INDIAN INSTITUTE OF MANAGEMENTBANGALORE

A Case AnalysisOn

American Connector Company

ByGroup 11

Ajusal SugathanDhruv Aggarwal

Rajeev TShivasheesh

M Ravi Kumar

PGP-Section A

AMERICAN CONNECTOR COMPANY (ACC)American Connector Company (ACC) operated four plants in the U.S and two in Europe. On the whole, the company’s competitive strategy was characterized by its emphasis on both quality and customization. The company had itself established a reputation as a high quality supplier and provided excellent technical solutions.

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ACC considered its customization strategy as highly integral to its business objective of satisfying customers and delivering creative solutions designed to suit their business needs. Thereby, its emphasis on quality was measured by the product’s conformance to the customer’s needs. Around 85% of the company’s annual production quota was standard batch production designs; however the remaining 15% were dedicated to custom orders, many of which had gone on to become industry standards. Although the company had been historically very profitable, with margins often touching 52%, increased competition in the industry, coupled with the slacking demand for the connectors made it difficult for the company to reach its historical profitability milestones in 1991. While sales had grown from $252 million in 1984 to $800 million in 1991, gross margins had eroded from 52% to 43% during the same period.

INDUSTRY OVERVIEW (1991)

Electrical connectors are devices that attach wires to other wires, wires to outlets, wires, components or chips to PC boards or attach PC boards to other boards. The two main body parts were the plastic housing, usually made from a plastic resin, and the socket pins, usually plated with a variety of metals, including gold and tin. The connectors had wide spread applicability across a variety of sectors and industries, with there being over 700 standard connector product lines in North America alone. The cost of a connector used in any appliance was typically less than 2% of the overall unit cost.

In the 1990s, the U.S connector industry suffered a slack in sales, with sales going down by 3.9% since the previous year, while the top ten industry leaders went down by 7.9%. There was an abundance of suppliers, often leading to reduced prices, improved quality and lesser lead times in delivering the end product to the customer. A lot of the original equipment manufacturers reduced their vendors by over 67%. ACC and DJC Corporation (DJC) were both second tier competitors in the fragmented $16 billion electrical connector industry, with sales between 500-800 million U.S dollars.

DJC KAWASAKI PLANT

The DJC Kawasaki Plant was a highly automated, continuously operated plant designed to meet three goals – firstly to achieve asset utilization of 100%, secondly to achieve 99% yield on raw materials and finally to reduce the number of customer complaints to 1 per million units of output. Achievement of these goals would undoubtedly make DJC the lowest cost producer in Japan. The Kawasaki plant enjoyed an advantageous location close to

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electronics market as well as to raw materials suppliers. The plant operated 24 hours a day, 7 days a week and 330 days per year and was designed to produce a maximum of 800 million connectors per year, out of which about 25 % was exported in countries other than Japan.

Process Technology:

1) Pre-automation

The production process was completely understood, properly designed, and properly laid out so as to make the production process suitable for reliable automation. The process flow and worker movements were analyzed to make the process streamlined, more efficient and to eliminate inventories.

Raw material quality and process tolerance levels were specified. Warehouse was centrally located and the amount of floor space was intentionally limited. Each injection mold had a dedicated press and each press a dedicated assembly line – to simplify material flows.

Assembly lines were laid out in a straight line so that one operator could run two assembly lines.

2) Better be reliable than new

Continuous improvement of proven processes was preferred to taking chances with new technology. Processes were operated below maximum speed and emphasis was given to maintenance in order to prevent breakdowns.

The reliability of DJC is demonstrated by the fact that non-scheduled non-operating time of DJC is only 13.2 % compared to 23.5% for ACC, while process failure is only 1% compared to ACC’s 8.9%.

3) Absolute reliability in upstream molding processes

Rigorous repair & maintenance schedules and frequent replacement of the molds made the molding process virtually faultless.

With an average life of 3 years and average annual cost of $29,000, the plant achieved in excess of 99.99% mold yields.

4) In-house technology development

DJC designed all of its molds and manufactured half of its molds in-house. For the standard equipment sourced from the vendors also, the proprietary design modifications were made in-house. This gave DJC a competitive edge in process technology.

