Introduction

TOMBOW Pencil Co., Ltd. was established in Japan in 1913 as a manufacturer of wood-cased lead and colored pencils. It is not an exaggeration to say that every student in Japan has grown up with the TOMBOW pencil. During the past four decades, TOMBOW has diversified its manufacturing program to include ballpoint pens, roller ball pens, markers, correction tape, glue sticks, liquid glues, adhesive tape, and dry highlighters. Today, TOMBOW has achieved an outstanding reputation for its unique, innovative and original products. TOMBOW’s main factory is in Shinshiro, which is located in the central part of Japan, with additional factories in Tokyo. In 1991, TOMBOW established TOMBOW (Thailand) Co., Ltd. in Bangkok, Thailand. Twelve years after, another factory in Hoh Chi Minh City, Vietnam to produce products under strict quality control. This was to compensate for the severe international price competition that had developed in the marketplace. Moreover, TOMBOW has a subsidiary in Frankfurt, Germany, which distributes various TOMBOW products throughout Europe. Also have very strong distribution network to cover almost 24 countries from Europe. TOMBOW owns more subsidiaries in USA, Georgia and in Dalian, China. In fact, TOMBOW is one of Japan’s top five office products manufacturers.

Question 1

Valuation of the particular sub-contracting system in TOMBOW' s case

TOMBOW' s subcontracting system depends on two major vendors Kantoh and Nagano which represents two thirds of the EO product cost. Tombow’s decision to tighten their production or to make vertical integrations must be based on the analysis of the advantages and disadvantages of the subcontracting systems. If the coordination cost of doing the activity in house will be higher than using the market, then Tombow must go for the market and continue with their subcontractors. On the other hand if the cost of using the market plus the transaction cost is higher than the internal coordination cost. So the company must decide to vertically integrate and internalise the process. The following contrast will enlighten Tombow’s management in taken this decision.

Advantages:

All the fixed assets and financial costs for the subcontractors are not related to Tombow.

All the manufactured parts by vendors have a fixed price and Tombow isn’t bother with the price fluctuation.

Tombow avoided all the problems that will arise due to labors availability, payments and skills because all of the above will be related to the subcontractors’ responsibility.

Disadvantages:

Long lead-time for a part shipped from Kantoh and arrived assembled to Tombow. Around third of the time wasted in transit.

Subcontractors are far away from Tombow, which makes it difficult for their engineers to monitor the subcontractors’ quality.

Late deliveries.

Can’t meet rush orders because they don’t have any control over the subcontractors’ delivery or capacity.

Depend heavily on two suppliers which represents 2/3 of the cost that is not acceptable, at least he can reduce it to be 40% of the total cost.

Question 2

Business environment changes influences on TOMBOW

Business environment is changing very fast. Innovations in all spheres and especially in technological sphere have become crucial for life cycle of firms. Nowadays companies have to survive in a Darwinian marketplace where the natural selection plays a fundamental role (Nicolau, 2005). Therefore firms must analyze business environment and make important changes to their corporate strategies. Japanese managers are aware of unprecedented changes in the international economic environment to which industrial organizations must speedily adjust if they want to survive (Yoshida, 1997).

Is Tombow management aware of environmental changes?

According to the Tombow’s chronicle the following findings can be made:

Almost each year company produced series of new products.

Tombow integrated in European and US market by opening their distribution centers.

Tombow is looking for standardization their processes. In 1998 company received ISO certification.

Tombow is among the six Japan leading companies in pencil industry.

However since 1990’s profits of the company have declined and during last ten years remained at low level.

So what has happened and why Tombow became unprofitable? Which signals coming from business environment were missed by Tombow’s management?

Here can be mentioned some of today’s business environment characteristics which influence the company’s performance:

Reduced life cycle of products and services in the market. The market requires continuous innovations and it is difficult for Tombow to cope with growing demands, as a result, the process of production, based on the classical subcontracting system is not giving reaction to new trends in time. Thus, for Tombow management and its subcontractors it is not easy to coordinate production, as unexpected changes in the volume of orders may not fit within the production and delivery schedule.

Today the market is controlled by customers who are looking for alternatives, compare the offers and choose the best. So market has become more customized. Customers require wide variety of the products. As mentioned in the case, sales people are complaining that there is not enough variation of the products. Also the head of the R&D department stated that truly innovative products arise only once a decade. Thus ineffective coordination between departments leads to the fact that it affects the whole production process and has negative impact on it. Also Tombow is weak in learning consumers’ preferences of their products. However many firms in Japan are very successful in analyzing their target groups. An excellent recent example of Japanese company customer focus is the launch of the Acura NSX sports car from Honda. Honda is studying the profiles of the several hundred consumers who have ordered the NSX prior to its launch (Montgomery, 1990). So, in a rapidly changing business environment, where not a big moved out a small, but where a slow-mover is replaced by fast one, Tombow has less chances to survive in the environment with strong competition, where innovative products became available for the lowest prices.

