American Connector Company (a) - Case Analysis

AMERICAN CONNECTOR COMPANY (A) SUBMITTED TO PROF. JANAT SHAH COURSE : OPERATIONS MANAGEMENT SUBMITTED BY

GROUP 7 ANUPAM BARA - 111008 JASDEEP SINGH - 111018 P SWETHA - 111030 PRITESH - 111037 VAIBHAV BAWEJA - 111056

1. CASE OVERVIEW American Connector Corporation (ACC) is one of the 28 suppliers of electrical connectors, worldwide with sales greater than $100 million. ACC manufactured Electrical Connectors from Sunnyvale, California since 1961. Electrical connectors are devices made to attach wires to other wires, attach wires to outlets, attach wires, components or chips to PC boards, or to attach PC boards to other boards. Connectors were used in a variety of product applications, ranging from military and aerospace equipment to consumer electronics and appliances. Each application and often each producer called for different connector specifications. In 1990, there were over 700 standard connector product lines in North America alone. Standard designs were established mainly by International Institute of Connectors and Interconnect Technology (IICIT), the National Electronics Distributors Association (NEDA) or by the end use industries. In USA, the connector industry was characterized as a hostile environment. The 1991, sales had fallen by 3.9% over the last year and the industry was seeing a downward trend since 1987, with 1986 being the peak year. Consequently, ACC’s last major expansion occurred in 1986 bringing its capacity to 600 million units per year. The 1991 utilization was 70% and was expected to reach 85% by 1996. Because of the depressed market conditions, the Sunnyvale plant made no major investments in capacity or new technology since 1986. DJC Corporation of Japan was a dominant supplier of electrical connectors in Japan. It was rumoured to be one of the most efficient connector plants in the world. Despite its success in Japan, DJC had not established itself in the US. It had no plants in the US and only a small sales force. There have been rumours in the last few years that the DJC would build a new plant in USA to launch an attack on the US market. Denise Larsen, the Vice President of Operations at ACC felt that ACC’s position was particularly vulnerable at the moment and contemplated a major overhaul of the manufacturing operations at Sunnyvale. Jack Mitchell, a recently graduated MBA and her assistant concurred to her view that the future looked bleak. Andrew Li, the plant manager felt that it would not be easy for DJC to implement their strategy in USA.

2. THE DJC CORPORATION DJC produced four basic connectors : wire-to-wire, wire-to-outlet, item-to-board and board-toboard. 2.1. Competitive Strategy of DJC Corp 1. DJC cultivated and maintained close links with the major computer, telecommunications and electronics companies and distributors in Japan. These relationships represented an important entry barrier in the Japanese connector market. 2. The company’s design strategy emphasized simplicity and manufacturability over innovation. a. DJC’s connectors were designed for maximum compactness to suit Japanese OEMs b. DJC adopted designs to economize raw materials and to simplify manufacturing so as to eliminate features which did not add perceived value to the customers.

3. DJC believed in low cost positioning of its products and built its operations to achieve the same. 4. DJC emphasized on the importance of manufacturing and the balance of power was tipped in favour of manufacturing. Thus, product schedules, product mix and lead times were fixed and rigid. 2.2. The Kawasaki Plant The Kawasaki plant was designed to produce a maximum of 800 million connectors per year. The plant operated 24 hours a day, seven days a week, 330 days a year. The main advantage of this continuous running of the plant was to minimize start up and shut down costs. The company President, Mr.Esaka had a vision with three goals for the plant, they were 1. Asset utilization of 100% 2. Yield on raw material of 99% 3. Customer complaints of not more than 1 per million units of output. Thus, the major aim of DJC at the Kawasaki plant was to achieve “the ultimate rationalization of mass production”. 2.3. Plant Layout In accordance to the vision of the President of the company, Mr.Esaka, the plant layout was designed for mass production. The Kawasaki plant was organized in 4 cells, each of which was responsible for producing one of the four general types of connectors. With the exception of plating, all the processes, needed to manufacture a complete connector were located in each cell

Wire to Wire Connectors

Wire to Outlet Connectors Plating

Item to Board Connectors

Board to Board Connectors

DJC – Kawasaki Plant Layout

Each cell contained anywhere from two to six production lines, with each line consisting of terminal stamping, housing, molding, assembly and packaging The production process can be depicted with a process flow diagram as shown.

