American Connector

American connector co. (A) Electrical Connectors Product-market-technology characteristics: • volume: med-high • value: low-med • functionality: critical • variety: med-high (in every electrical/electronic device) • PLC stage: mature • competition: high • technology: low-med capital intensive

American connector co. (A) Competitive dimensions: • cost • quality (size, weight, reliability, etc) • delivery

American connector co. (A) ACC 1. Among top 10 2. Serves computer, telecom, scientific instrument industries 3. Gr.margin dropped to 43% by 4. Strategy: offer broad variety, including customized products; emphasize flexibility

DJC Among top 10 Serves computer, telecom, consumer elec. Industries Gr.margin stable at 50% Strategy: low cost producer; narrow range of high vol. connectors

Historically, the two cos. were separated by geographical mkt focus as well as strategic mkt position

American connector co. (A)

Terminal st. & fabrication

Terminal plating

Housing molding

Assy & testing

ACC’s Sunnyvale plant

Packaging

American connector co. (A)

Terminal plating Terminal st. & fabrication

Housing molding

Assy & testing

DJC’s Kawasaki plant

Packaging

American connector co. (A) Cost item r/m product r/m packg labor electricity depreciation other (OH)

Change in 6 years DJC ACC 0.85 0.90 0.84 0.93 0.38 1.21 0.57 0.44 0.24 0.92 1.03 1.38

Product Automation; High design Multi-fn. trg. capacity changes utilzn.

More admin. & coord.

Cost ($/’000units): DJC: 20.2; ACC: 33.8

Share in late 90s DJC ACC 36% 28% 8% 6% 20% 30% 6% 2% 9% 15% 21% 18% More SKUs

American connector co. (A) Trade-offs involved: • • • • • • • • •

capital cost v/s running cost capital cost v/s WIP holding cost capital cost v/s cost of coordination, control, OH process engg. cost v/s maintenance cost process engg. cost v/s r/m cost product engg. cost v/s manufacturing cost f/g cost v/s wip cost f/g cost v/s cost of unreliable delivery capacity (cushion) cost v/s cost of unreliable delivery

American connector co. (A) Trade-offs involved (continued…): • • • •

supplier development cost v/s cost of delay, r/m quality in-house mfg of key equipment v/s risk of competition capacity thru improvement v/s capacity thru addition risk of losing customers due to standardizn. v/s cost of customization

American connector co. (A) DJC vs. ACC • DJC has lower costs, and has demonstrated the ability to reduce costs over time • Potential sources of cost differentials: – Utilization-driven cost differences – Differences inherent in each firm’s strategy – Differences in operating effectiveness/efficiency

American connector co. (A) Utilization cost differences Current output ( Million $): 420 (ACC)

700 (DJC)

Desired (rated) output ( Million $): 600 (ACC)

800 (DJC)

Depreciation rate at current capacity utilization ($/’000 units): 5.10 (ACC)

1.80 (DJC)

Depreciation rate at desired capacity utilization ($/’000 units): 4.20 (ACC)

1.58 (DJC)

Only a small difference costs are due to utilization

American connector co. (A) Cost differences due to operations strategy Area

DJC

ACC

orgn structure layout product engg.

mfg centered product-focused standardization, r/m cost, DFM reduce matl.flow, incre.improvemnt, new process pre-auto low defect rate long runs, short LT, JIT+MRP, hi f/g invy high utilization, improvement hi worker pdy, less indirect labor

mktg & engg centered process-focused variety (15% customized)

process engg.

quality PPC capacity workforce

process-wise, radical innovation, new process has low yield conf.to customer, inspection short runs, long LT, MRP, non-synchr., small f/g invy maintains excess capacity, addition lo worker pdy, more indirect labor

American connector co. (A)

Comparison of operations tasks: DJC ACC minimize running cost, increase scale, process engg.-driven quality, improvement led innovation, minimize lead time, improve on-time delivery

minimize initial investment cost(?), inspection & PPC driven quality, customized quality, tech.acquisition led innovation, PPC, FG/WIP driven delivery, plan for variety

