Production & Operation Management

Case Analysis

American Connector Company (A)

VGSOM, IIT Kharagpur

By

Abhishek Awasthi

Section A

11BM60071

To

Prof. Anand Teltumbde

Introduction:

Overview of Industry:

Electric Connectors were devices made to attach wires to other wires, wires to outlets, wires,

components or chips to PC boards, or PC boards to other boards. They found use in a number

of product applications – each of which called for a different connector specification. By

1992 attempts were being made to standardise these product specifications among the many

different industry associations.

The demand for electric connectors in the US had slowed in the mid to late 80’s and this had

resulted in an excess capacity of suppliers, many of whom had built up large capacities in the

70’s to meet the then growing industry demands from the computer industry. Hence, by the

90’s, the US Connector Industry (this included connectors, cable assemblies and backpanels)

was an extremely hostile environment containing more than 900 suppliers even as sales

continued to fall. In 1991, sales were down 3.9% from the previous year while the 10

industry leaders were on average down 7.9%. The competition was further exacerbated by the

increasing number of offshore producers entering the US market. Also, electrical connectors

were very engineering intensive products and were critical to product performance, thus there

were demanding requirements by the customers for cost, quality, reliability and performance.

Globally, both ACC and DJC were second tier companies having sales between $500 million

and $800 million. They operated in a $16 billion industry which was both highly competitive

and highly fragmented.

Overview of DJC Corp and the Kawasaki Plant:

The DJC Corporation’s adopted a typical Japanese competitive strategy in that it focussed

exclusively on profit maximization through achieving highly efficient manufacturing

processes and by emphasizing on simplicity and manufacturability over innovation. The

importance of manufacturing was also reflected in the company’s organization. The

manufacturing division had more power in altering production schedules, product mix and

lead times than the marketing division.

Their Kawasaki Plant, which began its operations in 1986 amid threats to the company’s

gross margins because of increased labour and material costs and a rising Yen, was designed

to be a highly automated, continuously operating plant aimed solely at mass production. It

was intended to meet the Company President’s three stated goals: 1) 100% asset utilization,

2) 99% yield on raw material, and 3) a customer satisfaction level of one complaint per

million units of output. The plant was located close to both the major Japanese electronics

companies as well as the major raw material suppliers.

The Plant’s management carefully integrated decisions and policies related to the product and

process technologies, workforce, production control, quality and organization and adopted

techniques in these spheres to meet the stated goals. For example, its layout was one of

Plants-within-a-Plant to minimise material handling and work in progress; there was

emphasis on ‘pre-automation’ since that would better facilitate reliability during the actual

automation processes; it approach involved a greater reliance on in-house technology

development rather than procurement from vendors; it possessed a Technology Development

Division that was responsible for inter-functional coordination of all development activities

for effective resource utilization; it exercised strict process and inventory control by

scheduling long production runs in order to minimize yield and production losses as well as

work-in-progress inventory and it aimed at reducing the number of direct production workers

as well as support and overhead staff by focussing on increasing automation.

Overview of ACC and the Sunnyvale Plant:

American Connector operated four plants in the US and two in Europe. The company’s

competitive strategy was characterised by its emphasis on both quality and customization. Its

products were recognised for their superior design and performance. Custom orders made up

15% of the company’s total production volume and employees worked closely with large

customers to develop unique solutions to specific connector problems. Many of these

products later became industry standards. In order to achieve growth and compete globally,

ACC had invested several hundred million dollars worldwide in new plants and equipment

between ’83 and ’88. However, falling demand for connectors had resulted in eroding its

gross margins from 52% to 43% even as sales had grown from $200 million to $800 million.

The company had opened the Sunnyvale Plant in 1961 to serve the emerging electronics-

based industry in and around Silicon Valley. The capacity of the plant had been expanded

pre-emptively to meet the expected growth in demand i.e. whenever it was estimated that

capacity utilization would exceed 85%. The last such expansion had occurred in 1986,

bringing the capacity up to 600 million units per year. However due to the depressed market

conditions prevailing since then, investments in capacity and technology had completely

stopped. The plant was divided into 5 production areas with each one having its own

Production Supervisor who reported to the plant’s Director of Manufacturing. Its scheduling

was flexible, in that it allowed for the scheduling to be changed in order to accommodate rush

orders from important clients, as failure to do this could have resulted in them taking their

designs to ACC’s competitors. Production scheduling though had been suffering due to the

growing number of individual products being manufactured which had prompted a

corresponding increase in the number of Production Control staff.

