Brant Allegretti, Kirk Blackwelder, Rick Calero, Mary Coffee, Jonathan Doddridge

American Connector Company
The intent of this paper is to address an operational management situation regarding American Connector Company (ACC) as they react to a competitor's announcement to build a major plant near ACC's main manufacturing facility. In the following pages, we will address the context of the two respective company backgrounds, strategic and financial elements of their operations, and a justification for a recommended plan of action for the ACC's response to their competition.

Background and Overview American Connector Company (ACC) and DJC Corporation (DJC) were both second tier competitors in the fragmented $16 billion electrical connector industry. ACC and DJC each maintained distinct theories related to the roles of manufacturing within their respective corporations. DJC, a Japanese corporation, relied heavily upon efficient manufacturing processes as the basis for their competitive strategy and as the means to achieve their annual profit goals. ACC viewed their success as dependent upon their ability to offer customized connector solutions and high end products. DJC recently announced the construction of an US-based manufacturing facility located near ACC’s Sunnyvale, CA facility. Faced with the threat of a highly efficient competitor launching a nearby production facility, ACC must develop a plan of action to limit DJC’s intrusion into their established North American market.

The Strategic and Financial Elements of DJC Corporation DJC is easily perceived as the typical Japanese manufacturer when considering their core principles. DJC’s corporate objective was profit maximization. High product quality was the prerequisite for this and low production costs would deliver long term success. Initially, innovation in product technology was bypassed and American made products, which were the most advanced in the world, were copied. These American designs were adapted to fit the requirements of the Japanese markets and to absorb the most value from high raw material costs in Japan. The marketing strategy of DJC hinged on volume and standardization. To this end, DJC concentrated on refining their manufacturing process in

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Brant Allegretti, Kirk Blackwelder, Rick Calero, Mary Coffee, Jonathan Doddridge order to make it as efficient as possible. Even DJC’s leadership reporting structure was concentrated on manufacturing, with the head of production reporting directly to the president of DJC. DJC’s key to winning orders in the marketplace centered around price, delivery, speed, and reliability. To this end 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) a customer satisfaction level of one complaint per million units of output. This high level of customer satisfaction is the basis of Six Sigma methodology, which has its roots in Japanese manufacturing philosophy. 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.

The Strategic and Financial Elements of ACC Corporation American Connector Corporation operated a total of six international manufacturing facilities, each producing four basic types of electrical connectors. ACC developed a reputation as a high quality supplier and quality became the focal point of company pride. ACC’s products were recognized for their superior design and performance, but it was their dedication to the customer that differentiated ACC from their competitors. The company’s commitment to customization and technical solutions solidified their reputation. ACC’s commitment to their customization strategy was considered an extension of its

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Brant Allegretti, Kirk Blackwelder, Rick Calero, Mary Coffee, Jonathan Doddridge emphasis on quality, beyond just meeting manufacturing specifications. ACC’s custom orders accounted for 15% of their total production volume. These custom products were conceptualized through early collaboration with their customer’s engineering divisions and through implementation, would eventually develop into industry standards. ACC’s corporate objective was profit. They had historically been successful with margins approaching 52%. Management realized they needed to compete globally to maintain future profitability, so they subsequently invested several hundred million dollars in plants and equipment worldwide. Increased competition and decreased demand eliminated the possibility of reaching profit goals. While sales had grown from $252 million to $800 million between 1984 and 1991, margins had eroded from 52% to 43%. Sunnyvale relied heavily up on a marketing strategy dedicated to a broad product range and significant customization capability. Sunnyvale’s leadership understood that quality, technical support, and design leadership was the key to winning orders in the marketplace. ACC’s Sunnyvale plant was conceived in 1961 to serve the electronics industry of nearby Silicon Valley. ACC invested in the expansion of production capacity when demand was forecasted to grow for sustained periods. The depressed electronics market of the late 1980’s resulted in no capacity expansion or improvement of production technology. The production equipment that had once made ACC the high technology leader in the manufacture of electrical connectors was outdated. ACC became more concerned with current financial returns than planning for future profits and was set to suffer the consequences of such action.

