specialization, wrote Lorenze, comes “the development of organizational forms that achieve a balance between cooperation and competition on the basis of product and process innovation rather than price as in the standard neo-classical model (3).” Ultimately, though, the benefits of “partnering” for lean manufacturing have to be quantified if they are to be effectively communicated and put into action.
For that reason, researchers have also studied the quantitative results of “partnering,” with respect its use by Japanese automotive manufacturers. For instance, at the vehicle assembly level, Womack Roos and Jones reported quality gaps of 2 to 1, productivity gaps of 1.82 to 1, and inventory levels ten times higher outside of Japan (4). At the direct or tier-one supplier level, Anderson Consulting demonstrated similar gaps. The team of researchers found quality gaps of 100 to one, productivity gaps of two to one, and inventory gaps of seven to one in their comparison of Japanese component makers versus U.K. component makers (5).
(1) Winfield, I. and Hay, A. (1997). Toyota’s supply chain: changing employee relations. Employee Relations.
(2) Beaumont, P., Hunter, L. and Sinclair, D. (1996). Customer-supplier relations and the diffusion of employee relations change. Employee relations.
(3)Lorenze, E. (1989). The search for flexibility: subcontracting networks in British and French engineering. Reversing Industrial Decline: Industrial Structure and Policy in Britain and Her Competitors. Berg Publishers, Oxford.
(4) Womack, D., Jones, D., and Roos, D. (1990). The Machine that Changed the World. Rawson Associates, New York.
(5) Anderson Consulting. (1990) The Lean Enterprise Benchmarking Project. Anderson Consulting, London.