OPERATION STRATEGY

American Connector
Company

Case Analysis on

(1) How serious is the threat of DJC to ACC

The threat of DJC to American Connector Company is very high. Following are the
reasons:

Raw material cost - If DJC sets up manufacturing base in USA, as per the exhibit 7
and exhibit 8 the raw material cost for DJC in USA will drastically reduce. Current Raw
material product and packaging cost is 14.89 which will reduce to 8.93 in USA.

Defect rates - ACCs defect rates are at 26000 PPM which is relatively high. The
Quality control of DJC is process centric where each process is QC monitored unlike
in Sunnyvale its end product inspection. The quality losses of DJC and ACC over total
production are 0.7% and 1.6%.

Asset utilisation - As Kawasaki plant is working for 24hrs/day thus the asset
utilisation is maximum and Connector output per employee is very high. (75.4% of
Kawasaki VS. 30.2% of ACC)

(1) How serious is the threat of DJC to ACC

(ctd.)
Manufacturing Efficiency - Due to high number of product variations in customer
orders of ACC which is employing batch production system there is frequent changes
in product manufacturing lines thus resulting in lower efficiency which could be
obtained in case of standardised products.

Inventory - The raw material inventories of DJC is averaging only 5 days as

compared to 10.8 days of ACC. So, DJC is incurring less Inventory cost which again
reduces finished good cost. Work in process inventory cost is very high in case of
ACC in comparison to DJC. This in turn is reduces connector output per square foot
as extra space is required for WIP and finished goods(15.1 of Kawasaki VS. 10.9 of
ACC).

Lead Time - The speed of customer order delivery of DJC is one day (because of
highly automated production process at Kawasaki plant) whereas the speed of
customer order delivery of ACC is more than one day (because of batch production
process producing about 4,500 varieties of connectors).

(2) How big are the differences between DJC' plant and ACC's
Sunnyvale plant? Consider both DJC's potential in Kawasaki
and its potential in America.
1.

Raw Material: - Current raw material cost for product and packaging in Kawasaki plant is
relatively high in comparison to ACC Sunnyvales plant. In the event of DJC setting up a plant in
USA, there would be a considerate cost reduction, as the cost indices US v/s Japan is lower
(0.6:1).
Cost of raw material + Production + packaging at Kawasaki = 12.13+2.76 = $14.89 / 1000 units.
in USA = 14.89 * 0.6 = $ 8.93 / 1000 units
2. Packaging Cost:- In comparison to Sunnyvale, the packaging cost of Kawasaki plant is lower due
to adaptability of standardised product packaging technology.
3.

Labour Cost :- 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 labour cost.
(Material handling cost of Kawasaki 3.2% v/s 10.4% of Sunnyvale).

Question 2

(ctd)

Electricity Cost: - In comparison to Sunnyvales plant the electricity cost of production is higher for
Kawasaki as electricity cost indices of US v/s Japan is 0.8: 1.
Power cost per 1000 units at kawasaki plant = $ 1.4
Power cost per 1000 units at Sunnyvale plant = $ 1.1
Runtime for moulding process:- Due to high batch of housings assembled during plating
operations resulted in lower runtime for moulding operations which was already down to 1.5 days
and any further reduction would affect costs.
Considering cost indices of US VS Japan and above cost factors, cost of manufacturing operations of
DJC in US would be as low as 25% of the current production cost of $ 26.10.

(3) What accounts for these differences? How much of the

difference is inherent in the way in which these two
companies compete? How much is due strictly to the
efficiency of operations?
(a) What accounts for these differences?
There are many reasons for these differences:
1.

Fixed Asset utilisation: Due to continuous factory runtime, the overall utilisation of fixed asset
increases for DJC Kawasaki in comparison ACC Sunnyvales plant.

2.

Raw material cost: In Japan raw material cost is twice as much high as in America.

3.

Production Process: Due to batch production system in ACC, there were changes required in
production line every time product was changed which lead to less efficiency and lower expertise
in churning out a product. This issue was not there with DJC continuous production process with
lesser number of product variations.

4.

Quality issues: The number of defective finished goods is very less for DJC when compared to
ACC.

Question 3

(ctd)

(b) How much of the difference is inherent in the way in which these two companies compete?
The basic differences are:
1.

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.

2.

Low inventory cost: DJC maintained low raw material inventory, where they ordered the raw
materials as per requirement and pull strategy for manufacturing.

3.

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.

Question 3

(ctd)

( c) How much is due strictly to the efficiency of operations?

The efficiency of Sunnyvale was very low as its defect rate was 26000 ppm. There was quality issue
which was leading to overall effect on productivity and profitability decrement.
If DJC comes to America and sets up a plant with a very high efficiency, as they did in Kawasaki,
American Connectors will lose their business to DJC.
ACC finance teams were also not allowing funds to upgrade their technology. This would also affect
the efficiency of the operations.
Further to this 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.

(4) What should ACC's management at the

Sunnyvale plant do?
There are a number of things ACCs management can do as follows:
1)

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.

2)

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. 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.

3)

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.

Question 4

(ctd)

5.

Mould recycling time needs to be decreased by ACC. This saves time and also helps to
introduces new designs.

6.

Inventory holding costs are to be minimized. It needs to follow pull strategy for of raw materials
in production line.

7.

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.

8.

Processing lead time should be reduced from 10 days to a substantial extent so that its order
management will be easier and less finished product inventory pile up.

9.

Asset utilisation - ACC can increase fixed asset utilisation 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 moulds. The moulds 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.

Thank You