5) Inter-functional co-ordination

The activities of product planning section, materials section, process engineering and molding technology group are co-ordinated and managed by the “Technology Development Division”. This

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division ensured that all groups work towards efficient resource utilization, design quality and manufacturability, smooth manufacturing introduction, shorter development cycle and continuous process improvement.

Sourcing

Close relationships with a few suppliers of raw materials is of utmost importance to DJC’s sourcing policy. The suppliers had to meet strict standards and to certify the quality for each delivery, which enabled DJC to use the materials directly without inspection.

DJC worked together with the suppliers to improve their quality and provided technical support if required.

The sourcing policy demanded frequent delivery – most on a daily basis, while others on weekly or monthly basis. Due to this policy, raw material inventories averaged only five days. This in turn helped DJC to have a relatively small warehouse and lower costs for managing and controlling raw material stocks.

Procurement was preliminarily based on Just-in-time deliveries, while MRP program was used to plan long-term material requirements.

Production and inventory control:

Manufacturing:

Excellence has been the strength of DJC, driven by continuous process improvement and careful attention to customer needs. Their cellular manufacturing approach by breaking the factory into small, homogeneous and cohesive productive units makes production and quality control easier. Continuous plant operation and good plant layout ensured maximum asset utilization and low work-in-process inventories and relatively higher finished goods inventory.

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 a 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.

Quality control:

• Pre-automation meant that production process could be automated after it was understood, designed and laid out which ensured quick identification of problems and correction, ensuring quality manufacturing. In-house technology development and inter-functional coordination of all its

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technology development activities creating customer value, process efficiencies, and differential advantage for the firm.

• Emphasized high supplier quality by enforcing strict quality standards. Emphasis on just-in-time delivery of raw materials ensured low.

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 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.

ACC need 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 the number of defective output units is very high. 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.

Organization and Workforce:

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.

Kawasaki employs 94 employees, 68% are direct labor and 32% are indirect labor. Management’s goal is to decrease the number of employees over time. As against to that at ACC Sunnyvale with 396 employees. 54% are direct labor, 56% are indirect labor.

ACC’S SUNNYVALE PLANT

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Due to lack of new investments, some of the equipment was not of leading technology.

The production process was not in a straight production line (unlike DJC) – it happened in 5 production areas (each for one stage in production) and material had to be transported from one area to another, increasing the processing time. Due to the difference in capacity of different stages, material had to wait before some stages – thus causing a WIP inventory. This even required a WIP holding area for the plant, causing additional cost to the company.

As ACC offered a large variety of customized products, manual assembly was required for low volume products.

ACC also offered a wide range of packaging formats, further increasing the costs due to lower standardization.

The processing lead time for a batch of connectors was typicaly 10 days for standard items, while 2 to 3 weeks for special order items.

Most product lines were run for 1.5 to 2 days, while some runs ran as long as one week.

ACC maintained a finished goods inventory of 38 days.

THE CONNECTOR MANUFACTURING PROCESS

Kawasaki Plant

1. The plant is organized into four cells. Each cell has two to six separate production lines and produces one of the four general types of connectors – wire-to-wire, wire-to-outlet, item-to-board and board-to-board. All processes, except plating are located in each cell.

2. The production line is sequential - consisting of terminal stamping, housing molding, assembly and packaging processes. Plating is organized separately in order to fully utilize the high fixed cost equipment and to protect the rest of the factory personnel from exposure to harmful chemicals and noxious fumes.

3. Such sequential planning allowed the DJC plant to minimize materials handling steps and to reduce as much as possible the distance travelled by work-in-process. The pace of the operations was modified on the basis of the cycle times of each of the sub-tasks, in order to synchronize parts fabrication and final assembly. Processing lead times were restricted to 2 days.

Figure 1: Normal Fabrication process of a Connector – DJC Corporation

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Sunnyvale Plant

1. The Sunnyvale plant operated with a slightly different mechanism, wherein the five production areas were clearly defined instead of being arranged in one production cell.

2. The Holding area - The terminals, after having been stamped out of metal were kept in a holding area, until they were ready to be plated. Meanwhile, the molding department would fabricate a batch of housings. Since the rate at which they could be molded was high, they were transferred to the work-in-process holding area, until the plated terminals were completed.

