CASE ANALYSIS

On

AMERICAN CONNECTOR COMPANY

SUBMITTED TO

PROF. D. KRISHNA SUNDAR

On 17-07-2015

As part of Manufacturing Strategy Course in Term 4

By Group-11

Mohit Khaitan-1401033

Ramesh Tanjavuru-1401050

Agila Sampath-1401063

Renu Chowdary-1401073

Industry overview

The electrical connector industry supplied connectors with various specifications to industries like military, industrial electronics, telecommunications, computer etc. Connectors were basically classified into two types- standard and customized. In the 1970s, the US connector industry was growing very rapidly and firms had built up capacity to fulfill the growing demand. But demand started to slow down during mid to late 80s and as a result there were too many suppliers and too much capacity.

During 1990s the industry turned into a hostile environment. With the presence of more than 900 suppliers sales started to fall rapidly. This gave buyers the power to bargain reduced prices, improved quality and faster delivery. Suppliers which produced many types of connectors were finding it very difficult to meet the increasing number of specifications. The industry was very fragmented with the top ten leaders accounting for $6.67 billion out of $16 billion of total sales.

DJC and American Connector Company were classified as the second tier company with sales within $500 million to $800 million range. DJCs competitive strategy was that of a cost leader by providing more standardized products than the customized products. DJC focused on mass production and hence they had experienced shorter process time. In DJC the manufacturing department was given top priority and they had the final say over sales and marketing. Whereas the strategy applied by ACC was that of a differentiator by providing customized products based on customer requirements. Variety, quality and flexibility were the top priorities in the manufacturing processes. The sales and marketing had the power to influence the decisions of manufacturing team since they always prided themselves on being responsive to customers needs.

Now after their successful stint in the home market DJC is planning to start another plant in the USA in order to foster sales there. Their arch rival ACC has been contemplating various scenarios that they would face after the entry of DJC in the US market.

THREAT OF DJC TO AMERICAN CONNECTOR COMPANY

THE AMERICAN CONNECTOR COMPANY

Strengths

Quality: Sunnyvale plant, being a technological leader, had latest production equipment which manufactured high quality products. Also, delivering high quality products (even when defect rate was 26000 per million units) to customers was achieved because of quality inspection checks put in place.

Customization: High emphasis on customization was given. Custom orders made up 15% of the companys total production volume.

Superior design and Performance: The Companys products are recognized for superior design and performance and had market reputation of being a high quality supplier.

Develop Unique Solution: ACCs employees used to collaborate with large customers to develop unique solutions to their specific connector problem. This kind of involvement many times resulted in ACCs custom products becoming industry standard.

High responsiveness: The Company had high responsiveness to customer needs in delivering perfect connectors without missing scheduled delivery. This was possible because rush orders and request from important customers were accommodated by changing the production schedule.

Weakness

Plants equipment not up-to-date: Sunnyvale had always been technological leader. One of the reasons for this was that they always had latest production equipment which helped them improve quality or productivity.

Process lead time is high: Process lead time is 10 days for standard items and 2 to 3 weeks for special order items.

Higher number of control staff: Production control staffs were increased from 42 to 65 due to increasingly complex production schedule.

High defect rates: Sunnyvale plant had a defect rate of 26000 per million units produced. Production supervisors felt most of these defects were due to new product design. Yields on newly designed products entering production for first time were at times as low as 55%

Unable to implement Statistical Process Control and other defect preventive measures.

Low labor productivity (1.06 million connector outputs per employee).

Opportunities

Mergers and Acquisitions: During 1990s, there were too many suppliers and too much capacity. Thus, analysts predicted that number of suppliers might drop to 400 from 1200 by the end of 1990s due increasing consolidation in the industry.

Exploring developed Asian markets

Effective implementation of the defect preventive measures to increase the yield.

Use of advanced and effective technologies for flexibility and cost minimization

Increasing demand for customized connectors

Threats

Competition due to High Efficient Plant: DJC building a plant on U.S Mainland and get access to cheap raw material which would make them provide connectors at very low cost

Price War: Increasing rivalry among the competitors can lead to price wars.

The American connector industry demands lower prices, high quality and faster delivery, and since DJC is already proficient in these aspects, it is poised to do well in American market.

Although ACC is strong in customization of products according to customer demands but only 15% of the revenue is generated from that segment, rest is from standard products only. So with high rivalry, ACC is highly vulnerable to the threat posed by DJC Corporation of Japan.

