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Tokaibane Mfg. Co., Ltd.

2008 8th Porter Prize Winner Spring manufacturer
Specializes in production of small lot orders of a wide variety of springs.

Industry Background

In Japan there were approximately 3,000 spring manufacturers in 2007. The domestic spring market peaked during Japan's bubble period then hit bottom in the early 1990's. Even now it remains stuck at around 80% of the peak. In recent years the size of the domestic market has shrunk because most companies that use springs have moved their production facilities overseas. The automotive and consumer electronics industries account for 85% of the industry's customers, and customers in these industries require a large volume of springs. Large spring manufacturers target these large customers applying a mass production model. As for small manufacturers, where springs are made by hand, the transference of skills to new employees is difficult, a problem that is made worse by the retirement of experienced employees.

Company Outline

Tokaibane specializes in the manufacturing of made-to-order springs which meet customers' specifications and are provided in the quantities customers want, whenever they want them. They even accept orders of a single spring. The company designs, manufactures and sells all types of springs of all types of metals. The average order size is five units, and the average price of each order is 68,000 yen.

Value Proposition

Tokaibane targets niche markets that require springs in small quantities, such as the machine tools industry, the industrial machinery industry, the shipbuilding industry, manufacturers of supplies for the railway industry, and the R&D department of the automobile and electronics industries.

Tokaibane makes a variety of springs (e.g., coils, leaf springs, and disk springs), in a variety of sizes ranging from under 1 mm. in diameter to springs 1.2 meters high, in a similarly wide range of materials.
Performance requirements of the springs vary widely and include long-lasting springs for use in nuclear power plants (40 years) and bridges (100 years) as well small and extremely precise springs such as a 3 mm. wide spring used on Japan's first infrared astronomy satellite "Akari."

The first element of the value Tokaibane offers is that it manufactures made-to-order springs which meet customers' specifications, and are provided in the quantities customers want, whenever they want them. They had an on-time delivery rate of 99.94% in 2007.

The second element of the value Tokaibane offers is their wide ranging capability to solve difficult problems. Since the company has accumulated vast experience designing and manufacturing a wide range of springs of many shapes, materials and performance requirements, Tokaibane has often solved problems that customers had spent years trying unsuccessfully to resolve.

The third element of the value that Tokaibane offers is ease of reordering. For example a customer that only needs to change a certain spring once in 10 years can easily reorder exactly the same spring, because Tokaibane has recorded design and manufacturing information for all orders since 1983.(The company had 28,534 orders in 2007).

Tokaibane does not compete on price terms, and in that it does not give discounts.

Value Chain

Technology development
Tokaibane develops technology in 3 main areas. First, it carefully analyzes the techniques of the highly skilled craftspeople who design and manufacture the springs. Tokaibane standardized the know-how of its experienced and skilled craftsmen and input that know-how into a database, allowing creation of design and manufacturing instruction sheets that explain how to combine the design and materials to achieve a specific performance from a spring.

Second, the company works to advance the spring design and manufacturing processes. Taking on challenging assignments such as the 100 year lifetime spring has sharpened the company's technical skills. Third, the company has been developing IT systems since the late 1970's and as a result now benefits from IT systems that support all processes including manufacturing, order management, delivery schedule management, etc.

Procurement
Tokaibane stores 2,000 types of metallic materials, because the materials it uses for making springs are not readily available on the market. When it purchases these materials, Tokaibane gives priority to high quality rather than low cost.

Logistics
Meeting delivery deadlines is a critical element of the company's value offering. Tokaibane developed an IT operating system that supports inquiries. Every order is bar coded so that Tokaibane can see in real time where the order is in the production process. When Tokaibane receives a new order, the company checks its database to confirm the latest production schedule and provide customers with a delivery date. Also the company maintains a policy of never accepting deadlines that cannot be met.

Design and production
Tokaibane's manufacturing process allows it to be successful even at an average lot size of only 5 springs, in a wide types and materials. To achieve this, Tokaibane does not use automated manufacturing processes with specialized machine tools but rather focuses on highly versatile multi-purpose manufacturing equipment and the workmanship and skill of its spring craftsman. The design and manufacturing instruction sheets mentioned in the R&D section above support the craftsmen with the information necessary to design a spring in 12 hours and manufacture the required spring on the first try. This is all necessary to efficiently manufacture small lots of a wide range of springs.

Marketing and sales
Tokaibane enjoys a high customer retention rate, and 87% of all orders are repeat business. At the same time, the company attracted 200 new customers to the company each year in the five-year period from 2003 to 2007. (The average number of customers who placed orders in the same period was 962 per year).

Tokaibane employs both pull and push marketing strategies. As an example of pull marketing, Tokaibane posted technological information on the Internet in 2003, employing an "e-dictionary" concept, and it succeeded in attracting new customers from R&D sections of well-known companies and university research departments.

Tokaibane's push marketing is done through its "Marketing Group," comprised of three members who each specialize in a particular type of spring. They visit laboratories in the aircraft, aerospace, and nuclear energy industries.

Finally, general inquiries are handled by the "Mother Station Group," which has ten members. It responds rapidly to technical inquiries from customers and requests for designs or estimates. Internet sales, which accounted for 5-6% of total sales in 2006, had increased 200% from 2005.

Tokaibane treats all clients including new clients as if they are special customers, regardless of the size or frequency of their orders. Thus prices are not adjusted based on the customer's order history, size of order, etc.