3. The bunch of plated terminals and molded housings were transferred to the assembly process and later packaged. The manufacturing process looked as depicted in Figure 2.

Figure 2: Normal Fabrication process of a Connector – ACC Corporation

THE CHALLENGE FACING SUNNYVALE PLANT

DJC Corporation of Japan had become a dominant supplier of electrical connector in its home market, after building one of the most efficient plants in 1986 at Kawasaki. Due to declining sales and rising issues with regard to quality, DJC Corporation clearly posed a severe threat to ACC’s market in the U.S. ACC possessed a cost advantage as compared to DJC, however a lot of it could be attributed to the higher cost of raw materials in Japan for manufacturing and packaging. The Sunnyvale plant would have to make a clear distinction between remodeling its facility along the cost-effective lines of the Kawasaki plant or to pursue a wait and watch strategy, while simultaneously trying to minimize its defects and costs. 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 America.

COMPETITIVE LANDSCAPE

There was a sharp decline in the sales of electrical connectors by about 3.9% in 1991. Due to an abundance of suppliers, there was fierce competition on the basis of cost, quality and quick delivery times. DJC had gained recognition on the basis of its low cost manufacturing ability, high efficiency and extremely low lead time in production, which posed a serious threat to the American competitors including ACC. A plant-wise comparison of the two connector manufacturing facilities has been re-produced in Table 1.

Kawasaki Sunnyvale

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Production Type 100% Continuous Flow 85% Batch Process15% Custom Made Orders

No. of different Models 640 4500Types of Connectors 4 4Max. production Capacity 800 million units per year 600 million units per yearAverage Production Rate 700 million units per year 420 million units per yearAverage duration of Runs 7 days and continuous sometimes 1.5 to 2 daysManufacturing Lead Time 2 days

No special orders takenStandard Items - 10 daysSpecial Orders - 14 to 21 days

Utilization 100% 85%Packaging 2000 unit strips 10 units to 1500 units loaded reelAverage Life of Mold 3 years 8 yearsAvg. annual cost per mold $29,0000 $40,000Raw Materials Inventory 5 days 10.8 daysWork-In-Process 2 days Varying, high for special itemsFinished goods Inventory 56 days 38 daysCompetitive Strategy 1. Low cost of production

2. Superior Product Design and customization

1. Focus on customer need2. Highly customized products

Management Production Focused Engineering and Marketing focusedIndirect staff 32 % - higher % of technical staff 46% - Large Control staffDefects Zero defects (target 1 per million units

of output)26,000 defects per million units of output

Yields 99 % 55% to 98% in one year for new designsMolding Technology 1. Fully owned in-house technology.

2. Older technology is trusted.1. Designing the equipment is outsourced.2. Cutting edge equipment is favored.

Table 1: Plant-wise comparison on several parameters

With better manufacturing methods and superior quality, DJC would be able to snatch some portion of ACC’s market share. Some of the important factors that might tilt the balance in favor of DJC are:

DJC identified 2 key objectives in its manufacturing processes:

High Automation

Continuous Operation

These objectives enabled DJC to achieve 3 main goals i.e

1. Asset utilization of 100%2. Yield on raw material of 99%3. Defects less than 1 per million units of output

Cellular manufacturing approach: It is implemented by breaking the factory into small, homogeneous and cohesive productive units that make production and quality control easier. Continuous plant operation and good plant layout ensured maximum asset utilization and low work-in-process inventories and relatively higher finished goods inventory.

Driven by continuous process improvement and careful attention to customer needs, manufacturing excellence has been the strength of DJC.

Emphasizing high supplier quality by enforcing strict quality standards and by reinforcing close relationships with suppliers of its key raw materials.

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Raw material delivery on a JIT basis, with minimum lead times helped to save on relatively small warehouse space and to reduce the amount of resources devoted to managing and controlling raw material stocks.

To minimize yield and capacity losses associated with changeovers, production runs were scheduled to be as long as possible, thereby minimizing the set-up time on a monthly basis. This helped DJC to save on the frequent changeovers and the set-up costs that would have been involved otherwise.

Owing to pre-automation the production process could be automated after it was understood, designed and laid out which ensured quick identification of problems and correction, ensuring quality manufacturing. In-house technology development and inter-functional coordination of all its technology development activities creating customer value, process efficiencies, and differential advantage for the firm.

