Production & Operation Management Case Analysis American Connector Company (A)
VGSOM, IIT Kharagpur
By Abhishek Awasthi Section A 11BM60071
To Prof. Anand Teltumbde
Introduction: Overview of Industry: Electric Connectors were devices made to attach wires to other wires, wires to outlets, wires, components or chips to PC boards, or PC boards to other boards. They found use in a number of product applications – each of which called for a different connector specification. By 1992 attempts were being made to standardise these product specifications among the many different industry associations. The demand for electric connectors in the US had slowed in the mid to late 80’s and this had resulted in an excess capacity of suppliers, many of whom had built up large capacities in the 70’s to meet the then growing industry demands from the computer industry. Hence, by the 90’s, the US Connector Industry (this included connectors, cable assemblies and backpanels) was an extremely hostile environment containing more than 900 suppliers even as sales continued to fall. In 1991, sales were down 3.9% from the previous year while the 10 industry leaders were on average down 7.9%. The competition was further exacerbated by the increasing number of offshore producers entering the US market. Also, electrical connectors were very engineering intensive products and were critical to product performance, thus there were demanding requirements by the customers for cost, quality, reliability and performance. Globally, both ACC and DJC were second tier companies having sales between $500 million and $800 million. They operated in a $16 billion industry which was both highly competitive and highly fragmented. Overview of DJC Corp and the Kawasaki Plant: The DJC Corporation’s adopted a typical Japanese competitive strategy in that it focussed exclusively on profit maximization through achieving highly efficient manufacturing processes and by emphasizing on simplicity and manufacturability over innovation. The importance of manufacturing was also reflected in the company’s organization. The manufacturing division had more power in altering production schedules, product mix and lead times than the marketing division. Their Kawasaki Plant, which began its operations in 1986 amid threats to the company’s gross margins because of increased labour and material costs and a rising Yen, was designed to be a highly automated, continuously operating plant aimed solely at mass production. It was intended to meet the Company President’s three stated goals: 1) 100% asset utilization, 2) 99% yield on raw material, and 3) a customer satisfaction level of one complaint per million units of output. The plant was located close to both the major Japanese electronics companies as well as the major raw material suppliers. The Plant’s management carefully integrated decisions and policies related to the product and process technologies, workforce, production control, quality and organization and adopted techniques in these spheres to meet the stated goals. For example, its layout was one of Plants-within-a-Plant to minimise material handling and work in progress; there was
emphasis on ‘pre-automation’ since that would better facilitate reliability during the actual automation processes; it approach involved a greater reliance on in-house technology development rather than procurement from vendors; it possessed a Technology Development Division that was responsible for inter-functional coordination of all development activities for effective resource utilization; it exercised strict process and inventory control by scheduling long production runs in order to minimize yield and production losses as well as work-in-progress inventory and it aimed at reducing the number of direct production workers as well as support and overhead staff by focussing on increasing automation. Overview of ACC and the Sunnyvale Plant: American Connector operated four plants in the US and two in Europe. The company’s competitive strategy was characterised by its emphasis on both quality and customization. Its products were recognised for their superior design and performance. Custom orders made up 15% of the company’s total production volume and employees worked closely with large customers to develop unique solutions to specific connector problems. Many of these products later became industry standards. In order to achieve growth and compete globally, ACC had invested several hundred million dollars worldwide in new plants and equipment between ’83 and ’88. However, falling demand for connectors had resulted in eroding its gross margins from 52% to 43% even as sales had grown from $200 million to $800 million. The company had opened the Sunnyvale Plant in 1961 to serve the emerging electronicsbased industry in and around Silicon Valley. The capacity of the plant had been expanded pre-emptively to meet the expected growth in demand i.e. whenever it was estimated that capacity utilization would exceed 85%. The last such expansion had occurred in 1986, bringing the capacity up to 600 million units per year. However due to the depressed market conditions prevailing since then, investments in capacity and technology had completely stopped. The plant was divided into 5 production areas with each one having its own Production Supervisor who reported to the plant’s Director of Manufacturing. Its scheduling was flexible, in that it allowed for the scheduling to be changed in order to accommodate rush orders from important clients, as failure to do this could have resulted in them taking their designs to ACC’s competitors. Production scheduling though had been suffering due to the growing number of individual products being manufactured which had prompted a corresponding increase in the number of Production Control staff. Though as a company, ACC had an outstanding reputation for quality, this was the very area in which the Sunnyvale plant had been struggling lately. The defect rates, in-plant, were relatively high at around 26000 per million units and inspection of these had to be carried out in order to prevent the customers from being exposed to similar numbers. This only added to the spiralling costs at the plant. Now the plant had to analyse the threat posed by DJC, which was rumoured to open a first plant in the United States and decide its future course of action.
