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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:
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.
Parameter
Production
Type
DJC
Completely Continuous
Flow
Sunnyvale
Majority Batch Process, rest Job
Process
Average
Production
Rate
Competitive
Strategy
Production
Areas
Production
Planning
Operates 168
hours/week on a 24
hour per day, 330 days
a year
Lead Time
Capacity
Utilization
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
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
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.
The plant run at a continuous basis avoiding start up and shut down
costs.
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.
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
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.
-
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
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.
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.
Weaknesses
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.