The yield per worker was much higher in the case of DJC, as one of their explicit goals was to gradually reduce the number of direct production workers and the associated overhead staff. This was aided by management’s policy of attracting the best engineers by paying a good starting salary at the university level, but by paying below average salaries for experienced workers. High process reliability also removed the need for much of its indirect labour force.

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.

The warehouse facility was centrally located and intentionally right-sized, leaving no room for excess material or products. The flow of men, materials and information throughout the production process left no room for any wastage and thereby brought down the costs significantly.

COMPARISON ON A COST BASIS

The plant-wise comparison of the two plants at Sunnyvale and Kawasaki has been provided in Table 2. The costs at face value are not comparable, owing to differences in costs incurred in several of the processes in Japan and U.S. Therefore, based on certain cost indices that have been provided for each of the below verticals, the costs have been adjusted on a comparable basis for both the plants. Figure 3 plots these costs on a graph to give a pictorial representation of the expenses incurred by the two plants.

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1986 1991DJC

KawasakiDJC if setup in US

ACC Sunnyva

le

DJC Kawasaki

DJC if setup in

US

ACC Sunnyv

ale

Cost Indices,

US/Japan

Raw Material, Products 14.32 8.59 10.40 12.13 7.28 9.39 0.60Raw material,

Packaging3.27 1.96 2.25 2.76 1.66 2.10 0.60

Labor, Direct 7.63 8.39 3.02 3.32 1.10Labor, Indirect 2.30 2.53 0.75 0.83 1.10

Total labour 9.93 10.92 8.53 3.77 4.15 10.30 1.10Electricity 2.47 1.98 1.80 1.40 1.12 0.80 0.80

Depreciation 7.63 7.63 5.52 1.80 1.80 5.10 1.00Others 4.12 4.12 4.41 4.24 4.24 6.10 1.00Total 41.74 35.20 32.91 26.10 20.24 33.79

Table 2: Cost-wise comparison of the two plants

Figure 3: Cost comparison in USD for the plants on a graphical basis

A rudimentary analysis of the labour (both direct and indirect) in both the Sunnyvale and the Kawasaki plants are shown below in Table 3, while a comparision of the productivity is provided in Table 4.

DJC/Kawasaki

ACC/Sunnyvale

No. of employees 94 396Indirect LabourControl 11.70% 16.70%Technology 12.80% 6.80%

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DevelopmentMaterial Handling 3.20% 10.40%Mechanics 4.30% 11.90%Direct Labour (Production)

68% 54%

Total 100% 100%

Table 3: Labour Composition at the two plants

Kawasaki (94 employees) Sunnyvale (396 employees)

Productivity ComparisonConnector output (in 1000s of units per square foot of map

space)

15.1 10.9

Connector output per employee (in millions of units)

7.45 1.06

Fixed Assets Utilization (%)Plant not operating 5.7 28.6

Non scheduled 13.2 23.5Process Failure 1 8.9

Preventive Maintenance 2 2.4Process Changeover 2 4.8

Quality Losses 0.7 1.6Effective Utilization 75.4 30.2

Table 4: Productivity comparision at the two plants

Electricity

The electricity cost per 100 units figures for 1986 and 1991 for Kawasaki and Sunnyvale plants show that electricity costs have come down in both plants by almost equal amounts. The cost per 1000 unit in Kawasaki has come down by 0.86 USD in Kawasaki plan over 1986 to 1991. And the reduction in cost per 1000 units in Sunnywale plant is 1 USD. These reductions can be most likely due to improvement in operating efficienty of plant and/or because of reduction in electricity prices. Not much plant specific reasons can be seen for this cost component. The Sunnyvale plant is known for being a more technology oriented plant hence the electricity cost reduction in Sunnyvale is more than Kawasaki plant.

Depreciation

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Depreciation per unit has gone down in Kawasaki because production has increased in 1991. The same derpreciation has now spread across more unit. The depreciation has also increased because Written Down Value (WDV) method of depreciation is used.The depreciation cost of Sunnyvale has come down to 5.1 in 1991 from 5.22 in 1986, which is not a large difference. This suggests that it uses a Straight Line method of depreciation.

