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Case study Report

on
American Connector Company (A)
To

Prof. Jishnu Hazra


Operational Management course
Indian Institute of Management Bangalore

A Raghuram - 1611226
Devika Mittal - 1611244
Peeyush Jain - 1611269
Suraj Govande - 1611286
T Ashok Reddy - 1611287
V Shravani - 1611290
(Group 12, Sec D)
Contents

Case brief .................................................................................................................................................. 3


Areas of operational issues in Sunnyvale plant ........................................................................................ 4
How was DJC able to produce at a very low cost?.................................................................................... 5
Scenario of DJC setting up new plant in USA ............................................................................................ 6
Suggested strategy for ACCs Sunnyvale plant: ........................................................................................ 7
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Case brief

American Connector company(ACC), while struggling with its own internal problems at its
Sunnyvale plant, is faced with the challenge posed by its Japanese competitor, DJC Corporation.
This challenge, coming in the backdrop of a hostile environment faced by the American connector
industry as a whole, makes it a critical juncture for ACC. The prime concern is about DJC setting
up a new plant in USA with the same standards as its Kawasaki plant, which could make it highly
competitive and could easily eat into the market share of ACC.

ACC had been an innovative company, catering to its customers varied designs to a very large
extent. It collaborates with its customers to improve the product designs according to their
requirements. By 1991, it was producing near to 4500 different connectors, which meant high
stress on production scheduling and consequential decrease in plant utilization.

DJC, on the other side, evolved into a highly process driven company, even though it started off
initially by copying the designs of ACC. Their Kawasaki plant evolved into a highly operational
efficient plant due to meticulous planning in terms of location which is near to suppliers, process
design, supply chain management etc., The product design of most connectors was standardized,
which resulted in the production of only 640 SKUs as against 4500 of ACC. This meant, reduced
costs and lack of complexity that is associated with shorter production runs. A commendable
breakthrough had also been achieved in terms of value engineering, which is apparent from
Exhibit no.3. In spite of high raw material costs, the total raw material cost for producing and
packaging of 1000 units had been reduced from $20.90(cost if ACCs design and package was
implemented) to $14.89(~29% reduction in cost).

Quality control is another aspect which is of very high relevance while comparing both the
companies. While ACC uses end product testing, DJC does quality audits at each and every step
of the process. Thus, the quality losses in ACC (1.6%) Sunnyvale are higher compared to DJC
(0.7%). Other aspects which gives DJC an edge are its emphasis on continuous improvement of
existing proven processes and pre-automation method.

The questions faced by Denise Larsen, ACC are as follows,

1. What would be the situation for ACC, if DJC successfully sets up a plant on similar lines to
its Kawasaki plant, in USA?
2. How to address the concerns with respect to the operating problems faced in their
Sunnyvale plant?
3. What can be done to avoid ceding market share to DJC?
Page |4

In order to address the above the questions, a look at the operational problems faced at the
Sunnyvale plant would be the first step.

Areas of operational issues in Sunnyvale plant

a) Production planning: Accommodation of rush orders, which disrupts the production plan
which had supposedly been frozen 30 days in advance. This increases the complexity of
the whole process and decreases the utilization, also increasing number of production
control staff.
b) Increasing number of SKUs (4500 in 1991): This number means a highly complex and
increasingly stressful production planning and increased planning costs, along this
complex production cycles.
c) High WIP inventory: This hadnt been a problem when increasing demand and sales
covered up the extra inventory holding costs. But in the present market scenario, this
poses a serious problem.
d) Effective utilization: The data from exhibit 6 of the case, indicates 30.2% effective
utilization against 75.4% of Kawasaki plant. Process failure, non-scheduled operations and
plant down time are the major areas of concern.
e) Assembly synchronization: Time for plastic housing much less than terminal stamping
and fabrication.
f) Technology: No investments in technology upgradation since 1986.
g) Packaging: Wide range of packaging formats, which means increase in packaging costs.
h) Labor costs: Labor costs are higher due to more number of employees.
i) Reducing gross margins: The gross margins have reduced from 52% in 1984 to 43% in
1991, due to increased competition, even though the general process costs have
decreased over the same period.
j) Lead time: Lead time of 10 days for general, two to three weeks for special orders
compared to 2 days of DJC Kawasaki plant. This is due to factors like less number of SKUs,
smaller ware house and more finished goods inventory (58 days).
k) High raw material holding costs: Raw material inventory of 10.8 days as compared to 5
days of DJC.
Page |5

