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INDUSTRY OVERVIEW

Connectors are used to attach wires to wires and other electrical components. In
1991, this was a fragmented $16 Billion Industry. DJC and American Connector
Corporation were companies in the second tier of the market, with sales in the $500
million to $800 million range.
IMPACT OF DJCS ENTRY INTO THE US MARKET
The year 1991 witnessed a sharp decline in sales (3.9%). The abundance of
suppliers forced competition on the basis of quality, cost and quick delivery. Hence,
the already struggling American companies like ACC were wary of the entry of DJC
in to the US market.
THREAT OF DJC TO AMERICAN CONNECTOR COMPANY
Mr. Larsen, VP of ACC believes the plant at Sunnyvale is struggling with operating
problems including deteriorating quality and increased cost. With better
manufacturing methods and superior quality, DJC would be able to snatch some
portion of ACCs market share. Some of the important factors that might tilt he
balance in favor of DJC are:

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.

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 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 inventory and
hence, lower warehousing and inventory holding costs.
COMPETITIVE COST ASSESSMENT AND DJCS POTENTIAL IN US MARKET
Exhibit (2) shows the cost assessment for both ACC and DJC with their present cost
structure. ACC has significant advantage in its material cost because of its
geographical location whereas DJC has advantage over its labor cost. DJC has
efficient production system and employs less labor which facilitates them in
reducing their labor cost. DJCs wise investment in technology development helped

them in achieving less depreciation cost. For DJC, depreciation cost contributes
6.89% to its total product cost whereas for ACC it is 15.09%. Overall production cost
for DJC is lower by $7.69 when compared to ACC.
DJCs potential in US market is analyzed in exhibit (3). DJCs expected total product
cost in US is lower by $5.859 when compared to its Kawasaki plant. This significant
cost advantage is due to the less material cost in US market. When we compare
DJCs potential cost structure in US with ACC, cost difference increases to $13.549
per 1000 units. This clearly indicates the prospects for DJC in US market.
Elemental cost analysis is performed for both ACC and DJCs potential US plant.
Elemental cost analysis helps in finding the areas where ACC can improve its
performance thereby creating opportunities to reduce their production cost. Exhibit
(3) shows the cost break up for both ACC and DJCs potential US plant. From this
analysis we found three main sources which are responsible for the cost differences.
They are as follows.
DIFFERENCE DUE TO PLANT UTILIZATION
Exhibit (4) shows the impact on fixed cost because of increased volume. Currently
ACC operates at a utilization rate of 70% which results in 420 million units per year.
If it increases its utilization rate to 85% their production volumes increases to 510
million units. This increase in production volume will help ACC in decreasing their
fixed cost by $3.795 per 1000 units. Though the demand is sluggish ACC has a
strong customer pool. So the decision of increasing their utilization rate will
definitely help ACC in improving their profit margin.
DIFFERENCE DUE TO STRATEGIC POSITIONING
Strategic differences between ACC and DJC are reported in exhibit (5) and its impact
can be found in exhibit (6). It is clear that regular changes in production scheduling
has pulled down the performance of ACC. The process lead time for ACC is 8 days
more than DJCs plant. Longer lead times and changes in production scheduling
have resulted in higher work in process inventory. Also it is found that 26000 units
have been identified as defective. Both WIP and defective products have
significantly increased their production cost. On other hand DJC strictly follows
production schedule and has WIP only for 2 days. DJCs has strictly enforced quality
standards with their supplier which helped them in reducing the defect to almost 1
part per million units. By following DJCs production scheduling system, ACC could
have reduced their direct labor cost by $3.518 per 1000 units.
DIFFERENCE DUE TO OPERATIONAL INEFFICIENCY
Exhibit (7) shows the cost difference due to operational inefficiency. Material
consumption in ACC is more when compared to DJC and this has resulted in increase
in their production cost by $2.556 per 1000 units. DJC invested in cutting edge

technologies for its production system which enabled them to reduce their labor
cost. If ACC would have followed the same strategy and upgraded their production
system they would have decreased their labor cost by $6.153 per 1000 units. Total
cost difference due to operational inefficiency accounted for $12 per 1000 units for
ACC.