Comparison Of Kawasaki and Sunnyvale Plants (1991) DJC , Kawasaki
ACC, Sunnyvale
Production Method
Continuous Flow Line
Job Processing Batch Processing
Production (Total Capacity)
700 million units (800 million units)
420 million units (600 million units)
Stock Keeping Units (SKU’s)
640
4500
Production areas
4 large cells – each to produce one of the four types of connectors.
Packaging
One method 2000-unit strips loaded onto a large reel
Process Lead Time
Average 2 days
Assembly Line Rate
200 units/minute
500 units/minute
Average Annual Cost per Mold
$29,000
$40,000
Average Life of Mold
3 years
8 years
Raw Materials Inventory
5 days
10.8 days
Work in Process Inventory
2 days
Higher due to customized orders
Finished Goods Inventory
56 days
38 days
Utilization
87.5%
70%
Management
Production Focus
Engineering and marketing focus
No changes incorporated.
Changes accommodated as they come. Were to be frozen 30 days in advance.
Production Scheduling
15% 85%
5 Production Areas – each specializing in one Process area of producing connectors. Wide range From 10 piece plastic bag to 1500 piece loaded reel Standard Items : 10 days Special Orders : 14 to 21 days
Yields
99.99%
55% for a new product 98% after one year
Runs
One week/continuous
1.5 – 2 days
Most technology production is inhouse. Close relationships with Few Suppliers – this collusion formed entry barrier for new entrants.
Design of equipment is outsourced to vendors.
Technology Relationship with Suppliers
No such relationships formed.
Case Analysis: 1) Analysis of Current Cost Comparison (USD per 1000 Units) between Kawasaki and Sunnyvale
Raw Material, Product Raw Material, Packaging Labour, Direct Labour, Indirect Total Labour Electricity Depreciation Other Total
Kawasaki Plant (A) 12.13
Sunnyvale Plant (B) 9.39
Difference (B - A) - 2.74
2.76
2.10
- 0.66
3.02 0.75 3.77 1.40 1.80 4.24 26.10
------10.30 0.80 5.10 6.10 33.79
------6.53 - 0.60 3.30 1.86 7.69
Hence, the current cost for the Kawasaki plant is 22.75% less than the cost for the Sunnyvale Plant. Another way to look at their comparative performance is the decreasing cost for the Kawasaki Plant, which has decreased its cost by 37.47% from the 1986 level ($47.74). Sunnyvale on the other hand, had experienced an increase in cost by 2.67% from its 1986 level ($32.91). 2) Analysis of Forecasted Cost Comparison (USD per 1000 Units) between Kawasaki and Sunnyvale if DJC establishes a similar plant in the US
Raw Material, Product Raw Material, Packaging Labour, Direct Labour, Indirect Total Labour Electricity Depreciation Other Total
Kawasaki Plant (A) 7.278
Sunnyvale Plant (B) 9.39
Difference (B - A) 2.112
1.656
2.10
0.444
3.322 0.825 4.147 1.12 1.80 4.24 20.241
------10.30 0.80 5.10 6.10 33.79
------6.153 - 0.32 3.30 1.86 13.549
Hence, if DJC establishes a Kawasaki – style plant in the United States, then taking cost indices into consideration, its cost for producing 1000 units comes out to be 40.09% less than the cost for the Sunnyvale Plant. Hence, ACC can potentially lose a significant portion of its market if DJC decides to establish a plant in the United States.