DJC – Kawasaki – Production Process - Cell Layout

This arrangement can be classified as a typical product oriented layout and production process. Advantages of Product oriented layout:    

A Product oriented layout works best when the output required is of high volume and low variety. This layout facilitates high equipment utilization, given there is adequate demand. The line production process followed by DJC also guaranteed low work in process inventory. The product is standardized

Disadvantages of Product oriented layout:   

Not flexible to handle products of high variety. In cases of insufficient demand, this may lead to high Finished Goods inventory. High volume is necessary for this type of layout to prove profitable.

2.4. Product Technology The product design at Kawasaki reflected the goals of continuous and reliable operations and the need to economize on raw materials.

Product design of most connectors was standardized to reduce the number of product variations. In 1991, the plant produced only 640 stock keeping units (SKUs), a relatively small number for a plant its size. To economize on raw materials, the designers adapted some pins plated with tin rather than gold. Also, to simplify packaging, DJC packaged its connectors only on tape and reels 2000 connectors per reel/tape, even though the industry standard was 1500 connectors per tape/reel. Thus, DJC’s engineers undertook extensive value engineering to implement cost saving designs which did not compromise on product quality or performance. 2.5. Process Technology There were several principles which guided the process technology, they were 1. Pre-automation: These activities were done to make the production process suitable foe highly reliable automation. Specifying raw material quality and process tolerance levels were also some pre-automation activities. 2. Better to use an old reliable process than a new, less reliable one. Thus, to ensure smooth runs, processes were operated below maximum speed. Emphasis was placed on eliminating unscheduled downtime. 3. Absolute reliability on upstream molding process: As molding was an important process in the manufacturing of a connector, it was important to ensure the molds were fault free. Regular maintenance and replacement kept the mold yields in excess of 99.99%. Even with such stringent measures, DJC managed to keep it’s annual cost per mold at $29,000 compared to $40,000 for ACC. 4. Reliance on in-house technology development 5. Inter-functional co-ordination of all its technology development activities. 2.6. Process Technology Kawasaki maintained close relationships with a few suppliers of its key raw materials. These suppliers had to meet rigorous quality standards. When Kawasaki received a shipment from a supplier, materials were used directly in production without further inspection. Kawasaki’s sourcing policy demanded frequent delivery which allowed Kawasaki to maintain a raw material inventory that averaged five days. 2.7. Production and Inventory Control To minimize yield losses, production runs were scheduled to be as long as possible. On average, a production run of a particular model lasted one week, though some product lines were run on an almost continuous basis. Long runs were possible due to the limited number of SKUs. Kawasaki’s processing lead times and work-in-progress inventories each averaged 2 days. However, it had a relatively high finished goods inventory of 56 days.

2.8. Workforce Production workers were directly responsible for all activities affecting conversion and material flows and were not specialized to particular processes or functions. Kawasaki paid above industry standards for new graduates from high schools and universities, thus attracting people with high skill and aptitude who could be developed on the job. However, it paid below industry standards for experienced workers. The effect of this system of remuneration is evident from the organization chart that 6 of the 8 Managing Directors had changed over the past 3 yrs.

