American Connector_group 5_sec C.pdf

American Connector Company

OPERATIONS MANAGEMENT CASE ANALYSIS

Group 5 | Section C Barsha Bulbul | 1711166 Nitin R Patil | 1711195 Prakashkumar Ahir | 1711155 Sanket Fulpatil | 1711205 Shreyas Raman | 1711208 Sumeet S Kasture | 1711212

1. HOW SERIOUS IS THE T HREAT TO AMERICAN CO NNECTOR COMPANY? The threat of DJC’s entry into the US connector industry is high. The following are the key reasons which explain the high threat: 1. Supply side economies of scaleThe product design of DJC was focused on the goal of continuous and reliable operations. The design of most connectors was standardized, thus manufacturing less variations of connectors. This helped DJC to economize on raw materials. It resulted in spreading out of the fixed cost over larger volumes of similar connectors. Also, limited number of variations reduced the cost of shorter production runs. 2. Cost of Raw MaterialsComparison of the various cost for DJC and American Connector Company is shown in the following table: Cost of Raw Materials (1991) DJC @ Kawasaki vs. DJC @ USA Item

DJC@ Kawasaki

Index

DJC@USA

Raw Material, Product

12.13

0.6

7.28

Raw Material, Packaging

2.76

0.6

1.66

Total Raw Material

14.89

8.94

The raw material cost for the proposed plant in United States has significant cost advantages. The table shown below compares the cost of raw materials of DJC (USA) with American Connector Company Sunnyvale plant. Cost of Raw Materials (1991) ACC @ Sunnyvale vs. DJC @ USA Item ACC@ Sunnyvale DJC@USA Raw Material, Product

9.39

7.28

Raw Material, Packaging

2.10

1.66

Total Raw Material

11.49

8.94

From the above table, total raw material cost for DJC in US is lower than ACC. The raw material cost of DJC at US is approximately 23% lower than ACC. DJC can get significant cost advantage and can threaten the existing players especially ACC, by charging lower prices to customers and thus posing a possible price war.

3. Total manufacturing costIf DJC uses manufacturing processes like Kawasaki, Japan plant then total cost for the US plant can be calculated using exhibit 7 and exhibit 8. DJC Vs American Connector Cost of Goods Sold (dollars per 1000 units) Item Raw Material, Product Raw Material, Packaging Labor, Direct Labor, Indirect Total Labor Electricity Depreciation Other Total

ACC@ Sunnyvale

DJC@ Kawasaki

Index

DJC @ US

9.39

12.13

0.6

7.28

2.10

2.76

0.6

1.66

-

3.02

1.1

3.32

-

0.75

1.1

0.83

0.8

1.40

0.8

1.12

5.10

1.80

1.0

1.8

6.10

4.24

1.0

4.24

33.79

26.10

10.30

20.25 Table 1

DJC has significant cost advantage over ACC. Except electricity, DJC has lower cost/1000 units for every other cost head. Total manufacturing cost for DJC is $20.25/1000 units as compared to $33.79 of ACC Sunnyvale plant. The total cost for the DJC plant will be approximately 40% lower than ACC Sunnyvale plant. 4. Low WIP InventoryDJC offers standardized products as against ACC which supplies more customized products. More customization of products results in more work in progress (WIP) inventory for ACC Sunnyvale plant. It holds WIP inventory of 56 days while DJC has 38 days of WIP inventory. It results in less storage and handling costs compared to the ACC. Higher degree of customization leads to smaller output per square feet of 10.9 (‘000 units) at ACC Sunnyvale plant compared to 15.1 (‘000 units) at DJC Kawasaki. 5. Technological AdvantagesDJC uses high degree of automation and relies on inhouse technology development. Each production line at DJC is straight which reduces the handling costs. Additionally, one worker can simultaneously work on two production lines. It helps to reduce total labor costs. Total labor force at DJC is 94 compared to 396 of ACC.

However, there are few factors which indicate DJC won’t pose much threat to ACC in the short run. 1. ACC produces highly customized products which are quite relevant in US market. DJC produces less varieties of products. Also, DJC supplies connectors with pins plated with tin instead of gold, which is acceptable in Japanese market. But it might not be acceptable to US customers, hence to supply connectors with gold plated pins, overall cost goes up. Since number of competitors are very high, the US customers have very high bargaining power. Hence, DJC cannot rely on tin plated pins to compete in the US market. 2. If DJC decides not to build a plant in US and import from Japan, then it results in higher lead time than competitors. In such case, ACC has the advantage of shorter lead time. From the above key parameters, the threat of entry of DJC is high for ACC if it plans to build a plant immediately in US.