The current business environment is an environment on continuous learning and improvement: now when knowledge rapidly becomes obsolete is not important what you know, but it is important how quickly you are able to learn. The shift from a dying industrial business economy to economy driven by knowledge and innovation requires from firms continuous improvement and application of the knowledge in practice. The market in Japan is a very competitive zone, where game players are afraid mostly of internal rivals, not external. Fighting to the end is of one of the existing cultural traditions and the business environment that has developed in Japan reflects these cultural traits. Therefore, to achieve competitive advantage Tombow has to carefully analyze the effective management examples of Japanese companies such as Toyota, Mitsubishi Motorola, and Honda and implement their best practices.

The wave of change has become so high that it led to the birth of a new era of business. As a result, dominating companies in today's market, the ones which recently even did not exist, and those old world leaders-giants who were able to learn how to move faster have survived. This new economic era is also characterized by frequent technological advances, rapidly changing rules in the market, and the formation of a new customer who has adjusted to these rapid changes and priorities of whom began to change with the speed of the television advertisements. Therefore Tombow the company which has existed almost one century must be aware of all these changes in a current business environment and make solid improvements in its corporate management system.

Question 3

Suggestions for TOMBOW’s production system amendment and risks

Involved

Since start Harunosuke Ogawa pursued improvements in black lead technology. This ended up with today’s thermally treated graphite/clay composition. TOMBOW’s R&D has to work hard to reach the required hardness for the school students and desired finesse by painters.

Wood-cased standard pencils

TOMBOW is managing the two factories located in Japan. With single shift / 8 hours per shift, using subcontractors extensively certainly to support mechanical pencils production.

It is worthy for TOMBOW to study concentrate on wood cased production in the Tokyo’s factory to befit TOMBOW’s tacit knowledge and context dependency. This knowledge enabled TOMBOW to produce these SKUs in-house 100%. R&D inside TOMBOW is well encouraged to upgrade their semiautomatic system to full automatic system to minimize Japanese labor institutions influence on the business. This by minimizing or elimination the need for outsourced labors.

Wood cased fashion pencils

Remaining SKUs represented “Fashion” painted colors. These SKUs are not typical “changing to cope with the updated fashion.

TOMBOW is required to change their strategy to work with seven subcontractors. Aiming to minimize the pencil cost for outsourcing.

TOMBOW is advised to go with a vertical integration with the most efficient subcontractor out of the seven.

This future subsidiary will be supported with TOMBOW’s machinery for painting and stamping.

New subsidiary will receive the pencil after cutting to paint TOMBOW’s pencils with the fashioned design.

Advantages of this change

Cutting costs of subcontractors ”50% od the pencil cost”

Unify subcontractor and TOMBOW machinery power for one SKU

Latter will make it easier for R&D to create new productive development.

Risks behind the move

New subsidiary may not be able to cover TOMBOW production demand.

Dropped subcontractors may exchange their explicit knowledge with TOMBOW ‘s Rivals.

Mechanical pencils

Mechanical pencils production has to be redesigned inside Shinshiro’s factory.

Production strategy needs to clearly delineate what parts are to be produced by TOMBOW to feed assembly subcontractors.

These subcontractors have to be monitored by TOMBOW engineering team to reach the highest efficiency.

Advantages:

Systematic procedures are much easier to upgrade and develop.

This step will support domestic expansion.

Keeping a considerable number of old relation (prewar) subcontractors loyalty

Expected risk

Large percent for involvement subcontractors will increase the cost of supervision to maintain TOMBOW’s quality product.

Risk of information leakage

Object EO (as a special brand of the mechanical pencils)

The above diagram summarizes the production of the Object EO pencils.

Point forward to Shinshiro’s factory, we will expect the ability to support in Object EO pencil production as this factory will be supported with the capabilities to produce types of mechanical pencils.

Production support will be there through producing part of the functional parts that are allocated for four vendors.

Engineers still has to manage Kantoh and Nagano production

Advantages:

TOMBOW leading capabilities will increase as it become part of the production process.

TOMBOW is controlling the final product by its assembly department.

TOMBOW Distribution is talking to TOMBOW assembly factory instead of dealing with Nagano as an assembly subcontractor or their supervision team.

TOMBOW ‘s involvement in the production process can be expanded in future.

Risks:

Supply chain requires forecasts and schedules to be given to all suppliers in a timely fashion, with as minimum last-minute changes as possible. But TOMBOW’s commodity managers will strive to get better at reducing unforeseen variances to plans.

TOMBOW failure to reach the economy of scale for Object EO product cost assembly. As the expected cost may be four times what TOMBOW is paying to Nagano (¥5.5). But the question is, if Nagano did it what will prevent TOMBOW to do it?