Manufacturing Strategy Comparison


S. no
1

Parameter
Production
Type

DJC
Completely Continuous
Flow

Sunnyvale
Majority Batch Process, rest Job
Process

Average
Production
Rate
Competitive
Strategy

700 million units


(800 million units
maximum)
Low cost production,
standardization and
superior design

420 million units


(600 million units maximum)

Production
Areas

4 Production Cells with


Terminal Stamping,
Housing Moulding,
Assembly, Packaging

5 Separate Areas - Terminal Stamping


and Fabrication, Terminal Plating,
Plastic Housing Molding, Assembly
and Testing, Packaging

Production
Planning

Operates 168
hours/week on a 24
hour per day, 330 days
a year

Operates 120 hours/week on a 3 shift


per day, 5 day per week schedule, 50
weeks of the year.

Lead Time

Relatively long lead times

Capacity
Utilization

short lead-times, large


finished good inventory
100% utilization

Flexibility and customization

only from 50-85%

Case Summary
The case describes the Problem of American connector company, which was
struggling with the quality issues with its Sunnyvale plant and a probable
threat of DJC setting up a plant with a quality standards of its Japans
Kawasaki plants.
The management of ACC was in a dilemma whether to be worried by DJCs
new proposed plant in US or if DJC doesnt have a strong backing which could
lead to a loss of competitive advantage for ACC.
The connector industry flourished in 1970s and faced a slowdown in late 80s
due to many suppliers and too much capacity. This led to price wars between
suppliers and producers bringing down margin over the time. This also led to
the trend of mergers and acquisitions.
ACC was perceived to be an innovative company which collaborates with its
customers to improve the designs according to the need of the customers.
On the contrary, DJC just copied the designs of ACC and modified according
to the requirements of their markets.
DJC reduced their cost per product by reducing the extra things which were
not adding perceived value to customers.
The case further talks about the DJC strategies and their implementation of
the same in their Kawasaki plant. This plant was considered to be the most
efficient in terms of operations due to various factors such as, the location,
facility planning, inventory planning and efficient supply chain.
Moreover, while DJC was investing on in-house technology development by
partnering with suppliers, thereby keeping their cost low, ACC on the other
hand, had their hands tied by the finance department on upgrading their

technology. This led to a backlog in their technology up gradation which


could probably put them in a difficult position.
Quality audits in DJC happens at each and every process. This makes it easy
for DJC to find the bottleneck in the system and therefore fix it as the process
goes on. While in the case of ACC the process was done in the end at the
end-product. This led to a high cost of quality and thereby the cost of goods
increase for the end product.
DJCs competitive advantages is their internal process which includes, PreAutomation, Using reliable old techniques and processes, upstream molding
process, inter functional department coordination. On the other hand ACC
was relying more on PCD supervisors which set targets based on forecast
and which led to freezing of the schedule 30 days in advance. Any deviation
from the schedule wasnt appreciated well by the workforce.

Process Flow of
DJC

Process Flow of
ACC
Terminal
Stamping &
Fabrication

Terminal
Stamping

Plastic
Housing
Holding Area

Housing/Mould
ing

Assembly
Operations

WIP
Holding
Area
Plating

Assembly

Testing

Testing

Packaging

Packaging

Problems faced by American Connector Company (ACC)