3. THE AMERICAN CONNECTOR COMPANY The American Connector Company operated four plants in the U.S and two in Europe. Each of these plants produced all the four basic types of connectors and each services a particular customer segment. 3.1. Competitive Strategy of American Connector Company The American Connector Company’s competitive strategy emphasized on both quality and customization. In the marketplace, the company had established a reputation as a high quality supplier; its products were recognized for superior design and performance. Customization was an extension of ACC’s emphasis on quality. Custom orders made up 15% of the company’s total production volume. Historically, ACC had been very profitable, sustaining margins as high as 52%. However, while sales had grown from $252 million in 1984 to $800 million in 1991, gross margins had eroded from 52% to 43% during the same period. 3.2. The Sunnyvale Plant The ACC opened the Sunnyvale plant in 1961 in order to serve the emerging electronics industries in and around Silicon Valley. The plant had started off with a capacity of 1 million units per year, but the last major expansion in 1986 saw the capacity at 600 million units per year. The plant’s utilization peaked in 1986 which proved to be a peak year of demand. Utilization sunk as low as 50% in 1988, but rebounded to 70% by 1991. Using current demand forecasts, the plant was expected to reach 85% utilization by 1996. Because of the depressed market conditions, the Sunnyvale plant made no major investments in capacity or new technology since 1986. So, some of the equipment was no more leading edge. The Finance department had not granted permission for the Sunnyvale plant to procure new equipment. The Director of Production lamented the lack of new technology. There were some nifty new molding presses in the market; it is to be examined whether ACC should buy them. The Sunnyvale plant produced about 4500 different models of connectors.

3.3. Plant Layout The Sunnyvale plant was divided into 5 production areas: Terminal Stamping and fabrication, terminal plating, plastic housing molding, assembly and testing; and packaging The layout can be termed as a repetitive focus or modular process.

ACC – Sunnyvale Plant Layout* *Representative diagram to show process layout, does not portray actual layout as the same is not evident from the case

A batch process or modular process was followed for production which is be depicted by the process flow diagram as below

ACC – Sunnyvale Plant – Production Process Advantages of Modular Process: 1. High degree of Product flexibility 2. Suitable for High Variety, Low Volume production 3. The production takes place in modules, so that a large variety of output options can be obtained by combining various modules Disadvantages of Modular Process:

1. Not suitable for mass production 2. High cost and low utilization 3. High Work-in-progress Inventory 3.4. Product Technology Customization was an extension of ACC’s emphasis on quality. Custom orders made up 15% of the company’s total production volume. It offered a wide range of packaging formats ranging from 10-piece plastic bag to 1500 piece loaded reel. 3.5. Production and Inventory Control The production schedule on any day was supposed to be frozen thirty days in advance. In reality, however, the schedule was routinely changed to accommodate rush orders and requests from important customers. ACC prided itself for being responsive to customer’s needs in this regard. Sunnyvale’s processing lead time averaged 10.8 days, while the processing lead time for a standard batch was only 10 days, special orders took two to three weeks. ACC carried a finished goods inventory of 38 days. While it had high work-in-progress inventories, the quantity has not been mentioned in the case. The high WIP inventory helped Sunnyvale carry out rush orders as these were pre-produced molded housings and terminals. A large finished good inventory was not desirable as they ran a high risk of obsoletion. 3.6. Quality Quality has been identified as an area offering major opportunity for improvement. Though customers found the quality impeccable, the defect rate within the plant was relatively high (26000 per million units of production in 1990). The numerous defects were a result of new product designs which used increasingly complex pin configurations. Yields on newly designed products entering production for the first time were sometimes as low as 55%. However, yields improved to about 98% once a product was in production for at least one year. 4. COMPARISION OF PRODUCTION PROCESSES OF DJC vs AMERICAN CONNECTOR COMPANY As is evident from the aforementioned process layouts and discussion regarding the same, the DJC Kawasaki layout is made primarily for mass production with high volume of standardized products being produced; while the ACC Sunnyvale plant layout suggests that it was

designed for a high output variety with low output volumes.

