AMERICAN CONNECTOR COMPANY: A CASE STUDY By Neelesh Khattar 11BM60070

CASE SOLUTION Introduction

American Connector Company is a supplier of interconnect products like connectors, cable assemblies and backpannels. Its connector plant in Sunnyvale, California has been struggling with a series of operating problem for the past year. Costs at Sunnyvale are increasing while quality seems to be deteriorating. The competitor of ACC, DJC Corporation of Japan has become a dominant supplier of electrical connectors in its home market in recent years. There is a prospect of DJC entering the US market. DJC is known for its design strategy which is mainly emphasised on simplicity and manufacturability rather than on innovation. DJC has adapted the designs to economize on raw materials. It has eliminated features which dont add perceived value to customers(such as colorcoded housings).The company has always relied upon manufacturing as the major means to achieve their overall profit goals. Thus, it has acquired a low cost segment in the electrical connector business. Now, we have various questions to be answered. Questions like whether DJC is really a threat for ACC in US or not. If yes, then, how ACC can prepare itself for the incoming storm. What happens when DJC enters US market? 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.As the raw material cost is almost half of the total finished goods cost, the raw material cost reduction would be substantial. Cost head KAWASAKI Units) ($/1000PLANT IN USA 14.89 * 0.6 =8.93

Raw material, Product + 12.13+2.76=14.89 Packaging

As Sunnyvales defect rates are at 26000 PPM of production which is relatively high. The Quality control of DJC is process centric where each process is QC

monitored unlike in Sunnyvale where it is end product inspection. The quality losses of DJC and ACC over total production are 0.7% and 1.6%. So, Quality is one grey zone which needs to be addressed by ACC. Work in process inventory cost is very high in case of ACC in comparison to DJC. This in turn reduces connector output per square foot as extra space is required for WIP and finished goods (15.1 of Kawasaki VS. 10.9 of Sunnyvale). 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 Sunnyvale) Due to high number of product variations in customer orders of Sunnyvale 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.(Product lines were as small as 1.5 to 2 days) 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. 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). The Only positive point which ACC has over DJC is: The flexibility of production process at DJC is less when compared to that of ACC. ACC has batch production process which allows it to have high customization of products to its customers. The major cost differences of DJC, compared to Sunnyvale are in respect to the following a) 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 head

KAWASAKI Units)

($/1000PLANT IN USA 14.89 * 0.6 =8.93

Raw material, Product + 12.13+2.76=14.89 Packaging

b) Packaging Cost:- In comparison to Sunnyvale, the packaging cost of Kawasaki plant is lower due to adaptability of standardised product packaging technology. c) 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). d) 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. Cost head Electricity KAWASAKI Units) 1.40 ($/1000PLANT IN USA 1.40 * 0.8 = 1.12

e) 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. American Connector Companys approach American connector management should look into the below points of consideration for increase in productivityCost 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.

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. 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. 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 at DJC.ACC needs to follow similar model for operations set up in the organisation to promote production oriented structure and greater balance. ACC needs to decrease mould recycling time. This saves time and also introduces new designs. ACC needs to line up the facility layout and minimize inventory holding costs. It needs to follow pull strategy for of raw materials in production line. ACC needs to focus on quality control. 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. ACC can save cost on colour coded cables/connectors which may be beneficial in longer run. ACC needs to control processing lead time from 10 days to a substantial extent so that it order management will be easier and less finished product inventory pile up. 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.