OPERATIONS MANAGEMENT

Case Write-Up

AMERICAN CONNECTOR COMPANY

SECTION F

GROUP 11

ISHAN NAG 1811420

SHARANYA R NAYAK 1811423

ANURAG PALAPARTHI 1811424

PNNEGANTI SAIROHITH 1811427

AMRITA TREHAN 1811441

RAVINDER YADAV 1811445

Introduction

American Connector Company (ACC) has positioned themselves with differentiator strategy.
It produces the customized products of connectors and they are always being responsive to
customer needs. The competitive advantage of ACC is high quality, superior design and
performance. Later, increase in competition and decline demand for connectors caused gross
margins decreased from 52% to 43%. At the same time DJC, a Japanese corporation, is
planning to enter the US electric connectors market. DJC has established themselves as a cost
leader in its own domestic market. The management of ACC is trying to understand the DJC
growth potential in US market since many players existed already and the market is
fragmented by around 1200 manufacturers. Denise Larson, vice-president operations at ACC,
must come up with a strategic decision to overcome the demand decline and threats from
the competitors.

DJC is trying to focus on minimizing the cost in its operations and improvement is shown
explicitly from 1986 to 1991. It is fundamentally due to choices of standardized products and
reliable process technologies. On the other side, ACC is lacking operational efficiency and the
costs are also increased during the same period, productivity is decreased, defects are
increased, workforce is increased, Inventory is increased etc. ACC go worse off with the DJC
entering into US market and so it must come up with some aggressive decisions in order to
achieve operational effectiveness.

Q1. How serious is the threat of DJC to American Connector Company?

DJC can be a possible threat to ACC, because it can increase the competition ad also decreases
market share. But its seriousness depends on various factors that are discussed below

a. Lower Cost:

DJC’s success in japan comes from the competence it developed over the years to
manufacture the connecters at lower costs compared to ACC. If DJC establishes a plant in the
USA, then this competitive advantage will help it in charging lower prices. Since the market
is highly competitive DJC could be a huge threat to ACC with lower prices.

The following table shows comparison of costs incurred by these plants

ACC/ Sunnyvale DJC/ Kawasaki DJC/ US cost indices

Total $33.79 $26.1 $20.241

(Detailed analysis of the following prices are given in the second question table)
b. Operational Efficiency:

DJC has an edge over ACC in following operational areas :

Areas ACC Sunnyvale DJC/ Kawasaki

Defect Rate (Defects per million units) 26000 1

Quality Losses [Exhibit 6] 1.6% 0.7%

Assets Utilization Rate [Exhibit 6] 30.2%% 75.4%

Labour Productivity (Millions of Unit per 1.06 = 7.45

employee) 600*.7/396

ACC is known for its outstanding quality but has a higher defect rate wrt to DJC , Kawasaki
plant , this could be due to the fact that Sunnyvale plant hasn’t made any major investment
in capacity/new technology since 1986 whereas Kawasaki plant thanks to its inhouse technical
team even after working with old technology has constantly made add-on/inhouse
innovations to increase productivity.

Sunnyvale and DJC plant has differential defect rates also due to the way they approach
manufacturing; DJC plant produces only 640 SKUs whereas Sunnyvale produces 4500 SKUs ,
DJC plant actively standardizes the connector design to reduce the no. of product variations

DJC plant using the continuous process and working for 24 hours a day, 7 days a week has
been able to achieve higher assets utilization and with highly automated plants a greater
labor productivity.

c. Yield:

ACC face a serious problem with yield when comes to introducing new products. The yield is
as low as 55% for a new product, however it goes up to 98% once the item is in production
for at least an year. DJC on the other hand achieved around 99.99% yield on almost all of its
products irrespective of it being old or new.

ACC/ Sunnyvale DJC/ Kawasaki

Total 55% - 98% 99.99%+

d. Inventories:
Holding inventory can be a huge burden to a company because if required additional
space, maintenance leading to higher costs. The following table shows how both the
companies are dealing with inventory maintenance.
 Head ACC/ Sunnyvale DJC/ Kawasaki

Raw Material 10.8 5

Work in Progress High 2 days - Low

Finished Goods 38 56

Output per Square Foot (in 10.9 15.1

thousands of units)

Since DJC planned its operations to work with lower lead time it holds lower inventories than
ACC. But DJC maintains a higher level of finished goods inventors which is taking up its cost,
where as it is raw materials inventory that is increasing the cost for ACC. Holding higher
inventory is making ACC to use additional space in storing inventory leading to lower output
per square foot. DJC’s well planned operations provide it a competitive advantage over ACC
here too.

e. Processing Lead Times:

The average process lead time of DJC is under 2 days. This shorter lead time will help he
company in moving the products faster, it also resulted in minimizing the Inventory (Work in
Progress). Reasons for DJC in achieving this is implementing a better plant layout, highly
operating the assembly lines and maintaining limited number of SKU.