Question 1: What are the major issues faced by ACC in their operation in US?
Answer: The major issues faced by ACC in their operations in US are:
Reducing gross margins: Though sales grew from $252 million in 1984 to
$800 million in 1991, Gross margins eroded from 52% to 43% in the same
period due to increased competition in the industry and slacking demand for
connectors.
No new technology has been used by the company in their operations.
Large number of models leading to increase in the number of SKUs:
The number of individual products manufactured at Sunnyvale expanded
from 3500 in 1986 to 4500 in 1991.
High Work in progress inventory: In the past, high WIP was not
considered to be a problem by the plant as any extra inventory carrying cost
would be covered by growing sales and it used to provide them some
flexibility in their operations as it could be used to quickly respond to
unexpected demand. But later, plant viewed excessive WIP as a burden and
thus attempts were made to reduce it.
Yield on new designed products: Yields on newly designed products
entering production for the first time were sometimes as low as 55%.
However, Yields would improve to about 98% once a product was in
production for at least a year.
Processing lead time: The processing lead time for a batch of connectors
was typically 10 days for standard items and 2-3 weeks for special orders
items.
Production run: In some cases, production runs ran as long as one week.
However, mostly it ran for 1.5 - 2 days.
Finished goods inventory: Sunnyvale plant maintained an inventory of 38
days for finished goods.
Capacity of 600 million units per year: After the last major expansion
that occurred in 1986, the capacity of Sunnyvale plant reached to 600 million
units per year.
Utilization at Sunnyvale Plant: Utilization at Sunnyvale plant sunk to 50%
in 1988 but rebounded to 70% in 1991. Using the current demand forecast,
the plant was expected to reach 85% utilization by 1996.

Time for plastic housing is much less than terminal stamping and fabrication,
thus synchronization problem at assembly area.
Schedule frozen for 30 days in advance: The production schedule for any
given day was supposed to be frozen thirty days in advance. However, in
reality, the schedule was routinely changed to accommodate rush orders and
requests from important customers.

Question 2: Should ACC be worried of DJCs new plant in America?


Answer: Yes, ACC should be worried of DJCs new plant in America. The reasons are:
Strengths of DJCs operation: DJCS operations are highly efficient possessing
the biggest threat for ACC. These are:
o

Economize on raw material: The cost of raw material was low as


Kawasaki plant was located near major raw material suppliers.

Availability of skilled workers: DJC located its plant in Kawasaki which


had an ample supply of young and highly skilled workers.

The plant run at a continuous basis avoiding start up and shut down
costs.

Lower number of SKUs leading to lower cost of maintenance.

Use of Tin instead of Gold: Though Gold was most reliable and durable
material, company used Tin instead of Gold which worked fairly well in
low power application to reduce raw material cost.

Pre-automation: Pre-automation refers to activities undertaken to make


the production process more suitable for highly reliable automation
was conducted. For this, process flows were carefully analyzed to
determine ways in which the process could be streamlined and
inventories eliminated. Workers movement and motion was studied,
raw material quality and tolerance levels were specified.

The plant relied on continuous improvement of existing processes.

Low Work in progress inventory leading to lower staff.

High finished goods inventory.

Raw Materials Cost is relatively cheaper for DJC if they move into the US
Markets.

Cost
Category

DJC
(Kawasaki)

DJC
(Plant in
US)

ACC
Plant

Raw
Material

12.13

7.28

9.39

Product
Packaging

2.76

1.65

2.11

Total

14.89

8.93

11.50

Labor Cost might increase a little but the impact of this with other factors
such as utilization of the plant negates this.(add cost)
Cost of Quality is also high for ACCs Sunnyvale because they only inspect the
final product while DJCs Kawasaki Plant has process level inspection to dig
into the details of the process that is the bottleneck to the process overall.
Size of the Workforce is relatively large for ACC compared to DJC because of
the # of products produced. Either ACC can increase its product lines to
ensure maximum output and also have spare capacity or they should limit
the set of unique products they have. This also reflects in their indirect labor
cost.
The Product layout has to be designed in such a way that the utilization of the
resources such as factory space has to be maximized.
Raw Material inventory of ACC is almost double of DJC. Analysis of this
requires more data on availability of the same. Assuming the parameters are
same ACC should work on reduction of their Raw materials Inventory.
WIP Inventory as mentioned in the case has to be avoided due to
obsolescence risk. This reduces the connector output per floor area of the
factory space because more area is needed to store raw materials.
The DJCs Kawasaki plant works 24 hours a day for 330 days a year. Millions
of units are thus produced in this process and the fixed cost per unit reduces,
depreciation is more justified in this case. Imagine in a 24 hour cycle ACC
having approx 2 shifts while DJC having 3 shifts. DJC could produce more than
twice as much as ACC due to its smaller SKUs
The Core Competency of ACC being its customizable production line is of
competitive advantage in the industry. Many customers could come to ACC