Ballpoint Pencil and markers

Reference is made to TOMBOW sales in 1989 we will notice that ballpoint pen domestic sales is almost 56% of the total sales and the percentage is 63% for the markers.

This encourages TOMBOW to produce these through a new factory outside JAPAN.

Certainly, to be MNC, TOMBOW has to study the institutional environment within which they will operate.

Future location is preferred to have, an open labor market, supporting inter-firm network and geographically closer as possible to the TOMBOW main factory.

Advantages:

New subsidiary will not be only factory (production), but varies activities will be created like sales, design…etc.

A chance for TOMBOW to study and choose location that institutionally they will benefit from. (Less labor cost, less material cost)

Risks and constrains:

JAPAN offers limited support for outward FDI

High standardization of the product

Question 4

Lessons learnt from TOMBOW case for managing suppliers in Japan

And in other countries with different types of firm

Japan is Coordinated Market Economy (CME) possessing established subcontractor networks. Execution of the transactions falls under “Obligational Contract Relationships” (OCR), which is characterized by goodwill and trust. In recent years Liberal Market Economies, such as the US, have been moving from more vertically integrated structures to outsourcing many of their activities that has enabled organizations to focus on their core competencies. The networks that are created in Japan across the supply chain induce the sharing of best practices therefore improving efficiency.

In general, objectives of supplier management activities in the United States and other western countries are aimed at minimizing the invoiced amounts pertaining to goods and services. There are a number of ways to do this; maintaining a large supplier base in order to guarantee stability of supply, maintaining a large supplier base in order to sustain leverage and limit supplier influence, shifting between suppliers, choosing suppliers on the basis of price and using shorter term contracts which require rebidding.

Japanese companies see mutual dependency as beneficial, opposite to the view of many organizations especially in the United States. For purposes of diversification it is usually viewed that the purchases made by an organizations customer should not exceed 15 to 25 percent of sales of the supplier. In Japan both suppliers have a small amount of customers and customers have a small amount of suppliers. Therefore Japanese companies built long-term relationships. The small number of suppliers results in a decline in administrative costs with regards to supplier management. Comparable organizations in other countries rely more on bidding.

The incentive for subcontracting is the aspiration to gain access to global technological expertise and designs. This requires management to recognize that the organizations needs pertaining to expertise may reside external to the organization. The suppliers of the product are usually more aware of the capabilities of the products than buyers, therefore, are able to transfer insights over the potential and limitations of the product. Toyota has mastered this and it is apparent from the case study that Tombow is attempting to follow the same path.

Tombow coordinated between six vendors and did not perform any manufacturing activities on its own; however, the company should use the members of their network to stimulate further innovation and efficiency. Such as Toyota’s case, Tombow should make use of the “Just in Time” delivery concept. The company has worked in parallel with its vendors by planning three months ahead and placing orders in a timely fashion in order to ensure efficient shop loading. This is falls short upon comparing it to Toyotas’ knowledge sharing practices. Tombow should strengthen its knowledge sharing initiatives across critical suppliers, i.e. suppliers that are able to impact the company’s cost and lead times. Tombow is unaware of Nagano’s production process details; the company has remained skeptical with regards to the assembly at Nagano’s factory. According to Tombow’s Subcontractor System Supervisor, the company did not care how the job was completed since they would be paying identical unit costs. Other concerns have arisen regarding quality as well as delivery times, both of which can be improved with solid knowledge sharing within the network.

Conclusion

It is apparent from Tombow Pencil’s Co. case that there are a number of valuable coordination with suppliers practices that firms in various geographies can learn from, furthermore, there are many areas in which Tombow can improve by following in Toyotas’ footsteps in order to get over in the supply chain management problems and information sharing culture to improve operational efficiency that eventually will lead them to success.

List of references

Kazuhiro, M. (1991) Tombow Pencil Co., Ltd. Harvard Business School

Jeffrey H. D. & Ketaro N.,(2000) ‘Creating and managing a high performance knowledge-sharing network: The TOYOTA case’, Strategic Management Journal, 21, pp. 345-367

Montgomery, D.B. (1990). Understanding the Japanese, as customers, competitors, and collaborators. Japan and the World economy Journal, 3 (1991) 61-91. Available at: http://www.sciencedirect.com/science/article/pii/0922142591900188 [Accessed: 15 January 2013]

Nicolau, J.L. (2005). Valuing the business environment on a daily basis. European Journal of Operational Research 164 (2005) 217–224. Available at: http://www.sciencedirect.com/science/article/pii/S0377221703009160[Accessed: 19 January 2013]

Yoshida S. (1997). Agenda for Japanese business in the global economy. Japan and the World Economy 9 (1997) 115-122 [online]. Available at: http://www.sciencedirect.com/science/article/pii/S0922142596002496# [Accessed: 17 January 2013]