5. CHALLENGES TO DJC IN IMPLEMENTING ITS KAWASAKI FACTORY MODEL IN USA A comparative analysis of the situation prevalent in USA versus DJC’s strategy in Japan is as below. S.No

In Terms of

1

Customer Contacts

2

Design Strategy

3

4

Production and Inventory Control

Power Equation between Sales and Manufacturin g

Existing Situation DJC cultivated and maintained close links with the major computer, telecom and electronics companies and distributers in Japan. These relationships represented an important entry barrier in the Japanese connector market

The company's design strategy emphasized simplicity and manufacturability, over innovation. On average, a production run of a particular model lasted one week, though some product lines were run on almost continuous basis. Long runs were possible because of the limited number of SKU's produced at the plant. The balance of power between manufacturing and the sales/marketing division was clearly tipped in favour of manufacturing. A former manager of DJC explained "Sales sometimes needs an unscheduled delivery, but manufacturing just does not allow it. There isn't even a debate".

Situation in USA

Remarks

USA has more than 900 suppliers of connectors. Of these 900, 28 firms existed with a sales of greater than $100 million. 700 standard connector product lines in North America alone. Other designs were custom - produced, usually on a one-year contract with a single connector company and were often accepted as industry standard after the contract expired. A simple connector such as a phone jack sold for only a few cents, whereas a custom designed connector such as one used in military electronics sold for several dollars.

DJC would have to compete in a new market without major customer contacts. Thus, it cannot leverage this strength to compete in USA

A standard connector would fetch considerably less margin compared to a custom designed connector. Is DJC aiming for the mass market? If yes, how low can it get in the price war given the standard connectors can cost a few cents or so. Is it a profitable approach to do so?

700 standard connector product lines in North America alone ACC makes 4500 SKU's

Will DJC be able to maintain such long run times when they need to produce almost 8 times the number of varieties of connectors they produce at Kawasaki?

USA has more than 900 suppliers of connectors, with about 28 firms having market more than $100 million.

Being rigid in delivery schedules will do DJC no good as the customers have a large number of suppliers to choose from other than DJC. Also, as DJC does not have a strong customer base in USA, delivery rigidity will only make it more difficult for DJC to gain a strong foothold in the highly competitive US connector industry

5

6

7

Cost cutting

Packaging Standards

DJC's engineers undertook extensive value engineering to identify and implement cost savings design changes which did not compromise product quality or performance

DJC packaged 2000 pieces onto packaging reel instead of 1500 which was the industry standard. This resulted in lower consumption of reels.

FG Inventory DJC carried 56 days of finished goods inventory.

8

Demand and FG Inventory The product oriented layout works best for high volume, low variety production.

The standard designs were those which had been established by the IICIT, NEDA or by end industries.

Would American Institutions like IICT, NEDA or the end industries accept changes in design? Especially changes like replacing gold with tin where the effect of this change might become noticeable only after considerable use of the product, would customers in USA be willing to take the risk associated with such changes?

To package 2000 connectors in a reel, it was important to get large orders.

Large orders are the standard orders which were mass produced. There would be significantly lower margins in orders which were standard compared to orders which were in R&D stage. Given the short life cycle of electronics, what about the risk of obsoletion of the connectors in inventory? It is evident that the DJC plant operated on high volumes and high yield and plant utilization rates, thus reducing cost. However, does USA have demand for such a huge volume of connectors from DJC?

5.1. Cost Analysis of DJC Kawasaki in USA Using the data given in Exhibit 7 and 8 of the case, we arrive at the below cost analysis for DJC Kawasaki plant, if a similar plant was to be set up in USA. It should be observed from Table 1, that in 1986, while DJC’s capacity utilization was 80%-90%, it’s cost were much higher compared to Sunnyvale. However, in Table 2, in 1991, DJC’s capacity utilization rose to 99% while Sunnyvale plant’s capacity utilization fell to 70%. In this scenario, DJC’s COGS were comparatively lesser than Sunnyvale’s. Observations from Cost Analysis: 1. It is unknown whether DJC can achieve such high utilization in USA, if it sets up a plant in USA. As the demand in USA was low and competition high, it is evident that running a plant at 99% capacity utilization will be a tough task for DJC. 2. Given the connector was a very small and inexpensive component of electronic equipment, it formed only about 2% of the product cost of the end product. As electronic equipment has a short lifespan, thus flexible delivery is a more important