Comparison of DJC and ACC over different attributes

Attribute

DJC - Kawasaki

ACC Sunnyvale

Competitive Strategy

Highly efficient manufacturing with high quality and low cost position

focus on high quality & Customization

Design

1. Simplicity & Manufacturability2. Economizes raw materials

Superior Design & Performance

Product Variety

High - more than 4500 SKUs as of 1991

only 640 different SKUs

Relationship

Maintained close relationship with suppliers

Highly responsive to customer needs

Customer

Majority of the customers are from Japan while only 25% come from Asia

Global Market

Production & Inventory

1. Maintained high run time (some were up to 1 week and some on a continuous basis) to minimize yield and capacity losses and reduce start-up and shutdown cost and time.2. Work in process inventory is around 2 days significantly less compared to that of ACC.

1. Low runtime at an average of 1.5 days.2. WIP is very high at 10.8 days which increases inventory carrying costs.

Flexibility of Operation

Low

High

Capacity utilization

High (approx. 75 %)

Very low (approx. 30%)

Intra Departmental relations

High Inter-functional coordination

Marketing and engineering has a higher say over production.

Workforce

Focus on maintaining low direct, support and overhead staff.Compensation system focused on attracting young qualified workers.

Total number of employees in both Direct and Indirect labour are significantly high compared to DJC

Process

1. Decentralization of decision making power2. Pre-automation3. Absolute reliability in upstream moulding process4. Designed all moulds in-house and manufactured half of them

1. Customization of products2. Processes getting obsolete3. Lower runtime of process leading to higher lead times4. High defect rate (26,000 per million production)

Comparison of Manufacturing Costs

DJC vs American Connector

Cost of Goods Sold (1991)

(dollars per 1000 units)

Expense Item

Cost Index

ACC/Sunnyvale

DJC/Kawasaki

DJC/Kawasaki after adjusting

Raw Material, Product

0.60

9.39

12.13

7.28

Raw Material, Packaging

0.60

2.10

2.76

1.66

Labour, Direct

1.10

-

3.02

3.32

Labour, Indirect

1.10

-

0.75

0.83

Total Labour

-

10.30

Electricity

0.80

0.80

1.40

1.12

Depreciation

1.00

5.10

1.80

1.80

Other

1.00

6.10

4.24

4.24

TOTAL

33.79

26.10

20.24

Difference in cost per 1000 units = 13.55 dollars

In 1991, Kawasaki production was estimated to be 700 million units. The total difference in cost for 700 million units is 9.484 million dollars.

Reasons for differences in cost

Raw Material Product Use of tin which was far cheaper than gold

Raw Material Packaging Kawasaki packed its connectors only on tape and reels compared to Sunnyvale which offered a wide range of packaging formats ranging from 10 piece plastic bag to 1500 piece loaded reel

Labour - There is a considerable labour cost difference between two plants because of the following reasons which reduced the number of employees in Kawasaki plant.

Kawasaki plants technology and operating policies were designed to reduce the sources of problems that create a need for control staff

High process reliability made it unnecessary to employ mechanics for repair

Lack of work in process inventory reduced the inventory control workers

The plant became increasingly automated

Depreciation Depreciation is lesser at Kawasaki since the production volume is high (700 million units) compared to Sunnyvale (420 million units).

Material Cost Savings for Kawasaki

Material Cost Savings

Cost per 1000 units

Kawasaki's Material Cost with ACC's design & packaging

20.90

Mold Design

0.21

Less Expensive Resin

0.48

Reduced Mass of Housing

0.18

Waste Reduction

1.05

Tin Plating

3.50

2000 piece reel

0.59

Total Cost Saving by Kawasaki

6.01

Current Kawasaki Material Costs (1991)

14.89

Current Kawasaki Material Costs - Adjusted for Cost Index

8.93

Sunnyvale Material Costs

11.49

Difference in cost

2.56

Difference in cost per 1000 units = 2.56 dollars

The total difference in cost for 700 million units is 1.789 million dollars.

Challenged could be faced by DJC in US market

1. DJC existing competitive strategy stresses on Simplicity and manufacturability with no focus over innovation and customizability, whereas the US market has product requirement varying from high customizability to low. In this case DJC, with its existing capability of producing high volume standardized connectors has to focus on mass market. If it aims mass market can it compete in the highly fragmented US market for low margins else if it targets customer designed segment, can it beat the competition which has expertise in producing customized connectors?