rather than DJC for solutions that can be designed to suit the needs rather
than adjust with a market standard. It will help to differentiate the client from
the lot of other producers.
Question 3: What should ACC do to avoid a loss of Market Share in case DJC
replicates the Kawasaki Plant in the US?
Answer: ACC should take the following steps as a preventive strategy to avoid a loss
of market share in case DJC replicates the Kawasaki Plant in the US:
Cost Control
Revamp Quality Control
Implement a Pull strategy for Raw materials
Probably Patent designs that make it an advantage as in IPR.
Rely on Internal Production Teams to come with process innovations rather
than relying on facts and figures of research.
Improved facility layout to ensure utilization
Decrease Inventory (FG or WIP). Reduces overall cost of goods sold.
Remove the least sold Packaging sizes from the lot and reduce some cost.

Competetive Objectives

Low Cost
Highly automated process
High WIP inventory, so
number of employees
increased
3shifts/day,5days/week,
capacity utilized is 70%
approx.

Low Cost
Less inventory
Reduced workforce
No start-up & shutdown cost
Standardized
products
Location advantage
Connectors
packaged in tape &
reels

Product innovation
Wide range of products
Superior design
Less investment on
technology
No quality control

Product innovation
Copied from US
designs
Innovative ways to
produce developed,
pre-automation, inhouse technology
Standardized
design

Reliability
Latest production equipment
used
High defective rates on new products, but
no defective product is sent to customer

Reliability
Old reliable process
used in quality
control
Molds checked
regularly

Flexibility
Flexible
Customized products
Production schedule changes
often

Flexibility
Not much flexible
High finished
product inventory
Production schedule

is more or less fixed

Recommendations

Suggested Change
Improve tech
development.
Improve employee
productivity
Improve utilization by
focusing mainly on
increasing plant
operating time
Decrease raw material
inventory size
Bring in a degree of
standardization for
orders
Focus on reducing
depreciation and other
costs
Study cost cutting
policies of KW and
implement the same

Current Scenario
Presently its 12.8% for
Kawasaki ,6.8% for
Sunnyvale
At Present: 7.45 m for
Kawasaki, 1.06 for
Sunnyvale
At Present: (330
days/year-Kawasaki, 3
shifts/day,5 day/wk,50
wks/yr for ACC.
5 days for Kawasaki, 10.8
days for Sunnyvale.
-

Total of 6.04 for KW while


total of 11.20 for
Sunnyvale.