Comparing and Contrasting DJC and ACC DJC Corporation, dedicated to process positioning and robust systems engineering, required that the Kawasaki facility be highly automated. Particular emphasis was placed on what they termed “preautomation.” DJC’s belief was that a production process could only be fully automated following when the process was fully understood and properly designed. They were concerned that automating a production line too early might result in investing in an inefficient process. This pre-automation process helped analyze process flows, worker movements, and raw material consumption. As a result, the warehouse

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Brant Allegretti, Kirk Blackwelder, Rick Calero, Mary Coffee, Jonathan Doddridge facility was centrally located and intentionally right-sized, leaving no room for excess material or products. Additionally, each production line was equipped with a dedicated injection mold press, and was a complete line from raw material in-flow to packaging. DJC also believed it better to utilize an older, more established process, rather than implementing newer unproven processes. Continuous improvement of existing processes was highly relied upon. DJC also emphasized reliability of equipment and invested significantly in repair and maintenance to ensure the most critical portions of the manufacturing process were well maintained. DJC staffed experts in polymer physics and former employees of mold manufactures, and followed a strict process of mold replacement and upgrades. This dedication to process reliability helped protect DJC from unexpected down time and profit losses due to unexpected failures. Furthermore DJC developed in-house workshops in their factories in order to protect proprietary processes, believing their competitive edge would be eroded if equipment suppliers had insight into their processes. DJC’s “Technology Development Division” coordinated the product planning session, materials section, process engineering, and the molding technology group. It was TDD’s responsibility to make certain these sections operated together in the achievement of efficient resource utilization, design quality and manufacturability, smooth manufacturing introduction, shortened development cycle, and continuous process improvement. Furthermore, TDD coordinated efforts to ensure product improvement. The remaining portions of the Kawasaki facility were sourcing, quality control, and production and inventory control. Sourcing developed close relationships with material suppliers and insisted they meet rigorous standards and frequent delivery. Quality control was tasked with improving product quality control standards, improving the process inspection system, improving the precision of molded components, improving the quality of product designs, and reducing the plant’s waste. Production and inventory control’s responsibility was to minimize yield and capacity losses. DJC’s goal with respect to their workforce was to gradually reduce direct production workers, support, and overhead staff. As the processes matured and became more and more automated, fewer direct production workers would be required.

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Brant Allegretti, Kirk Blackwelder, Rick Calero, Mary Coffee, Jonathan Doddridge American Connector Company’s Sunnyvale facility was divided into five separate production areas: terminal stamping and fabrication, terminal plating, plastic housing molding, assembly and testing, and packaging. Typically, terminals were cut or stamped, then transported to a holding area to await plating. Concurrently, the molding division fabricated the plastic housings, which were then shipped to the work-in-process holding area to await plating of the terminals. Following plating, the batches of housings and plated terminals were shipped to assembly, where most of the units were assembled through an automated assembly process (10% of production we subjected to manual assembly). The completed batches of connectors were then tested and sent to packaging. Packaging incorporated many different methods, from a 10-piece bag to 1500-piece loaded reels. Furthermore, Sunnyvale’s manufacturing was handicapped when production runs were slowed or stopped in order to inject a specialty or custom order. When the market was good, growing sales allowed ACC to cover carrying costs of the finished goods inventory. This work-in-process inventory also allowed ACC to react quickly to customer’s needs. However, due to increased competition and a deflated market, ACC’s Production Control section was under pressure to lower work-in-process inventory. Sunnyvale’s finished inventory traditionally maintained for an average of 38 days. As a result, various production scheduling methods were implemented. Shorter production runs, while a simple alternative, impacted costs through decreased utilization. ACC invested $500,000 in a new computer system and software to assist in production scheduling. ACC’s quality had declined over time with defect rates reaching as high as 26,000 per million units produced. These defects did not typically reach the customers as in-house inspection processes ensured these parts never left the facility. Statistical process control measures offered some progress, but defect rates remained high. New products usually experienced yield rates as low as 55% as production began, but typically improved to 98% following one year of production.