Though as a company, ACC had an outstanding reputation for quality, this was the very area

in which the Sunnyvale plant had been struggling lately. The defect rates, in-plant, were

relatively high at around 26000 per million units and inspection of these had to be carried out

in order to prevent the customers from being exposed to similar numbers. This only added to

the spiralling costs at the plant. Now the plant had to analyse the threat posed by DJC, which

was rumoured to open a first plant in the United States and decide its future course of action.

Comparison Of Kawasaki and Sunnyvale Plants (1991)

DJC , Kawasaki ACC, Sunnyvale

Production Method Continuous Flow Line Job Processing 15%

Batch Processing 85%

Production (Total Capacity) 700 million units (800 million units) 420 million units (600 million units)

Stock Keeping Units (SKU’s) 640 4500

Production areas 4 large cells – each to produce one

of the four types of connectors.

5 Production Areas – each specializing in

one Process area of producing

connectors.

Packaging

One method

2000-unit strips loaded onto a large

reel

Wide range

From 10 piece plastic bag to 1500 piece

loaded reel

Process Lead Time Average 2 days Standard Items : 10 days

Special Orders : 14 to 21 days

Assembly Line Rate 200 units/minute 500 units/minute

Average Annual Cost per Mold $29,000 $40,000

Average Life of Mold 3 years 8 years

Raw Materials Inventory 5 days 10.8 days

Work in Process Inventory 2 days Higher due to customized orders

Finished Goods Inventory 56 days 38 days

Utilization 87.5% 70%

Management Production Focus Engineering and marketing focus

Production Scheduling No changes incorporated.

Changes accommodated as they come.

Were to be frozen 30 days in advance.

Yields 99.99% 55% for a new product

98% after one year

Runs One week/continuous 1.5 – 2 days

Technology Most technology production is in-

house.

Design of equipment is outsourced to

vendors.

Relationship with Suppliers

Close relationships with Few

Suppliers – this collusion formed

entry barrier for new entrants.

No such relationships formed.

Case Analysis:

1) Analysis of Current Cost Comparison (USD per 1000 Units) between Kawasaki

and Sunnyvale

Kawasaki Plant (A) Sunnyvale Plant (B) Difference (B - A)

Raw Material,

Product

12.13 9.39 - 2.74

Raw Material,

Packaging

2.76 2.10 - 0.66

Labour, Direct 3.02 ---- ----

Labour, Indirect 0.75 ---- ----

Total Labour 3.77 10.30 6.53

Electricity 1.40 0.80 - 0.60

Depreciation 1.80 5.10 3.30

Other 4.24 6.10 1.86

Total 26.10 33.79 7.69

Hence, the current cost for the Kawasaki plant is 22.75% less than the cost for the Sunnyvale

Plant. Another way to look at their comparative performance is the decreasing cost for the

Kawasaki Plant, which has decreased its cost by 37.47% from the 1986 level ($47.74).

Sunnyvale on the other hand, had experienced an increase in cost by 2.67% from its 1986

level ($32.91).

2) Analysis of Forecasted Cost Comparison (USD per 1000 Units) between

Kawasaki and Sunnyvale if DJC establishes a similar plant in the US

Kawasaki Plant (A) Sunnyvale Plant (B) Difference (B - A)

Raw Material,

Product

7.278 9.39 2.112

Raw Material,

Packaging

1.656 2.10 0.444

Labour, Direct 3.322 ---- ----

Labour, Indirect 0.825 ---- ----

Total Labour 4.147 10.30 6.153

Electricity 1.12 0.80 - 0.32

Depreciation 1.80 5.10 3.30

Other 4.24 6.10 1.86

Total 20.241 33.79 13.549

Hence, if DJC establishes a Kawasaki – style plant in the United States, then taking cost

indices into consideration, its cost for producing 1000 units comes out to be 40.09% less than

the cost for the Sunnyvale Plant. Hence, ACC can potentially lose a significant portion of its

market if DJC decides to establish a plant in the United States.

3) Comparison of Labour Usage between Kawasaki and Sunnyvale:

Kawasaki Plant (94

Employees)

Sunnyvale Plant (396

Employees)

Indirect Labour -

Control

11 (11.7%) 66 (16.67%)

Indirect Labour –

Technology

Development

12 (12.8%) 27 (6.8%)

Indirect Labour –

Materials Handling

3 (3.2%) 41 (10.4%)

Indirect Labour –

Mechanics

4 (4.3%) 47 (11.9%)

Direct Labour

(Production)

64 (68%) 214 (54%)

We see that the Kawasaki plant employs less employees overall due to a high degree of

automation. In comparison, the Sunnyvale plant employs more manual labour for the

production of very low volume products (about 10% of its total volume).

