AMERICAN CONNECTOR COMPANY CASE STUDY

Submitted By SUMIT PAL SINGH 11BM60048

Q1. How real is the threat from DJC? DJC is a typical Japanese manufacturer with its corporate objective of profit maximization while delivering high product quality at low production costs. DJC concentrated on using tried and tested technology by adapting to the existing technology in the market rather than being research and development intensive. This allowed DJC to customize their product offering as suited to the Japanese and Asian markets. Price, delivery, speed, and reliability were the key factors around DJC skey to winning orders in the marketplace. DJC developed their Kawasaki facility in the face of increased labor and raw material costs, a rising yen, and escalating import penetration. This new facility was designed to be the ultimate rationalization of mass production as envisioned by DJC s president. The Kawasaki manufacturing segment was to be highly automated and continuously operating. Furthermore, three goals were to be met: 1) 100% asset utilization, 2) 99% yield on raw material, and 3) Customer satisfaction level of one complaint per million units of output. The Kawasaki facility offered several advantages in terms of its geographic location and workforce. The facility was located near major Japanese electronics manufacturers and their source of raw material suppliers. The draw of the nearby electronics manufacturers was the availability of a stable workforce of young, highly skilled workers. Kawasaki s Technology Development Division (TDD) implemented waste reduction measures and eliminated several non-critical design features. Even though raw material costs were nearly twice as much as those of ACC, TDD s measures reduced the cost of manufacturing to $14.89 per thousand units, compared with ACC s $11.49 per thousand units. Had Kawasaki mimicked ACC s production methods, design, and packaging, their costs would have been $20.90 per thousand units.

Q2. If it is real, how serious it is? The threat of DJC to American Connector Company is very high. Following are the reasons: If DJC sets up manufacturing base in USA, as per the exhibit 7 and exhibit 8 the raw material cost for DJC in USA will drastically reduce. Current Raw material product and packaging cost is 14.89 which will reduce to 8.93 in USA.As the raw material cost is almost half of the total finished goods cost, the raw material cost reduction would be substantial. As Sunnyvale s defect rates are at 26000 PPM of production which is relatively high. The Quality control of DJC is process centric where each process is QC monitored unlike in Sunnyvale its end product inspection. The quality losses of DJC and ACC over total production are 0.7% and 1.6%. So, Quality is one grey zone which needs to be addressed by ACC. Work in process inventory cost is very high in case of ACC in comparison to DJC. This in turn is reduces connector output per square foot as extra space is required for WIP and finished goods(15.1 of Kawasaki VS. 10.9 of Sunnyvale). As Kawasaki plant is working for 24hrs/day thus the asset utilisation is maximum and Connector output per employee is very high. (75.4% of Kawasaki VS. 30.2% of Sunnyvale) Due to high number of product variations in customer orders of Sunnyvale which is employing batch production system there is frequent changes in product manufacturing lines thus resulting in lower efficiency which could be obtained in case of standardised products.(Product lines were as small as 1.5 to 2 days) The raw material inventories of DJC is averaging only 5 days as compared to 10.8 days of ACC. So, DJC is incurring less Inventory cost which again reduces finished good cost. The speed of customer order delivery of DJC is one day (because of highly automated production process at Kawasaki plant) whereas the speed of customer order delivery of ACC is more than one day (because of batch production process producing about 4,500 varieties of connectors).

The Only positive point which ACC has over DJC is: The flexibility of production process at DJC is less when compared to that of ACC. ACC has batch production process which allows it to have high customization of products to its customers

Q3. Create cost flexibility frontiers The major cost differences of DJC, compared to Sunnyvale are in respect to the following a) Raw Material: Current raw material cost for product and packaging in Kawasaki plant is relatively high in comparison to ACC Sunnyvale s plant. In the event of DJC setting up a plant in USA, there would be a considerate cost reduction, as the cost indices US v/s Japan is lower (0.6:1). Cost head Raw material, Product + Packaging KAWASAKI ($/1000 Units) 12.13+2.76=14.89 PLANT IN USA($/1000 Units) 14.89 * 0.6 =8.93 b) Packaging Cost:In comparison to Sunnyvale, the packaging cost of Kawasaki plant is lower due to adaptability of standardised product packaging technology. c) Labour Cost: As the WIP and finished goods inventory is high in ACC Sunnyvale plant in comparison to Kawasaki plant the manpower required to handle this excess inventory space is also increased thereby increasing the complexity of the plant environment and labour cost.(Material handling cost of Kawasaki 3.2% v/s 10.4% of Sunnyvale). d) Electricity Cost: In comparison to Sunnyvale s plant the electricity cost of production is higher for Kawasaki as electricity cost indices of US v/s Japan is 0.8: 1. e) Runtime for moulding process: Due to high batch of housings assembled during plating operations resulted in lower runtime for moulding operations which was already down to 1.5 days and any further reduction would affect costs. If we take into account cost indices of US VS JAPAN and above cost factors, cost of manufacturing operations of DJC in US would be as low as 25% of the current production cost of 26.10 $.

There are many reasons for these differences: Fixed Asset utilisation: Due to continuous factory runtime, the overall utilisation of fixed asset increases for DJC Kawasaki in comparison ACC Sunnyvale s plant. Raw material cost: In Japan raw material cost is twice as much high as in America. Production Process: Due to batch production system in ACC, there were changes required in production line every time product was changed which lead to less efficiency and lower expertise in churning out a product. This issue was not there with DJC continuous production process with lesser number of product variations.