Looking at the scenario in 1991, the table below shows the cost of production of 1000 units by
both ACC/Sunnyvale and DJC/Kawasaki.
Table 1 Cost of production of 1000 connectors by DJC and ACC in 1991

DJC 1991/kawasaki ACC 1991


raw m/l product 12.13 9.39
raw m/l packaging 2.76 2.1
labour direct 3.02 NA
labour indirect 0.75 NA
total labour 3.77 10.3
Electricity 1.4 0.8
Depreciation 1.8 5.1
Other 4.24 6.1
Total cost in $/1000units 26.1 33.79

It can be seen that, in spite of higher raw material costs, DJC is able to produce at a much lesser
cost as compared to ACC. This had been possible mainly due to DJCs savings in labor costs, both
direct and indirect combined.

How was DJC able to produce at a very low cost?

Value engineering: economizing on raw materials


Continuous operation of the plant: High utilization due to decreased start up and down
times
Lower number of SKUs (640) due to product standardization
Pre-automation: This resulted in very effective automation and high synchronization
Continuous improvement of existing processes
Low WIP inventory and smaller and central location of ware house
Low cost of quality due to process level inspection
High utilization of resources due to optimized process layout
In house technology development and molding
Page |6

Scenario of DJC setting up new plant in USA

Now, assuming that DJC sets up a plant in USA, similar to its Kawasaki plant, the raw material
costs will be only 60% of existing costs at Kawasaki plants. Considering that, there is going to be
an effect on the other factors as well, the total cost could be as shown in the table below.
Table 2 Estimated Cost of production of DJC's USA plant

DJC/USA
raw m/l product 7.278
raw m/l packaging 1.656
labour direct 3.322
labour indirect 0.825
total labour 4.147
Electricity 1.12
Depreciation 1.8
Other 4.24
Total cost in $/1000units 20.241

It is apparent that raw material costs have further decreased to $8.934 per 1000 units, which
results in a total cost of $20.241 for DJC USA plant.

Something which needs to be considered at this point is the value engineering that had been
done by the Kawasaki plant to reduce material costs. Of all the areas shown in Exhibit 3, Tin
plating and 2000 pieces packaging reel could be areas that DJC might deter from implementing
in USA plant.

In such a scenario where similar value engineering isnt replicated,

the raw material costs would then be (12.13+2.76+3.5+0.59) * 0.6 = $11.39

That would result in a total cost of $22.695

When these production costs ($20.24 & $22.69) are compared to $33.79 of ACC Sunnyvale plant,
Jack Mitchells sentiment that DJC will kill ACC if the operate a plant like Kawasaki in USA, makes
complete sense. But, that would only be in the case of standard connectors. Whereas in the case
of customized connector designs, ACC holds its advantage and could be its largest selling point.
Therefore, even though ACCs market share will take a blow due to DJCs American plant, the
extent of the real impact would depend on the market scenario and customer expectations.

This answers the questions about the extent of threat posed by a potential DJC plant in USA
similar to its Kawasaki plant. Therefore, ACC needs to try and improve its Sunnyvale plant in the
lines of DJCs Kawasaki plant to maintain its market share, a decision independent of DJC setting
up its plant in USA.
Page |7

Suggested strategy for ACCs Sunnyvale plant:

ACC should implement changes in its operations to on the lines of DJCs Kawasaki plant
considering feasibility to the American conditions and market. At the same time, ACC should look
into the possibility of taking advantage of its customized product offering to compete with DJC
and retain its existing customers.
The operational improvements suggested are as follows.

1. Value engineering especially in the areas of waste reduction and plating


2. Decrease raw material and WIP inventory
3. Improvement in the layout of the facility to increase utilization and decrease wastage and
costs
4. Decreasing quality costs by changing from final product testing to process level inspection
5. Decreasing packaging costs by standardizing packaging and decreasing packing range
6. Increase process utilization by consistency in planning and taking the aid of internal
production teams to make innovations in the processes
7. Need for investment in new technology, in order to decrease the chances of downtime
due to break down and for better production rates and utilization.
8. In house innovations in equipment and technology related to it. Continuous process
improvements.