ACC’s Concerns with DJC’s New Manufacturing Facility

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Brant Allegretti, Kirk Blackwelder, Rick Calero, Mary Coffee, Jonathan Doddridge 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 Average Production Rate Types of Connectors Competitive Strategy Models 1961 85% Batch Process 15% Job Process 420 million units (600 million units maximum) 4 Focus on customer need Kawasaki 1986 100% Continuous Flow 700 million units (800 million units maximum) 4 Low cost production, customization and superior design 640

4500 5 Separate Areas - Terminal 4 Production Cells with Terminal Stamping and Fabrication, Terminal Production Areas Stamping, Housing Molding, Plating, Plastic Housing Molding, Assembly, Packaging Assembly and Testing, Packaging Multiple – 10-piece bagging to 1500Packaging One – 2000-unit strips unit loaded reel 10 days for standard items, 2-3 Processing Lead Time 2 days, no special orders weeks for special orders Runs Most are 1.5 to 2 days One week and some continuous Average Annual Cost per Mold $40,000 $29,000 Average Life of Mold 8 years 3 years Raw Materials Inventory 10.8 days 5 days Various, but high to accommodate Work in Process 2 days special orders Finished Good Inventory 38 days 56 days Management Engineering and marketing focus Production focus Attempt to freeze 30 days out. Complete control by the plant. No Production Schedule Could change daily for SO’s. 15% change to the schedule for of orders were custom orders. unplanned orders. Utilization 50-85% 100% 46% - Heavily weighted towards 32% - Weighted towards Indirect Staff control staff. Technology Department. Defects 2.60% 0.0001%

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Brant Allegretti, Kirk Blackwelder, Rick Calero, Mary Coffee, Jonathan Doddridge Yields Other 55% to 98% after one year Outsourced design of equipment. Emphasized cutting edge equipment. 99% All technology in house. Emphasis on older technology.

American Connector Company’s Plan of Action In order for American Connector Company Sunnyvale facility to compete with a locally established DJC facility similar to Kawasaki, they should begin with a review of ACC Sunnyvale’s current corporate objective of competing globally, increasing growth and maintaining profitability. With sales growing from $252 million in 1984 to $800 million in 1991, but gross margins dropping from 52% to 43% during the same period, we recommend ACC Sunnyvale revise their objective from simply maintaining profitability, to focusing on profitability enhancement by increasing gross margins back to 52% within two years. ACC Sunnyvale should then develop a comprehensive marketing strategy by conducting a situational analysis of product markets including a competitive review of the 1st tier, top ten worldwide market leaders, accounting for $6.67 billion in sales, and also the other five 2nd tier of companies. In addition, ACC Sunnyvale will estimate future volumes based on industry trends for the 15% custom order segment and the 85% that comprises continuous batch orders and determine the order winning criteria for each including product quality and reliability, delivery speed, and delivery reliability. The actions Sunnyvale must undertake These actions may be categorized into five different efforts: 1) product analysis, activity based costing, and pricing strategy; 2) production line optimization; 3) process reconfiguration; 4) implementation of inventory control measures; and 5) minimization of indirect staff. ACC Sunnyvale should immediately implement an activity based costing system and an aggressive pricing scheme. This first action will involve a thorough examination and measurement of the current processes and their associated costs in order to determine minimum efficient batch sizes. This data will permit surcharge pricing to be applied to special or custom orders and will outline a plan for minimum order fees. Competitive pricing analysis combined with internal cost accounting will permit ACC to determine which product lines are profitable at current volumes and will determine what customers are

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Brant Allegretti, Kirk Blackwelder, Rick Calero, Mary Coffee, Jonathan Doddridge willing to pay. ACC’s connectors should be evaluated for any potential optimization as part of the cost analysis. This analysis might uncover complex design features that may be removed or modified in order to reduce costs further. The data gathered through cost and product analysis will allow for product line optimization. This may lead to elimination of lower profit products which will further reduce SKU’s and the burden on strained production resources. Following product line optimization, the processes may be reconfigured in order to capitalize on efficient production. Sunnyvale should reconfigure their facility with a continuous process batch production line to support non-custom orders and specialization cells to support custom orders. The continuous batch orders account for 85% of Sunnyvale’s orders and improved efficiency in production will improve product margins. Individual specialization cells will cater to Sunnyvale’s 15% custom order business, for which higher premiums can be demanded. ACC will still be allowed to concentrate on their customers who require specialized services, but in an even more profitable manner. Inventory control measures must be implemented in order to control cost associated with raw material and finished goods inventory, but should be coupled with optimization of the plant layout to ensure a smooth material flow. This measure will improve margins on the traditionally low margin batch process. The improvements realized through optimization of the product lines, production processes, and inventory control will allow for opportunities to minimize indirect staff. ACC Sunnyvale should follow DJC Kawasaki’s lead and further refine this process through scheduled reexamination of these steps. This continuous improvement process will further improve efficiency and increase profit margins.

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