American Connector Company (ACC) is a electrical connector company in the United States. It operated 4 plants in the United States and 2 plants in Europe. Known for their high quality & customized solutions, ACC was had been very profitable sustaining margins around 52%. From 1984 to 1991, due to increased competition in the industry and demanding requirements from clients for space, weight, cost and performance.
Their competitor DJC Corporation had become a dominant supplier of electrical connectors in Japan and was rumored to have the most efficient plant in the world. DJC cultivated close links with major computer, telecommunications and electronics companies & distributors in Japan. DJC were ruthless competitors and changed the rules of the game to efficient production than innovation.
In 1991, Denise Larsen, Vice President of Operations at ACC wondered about their approach to manufacturing & the impact on ACC's profitability and market share if DJC set up a plant in US.
1. How serious is the threat of DJC to American Connector Company?
The competencies of DJC primarily lie in manufacturing processes and high automation, very low defect rates ,very low inventory costs, efficient production layout, low labour cost . The current model of the Kawasaki plant established by DJC , possesses a major threat in case it decides to set up a plant in the US. This inference can be made from the following analysis that illustrates American Connector Company lagging behind in terms of its production capabilities, process methodology and cost structure. Please look at Appendix Table 1
Competencies of DJC/Kawasaki depicting threat to ACC are
Lower Cost per Unit of Production: The table 2 shows a comparative analysis of the costs of production in case Kawasaki sets up a plant in US. It clearly shows the Japanese enterprise having an edge over the American counterpart due to reduced expenses on manpower, electricity , raw materials in addition to the process capabilities of the plant.
Manufacturing Efficiency and Capabilities : DJC has highly efficient and result-oriented manufacturing capabilities. It maintains a 100% capacity utilization in comparison to ACC that has 85% utilization. This can result in churning out higher number of units per year by DJC as compared to ACC.
Standardization of Product: DJC has the production facility for 640 SKUs as compared to 4500 for ACC. The standardization of product variety by Kawasaki plant of DJC results in longer production runs , thereby increasing overall machine efficiency and capacity utilization. This makes DJC to seek to capture 85 % of the market , that caters to the standardized variety.
Existing model of maintaining low work-in-progress inventory and raw materials inventory- DJC works closely on reduced WIP inventory and raw materials inventory due to continuous production runs .
Higher production of Connector Units per Employee by DJC : The number of connectors produced per employee by DJC is almost 7 times than that of ACC. Even if the customized service obligation of ACC is considered, only 15% of production caters to the customized units, whereas 85% is for standardized variety.
In- house Product and Equipment Development: DJC develops the product and equipment capabilities in-house. This can lead to better technology variations and customization to the existing environment in US. Also, the possibility of process imitation by other companies is minimum.
Extremely Low Defect Rates of DJC compared to ACC: The DJC operates on the model of 1 consumer complaint per million units which culminates to 1 defect per million units. This is in stark contrast to the 26000 defects per million units.
CRITICAL ANALYSIS
There is still a silver lining for ACC when we consider the practical aspects of DJC/Kawasaki setting up a plant in US:
High investment in setting up the plant .DJC would require a huge capital investment for setting up similar plant capacity in US. This would reflect in a high initial fixed cost. The breakeven time would increase in case DJC tries to keep its cost competitive.
Apparent Lower Product Quality of DJC as compared to ACC : In order to reduce raw material costs , DJC has compromised on its raw materials,(e.g. replacing gold plating with tin plating), using thinner housing and less expensive resin. There is a probability that product might not be accepted by the US consumers in terms of the quality .
Challenging the reputation of Existing product Line and customization capabilities of ACC: ACC is a established player in the US market. DJC will have to invest in challenging the reputation of ACC . Also , ACC is flexible when it comes to the customization capabilities. This is not the case for DJC.
Analyzing the above facts, DJC is a major threat to ACC when it comes to the standardized product market , and the factors working against DJC can eventually be overcome owing to 85% of the market
2. How big are the cost differences between DJC's plant and American Connector's Sunnyvale plant? Consider both DJC's performance in Kawasaki and its potential in the United States.
Current Scenario :
In 1986, ACC/Sunnyvale had an advantage over DJC/Kawasaki in terms of manufacturing costs. However, by 1991 Kawasaki ended up reducing its production costs by 37.4 % while the same increased by 2.6 % for ACC. As is clear from Table 1 below, Kawasaki has a clear cost advantage of 29.4 % over ACC. The relevant cost heads where % change is relevant have been listed below:
Category
DJC/Kawasaki ( $/1000 units)
ACC/Sunnyvale ( $/1000 units)
Raw Materials, Product + Packaging
14.89 ( 15 % decrease )
11.49 (9.1 % Decrease)
DJC has been able to achieve significant cost savings in raw material procurement and usage as compared to ACC Sunnyvale. This has been possible due to focus on continuous and long production runs, standardized processes and slight changes to reduce cost
Labor ( Direct + Indirect )
3.77 ( 62.04 % decrease )
10.30 ( 20.75 % Increase )
Total labour costs, direct and indirect, have significantly reduced for DJC in the past 5 years due to considerable automation in processes, low WIP inventory and material handling.