American connector co. (A) Cost differences due to operations strategy Item

DJC

Competitive priorities

Low cost

Hi flexibility

Less innovative

Cust. responsiveness

Less flexible

Higher costs

$ 52.20

$ 59.28

Avg selling price

ACC

ACC Cost DJC Flexibility

American connector co. (A) Cost differences due to operating effectiveness

ACC Strategy related gap Cost DJC1 Efficiency gap DJC2 Flexibility

American connector co. (A) Cost differences due to operating effectiveness Material cost differences: Efficiency related: mold design ($0.21) + less expensive resin ($0.48) + less mass of housing ($0.18) + less waste ($1.05) = $1.92 Strategy related: tin plating ($3.50) + 2000 piece reel ($0.59) = $4.09

Labor cost differences: Labor cost difference, adjusting for US operations: $6.15 Labor cost difference, assuming ACC can operate full capacity without additional labor (42% increase in labor pdy): $3.02

Fixed cost differences: ACC’s underutilization due to inefficiency: unplan.downtime (23.5) + process fail.(8.9) + prev.maint.(2.4) + quality loss (1.6) = 36.5% ACC’s underutilization due to strategy: plant not operating (28.6) + process changeovers (4.8) = 33.4% ACC is forfeiting a lot of efficiency by serving commodity mkt via an operations strategy developed for customized mkt

Let’s fit ACC & DJC in Top-Down Fit Framework KPI or Ops Task

Priority of KPI

Sub-KPI Element

Capacity

Production system Workforce

Marketing / sales Product Design & Technology

Cost

Quality

Delivery

Customization

High (OW)

Functional (OQ)

High (OW)

High for specialized needs; Low for rest

R/M cost; Fixed opn. Cost; Inventory cost

Process quality (adherence)

Mfg+proc lead time; Inventory

Variety; New designs

ACC KPI or Ops Task

Cost

Quality

Delivery

Customization

High (OW)

Functional (OQ)

High (OW)

High for specialized needs; Low for rest

Sub-KPI Element

R/M cost; Fixed opn. Cost; Inventory cost

Process quality (adherence)

Mfg+proc lead time; Inventory

Variety; New designs

Capacity

(-)

FG inventory (?)

High cushion (+)

Production system

(-)

Inspection (?)

MRP (-) (inadequate)

Process layout (+) Small lots (+)

Marketing / sales

(-)

(?)

(?)

Dictates prodn & design  variety (+)

Product Design & Technology

(-)

Features (?)

Priority of KPI

Design for marketing (+)

DJC KPI or Ops Task Priority of KPI

Sub-KPI Element

Cost

Quality

Delivery

Customization

High (OW)

Functional (OQ)

High (OW)

High for specialized needs; Low for rest

R/M cost; Fixed opn. Cost; Inventory cost

Process quality (adherence)

Mfg+proc lead time; Inventory

Variety; New designs

Low FG inventory (+)

(-)

Capacity

Low cushion (+) Low FG inventory (+)

Production system

Product layout (+) Large lots (+) Automation (+) Low WIP inventory (+)

Standard & automated process (+)

Product layout (+) Low WIP inventory (+) JIT + MRP (+)

(-)

Marketing / sales

Low SKU range (+)

(+)

Std. distribution system (+)

(-)

Product Design & Technology

Design for mfg. & procurement (+)

Design driven quality (+)

(+)

(-)

American connector co. (A) Options for ACC I.

No major structural changes; Improve efficiency slightly to reduce costs * Is the ‘customized service’ niche going to thrive? * How easily can DJC enter this niche?

II.

Adopt DJC model * Are connectors becoming commodities? * Is price increasingly becoming the order winner? * How fast can ACC shift to this strategy?

III. Change to Hybrid model * How fast can ACC shift to a ‘dual-focused’ strategy?

American connector co. (A) Some lessons •

Benchmarking competition requires comparison of changes in performance measures, distinguishing between strategyrelated and efficiency-related differences, and controlling for strategy-related differences

•

Different product-market characteristics require different competitive and operational strategies (Focus), though this comes at a cost

•

Alignment of operations systems & practices to operations strategy must be visible in all areas of operations

•

Sustaining operations improvements and building capabilities is a different ballgame, though an integral agenda of operations strategy