3) Comparison of Labour Usage between Kawasaki and Sunnyvale:
Indirect Labour Control Indirect Labour – Technology Development Indirect Labour – Materials Handling Indirect Labour – Mechanics Direct Labour (Production)
Kawasaki Plant (94 Employees) 11 (11.7%)
Sunnyvale Plant (396 Employees) 66 (16.67%)
12 (12.8%)
27 (6.8%)
3 (3.2%)
41 (10.4%)
4 (4.3%)
47 (11.9%)
64 (68%)
214 (54%)
We see that the Kawasaki plant employs less employees overall due to a high degree of automation. In comparison, the Sunnyvale plant employs more manual labour for the production of very low volume products (about 10% of its total volume). 16.67% of Sunnyvale’s total employees are engaged in Control Department. This is due to the fact that scheduling is often done on a daily basis because of the acceptance of rush orders placed by large customers to the plant. Also, due to the absence of defect preventive measures during process control, the Quality Control team has to manually inspect the units produced. Kawasaki has a higher percentage of employees engaged in Technology Development because the plant concentrates on the inter-functionality of all its technology development activities in order to achieve a consistent set of explicit goals. Owing to its short production runs and emphasis on customised orders, the Sunnyvale Plant has a large Work-In-Progress and Raw Material inventory in comparison with the Kawasaki plant. Thus it requires a significantly larger workforce in the Materials Handling department. The presence of a relatively continuous process flow eliminated the need of such personnel at the Kawasaki plant. The Kawasaki plant relied on a continuous improvement of existing proven processes to ensure that unscheduled downtime was eliminated, which made it unnecessary to employ mechanics for repairing purposes. However, Sunnyvale with its emphasis on new product designs was more prone to faults, for which mechanics were required.
4) Productivity Comparison between Kawasaki and Sunnyvale Plants
Connector Output Per Square Foot (in thousand units) Connector Output Per Employee (in million units) Connector Output Per Direct Employee (in million units) Fixed Asset Utilization % Plant Not Operating Non-Scheduled Process Failure Preventive Maintenance Process Changeover Quality Losses
Kawasaki Plant (94 Employees) 15.1
Sunnyvale Plant (396 Employees) 10.9
7.45
1.06
10.93
1.96
5.7% 13.2% 1.0% 2.0% 2.0% 0.7%
28.6% 23.5% 8.9% 2.4% 4.8% 1.6%
Kawasaki has a comparatively high connector output per thousand square feet since it has a very low Raw Material and Work-In-Progress Inventory and hence does not need to devote space for the storage of these inventories. The relative differences between connector output per employee and the connector output per direct employee show that the Indirect Labour force forms a larger part of the Sunnyvale plant than the Kawasaki plant. It is seen that Connector output almost doubles in the case of Direct Employee for Sunnyvale while Kawasaki only experiences a 46.7% increase. This can be attributed to the fact that Kawasaki uses a high degree of automation in its processes which eliminate the need for labour. The difference between Fixed Asset Utilization due to non-operation for the two plants is because of the differences in the legal rules and conventions that exist in Japan and the US. The five-day week is adhered to more strictly in the latter and hence, Sunnyvale is operational only for 50 five-day weeks throughout the year, whereas Kawasaki is operational for 330 days in a year. Thus, it is not appropriate to compare the two plants on this basis. Non-scheduled processes create a difference in fixed asset utilization because of the fact that at Sunnyvale, given the high rate of moulding, the housings had to be sent to a holding area until the terminals were completed. This was done because the moulded housing and terminals had to be produced in an efficient batch size. Its utilization is also low because it needs some buffer capacity for its flexible operations, as according to the company policy whenever the long term forecast indicates that utilization would exceed 85% for sustained
periods the capacity was increased. Scheduling of the moulds was a slightly lesser problem at Kawasaki as well, since the process speed of the process had to be slowed down in order to synchronise fabrication and assembly process. Both Process Failure and Preventive Measures take up a higher chunk of the Fixed Asset Utilization for Sunnyvale in comparison to Kawasaki because unlike the latter, which concentrates on old, reliable processes rather than new, less reliable ones in addition to focussing on continuous improvement of existing proven processes to ensure the elimination of unscheduled downtime, Sunnyvale emphasises on new product design, which is more prone to faults and hence lower yields. The difference between the Fixed Asset Utilization due to Process Changeover exists for the two plants because while Kawasaki was run on a nearly continuous basis to avoid start up and shut down costs, the Sunnyvale plant had production runs that barely lasted 1.5 – 2 days, and hence it underwent a large amount of process changeover in comparison. Finally, the difference in losses due to quality exist because while the Kawasaki plant places a lot of emphasis on maintaining equipment during process runs to eliminate unscheduled downtimes, Sunnyvale suffers from a lack of defect preventive measures due to which manual inspection of faults need to be carried out, which at 26000 per million units are pretty high in number. To conclude, it is inappropriate to compare the two plants on the basis of the above productivity factors as they completely differ in their competitive strategy. Kawasaki is a mass producer using a continuous flow line for production while Sunnyvale is a custom producer using batch processing.