Human resource management
Learning and skill development is a top priority in human resources management at Tokaibane. The performance evaluation criteria focus on the extent to which employees work to develop specific skills and abilities, rather than on results, work experience, or educational background.

Skills are learned through on-the-job training and internal testing to assess each worker's level of skill. This clarification of a worker's level of skill enables the preparation of a career path for skilled workers.

The company supports staff career development by clearly defining skills using an internal skill evaluation system. Each year, two days are set aside for employees to present action plans for their own self development. These presentations are made in front of 14-15 executives.

Another priority of human resource management at Tokaibane is to put employee satisfaction over customer satisfaction. Tokaibane differs from other Japanese small- and medium-sized companies in requiring employees to take all their paid holidays and discouraging overtime work. Following its philosophy of "clear, fair, open" management, Tokaibane also shares its operating performance results with its employees through intranet.

As a result, employee turnover at Tokaibane is almost zero. The average age of employees working in design, manufacturing, and quality management is 32 to 33. The craftsmen's skills are standardized and transferred from experienced workers to younger employees.

Fit among Activities

Tokaibane's activities system centers on activities that support execution of a core strategy of small lot production of a wide range of high quality products offered in the volume the customer wants when they want it, with a sales focus on custom-made small lot orders and management to maximize staff satisfaction.
(See Tokaibane Activity System Map).

Innovations that Enabled Strategy

  • Database and worker training system enables successful design and manufacturing on first try, without rework, for an extremely wide range of springs
  • Treats even first time customers like preferred customers
  • Shares production knowhow and database which normally would be considered proprietary to company

Consistency of Strategy Over Time

Tokaibane's strategy of small lot production of a wide range of springs has been applied consistently except for one brief period. The company's history is the accumulation of means of improving the execution of this strategic positioning. In 1934 when Tokaibane was founded, the company was a latecomer to the spring industry. From founding until the 1960's the company specialized in small orders that large manufacturers wouldn't accept. Initially it specialized in coil springs, covering a wide range of sizes from very small to quite large. It gradually increased the range of springs it handled, adding leaf springs, plate springs, etc., creating the foundation of the business model of small lot production of a wide range of springs. However, since it was not unable to create a way to achieve solid profitability, in the 1970's the company expanded its standardized products and accepted more mid-sized orders, but the result was a failure. Tokaibane decided to return to being a custom order specialist and in 1978 installed computers to record in a database customer history and order history. From then on, through continuous improvement of its implementation of IT, additional capabilities such as efficient order and production management and delivery schedule management were introduced. However, it wasn't until 2003 when Tokaibane actively began to apply the Internet in its business that the company improved its ability to win new customers and improved its WTP (willingness to pay) position with customers as the value added offered by the company became widely recognized, and greatly improved its supply chain management.

Trade-offs

  • No price competition, and no price discounting for sales promotion.
  • Does not pursue large-volume sales. (It asks partner companies to produce orders of 100-200 springs using Tokaibane's design and provides quality assurance. It declines medium-to-large orders that should be mass produced.)
  • Tries to preserve the skills of craftsmen, and is not dependent on machine operations.
  • Only accepts orders that can be delivered on time.

Profitability

Tokaibane's return on invested capital lags the industry average by 2% over a four year period, but return on sales exceeds the industry average by 2.7% over a four year period. The Porter Prize focuses as one of its criteria on superior competitive strategy whose uniqueness enables consistent industry outperformance in profitability, in particular in return on invested capital, so in the choice of Tokaibane an exception has been made.

By way of contrast, the small and mid-sized spring manufacturers that have received financing from Japan Finance Corporation (formerly Japan Finance Corporation for Small and Medium Enterprise), which do show average return on invested capital higher than Tokaibane, have a lower denominator in the calculation of ROIC which represents the amount of capital invested, compared to Tokaibane, which is actually increasing the amount it invests while its peers are decreasing their investment. In return on sales, which is shown by the numerator, Tokaibane is growing rapidly while its industry peers are only growing at a slow pace. Meanwhile Tokaibane's sales have been growing at a consistent annual rate of about nine percent while the sales of the peer group companies alternately grow and shrink in cyclical fashion at about the same rate.

In other words, these companies used as a comparison are not actively investing in their business and not growing but are rather just maintaining their profitability. In other words, one can say that they are entering a period of harvesting their profitability. Tokaibane meanwhile is actively investing in order to achieve a unique strategic positioning. That the market is rewarding this is evidenced by the fact that sales and profit on sales amounts are increasing and by the fact that the ROS is relatively high compared to peers. The fact that a fairly small company with sales of about 2 billion yen has been able to build a boldly unique strategic positioning in a mature product area like springs was evaluated quite highly by the Porter Prize selection committee. Tokaibane still lags competitors in profitability in relation to invested capital, but we expect that its current investments will result in higher profitability in the future.

Return on invested capital (ROIC)   (Unit = percentage point)
Difference from industry averag
over 5 year period
Difference from industry average, by year
2003 2004 2005 2006 2007
-3.5%P n.a. -4.9%P -1.1%P -1.1%P -3.4%P
Return on invested capital = Operating income / Average invested capital

Return on sales (ROS)   (Unit = percentage point)
Difference from industry average
over 5 year period
Difference from industry average, by year
2003 2004 2005 2006 2007
2.0%P n.a. -1.7%P 4.9%P 4.1%P 3.5%P
Return on sales =Operating income / Net sales

Activity System Map

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