AMERICAN CONNECTOR COMPANY Submitted By: Arun Kabra 11BM60046


2. ACCs response plan to possible threat from DJC ACC competes on its ability to
provide customized products to its clients along with high quality and efficiency.
ACC should respond by limiting the number of SKUs and produce standard size
connectors. The same applies for packing and batch jobs. Improve its inventory
management by reducing its WIP goods and raw material. Automating the entire
plant operations with new machinery thus eliminating manual errors and rework.
Building and Implementing Quality Control team to avoid efforts for manual check
for defective pieces thus delivering superior quality.
3. Seriousness of threat from DJC DJC basically competes on its cost effective
operational model based on more productive use of resources. Marketing strategy
of DJC is based on large volume and standardization with the core objective of profit
maximization. With DJC plan to enter US market, it does not posses a major threat
to ACC for the reason being ACC was able to survive stiff competition in US market
where more than 2/3rd of total manufacturers worldwide existed. While
comparing the costs we see that the historical costs are lower for ACC as compared
to DJC by $15.83/1000 piece. The static costs for ACC exceeds DJC by $7.69/1000
pieces. This less cost of DJC is achieved by fixed asset utilization, Batch
production process, use of advanced technology, lower inventory handling cost and
automation improving
4. How serious is threat from DJC if real? Threat from DJC to ACC comes mainly
from the static cost difference and operational efficiency. From Exhibit 7 in given
case we see that DJC can saves the following percentage of its costs over ACC if it is
operated in USA Raw material 29.02% Packaging 26.81% Labor
148.37% Electricity consumption (-28.57%) From exhibit 6 it is clear that the
effective utilization of fixed asset for DJC is 75.4% compared to 30.2% of ACC Only
advantage that ACC has over DJC is customization which gives ACC a 15% of total
profit share. Thus based on its cost effectiveness and effective resource
utilization, it can eat into market share of ACC in US market
5. Resource available with ACC to respond Plant modeled like Kawasaki facility
has tremendous advantage over Sunnyvale facility mainly due to high efficiency,
integrated production facility with implementation of automation process and
continuous improvement plans. ACC has a head start as it already has a plant
while DJC has to incur additional fixed costs to set up one. The current fixed asset
utilization for ACC is only 30.2 % and thus has a lot of room for improvement. ACC
supports a much larger number of SKUs, servicing markets where there is no
competition from DJC.
6. Business & Operational Strategy for ACC Automate the material handling which
would reduce variable costs. This would reduce costs from the present 10-11% to 3-

4%. This would also increase resource utilization to about 68%. Create two
distinct divisions, one for regular products and the other for customized products ,
the rarer SKUs and out of turn orders. Create a linear process flow with longer
batch runs to reduce setup time needed for each production run. Reduce WIP
inventory and raw material. Along with this it also needs to reduce the lead time.
Introduce Quality control in process which would include the suppliers as well. This
would reduce the
7. Mail from Denise Larsen Most of the ideas shared by Denise are feasible, but
few of them as mentioned below are skeptical: Training workers to use statistical
process control and other state of art QC techniques is a bit difficult to implement
for the reasons like large labor force to train, costly training, etc. This can be
implemented if automation is implemented with reduction in dependency on
manual labor. Implementing Work teams: Instead of identifying new team
members and implementing work teams, its is better and more appropriate to
identify the team members from existing teams and training them to work towards
the goal. 7 day work production is not feasible due to maintenance requirements
for machinery and downtimes due to

Evaluation of JDC Corp.


Strengths
JDC Corp. has successfully employed a low-cost manufacturing strategy in Japan and
hopes to replicate that success in the US. In particular, JDC has been able to capitalize
on the following strengths:
Product-Focused Manufacturing Strategy

JDCs Kawasaki plant produces a small variety (640) of connectors. This reduces production
costs and complexity.
Products are standardized, improved copies of US-made connectors.
Steps and features that do not add value are eliminated.
Continuous 24-hr a day production reduces variable costs and eliminates startup and
shutdown expenses.
Goal is 100% utilization of plant and equipment.
Use of tin-plated pins and new type of resin maintains quality while reducing costs.

Efficient Production, Inventory and Delivery Systems


Processing lead times and work-in-process inventories average two days.
Just-in-time (JIT) delivery results in low raw materials inventory.
Long production runs minimize yield and capacity losses.
Products are delivered frequently, usually daily but sometimes hourly.
All technology development activities are coordinated.

Weaknesses
Not surprisingly, JDCs weaknesses are due primarily to the companys low-cost
manufacturing strategy. Some of the disadvantages surrounding this approach include:
Standardization and limited variety restrict the companys ability to meet customized needs.
Success of low-cost approach is highly dependent on full utilization of capacity to reduce

costs.
Relatively high finished goods inventory adds to costs.
Production of standardized, low-cost connectors might not be optimal strategy if customers
place a higher value on other product characteristics.
JDCs production capacity could lag demand.
Production schedules are very inflexible.