Case Results: Analysis of the Threat in Case DJC Opens a Plant in the US: In the case of DJC establishing a Kawasaki – style plant in the US, Sunnyvale would be competing directly with Kawasaki’s high volume / low cost products and faces the possibility of losing lower margin, price sensitive customers. While only 15% of ACC’s total production volume was custom orders, 1% was prototype orders and 10% were very low volume orders, the remaining share of the volume can be assumed as high volume / standard product. This will be the market segment that will be the hardest to compete with DJC. As it has already been shown in the Case Analysis, upon entering the US market, a DJC plant could have a cost advantage of over $13 with respect to ACC’s Sunnyvale plant due to the reduced cost of raw materials and electricity in the US. This would mean that along with the price penetration strategy that DJC is sure to undertake to quickly corner a share of the market, this cost advantage could potentially take away a number of mass-market ACC customers who are not too keen on customization. A plant modelled on DJC’s Kawasaki production facility would also have a great manufacturing advantage over ACC’s Sunnyvale facility. Kawasaki maintained a highly
efficient, integrated production facility with methodically maintained equipment, a low workforce requirement, increased automation and fully implemented continuous improvement plans. All this means a process lead time of only a couple of days, compare with 10 days for Sunnyvale. Hence, of two important parameters of cost and delivery time, a DJC plant would clearly outperform the ACC plant. In the current market climate of an abundance of suppliers, the customers have been given the leverage of demanding reduced prices and faster delivery, both factors on which DJC scores high marks. Hence it can certainly be seen to be a huge potential threat to ACC if it establishes a plant in the same country. However, looking at the other side of the argument if we rate the threat of DJC entry on the Operations parameters of Quality, Cost, Delivery Time and Flexibility, we find that there are two major areas in which the Kawasaki method of production and processing is severely lacking when it comes to the American market for connectors. Based on ACC’s experience, the market has a high demand for quality for which the company has already built an outstanding reputation. Thus it will be difficult for the mass marketed product lines from DJC to challenge ACC in this aspect. Sunnyvale manages to provide high quality to its customers due to a strict inspection process at the end of its assembly process, which manages to eliminate 26000 defects per million units. Moreover, looking at ACC’s corporate strategy, it is clear that the company’s focus is on customers who demand customization and flexibility. Though the share of such customers is only 15% of the company’s total production volume, it may be reasonably assumed that such custom orders would have a high profit margin. Hence, even with the entry of DJC this would be an area where ACC would continue to have a stranglehold because the former is only competent at mass production. Also, DJC would have to fundamentally change its production method in order to attain the same level of flexibility that ACC offers its larger customers. In fact in Japan, DJC even refuses to entertain any rescheduling requests from its customers and if such a policy is carried into the United States ACC need not worry because this lack of flexibility would prevent it from seriously harming ACC’s large-customer base. Finally, though the Kawasaki method of production may be give you low delivery times and costs, we see that the cost of connectors only form 2% or less of the customers final product price. Hence, it may be reasonably assumed that the customer is not that price-sensitive about these products but instead would rather have the suppliers supply to be flexible and of a high quality. Quantum of Difference between ACC and DJC’s Plant Costs: I.
While the DJC plant is still based in Japan: The current cost at the Kawasaki plant is 22.75% less than the cost at the Sunnyvale plant. The cost at the Kawasaki plant is $26.10 per 1000 units while the cost at the Sunnyvale plant is $33.79 per 1000 units. This despite the cost of raw materials being significantly higher in Japan than in the US.
II.
If the DJC Plant is established in the US: In such a scenario, the cost at the DJC plant could be as much as 40.09% less than the cost at the Sunnyvale plant. The cost at the Sunnyvale plant is $33.79 per 1000 units while the cost at the DJC plant could drop as low as $20.24 per 1000 units.