Cost of starting a new plant in US

In oder to calculate the initial cost opening a new plant, we assume that the total lifetime of 10 years for the plant after which the salvage value is 5% of initial cost. Using the WDV method of depreciation and a depreciation amount of 1.260 million USD for year 1991 the initial cost of plant comes out to be 5.31 million USD. Using this value and the initial value and the inflation rate we can estimate the cost of opening a new plant in future.

Inferences:

DJC-Kawasaki’s total cost of $ 20.24 per 1000 parts is much lower than ACC-Sunnyvale’s $33.79 per 1000 parts for 1991, thereby signalling the threat on American soil upon its launch

Over the 5 year duration, DJC-Kawasaki has substantially improved its total labour costs and Depreciation costs as compared to ACC-Sunnyvale.\

Raw material packaging

In 1986, the raw material costs of the Sunnyvale plant were higher by $1.81 when compared to the Kawasaki plant. This difference has increased to $2.11 per part in 1991. The changes in the Raw material cost could be due to a number of reasons as given below :

a. Yield on the raw material was almost 100% in case of Kawasaki and in the case of American Connector Company, the yield deteriorated to 55% in the case of new products, which later improved to 98% when the product was at least one year old.

b. The number of SKUs in case of Kawasaki were only 640 as compared to 4500 of ACC. This could be inherently because of the fact that the Sunnyvale plant catered to the Silicon Valley start ups which were more likely to request for tailor-made components and also in smaller batch sizes.

c. The rate of defects was almost nil in the case of Kawasaki but 2.6% in case of ACC. The finished-goods inspection is rather extensive at the ACC sunnyvale plant and also there is very little use of statistical processes in order to inspect the parts. In this context, the way in which the Japanese plant has adopted preventive maintenance methedologies plays a major role. Instead of inspecting the finished goods, they start with the supplies sent in by their suppliers. Any defective piece is weeded out in the initial(upstream) stages itself.

d. Extensive value engineering in case of Kawasaki prompts cost saving design changes. This is possible because of the cross trained workers in the Kawasaki plant who are encouraged to adopt the quality control philosophy. For instance, Use of less expensive

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resigns and tin plating in place of gold plating in certain products ensured that the overall costs came down.

e. By using narrower runners in its mold design, DJC was able to reduce the consumption of raw materials in molding.

f. Waste reduction resulting from lower plastic molding and terminal stamping and limitation of damages incurred during material handling improved the overall efficiency of the process. This process is also aided by the philosophy with which the DJC plant operates, which is that the design strategy must be oriented towards simplicity and manufacturability of the design and not pure innovation. Also, the Kawasaki plants invests heavily in using machines with high yield – the mold making process for example has the machine replaced every 3 years. This gives rise to yields of approximately 99.99%

The release of rawmaterials is also an issue that the Sunnyvale plant could look into. The way the assembly line is laid out and the impact of the corrosive chemicals used in the plating, on the raw materials used are issues that the ACC Sunnyvale plant can improve upon.

Labour

The labour costs of the DJC plant have dramatically decreased from $10.92 in 1986 to $4.15 in 1991. In the same time, the labour costs of the ACC plant has gone up. This is despite the tough labour laws in Japan. Hence this is a pointer to the major problems in the Sunnyvale plant. The lowering of the la bour costs was possible on account of factors such as :

Much lower number of staff resulting into much higher connector output per employee. Cross training of workers results in better utilization of labour force and less idle time. Employment of young energetic graduates and their extensive training resulting into

higher productivity and motivation.

In order to improve Labour productivity, some of the key issues that Sunnyvale needs to address are :

1) Recruit more people with a technological orientation in order to partner with the design teams of the customers and facilitate the designing so that changes in orders are not made at the last minute leading to wastages.

2) Where the people are utilized is also a concern if the labour composition is analysed, it can be seen that percentage of labour involved in non productional activity is much higher in the sunnyvale plant when compared to the DJC plant in Japan. Sunnyvale must hence reduce these numbers to requisite amounts.

3) Cross training of the labour force in activities helps in shuttling around idle work force in order to achieve better performance.