Quality issues: The number of defective finished goods is very less for DJC when compared to ACC.

The basic differences are: Technological Advantage: In house R&D team which was bringing difference in terms of technology, DJC was producing machines and customizing it according to their needs, thus eliminating the need for external technology innovation. Low inventory cost: DJC maintained low raw material inventory, where they ordered the raw materials as per requirement and pull strategy for manufacturing. Nearness to raw material suppliers and end users: The location of the company which played an equally important role for eliminating transportations and logistic baggage. The company location was chosen such that it was near the major Japanese electronics companies and also near the major raw material suppliers.

The efficiency of Sunnyvale was very low as it was producing 26000 defected units in 1 million. There was quality issue which was leading to overall effect on productivity and profitability decrement. If DJC comes to America and sets up a plant with a very high efficiency, as they did in Kawasaki, American Connectors will lose their business to DJC.ACC finance teams were also not allowing funds to upgrade their technology. This would also affect the efficiency of the operations. Further to this ACC organizational hierarchy was more inclined towards marketing and engineering teams and lesser stress on production team which was different in case of DJC which had equal stress on the production team; this was a motivational factor for increase in productivity.

Q4. How much time/resources are available to ACC to respond? Sunnyvale would be competing directly with Kawasaki s high volume / low cost products and faces the possibility of losing lower margin, price sensitive customers. A plant modeled on DJC s Kawasaki production facility has a tremendous manufacturing advantage over ACC s Sunnyvale facility. Kawasaki maintained a highly efficient, integrated production facility with meticulously maintained equipment, a low workforce requirement, with fully implemented continuous improvement plans. Furthermore, the Japanese manufacturing philosophy of one defect per million ensures customer satisfaction. ACC s Sunnyvale facility and DJC s Kawasaki facility are best summarized in the following table:

Sunnyvale Year Facility Built Production Type 1961 85% Batch Process 15% Job Process 420 million units (600 million units maximum) 4 Focus on customer need 4500

Kawasaki 1986 100% Continuous Flow 700 million units (800 million units maximum) 4 Low cost production, customization and superior design 640

Average Production Rate Types of Connectors Competitive Strategy Models

Production Areas

5 Separate Areas - Terminal Stamping and Fabrication, 4 Production Cells with Terminal Terminal Plating, Plastic Housing Stamping, Housing Molding, Molding, Assembly and Testing, Assembly, Packaging Packaging Multiple 10-piece bagging to 1500-unit loaded reel 10 days for standard items, 2-3 weeks for special orders Most are 1.5 to 2 days One 2000-unit strips

Packaging

Processing Lead Time Runs

2 days, no special orders One week and some continuous

Average Annual Cost per Mold Average Life of Mold Raw Materials Inventory Work in Process Finished Good Inventory Management

$40,000 8 years 10.8 days Various, but high to accommodate special orders 38 days Engineering and marketing focus

$29,000 3 years 5 days 2 days 56 days Production focus

Production Schedule

Attempt to freeze 30 days out. Complete control by the plant. No Could change daily for SO s. 15% change to the schedule for of orders were custom orders. unplanned orders. 50-85% 46% - Heavily weighted towards control staff. 2.60% 55% to 98% after one year 100% 32% - Weighted towards Technology Department. 0.0001% 99%

Utilization Indirect Staff Defects Yields

Other

Outsourced design of equipment. All technology in house. Emphasis Emphasized cutting edge on older technology. equipment.

Highlights of the ACC plant can be leveraged to defend against DJC. As far as time is concerned, DJC will take quite a long time to venture out into America and set up a running plant there.

Q5. Redefine the underlying business strategy as well as operating strategy. Cost control measures needs to be taken for the ACC current operations, as the same has been increasing and the quality control figures are going down. Quality control issues of high defect rate (26,000 in a million) implies imperfections in the batch processing at Sunnyvale. It implies that there is quality control inspection required at each process level unlike the current practice of end product inspection. Product design innovations which will not allow reverse engineering of product by competitors to a greater level. Improving the compactness of the connectors will bring some competitive advantage.

There is requirement of in-house R&D to develop technical innovations for production process. It would help in developing in-house machinery to have a technological edge over competitors. ACC organizational hierarchy was more inclined towards marketing and engineering teams and lesser stress on production team which was different in case of DJC which had equal stress on the production team; this was a motivational factor for increase in productivity at DJC.ACC needs to follow similar model for operations set up in the organisation to promote production oriented structure and greater balance. ACC needs to decrease mould recycling time. This saves time and also introduces new designs. ACC needs to line up the facility layout and minimize inventory holding costs. It needs to follow pull strategy for of raw materials in production line. ACC needs to focus on quality control as there quality control issues have been identified. Reducing design flaws through better R&D support and good quality raw materials will help reduce the low yields. Flawless raw material needs no testing and adoption of stringent standards for raw material eliminated the trouble to check every batch of raw materials. ACC can save cost on colour coded cables/connectors which may be beneficial in longer run. ACC needs to control processing lead time from 10 days to a substantial extent so that it order management will be easier and less finished product inventory pile up. ACC can increase fixed asset utilisation and decrease operational cost by controlling on startup and shut-down costs. It can be controlled using increased amount of machinery to handle different moulds. The moulds producing less no. of specific type of connectors can be for frequent changeover. It can be controlled using specific fixed lines for large size order which would run for longer period and frequent changing lines fixed for smaller orders.