Reason for DJC and ACC Cost Differences: There are a number of reasons for the existing and predicted differences in cost between the DJC and ACC plants. Firstly, DJC and especially its Kawasaki plant is exclusively focussed on mass production where a large part of the production process is automated and the plant is run on a continuous basis. This allows it to keep costs like start up and shut down as well as costs spent on labour and materials handling as low as possible in order to compete favourably in the market. Secondly, due to its adherence to mass production, the Kawasaki plant has achieved an economy of scale which is difficult for the ACC plant to match. This is best reflected in the Depreciation costs for the two plants. Sunnyvale with a much lower production output as compared to the Kawasaki plant has a significantly higher depreciation cost per 1000 units as compared to the latter. This is because the average depreciation cost is split over a fewer number of output units for the Sunnyvale as compared to Kawasaki. In fact on taking this factor into account, we find that Sunnyvale could save a depreciation cost $2.04 per 1000 units if it produces the same volume as that produced by Kawasaki. Thirdly, Sunnyvale follows Customization and Flexibility, both of which demand a higher input cost as they mean more costs being put into new product design, resolving unscheduled downtimes and rescheduling on-going operations to accommodate rush orders from large customers. Fourthly, a significant portion of the cost saving achieved by Kawasaki over Sunnyvale is due it’s the adoption of material cost saving measure such as the use of Tin in plating instead of Gold, Waste Reduction, using less expensive Resin etc. Finally, the cost difference also owes its origins to the varied markets in which the two companies operate. The price indices in the case show that the cost of raw materials and electricity is higher in Japan while the labour costs (both direct and indirect) are higher in Japan. Both these factors add to the already existing cost difference between the two companies. Cost Difference due to Company Strategy i.e. the way each company competes: $6.187 per 1000 units cost difference between the Sunnyvale and Kawasaki plant exist because of the difference in strategies adopted by the two plants to compete in the market. This difference exists because the Kawasaki plant has a lower labour cost (due to the higher automation adopted by DJC), lower packaging cost (due to DJC packing 2000 pieces onto a packaging reel in comparison with ACC, which customises this processes according to the customers’ needs) and lower electricity costs (due to increased automation).
Cost Difference due to Company Operational Inefficiency i.e. the way each company operates: $3.252 per 1000 units cost difference between the Sunnyvale and Kawasaki plant exists because of the inefficiencies in operational processes at the former. It is shown that if ACC operated its current plant in Japan, it would have cost them $20.90 per 1000 units whereas it only cost the DJC $14.89 per 1000 units. This difference exists because of the Kawasaki plant managing to reduce its costs through easily adoptable operational techniques like better mould design with narrower runners, using less expensive resin, reducing the mass of housing material, waste reduction and replacing Gold with Tin for the terminals’ plating. Most of these were measures that could have been easily adopted by ACC to improve the operational efficiency of its plants.
Final Recommendation for the ACC Management at the Sunnyvale Plant: Although the threat of DJC’s rumoured foray into the US market by way of establishing a plant in the country is certainly a substantial one, it must be realised that the two companies have vastly different corporate and competitive strategies. While DJC has tailored the entire working of its Kawasaki plant towards attaining the maximum possible resource utilization in order to perfect mass production and supply to regular customers, ACC continues to adhere to its stated goals of providing a high product quality in addition to delivering greater customization/flexibility for its customers. Thus even with the establishment of DJC’s new plant in the country, it would be ill advised to change its strategy completely as a retaliatory measure because that would mean giving up on main profitable customer base for connectors in the country, the one which demands customization and flexibility from its suppliers. This is a parameter on which the DJC plant would not be able to compete without a major overhaul from its existing operations in Japan. Instead the Sunnyvale plant should simply try to concentrate on getting the easy things right, i.e. focussing on trying to reduce its operational inefficiency through adopting the same measures as those undertaken at the Kawasaki plant. Adopting these methods could allow Sunnyvale to save up to $3.252 per 1000 units in comparison with to its prior operations. Sunnyvale could also try to integrate itself vertically by producing some of its own equipment and moulds so that it can save on transaction cost economics. Finally, in order to create entry barriers for any new entrant, ACC could try to collude with the Government, suppliers and customers over industry rules and customer – supplier contracts. In a nutshell, ACC should not try to change its strategy but instead should try to reduce its own cost.