16.67% of Sunnyvale’s total employees are engaged in Control Department. This is due to

the fact that scheduling is often done on a daily basis because of the acceptance of rush orders

placed by large customers to the plant. Also, due to the absence of defect preventive

measures during process control, the Quality Control team has to manually inspect the units

produced.

Kawasaki has a higher percentage of employees engaged in Technology Development

because the plant concentrates on the inter-functionality of all its technology development

activities in order to achieve a consistent set of explicit goals.

Owing to its short production runs and emphasis on customised orders, the Sunnyvale Plant

has a large Work-In-Progress and Raw Material inventory in comparison with the Kawasaki

plant. Thus it requires a significantly larger workforce in the Materials Handling department.

The presence of a relatively continuous process flow eliminated the need of such personnel at

the Kawasaki plant.

The Kawasaki plant relied on a continuous improvement of existing proven processes to

ensure that unscheduled downtime was eliminated, which made it unnecessary to employ

mechanics for repairing purposes. However, Sunnyvale with its emphasis on new product

designs was more prone to faults, for which mechanics were required.

4) Productivity Comparison between Kawasaki and Sunnyvale Plants

Kawasaki Plant (94

Employees)

Sunnyvale Plant (396

Employees)

Connector Output Per

Square Foot (in thousand

units)

15.1 10.9

Connector Output Per

Employee (in million

units)

7.45 1.06

Connector Output Per

Direct Employee (in

million units)

10.93 1.96

Fixed Asset Utilization %

Plant Not Operating 5.7% 28.6%

Non-Scheduled 13.2% 23.5%

Process Failure 1.0% 8.9%

Preventive Maintenance 2.0% 2.4%

Process Changeover 2.0% 4.8%

Quality Losses 0.7% 1.6%

Kawasaki has a comparatively high connector output per thousand square feet since it has a

very low Raw Material and Work-In-Progress Inventory and hence does not need to devote

space for the storage of these inventories.

The relative differences between connector output per employee and the connector output per

direct employee show that the Indirect Labour force forms a larger part of the Sunnyvale

plant than the Kawasaki plant. It is seen that Connector output almost doubles in the case of

Direct Employee for Sunnyvale while Kawasaki only experiences a 46.7% increase. This can

be attributed to the fact that Kawasaki uses a high degree of automation in its processes

which eliminate the need for labour.

The difference between Fixed Asset Utilization due to non-operation for the two plants is

because of the differences in the legal rules and conventions that exist in Japan and the US.

The five-day week is adhered to more strictly in the latter and hence, Sunnyvale is

operational only for 50 five-day weeks throughout the year, whereas Kawasaki is operational

for 330 days in a year. Thus, it is not appropriate to compare the two plants on this basis.

Non-scheduled processes create a difference in fixed asset utilization because of the fact that

at Sunnyvale, given the high rate of moulding, the housings had to be sent to a holding area

until the terminals were completed. This was done because the moulded housing and

terminals had to be produced in an efficient batch size. Its utilization is also low because it

needs some buffer capacity for its flexible operations, as according to the company policy

whenever the long term forecast indicates that utilization would exceed 85% for sustained

periods the capacity was increased. Scheduling of the moulds was a slightly lesser problem at

Kawasaki as well, since the process speed of the process had to be slowed down in order to

synchronise fabrication and assembly process.

Both Process Failure and Preventive Measures take up a higher chunk of the Fixed Asset

Utilization for Sunnyvale in comparison to Kawasaki because unlike the latter, which

concentrates on old, reliable processes rather than new, less reliable ones in addition to

focussing on continuous improvement of existing proven processes to ensure the elimination

of unscheduled downtime, Sunnyvale emphasises on new product design, which is more

prone to faults and hence lower yields.

The difference between the Fixed Asset Utilization due to Process Changeover exists for the

two plants because while Kawasaki was run on a nearly continuous basis to avoid start up and

shut down costs, the Sunnyvale plant had production runs that barely lasted 1.5 – 2 days, and

hence it underwent a large amount of process changeover in comparison.

