Licenciado Mba

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Tombow Pencil Co. Ltd. Case Study









Managing Internationally Across Business Systems

Assignment 1

UK A1 Group 11

Word Count: 3,000 words





Question 1: What are the advantages and the disadvantages of the particular sub-contracting system in this case?



The Tombow Pencil Company (Tombow) is a Japanese family company established in the pre-World WarII era. Tombow manufactures writing instruments for multiple geographical markets and customer segments, and utilizes an extensive sub-contracting network to produce and distribute their products. Tombow is struggling with profitability problems which seem to have roots in their supply network. The authors will now evaluate the advantages and disadvantages of Tombow’s sub-contracting system.Tombow’s sub-contracting system appears to be a vertical Keiretsu as it encompasses their supply chain, is based on long-standing relationships, utilises co-operative facilities and represents a significant part of Tombow’s production. Thus, the attributes of the Keiretsu network model is relevant when analysing Tombow’s sub-contracting system.

The advantages predominantly derive from theintegrated Keiretsu model which provides a good supply network configuration for coordinating inter-organizational operations and sharing of best practices, knowledge, risks and production costs (Lincoln and Gerlach 2004). These qualities are exemplified by the large degree of corporation and trust between Tombow and its subcontractors which enables Tombow to mitigate fluctuations in labour force andproduct market demand while minimalizing production capacity issues.

The sub-contracting system has, to some degree, also allowed Tombow to lower production costs by utilizing their sub-contractor’s lower labour costs and economies of scale. In addition, the large degree of trust in the relationships has allowed Tombow to focus on product development and continuous improvement on productquality.



Tombow’s relationships with its subcontractors can be described as Obligation Contractual Relations (OCR) (Sako 1992). OCR generally reduces transaction costs. Though Tombow’s transaction costs in their subcontracting network may be higher than if they maintained the entire production themselves; they will be lower than procuring products and services in an arm’s length market. Thusthe sub-contracting system adds network value to Tombow’s business.

Overall the disadvantages of Tombow’s sub-contractor system are primarily rooted in their implementation and governance of the network. In addition, though it seems that the OCR provides a large degree of trust, the complexity and multidimensional nature of Tombow’s supply network increases the risk of Tombow incurring agencyand opportunity costs. The lack of transparency, and thus control, can further result in poor inter-organizational coordination and governance in the supply network leading to higher transaction costs and operations costs.

In Tombow’s case, the opaqueness of their sub-contracting system is illustrated by their major vendors being located up to two hundred kilometres from Tombow’s own facility,and by these vendors using sub-contractors of their own for certain processes. The dispersed physical locations of Tombow’s primary vendors provides for higher transaction costs, accumulates significant freight cost by long transit times, and constrains Tombow’s adaptability to market changes because of long production lead times. These long lead times subsequently provides for poor inventoryrotation and control, and adds unreasonably high storage costs and cost of capital being tied down in inventory.

Tombow’s vendor collaboration framework would risk hold-ups in an arm’s length contractual relationship (Sako 1992); however, the high level of trust in their OCR environment minimalizes this risk. Tombow’s trust in their vendor relationships reduces the need for vendor control and...