2. The current production runs were scheduled for as long as 1 week and some are run continuously as there are limited number of SKU's but if they target the US market can they be able to maintain the long runs while targeting the customized connector segment in which ACC has more than 4500 SKUs.

3. Compared with ACC, production schedule is not very flexible in case of DJC. Hence when it targets US market, will it change its schedule from rigid to flexible if not it will be difficult for DJC to sustain in US market where the number of suppliers are very high which give high bargaining power to customers. As they don't have a foot hold in US rigid delivery schedules will make it more difficult for them to sustain in a highly competitive market like US.

4. Unlike in Japan, DJC doesn't have a strong customer base in US which will make it difficult for DJC to compete in highly competitive market with more than 900 suppliers.

5. In order to cut costs, DJC opted for Tin plating instead of Gold plating in Japan market but will the customers accept it in US and compromise on reliability which is high in case of Gold pins.

6. As the DGC carried finished good inventory for 56 days, it increased the risk of obsoleting which is already high due to shorter lifecycle of electronic goods.

7. In overall, it is evident from the DJC Kawasaki plant that, it operated on high quality and high volume with lower costs and higher utilization rates but will the same work in US. Does US has demand for such high volume connectors, if at all there is demand how much feasible for it to penetrate in US market? And what will be the other marketing costs that may incur in order to penetrate more.

Suggested Strategies

Though it is questionable if DJC can operate a plant like Kawasaki in US, it nevertheless poses a threat to ACC and they should strategize to avoid any loss of market share to DJC when they enter US market.

Production system:

At ACC, the plant was divided into 5 production areas which follows a batch flow production system and functional layout.In this kind of layout, there are low volumes and high variety whereas at DJC Kawasaki plant follows a cellular layout . About 85% of ACC's orders were standard orders and 15% were custom built connectors. If DJC were to replicate their existing model in US, they would be creating a plant which is suitable for low volumes and high variety when 15% of orders were only custom built. Hence, ACC should consider using suitable production lay outs for different types of orders(standard and custom)as having a functional layout which suites for high variety to produce 85 % of standard orders is not efficient.

Losses due to Non-operation of Plants:

We can see from exhibit 6 in case that 28.6% of loss in fixed asset utilization is due to non-operation of plant. Kawasaki runs the plant for 24 hours a day, 7 days a week whereas Sunnyvale operated only for 3 shifts a day, for 5 days a week. By implementing 24/7 production system and reducing shut down, start-up costs would increase production and improve fixed asset utilization.

Losses due to Non- Scheduled outages:

Non -scheduled outages resulted in 28.6 % loss in fixed asset utilization at ACC whereas at DJC it is only 13.2%.Hence, better and frequent maintenance of equipment is need to be done at ACC plant.

Training of workers:

ACC should consider investing in improving the technical know how about products and processes to improve efficiency and productivity of workers.

Workforce:

ACC can reduce number of direct production workers , support an overhead staff to reduce operational costs. Making process more automated will result in fewer direct workers and results in reliable process.

Sunnyvale direct labour 54% ( out of 396 employees) i.e, -214 employees where as in Kawasaki plant it is 64. It is also worth noting that production is almost 1.7 times higher at Kawasaki as compared to Sunnyvale.

Technology Upgradation:

Sunnyvale plant had made no major investment in capacity nor technology since 1986. Some of its equipment is no longer leading edge stuff. They should consider investing in technology as it would hit their sales badly down the lane if they dont have upgraded and nifty molding presses.

Coordination among departments:

Intern functional coordination plays a critical role in achieving the set goals.They result in efficient resource utilization, design quality and manufacturability. It reduces development cycle and results in continuous process improvement. It also results in synergies across teams and coordination among various functions helps in improving product characteristics. Information sharing across departments would yield better results.

Product and Process Improvements Kawasaki:

Like Kawasaki has developed a new resin to improve connector durability and they tried to understand consumer needs. This contact helped them in understanding that a material connector would help differentiate DJC product in the customers syes. Materials team also learned about new materials and requirements of manufacturing process by having discussions with process engineering groups. Though ACC gives high priority to customer needs and preferences, it is not able to come up with innovative process and product improvements due to incoherence in information flow across teams.