Depreciation cost had improved drastically in case of Kawasaki from 1986 to 1991 because:

a. Better utilization of Fixed Assets ( 75.4% in case of Kawasaki compared to 30.2% in case of ACC) ensured lesser depreciation costs.

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b. The plant had depreciated in the books over the 5 year period from 1986 to 1991 and therefore, depreciable base had fallen. Thus the depreciation cost per unit of product had fallen drastically.

Packaging cost of Kawasaki plant was lower because of the:

a. Use of lower number of standardized SKUs

b. Use of a 2000 piece reel resulting in economies of scale in the production process

NUMERICAL ANALYSIS

If DJC sets up a plant in Sunnyvale the advantages include

1. Availability to cheaper raw material (Raw material costs are twice as high in Japan than that of USA. Raw material cost is almost 50% as that of the finished good)

2. Availability of cheaper Electric Power3. Given the competitiveness of the market, DJC will be able to price its product at a lower rate

than

Costs for DJC Cost Per ‘000 Units at Kawasaki

Cost Per ‘000 Units at Sunnyvale

Raw Material, Product 12.13 = 12.13 * 0.6 = 7.278Raw Material, Packaging 2.76 = 2.76 * 0.6 = 1.656Labor, Direct * 3.02 = 3.02 * 1.1 = 3.322Labor, Indirect * .75 = .75 * 1.1 = 0.825Electricity 1.4 = 1.4 * 0.8 = 1.12Total Unit Cost 20.06 14.201

* In the above calculation we consider the same amount of labor utilization as that in the Kawasaki Plant

The total cost per unit if it sets up a plant in Sunnyvale = 14.201, hence it is able to get a cost advantage of 29.2% per ‘000 units of product produced.

Considering the costs at ACC at Sunnyvale for every ‘000 units produced

Costs for ACC Cost Per ‘000 Units at SunnyvaleRaw Material, Product 9.39Raw Material, Packaging 2.10Labor 10.3Electricity .80Total Unit Cost 22.59

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If DJC’s plant is set up in Sunnyvale, the primary concerns for ACC include

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 labor cost. (Material handling cost of Kawasaki 3.2% v/s 10.4% of Sunnyvale).

Also, at DJC Kawasaki plant, the process technology was such that they were following the pre- automation technique for an effective automated production process. This method also resulted in the reduction of worker and material movements in the plant. The centrally located warehouse, limited floor space ensured that there was a low room for excessive inventories and this resulted in effective utilization of the machinery and which is one of the reasons output per square foot at Kawasaki is more and the utilization of the labor is high.

The In house R&D team at DJC has brought about a huge difference in terms of technology; DJC was producing machines and customizing it according to their needs, thus eliminating the need for external technology innovation. They usually consider usage of older machines than purchasing new ones. This gives them an opportunity to continuously improve the performance of the existing machines and better their performances. Also, Due to continuous factory runtime, the overall utilization of fixed asset increases for DJC Kawasaki in comparison ACC Sunnyvale’s plant.

As Sunnyvale’s defect rates are at 26000 per million units of production, this is primarily due to the fact that DJC has trusted supplier base and has a policy of continuously evaluating the suppliers and raw materials before they enter the production system. Also, the Quality control of DJC is process centric where each process is QC monitored whereas in Sunnyvale the quality control process is at the end product stage, which is the product is tested for quality after it is produced. This results in it incurring additional costs. The quality losses of DJC and ACC over total production are 0.7% and 1.6%.

Since the number of product varieties produced in the Kawasaki plant are lower than that of ACC and given the fact that DJC ‘s Kawasaki plant is operating for 24hrs/day thus the asset utilization 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 (which also included custom products) of Sunnyvale which is employing batch production system there is a frequent changes in product manufacturing lines which includes set up time and re-run of the entire assembly line, thus resulting in lower efficiency which could be obtained in case of standardized products.(Product lines were as small as 1.5 to 2 days)

DJC plant ordered raw material on a daily basis and this resulted in the raw material inventories of DJC is averaging only 5 days as compared to 10.8 days of ACC. So, DJC has been incurring less Inventory cost which again reduces finished goods

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In order to counter the threat from DJC, ACC should consider implementing the following changes to its production strategies irrespective of whether DJC sets up a new plant in Sunnyvale.

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 need 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 has 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.

