What is Keiretsu?

Keiretsu is a Japanese term that refers to a small, integrated supplier group.

How Does Keiretsu Work?

Just in time (JIT) is an inventory management method whereby materials, goods and even labor are scheduled to arrive or be replenished only exactly when needed in the production process. Toyota Motor Company developed JIT in the 1950s. JIT is often referred to as a 'pull' system, whereas traditional inventory methods are often referred to as 'push' systems or 'just-in-case' management.

The dominant characteristic of JIT is that it essentially requires the supplier to assume the manufacturer's inventory management function. JIT companies tend to have fewer suppliers than traditionally managed companies. Supplier consolidation -- keiretsu -- means suppliers receive larger portions of the company's business and are hence more committed to meeting quality and delivery requirements. Quantity discounts available to the JIT company may also be larger.

Why Does Keiretsu Matter?

The goal of keiretsu is to improve product quality by keeping only enough inventory on hand to meet immediate production needs. Thus, in order to effectively employ JIT, a company must accurately forecast demand. JIT's encouragement of planning, simplification and standardization is aimed at reducing production errors and, by extension, encourages the limitation of the number options a product has. These methods eliminate the expense of housing idle materials and lower the costs of defective products, wasted space, extra equipment, overtime, warranty repair and scrap.

A smaller supplier group also means, however, that JIT companies are more exposed to work stoppages or product shortages if the supplier cannot deliver, and exclusive or long-term contracts may disincent some suppliers to continue improving quality.