Q1 How serious is the threat of DJC to American Connector Company?
Answer - The threat of DJC to American Connector Company is very high. Following are the reasons:
Ø 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 ($/1000 Units) | PLANT IN USA |
| Raw material, Product + Packaging | 12.13+2.76=14.89 | 14.89 * 0.6 =8.93 |
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Ø As Sunnyvale’s 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 its 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.
Ø Work in process inventory cost is very high in case of ACC in comparison to DJC. This in turn is 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).
Ø 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)
Ø 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)
Ø 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.
Ø 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:
Ø 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.
Q2 :How big are the cost differences between DJC’s plant and American Connector’s Sunnyvale plant? Consider both DJC’s performance in Kawasaki and it’s potential in the United States.
Answer: 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 Sunnyvale’s 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 ($/1000 Units) | PLANT IN USA |
| Raw material, Product + Packaging | 12.13+2.76=14.89 | 14.89 * 0.6 =8.93 |
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 Sunnyvale’s 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 | KAWASAKI ($/1000 Units) | PLANT IN USA |
| Electricity | 1.40 | 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.
If we take into account cost indices of US VS JAPAN and above cost factors, cost of manufacturing operations of DJC in US would be as low as 25% of the current production cost of 26.10 $.
DJC KAWASAKI
DJC/USA
Q3: What accounts for these differences? How much of the difference is inherent in the way each of the two companies competes? How much is due strictly to differences in the efficiency of the operations?
Answer-
a) There are many reasons for these differences:
Ø Fixed Asset utilisation: Due to continuous factory runtime, the overall utilisation of fixed asset increases for DJC Kawasaki in comparison ACC Sunnyvale’s plant.
Ø Raw material cost: In Japan raw material cost is twice as much high as in America.
Ø Production Process: Due to batch production system in ACC, there were changes required in production line every time product was changed which lead to less efficiency and lower expertise in churning out a product. This issue was not there with DJC continuous production process with lesser number of product variations.
Ø Quality issues: The number of defective finished goods is very less for DJC when compared to ACC.
b) The basic differences are:
Ø Technological Advantage: In house R&D team which was bringing difference in terms of technology, DJC was producing machines and customizing it according to their needs, thus eliminating the need for external technology innovation.
Ø Low inventory cost: DJC maintained low raw material inventory, where they ordered the raw materials as per requirement and pull strategy for manufacturing.
Ø Nearness to raw material suppliers and end users: The location of the company which played a equally important role for eliminating transportations and logistic baggage. The company location was chosen such that it was near the major Japanese electronics companies and also near the major raw material suppliers.
c) The efficiency of Sunnyvale was very low as it was producing 26000 defected units in 1 million. There was quality issue which was leading to overall effect on productivity and profitability decrement. If DJC comes to America and sets up a plant with a very high efficiency, as they did in Kawasaki, American Connectors will lose their business to DJC.ACC finance teams were also not allowing funds to upgrade their technology. This would also affect the efficiency of the operations. Further to this 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.
Q4. What should American Connector’s management at the Sunnyvale plant do?
Answer – American connector management should look into the below points of consideration for increase in productivity-
Ø Cost 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.
Ø 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.
Ø Product design innovations which will not allow reverse engineering of product by competitors to a greater level.
Ø Improving the compactness of the connectors will bring some competitive advantage.
Ø 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.
Ø 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.
Ø ACC needs to decrease mould recycling time. This saves time and also introduces new designs.
Ø ACC need to line up the facility layout and minimize inventory holding costs. It needs to follow pull strategy for of raw materials in production line.
Ø ACC needs to focus on quality control as there quality control issues has been identified. 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.
Ø ACC can save cost on colour coded cables/connectors which may be beneficial in longer run.
Ø 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.
Ø 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.