Total
26.10
33.79
% change
37.4 % decrease
2.6 % increase
Kawasaki Plant in United States :
If Kawasaki decides to open a new plant in United States, major cost savings would be in terms of Raw materials and electricity which would lead to a net 22.45% reduction in manufacturing costs. While the raw material costs have decreased by 60 %, Labour expenses have increase by a marginal 10%. Comparing this with the manufacturing costs of ACC plant under the same cost heads and ignoring the initial investment for starting a project in US, DJC is able to achieve a 66.9 % cost advantage over ACC. Significant cost advantage is in terms of labour and depreciation costs. One of the reasons for lower depreciation costs could be because of longer and continuous production runs which depreciate cost over a longer run. On the other hand, ACC has short batch runs which would lead to higher depreciation costs.
Category
DJC/Kawasaki Plant ( $/1000 units)
DJC/Kawasaki US Plant ( $/1000 units)
Raw Materials, Product + Packaging
14.89
= 14.89 * 0.6 = 8.934
Since cost index for Raw material index ( product and packaging )is 1: 0.6 (US/Japan), the raw material costs have gone down drastically
Labor ( Direct + Indirect )
3.77
4.147 ( 10 % Increase )
Electricity
1.4
1.12 ( 20 % decrease )
Total
26.10
20.241
% change
22.45 % Decrease
3. What accounts for these differences? How much of the differences is inherent in the way each of the two companies compete? How much is due strictly to differences in the efficiency of the operations?
The cost differences between ACC & DJC are due to:
Strategic Factors:
Customized/ Standardized: DJC produces standardized products and focuses on manufacturability. They have also reduced the number of SKUs product and DJC enjoys economies of scale.
Inhouse R&D and Product Development: DJC relies on its inhouse expertise for upgrading machines & in product design while ACC procures new technology from vendors. The additional costs of buying new machines increases ACC's total cost.
Continuous Production: DJC produces 24X7 for 330 days a year which reduces the set up cost for the machines and increases utilization.
Labour Productivity & Cost: ACC has a larger proportion (46%) of indirect labour (Control, Material Handling and Mechanics). These overheads bring down the output per employee. The output per direct employee are mentioned below:
DJC
ACC
Production (mn)
700
420
Direct Labor
64
214
Production per direct labor (mn)
10.94
1.96
Operations:
Design Changes: DJC has improvised the product design by using Tin Plating, Waste Reduction, Waste Reduction, Reduced Mass of Housing, Less Expensive Resin and Mold Design resulting in 28.75% savings.
Process Layout: DJC's production layout is product based, each product has individual cell with 2-6 production lines. The only common operation was plating. Each process was aligned one after other and hence the material handling and manpower costs were lesser. ACC used a process based production layout divided into 5 production areas: terminal stamping and fabrication, terminal plating, plastic housing module, assembly and testing, and packaging.
Automation: DJC's automation reduced the number of errors (1 unit per 1 mn) which had benefits like waste reduction, size of the inspection team.
Inventory & WIP Costs: ACC has greater WIP and inventory, it may be due to non continuous production line and shorter production schedule. This results in greater holding cost and other overheads. While for DJC, a continuous production line and longer production schedule results in lesser monitoring cost.
4. What should American Connector's management at the Sunnyvale plant do?
Cost savings:
ACC can improve upon the material cost savings by incorporating ideas from Kawasaki plant like:
Introducing usage of tin plating in standardized connectors.
Implementing waste reduction processes by looking into defect management and better process methodology. The standardized and customized could be handled separately and the production depending upon the priority of the orders.
The technology should focus on improving in house techniques to improve the mould designs and focus on reduced mass of housing.
Maintain the core competence:
ACC has been able to mark its presence in customized connectors and quality (4500 connectors per annum). ACC has an advantage by over DJC as they will be new player in the market without any prior experience in customized connectors even if DJC intends to open a plant in US. DJC has no expertise in manufacturing customized connectors and also has no sales and promotion facilities in the US market. Hence customized connector market will become the niche market for ACC.
Improved standard connector production:
The remaining 85% of the demand comes from standard connectors. DJC is pioneer in manufacturing standard connectors. If DJC enters the US market and establishes its foothold with low cost and low defective rate then it poses potential threat to ACC in terms of cost, efficiency in resource utilisation and quality in terms of less defective connectors. Hence ACC should concentrate on
Reducing raw material wastage
Reducing indirect labour in material handling
Reducing defective PPM
Improving yield rate to match with DJC (excess of 99.99%)
Improved plan lay out
In house technology development and R&D
Reducing processing lead time and work in process inventory (2 days for DJC and 10 days for ACC)
Better Quality and Inspection checks:
DJC is operating with long production runs (average one week production run) resulting in reduced yield and capacity losses associated with changeovers whereas ACC is operating with frequent changes in the product design to satisfy the 15% customers, which is resulting in low yield rate as low as 55% and also increased defect rate.
Hence ACC should standardise the 85% product design with dedicated production lines and operate with long production runs which will improve yield rate (up to 99.99%) and reduce rate of defective ppm (reduced raw material wastage, inspection man power saving).
Employee Efficiency:
Connector output per employee at Sunnyvale (ACC) is only 1.06 mn units per year v/s 7.45 mn units per year at Kawasaki (DJC). On a closer look at the labor use, we observe that Sunnyvale employs a large number of total employees 396 but still produces lesser total units. They should streamline the indirect labor reducing the number of Indirect Labor in Control, Material Handling and Mechanics (Appendix 3)