Opportunities
JDCs opportunities include seizing market share from American connector
manufacturers such as ACC through introduction of its low-cost, yet effective
manufacturing strategy in the US market. If JDC can successfully implement in the
US the manufacturing and production strategies that have brought it so much success
in Japan, then the company can position itself as a major player in the US connector
market and successfully challenge the dominance of American manufacturers. Indeed,
the opportunities for JDC to profitably expand in the US are almost limitless.
Threats
As the latest competitor in the US connector industry, JDC is more likely to pose a
threat to other manufacturers than face direct threats itself. Indeed, were JDCs lowcost strategy to prove more effective than ACCs mass customization approach, the
future prospects of many American connector producers would definitely be at risk.
From a more optimistic perspective, however, JDC may not pose as much of a threat
as some believe given that the company does not compete directly with ACC; that is,
JDC produces low-cost connectors for customers who neither seek nor demand
product customization, whereas ACC produces highly customized connectors for
customers demanding specialized products. In brief, there could be enough space in
the marketplace for both ACC and JDC to serve their respective niche markets.

Evaluation of American Connector Co.


Strengths

American Connector Co. has successfully employed a mass customization approach


in the US and expects to remain competitive by fully exploiting the strengths of its
strategy, namely:
Mass Customization Manufacturing Strategy
ACCs Sunnyvale plant produces a large variety (4,500) of connectors. This allows the
company to provide just about any kind of connector that a customer could want.
Products are customized and state-of-the-art. They also exceed customers expectations.
Batch processing and automated assembly facilitate production of large quantity of products
(600 million units per year).
ACC is committed not only to product variety and quantity but product quality as well.
Production process is flexible and easily accommodates customers needs.
Mass customization approach focuses on product innovation rather than cost reduction.

Efficient Production, Inventory and Delivery Systems


Processing lead times and work-in-process inventories are held down through efficient
production scheduling.
Just-in-time (JIT) delivery results in minimal raw materials inventory.
Short production runs maximize operational flexibility.
Products are quickly modified to meet needs of customers.
Production capacity is increased ahead of increased demand.

Weaknesses

Despite ACCs dedication to producing mass quantities of high quality, custom-made


connectors, the company does have several weaknesses:
Although defects are rising (approx. 26,000 per million units), ACC continues to employ
post-production inspections rather than statistical process control.
Customization and high variety place tremendous pressure on companys forecasting and
production schedules.
High level of work-in-process inventory promotes flexibility but increases finance costs.
Despite its commitment to technology and product quality, the company has not made any
significant plant investments since 1986.
Although 15% of the companys products are geared toward meeting the specialized needs of
customers, the remaining 85% are prone to price undercutting by rivals such as JDC.
A relatively high percentage (46%) of the companys workforce is employed in indirect labor
activities.
The companys connector output per employee (1.06 million units) pales in comparison to
JDCs (7.45 million units).

Opportunities
There are tremendous opportunities for ACC to revamp its production and
manufacturing processes to better meet the threat posed by low-cost competitors such
as JDC. There is no reason for ACC to discontinue meeting the needs of customers
seeking customized, innovative product solutions; nevertheless, ACC must seize the
opportunity to undertake a top-to-bottom restructuring of its operations if it does not
wish to be priced out of the market. Indeed, the company must:
Adopt a product-focused strategy for standardizing production of the 85% of connectors that
do not require customization.
Decide whether it wishes to continue meeting the needs of both standard and specialty
customers or concentrate on only one type of customer

Depending on which strategy it adopts, invest in new plant and equipment to meet the highly
customized needs of the specialty market; or, rely on continuous improvement of existing
plant and equipment to produce reliable, low-cost standardized connectors.
Decrease the percentage of employees dedicated to indirect labor by redesigning and
improving product development and manufacturing activities.
Institute statistical process control methods to ensure product quality.

Threats
The threats faced by American Connector Co. are substantial. Unless the company
completely changes its manufacturing process from a mass customization approach to
a product-focused strategy, it faces the very real risk that it will be undercut by lowcost rivals such as Japans JDC Corp. Moreover, if low-cost rivals were to make a
concerted push to enter the specialized connector market, ACC could feel that
segment of its customer base threatened as well.