aspect than cost of the connectors. As DJC would be rigid with delivery dates, a customer would pay a few thousand dollars more to ACC to have a special order made than lose out due to rigid schedules of DJC. 3. It should be noted that the prices below are the prices on an average. As DJC made standard connectors it’s per connector price would hover around the below price. But, ACC had 15% of its sales in custom build connectors, where it would be able to charge a premium. Thus, ACC has the ability to reduce the prices of standard connectors below the price of DJC and offset the additional cost with higher margins from custom build products. Thus, ACC’s standard products can be as competitively priced against DJC’s, all the while making good margins in the sale of custom built connectors.

1986 Capacity Utilization No. of Types of Connectors Raw Material, Product Raw Material, Packaging Raw Material Cost Labour, Direct Labour, Indirect Total Labour Electricity Depreciation Other

DJC/Kawasaki DJC in USA ACC/Sunnyvale (in $) (in $) (in $) 80-90% 80-90% 85% --3500 14.32 8.592 10.4 3.27 1.962 2.25 17.59 10.554 12.65 7.63 8.393 2.3 2.53 9.93 10.923 8.53 2.47 1.976 1.8 7.63 7.63 5.52 4.12 4.12 4.41

TOTAL

41.74

35.203

24.38

Selling Price per connector @40% GM

0.058

0.049

0.034

Table 1: Cost of Goods Sold per 1000 connectors in 1986 if DJC setup a plant similar to Kawasaki plant in USA

1991 Capacity Utilization No. of Types of Connectors Raw Material, Product Raw Material, Packaging Raw Material Cost Labour, Direct Labour, Indirect Total Labour Electricity Depreciation Other

DJC/Kawasaki (in $) 99% 400 12.13 2.76 14.89 3.02 0.75 3.77 1.4 1.8 4.24

DJC in USA ACC/Sunnyvale (in $) (in $) 99% 70% 400 4500 7.278 9.39 1.656 2.1 8.934 11.49 3.322 0.825 4.147 10.3 1.12 0.8 1.8 5.1 4.24 6.1

TOTAL

26.1

20.241

23.49

Selling Price per connector @40% GM Price of end product

0.037 1.827

0.028 1.417

0.033 1.644

Table 2: Cost of Goods Sold per 1000 connectors in 1991 if DJC setup a plant similar to Kawasaki plant in USA * We have considered depreciation in USA and Japan to be the same as per the Exhibit 8 : Cost Indices.

6.

SUGGESTED STRATEGY FOR ACC TO COUNTER DJC’S ENTRY INTO THE US MARKET

It is evident from the above analysis that though DJC’s strategy succeeded in Japan, the same might not work in the US market. Nevertheless, ACC is not completely safe, DJC does pose some threats to ACC. ACC should be ready with a counter strategy to eliminate DJC’s threat and save its market share. There are many areas where ACC is found to be lagging behind and some suggestions for ACC’s future strategy are as below.

S.No

1

In Terms of

Process Layout

ACC Sunnyvale Existing Situation

Threat from DJC

The plant was divided into 5 production areas. This was a typical modular process layout. Modular process layouts are designed to accommodate high variety and low volume production.

Though there was high variety in connectors, the volumes are not low. Also, 85% of ACC's orders were standard orders while only 15% were custom built connectors. Designing a plant around 15% of the orders is not justifiable. Upon the entry of DJC into the US market, ACC stands to lose it's 85% standard sales as DJC Would be selling the same standard equipment at almost half the price.