Finally, the difference in losses due to quality exist because while the Kawasaki plant places

a lot of emphasis on maintaining equipment during process runs to eliminate unscheduled

downtimes, Sunnyvale suffers from a lack of defect preventive measures due to which

manual inspection of faults need to be carried out, which at 26000 per million units are pretty

high in number.

To conclude, it is inappropriate to compare the two plants on the basis of the above

productivity factors as they completely differ in their competitive strategy. Kawasaki is a

mass producer using a continuous flow line for production while Sunnyvale is a custom

producer using batch processing.

Case Results:

Analysis of the Threat in Case DJC Opens a Plant in the US:

In the case of DJC establishing a Kawasaki – style plant in the US, Sunnyvale would be

competing directly with Kawasaki’s high volume / low cost products and faces the possibility

of losing lower margin, price sensitive customers. While only 15% of ACC’s total production

volume was custom orders, 1% was prototype orders and 10% were very low volume orders,

the remaining share of the volume can be assumed as high volume / standard product. This

will be the market segment that will be the hardest to compete with DJC. As it has already

been shown in the Case Analysis, upon entering the US market, a DJC plant could have a

cost advantage of over $13 with respect to ACC’s Sunnyvale plant due to the reduced cost of

raw materials and electricity in the US. This would mean that along with the price penetration

strategy that DJC is sure to undertake to quickly corner a share of the market, this cost

advantage could potentially take away a number of mass-market ACC customers who are not

too keen on customization.

A plant modelled on DJC’s Kawasaki production facility would also have a great

manufacturing advantage over ACC’s Sunnyvale facility. Kawasaki maintained a highly

efficient, integrated production facility with methodically maintained equipment, a low

workforce requirement, increased automation and fully implemented continuous

improvement plans. All this means a process lead time of only a couple of days, compare

with 10 days for Sunnyvale. Hence, of two important parameters of cost and delivery time, a

DJC plant would clearly outperform the ACC plant. In the current market climate of an

abundance of suppliers, the customers have been given the leverage of demanding reduced

prices and faster delivery, both factors on which DJC scores high marks. Hence it can

certainly be seen to be a huge potential threat to ACC if it establishes a plant in the same

country.

However, looking at the other side of the argument if we rate the threat of DJC entry on the

Operations parameters of Quality, Cost, Delivery Time and Flexibility, we find that there are

two major areas in which the Kawasaki method of production and processing is severely

lacking when it comes to the American market for connectors. Based on ACC’s experience,

the market has a high demand for quality for which the company has already built an

outstanding reputation. Thus it will be difficult for the mass marketed product lines from DJC

to challenge ACC in this aspect. Sunnyvale manages to provide high quality to its customers

due to a strict inspection process at the end of its assembly process, which manages to

eliminate 26000 defects per million units.

Moreover, looking at ACC’s corporate strategy, it is clear that the company’s focus is on

customers who demand customization and flexibility. Though the share of such customers is

only 15% of the company’s total production volume, it may be reasonably assumed that such

custom orders would have a high profit margin. Hence, even with the entry of DJC this would

be an area where ACC would continue to have a stranglehold because the former is only

competent at mass production. Also, DJC would have to fundamentally change its production

method in order to attain the same level of flexibility that ACC offers its larger customers. In

fact in Japan, DJC even refuses to entertain any rescheduling requests from its customers and

if such a policy is carried into the United States ACC need not worry because this lack of

flexibility would prevent it from seriously harming ACC’s large-customer base.

Finally, though the Kawasaki method of production may be give you low delivery times and

costs, we see that the cost of connectors only form 2% or less of the customers final product

price. Hence, it may be reasonably assumed that the customer is not that price-sensitive about

these products but instead would rather have the suppliers supply to be flexible and of a high

quality.

Quantum of Difference between ACC and DJC’s Plant Costs:

I. While the DJC plant is still based in Japan: The current cost at the Kawasaki plant

is 22.75% less than the cost at the Sunnyvale plant. The cost at the Kawasaki plant

is $26.10 per 1000 units while the cost at the Sunnyvale plant is $33.79 per 1000

units. This despite the cost of raw materials being significantly higher in Japan

than in the US.

II. If the DJC Plant is established in the US: In such a scenario, the cost at the DJC

plant could be as much as 40.09% less than the cost at the Sunnyvale plant. The

cost at the Sunnyvale plant is $33.79 per 1000 units while the cost at the DJC

plant could drop as low as $20.24 per 1000 units.

