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    American Connector - Group 5 - Sec C PDF

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    Harshal Wankhede
    The threat of DJC's entry into the US connector industry is high for American Connector Company. DJC has significant cost advantages over ACC, including lower raw material costs that are approximately 23% lower than ACC. If DJC builds a plant in the US, its total manufacturing costs would be around 40% lower than ACC's costs. The large cost differences are due to DJC's standardized products, high degree of automation, and efficiencies in production that allow it to utilize its plant space and labor more efficiently than ACC.

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    American Connector - Group 5 - Sec C PDF

    Uploaded by

    Harshal Wankhede
    87 views8 pages
    The threat of DJC's entry into the US connector industry is high for American Connector Company. DJC has significant cost advantages over ACC, including lower raw material costs that are approximately 23% lower than ACC. If DJC builds a plant in the US, its total manufacturing costs would be around 40% lower than ACC's costs. The large cost differences are due to DJC's standardized products, high degree of automation, and efficiencies in production that allow it to utilize its plant space and labor more efficiently than ACC.

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    The threat of DJC's entry into the US connector industry is high for American Connector Company. DJC has significant cost advantages over ACC, including lower raw material costs that are approximately 23% lower than ACC. If DJC builds a plant in the US, its total manufacturing costs would be around 40% lower than ACC's costs. The large cost differences are due to DJC's standardized products, high degree of automation, and efficiencies in production that allow it to utilize its plant space and labor more efficiently than ACC.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    87 views8 pages

    American Connector - Group 5 - Sec C PDF

    Uploaded by

    Harshal Wankhede
    The threat of DJC's entry into the US connector industry is high for American Connector Company. DJC has significant cost advantages over ACC, including lower raw material costs that are approximately 23% lower than ACC. If DJC builds a plant in the US, its total manufacturing costs would be around 40% lower than ACC's costs. The large cost differences are due to DJC's standardized products, high degree of automation, and efficiencies in production that allow it to utilize its plant space and labor more efficiently than ACC.

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    © All Rights Reserved
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    of 8

    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 scale-
    The 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 Materials-
    Comparison 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, 2.76 0.6 1.66


    Packaging

    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 cost-
    If 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 ACC@ Sunnyvale DJC@ Kawasaki Index DJC @ US


    9.39 12.13 0.6 7.28
    Raw Material,
    Product
    2.10 2.76 0.6 1.66
    Raw Material,
    Packaging
    - 3.02 1.1 3.32
    Labor, Direct
    - 0.75 1.1 0.83
    Labor, Indirect
    10.30
    Total Labor
    0.8 1.40 0.8 1.12
    Electricity
    5.10 1.80 1.0 1.8
    Depreciation
    6.10 4.24 1.0 4.24
    Other
    33.79 26.10 20.25
    Total
    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 Inventory-


    DJC 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 Advantages-
    DJC 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 800 600


    units)

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


    = 2121.21 = 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) + (5.46*6000*396/3) =


    (6.63*7920*30/3) = 2.64 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 15.1 10.9 DJC utilized its available plant place more
    output/square efficiently
    feet Utilization

    Connector 7.45 1.06 DJC was successful in getting more output from
    output/employee its employees reducing per unit cost
    utilization

    Fixed asset 75.40% 30.20% DJC’s asset utilization was much more than that
    utilization of ACC

    SKUs 640 4500 Reduced cost and complexity associated with


    shorter production runs for DJC

    Yield 99.99% 55% initially, Non standardized products resulted in lower


    98% after a yield for ACC
    year

    Production 800 mn 600 mn Lower fixed per unit cost for DJC because of
    capacity higher continuous production

    Finished goods 56 days 38 days Higher inventory holding cost for DJC but
    inventory smooth flow of materials

    Lead time 2 days 10 days for Relatively few resources to inventory control
    regular item
    and 2-3
    weeks for
    non-regular

    Annual cost per $29000 $40000 Emphasis on in house production of complex


    mold/year molds leads to lower overall cost

    Raw material 5 days 10.8 days Relatively small warehouse and fewer resources
    inventory in handling raw materials for DJC

    Annual operation 330 250 days Higher production days


    days
    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 end-
    product 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.

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