Given the high rate Bottlenecks at which the 2 in connectors could be production molded, a batch of housings was almost always ready for assembly before the terminal plating operations were completed

Suggested Counter Strategy for ACC As ACC has 85% orders as standard orders, it is advised that ACC shifts its method of production from batch process to lean production for this 85%. Having combination layout with a product layout for standard orders and process layout for custom orders will help achieve this. A product layout with product focus with a capacity of 510 million units may be implemented for standard orders while a modular process with capacity of 90 units be implemented for custom orders. a)ACC could benefit from following DJC's strategy of running the line at lower than maximum speed. Thus, this holding area for holding finished housings can be eliminated, ensuring better space utilization. b)Augmenting the plating capacity to eliminate the bottleneck might not be a viable strategy at the moment as there is inadequate market demand to justify expenditure for augmenting the capacity.

3 Quality

New 4 Molding Presses

Quality Losses 5 Plant Not Operating

The defect rate within the plant was relatively high 26000 per million units of production in 1990. Yields on new designs was sometimes as low as 55%. The Sunnyvale plant had always been a technology leader. The Finance department had not granted permission for the Sunnyvale plant to procure new equipment. The Director of Production lamented the lack of new technology. There were some nifty new molding presses in the market; it is to be examined whether ACC should buy them.

From Exhibit No 6 of the case, it is observed that 28.6% of loss in fixed asset utilization is due to plant not operating.

Making production of custom products and standardised products as two different manufacturing layouts, and having inspection at every stage (TQM) of production can reduce defects and improve the first time yield rate.

For DJC molding was an important process in the manufacturing of a connector, it was important to ensure the molds were fault free. Regular maintenance and replacement kept the mold yields in excess of 99.99%. Even with such stringent measures, DJC managed to keep it’s annual cost per mold at $29,000 compared to $40,000 for ACC. Sunnyvale operated only for 3 shifts a day, for 5 days a week for 50 weeks a year. This increased start up and shut down costs. Kawasaki on the other hand minimized these costs by running the plant for 24 hours a day, 7 days a week and 330 days a year. Given the loss in fixed asset utilization and the additional shut down and start-up costs, ACC might be out priced by DJC.

It is to be examined whether the new technology is the reason for DJC's high yield and low cost of Molds. Also, if new molding presses could reduce the defect rate, investing in new molding presses would be a good investment. However, if the new molding presses were solely to increase output, it would not serve any purpose in the present situation as the bottleneck was plating and not molding.

ACC should implement 24 hours a day, 7 days a week and 330 days a year working of the plant. This will reduce the lead time for customers and also reduce shutdown and start-up cost all the while increasing the fixed asset utilization.

Quality Losses 6 NonScheduled

7

From Exhibit No 6 of the case, it is observed that 28.6% of loss in fixed asset utilization is due to non-scheduled outages.

DJC's non-scheduled outages were only 13.2%

ACC was characterized by its emphasis on both quality and customization.

DJC would be marketing itself as a low cost supplier of connectors.

Marketing Strategy

This shows that the plant has fallen into improper maintenance. It is important for ACC to schedule more frequent maintenance of equipment as the plant is aging. Also, some old and aging equipment might be replaced for newer ones to reduce this loss of asset utilization. ACC has 15% of its sales in custom build connectors, where it would be able to charge a premium. Thus, ACC has the ability to reduce the prices of standard connectors below the price of DJC and offset the additional cost with higher margins from custom build products. Thus, ACC’s standard products can be as competitively priced against DJC’s, all the while making good margins in the sale of custom built connectors.

7. CONCLUSION It can be safely concluded that though DJC does pose a significant threat to ACC, with some changes in the production process, ACC can effectively counter the threat of DJC’s entry into the US market. 8. REFERENCES th

[1] Jay Heizer and Barry Render, “Operations Management, 8 Edition”, Chapter 7 – Process Strategy th [2] Jay Heizer and Barry Render, “Operations Management, 8 Edition”, Chapter 9 – Layout Strategies