2.HOW BIG ARE THE CO ST DIFFERENCES BETWE EN DJC’S PLANT AND AMERICAN CONNECTOR’S SUNNYVALE PLANT? CO NSIDER BOTH DJC’S PERFORMANCE IN KAWASAKI PLANT AND ITS POTENTIAL IN UNITED STATES. From Table 1, the cost difference between DJC’s Kawasaki plant and ACC Sunnyvale plant is 7.69 dollars/thousand units. Similarly, the difference between DJC’s US plant and ACC Sunnyvale plant is 13.549 dollars/thousand units. Except for low material costs, all other costs are higher for ACC than for DJC. So, we can say that DJC can manufacture the connectors in US at about 60% of the costs of ACC. Following table compares the various costs incurred by DJC and ACC. We have assumed that the total production in a year as 700 million units for following calculations. Cost Comparison between DJC and ACC DJC/Kawasaki

ACC/Sunnyvale

Annual Production (million units)

700

420

Annual Production Capacity (million units)

800

600

Capacity Utilization

87.50%

70%

Total operating hours

330*24 = 7920 hrs

50*24*5 = 6000 hrs

Daily Production (in '000 units)

(700*10^6) / (330*1000) = 2121.21

(420*10^6) / (250*1000) = 1680

Direct Labor Cost ($/hr)

(3.02*2121.21) / (64*8) = 12.51

Indirect Labor Cost ($/hr)

(0.75*2121.21) / (30*8) = 6.63

Total Labor Cost ($/hr)

12.51 + 6.63 = 19.14

(10.3*1680) / (396*8) = 5.46

Annual Labor Cost ($ mn)

(12.51*7920*64/3) + (6.63*7920*30/3) = 2.64

(5.46*6000*396/3) = 4.32

Annual Material Cost ($ mn)

14.89*700*1000 = 10.42

11.49*700*1000 = 8.04

Since the DJC plant was operated on a continuous basis as well as slow growth in demand of ACC explains the greater capacity utilization of DJC (87.5%) as compared to ACC (70%). Due to reduced number of workers in the production activities as well as less number of manpower allocated for inventory management explains the reduction in annual labor costs of DJC in comparison to ACC. Other cost advantages have been elaborated more in Question 1 and 3.

3.WHAT ACCOUNTS FOR THESE DIFFERENCES? HOW MUCH OF THE DIFFERENCES ARE INHE RENT IN THE WAY EACH OF THE TWO COMPANIES COMPETE? HOW MUCH IS STRICTLY DUE TO DIFFERENCES IN EFFICIEN CIES OF THE OPERATIONS? DJC’s Kawasaki plant was started with the vision of making it highly automated, continuously operating plant. While that of ACC’s Sunnyvale plant was expanded to fulfill the forecasted demand within certain flexibility. The differences between these two plants can be implicated from multiple quantitative and qualitative factors as follows: Quantitative factors: Factors

DJC

ACC

Implications

Connector output/square feet Utilization

15.1

10.9

DJC utilized its available plant place more efficiently

Connector output/employee utilization

7.45

1.06

DJC was successful in getting more output from its employees reducing per unit cost

75.40%

30.20%

DJC’s asset utilization was much more than that of ACC

SKUs

640

4500

Reduced cost and complexity associated with shorter production runs for DJC

Yield

99.99%

55% initially, 98% after a year

Non standardized products resulted in lower yield for ACC

Production capacity

800 mn

600 mn

Lower fixed per unit cost for DJC because of higher continuous production

Finished goods inventory

56 days

38 days

Higher inventory holding cost for DJC but smooth flow of materials

Lead time

2 days

10 days for regular item and 2-3 weeks for non-regular

Relatively few resources to inventory control

Annual cost per mold/year

$29000

$40000

Emphasis on in house production of complex molds leads to lower overall cost

Raw material inventory

5 days

10.8 days

Relatively small warehouse and fewer resources in handling raw materials for DJC

Annual operation

330 days

250 days

Higher production days

Fixed asset utilization

Qualitative factors: •

•

•

•

Process changeovers- DJC’s vision of continuous operating plant helped them avoiding start-up and shut-down costs while ACC’s frequent change overs with 1.5-2 days lasting processes increased these costs Material costs- DJC economize its cost of raw materials by using much cheaper tin plated pins instead of gold plated ones for connectors. It restricted connectors’ use in low power applications but was most cost effective. Process technology- While DJC focused on automating its production processes it had given equal importance on the activities required to be automated. They also studied worker movements & motions and raw material quality involved to find out the ways where process can be made more efficient. Quality control – To improve the quality, DJC followed the approach of quality check starting from molding of the components later on to improving process inspection system and reducing plant’s waste. They had the vision of keeping customers complaints not more than 1 per million units of output. On the contrary, ACC was doing quality check using older manual method causing 26000 faults per million.

4.WHAT SHOULD A MERICAN CONNECTOR ’S MANAGEMENT AT SUNNYVALE DO? American Connector should consider the points mentioned below for enhancing their productivity • They should opt for better quality control systems to reduce ppm levels and manual inspection. • The management should look over improvising the compactness of connectors to gain some competitive advantage. • They should reduce depending upon outside technology and invest into research and development to develop in-house machinery and have a technological advantage over the competitors. • There should be a quality inspection done at intermediate levels instead of an endproduct inspection. • Lead time control should be done to have an easier order management and lesser inventory pile up. • Fixed asset utilization should be increased, and operational cost should be decreased by controlling the costs of start-up and shut down. • The available space utilization should be increased by going for a change in layout.