Reason for DJC and ACC Cost Differences:

There are a number of reasons for the existing and predicted differences in cost between the

DJC and ACC plants. Firstly, DJC and especially its Kawasaki plant is exclusively focussed

on mass production where a large part of the production process is automated and the plant is

run on a continuous basis. This allows it to keep costs like start up and shut down as well as

costs spent on labour and materials handling as low as possible in order to compete

favourably in the market. Secondly, due to its adherence to mass production, the Kawasaki

plant has achieved an economy of scale which is difficult for the ACC plant to match. This is

best reflected in the Depreciation costs for the two plants. Sunnyvale with a much lower

production output as compared to the Kawasaki plant has a significantly higher depreciation

cost per 1000 units as compared to the latter. This is because the average depreciation cost is

split over a fewer number of output units for the Sunnyvale as compared to Kawasaki. In fact

on taking this factor into account, we find that Sunnyvale could save a depreciation cost

$2.04 per 1000 units if it produces the same volume as that produced by Kawasaki. Thirdly,

Sunnyvale follows Customization and Flexibility, both of which demand a higher input cost

as they mean more costs being put into new product design, resolving unscheduled

downtimes and rescheduling on-going operations to accommodate rush orders from large

customers. Fourthly, a significant portion of the cost saving achieved by Kawasaki over

Sunnyvale is due it’s the adoption of material cost saving measure such as the use of Tin in

plating instead of Gold, Waste Reduction, using less expensive Resin etc. Finally, the cost

difference also owes its origins to the varied markets in which the two companies operate.

The price indices in the case show that the cost of raw materials and electricity is higher in

Japan while the labour costs (both direct and indirect) are higher in Japan. Both these factors

add to the already existing cost difference between the two companies.

Cost Difference due to Company Strategy i.e. the way each company competes:

$6.187 per 1000 units cost difference between the Sunnyvale and Kawasaki plant exist

because of the difference in strategies adopted by the two plants to compete in the market.

This difference exists because the Kawasaki plant has a lower labour cost (due to the higher

automation adopted by DJC), lower packaging cost (due to DJC packing 2000 pieces onto a

packaging reel in comparison with ACC, which customises this processes according to the

customers’ needs) and lower electricity costs (due to increased automation).

Cost Difference due to Company Operational Inefficiency i.e. the way each company

operates:

$3.252 per 1000 units cost difference between the Sunnyvale and Kawasaki plant exists

because of the inefficiencies in operational processes at the former. It is shown that if ACC

operated its current plant in Japan, it would have cost them $20.90 per 1000 units whereas it

only cost the DJC $14.89 per 1000 units. This difference exists because of the Kawasaki

plant managing to reduce its costs through easily adoptable operational techniques like better

mould design with narrower runners, using less expensive resin, reducing the mass of

housing material, waste reduction and replacing Gold with Tin for the terminals’ plating.

Most of these were measures that could have been easily adopted by ACC to improve the

operational efficiency of its plants.

Final Recommendation for the ACC Management at the Sunnyvale Plant:

Although the threat of DJC’s rumoured foray into the US market by way of establishing a

plant in the country is certainly a substantial one, it must be realised that the two companies

have vastly different corporate and competitive strategies. While DJC has tailored the entire

working of its Kawasaki plant towards attaining the maximum possible resource utilization in

order to perfect mass production and supply to regular customers, ACC continues to adhere

to its stated goals of providing a high product quality in addition to delivering greater

customization/flexibility for its customers. Thus even with the establishment of DJC’s new

plant in the country, it would be ill advised to change its strategy completely as a retaliatory

measure because that would mean giving up on main profitable customer base for connectors

in the country, the one which demands customization and flexibility from its suppliers. This

is a parameter on which the DJC plant would not be able to compete without a major

overhaul from its existing operations in Japan. Instead the Sunnyvale plant should simply try

to concentrate on getting the easy things right, i.e. focussing on trying to reduce its

operational inefficiency through adopting the same measures as those undertaken at the

Kawasaki plant. Adopting these methods could allow Sunnyvale to save up to $3.252 per

1000 units in comparison with to its prior operations.

Sunnyvale could also try to integrate itself vertically by producing some of its own equipment

and moulds so that it can save on transaction cost economics. Finally, in order to create entry

barriers for any new entrant, ACC could try to collude with the Government, suppliers and

customers over industry rules and customer – supplier contracts.

In a nutshell, ACC should not try to change its strategy but instead should try to reduce its

own cost.