On the other hand ACC has a lead time of 10 days for the production of connectors with
standardized specifications. It goes up to 2-3 weeks in case of customized connectors.

f. Product and Process Technologies:

Kawasaki plant has focused on minimizing cost in its operations. Its choices with regards to
products and process technologies reflected the same. SKUs were brought down to 640 to
make operations more streamlined and cost effective.

They based their processes on 5 guiding principles

1. Pre-automation,
2. Use of widely used reliable process rather than taking chances with new technology
3. Highest emphasis being laid on Upstream Molding process were the most critical
Molding
4. Reliance on inhouse technology team rather than outside vendors.
5. Coordination among departments for development of new technologies.

ACC on the other hand had huge focus on customers and quality. The accepted rush orders 9
not done by DJC) – manufacturing team had more power than sales-marketing team) , gave a
lot of customization options, producing nearly 4,500 varieties on 1991. Though this was a
good strategy, but it created a lot of operational challenges like high lead times, pressure on
production runs, high WIP inventory.

Given that connector Industry in 1990 is facing an excess capacity issue and higher no. of
suppliers ( around 900) , slowing demand and OEM’s decision to reduce no. of suppliers –
Customer’s leverage aka buying power is high.

Q2. How big are the cost differences between DJC’s plant and American Connector’s
Sunnyvale plant? Consider both DJC’s performance in Kawasaki plant its potential in United
States.

Comparison between COGS and their relative weightages for a Standard Chip-to-Board
Connector(dollars per 1000 units) in 1991:

ACC/ Sunnyvale DJC/ Kawasaki DJC/ US cost indices

Raw material, product 9.39 28% 12.13 46% 7.278 36%
Raw-material,
packaging 2.1 6% 2.76 11% 1.656 8%
Labor, direct - - 3.02 12% 3.322 16%
Labor, Indirect - - 0.75 3% 0.825 4%
Total Labor 10.3 30% 3.77 14% 4.147 20%
Electricity 0.8 2% 1.4 5% 1.12 6%
Depreciation 5.1 15% 1.8 7% 1.8 9%
Others 6.1 18% 4.24 16% 4.24 21%
100
Total 33.79 100% 26.1 100% 20.241 %

 We can observe that the DJC is able to reduce its cost by 37.4% from 1986 to 1991 by
improving the operational efficiency. However, ACC costs are increased by 2.6%
during the same period. By taking the purchase power parity also into consideration,
the costs comparison would worse off for the ACC(Sunnyvale plant). DJC will be able
to manufacture with similar Kawasaki plant, with 40% less costs compared to ACC.
 The cost difference is mainly attributed to labor and depreciation cost. The edge over
low labor cost and low depreciation cost for DJC’s plant is however slightly
compensated by higher cost for raw materials and electricity. Moreover, labor cost is
accounted as higher for ACC’s plant and raw material cost for DJC’s plant among all
costs. Henceforth, if DJC plans to setup a plant in US, they get an advantage over ACC’s
plant in terms of cost efficiency.
 Since ACC’s always tries to be responsive to customers needs, they end up in having
more extra raw materials in the inventory and it costs around $11.49 dollars for every
 1000 units. Despite the cost figure seems lesser than the DJC ($14.89), but
proportionately DJC’s plant incur less costs since the cost indices is 1:0.6.
 Labor cost is also creating the difference. Kawasaki plant has only 94 employees and
Sunnyvale plant has 396 employees. DJCs plant goal is to reduce the workforce as
much as possible by reducing the overall complexity of the plant, automating the
process, reducing the WIP and inventory such that no controlling activities by labor.
DJCs plant reduced its workforce cost by 62% from 1986 to 1991, however, ACCs plant
due to lack of operational efficiency, workforce cost is increased during that period.
Inefficiency can be seen in the Productivity of ACCs plant which is just about 30.2%
and that of DJCS is 75%.
 Average annual maintenance cost for DJC’s plant per mold is $29,000 which is lower
to compared to ACC’s plant of annual cost of $40000.

On the flip side, despite having cost advantage for DJCs, the setup cost in US can go higher. It
has to create their own distribution channels. Transactional costs, Information cost,
promotional cost can also be incurred. In Japan, DJC have established their plant near to the
supplier and so it became much easier for them to manage their inventory and were able to
reduce operational costs. But in US, it can become difficult if they don’t get the place which
is feasible in all the ways.

Recommendations:

a. ACC should leverage Statistical Process Control for eliminating the defects at different
stages of production and improve the efficiency. This in turn minimizes the overhead
costs.
b. Since customized products share is just 15% of the orders, ACC can have separate
production lines for regular and customized connectors. This helps in not to have
shorter production runs for all the stages. Hence, again efficiency and Utilization is
improved.
c. The effective productivity can be increased (30.2% for ACC vs 75.4% for DJC) by letting
the plant run whole week to reduce the non-scheduled downtime. Higher production
will reduce the indirect cost per item.