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ACC can increase fixed asset utilization and decrease operational cost by controlling on start-up and shut-down costs. It can be controlled using increased amount of machinery to handle different molds. The molds 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.

RECOMMENDATIONS

In response to the threat of DJC in US, the ACC should undertake some of the recommendations stated below:

1) The orientation of the two plants: The Kawasaki plants is keen on reducing the costs and constant innovation or Kaizen is a philosophy that they are trying to implement – this is aided by their supplier focus. The emphasis is on technology transfer in order to enable the supplier conform to the required quality standards. Their market orientation is displayed in the design re-engineering or value engineering that the plant incorporates. The Sunnyvale plant on the other hand is more market oriented. Rush jobs are more the norm than exception. While the market characteristics containing the Silicon valley startups demand greater customization, what the plant lacks is supplier orientation. Hence the group recommends a clear alignment in this regard.

2) The ‘design for manufacturing’ that the DJC plant carries out may not be entirely consistent with the demands of ACC’s customers – but efficient production and reduction in cost could arise by adopting pricing and contract methods. For instance, the policy of accepting last-minute changes from customers is affecting the Sunnyvale plant in terms of backlogs and in terms of high setup and deployment costs. Either Sunnyvale should do modifications in production setup so as to have a lower setup cost and be able to cater to frequent last-minute changes or Sunnyvale should change the policy of accepting these changes because these changes are affecting profit severely by increasing the production cost. Possibly, a new policy to accommodate these last minute changes can be that Sunnyvale can ask for charging premium for these rush jobs. This can help compensate for the setup costs incurred by these order changes. Another issue to keep in consideration regarding these rush jobs is that since Sunnyvale is working in Silicon Valley and most of its customers are start-ups, hence there will not be many long-term association with a particular customer (the failure rate of start-ups is high). Owing to this fact, Sunnyvale plant can take more aggressive approach by not accepting most of these rush jobs and hence reduce the cost incurred because of these rush jobs.

3) Inventory management can undergo a sea change. The Kawasaki plant for instance, carries finished goods inventory for about 58 days while it carries very low levels of work in progress and finished goods inventory. This allows them to meet demands of the customers dynamically by adopting the just-in-time philosophy while having a buffer to guard against. The Sunnyvale

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plant on the other hand carries a lot of rawmaterial and work-in-progress inventory. Hence, when the customers place orders, the lead-times that they can promise would be higher. If they belive in carrying large finished goods inventory to cater to customer demands very fast or if they produce just in time, the amount of money tied up as work in progress (which neither ensures fast response nor enables greater working capital) would be much less.

4) Changing the number of SKUs. Industry standards are a way through which the plant can streamline its operations. In the electronics industry, the connector size, the kind of materials used in the connector etc can easily be standardized. Such a standardization can not only allow ACC to manufacture lesser number of SKUs and its customers to allow for easy design parameters, but also project ACC as trend setter/benchmark company leading to more business – especially from large scale OEMs who have a more predictable & large demand.

5) Implementation of statistical process control in the inspection process and materials release planning systems would significantly improve the operational efficiency of the plant.

6) The equipment usage: in terms of replacing old equipment, the Kawasaki plant has an interesting method. The equipments are tried and tested. They would rather work with old equipment that is reliable than ‘state-of-the-art’ machines. Once they have decided on the equipment though, the machines are replaced once every few years so as to have a greater yield. The Sunnyvale plant though, believes in buying the best equipment there is in the market every few years. This requires the workers to familiarize themselves witht the workings of the machine and also the ‘learning-effects’ are mitigated. This is a policy that the plant could consider amending.

7) Many of the equipments are customized in-house by the Kawasaki plant. This not only ensures the ‘for-manufacturing’ orientation, but also helps the designers and the workmen to gain insights into the machine’s workings. This would enable them to suggest improvements to the machine or the process and hence lead to cost savings. The Sunnyvale plant, which currently gets its equipment made by external parties would do well to incorporate this change in its functioning.

8) Plant layout: the factory layout plays a major role in minimizing cost. Movement of men and materials need could be streamlined with the usage of Kanban cards or boards. While the entire assembly line need not be reconfigured, measures to isolate areas which manufacture one type of connector from the other enables easy materials management and monitoring.

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