“Looks Bleak”, words of Ms. Larsen who is the vice president of operation at American Connector Company. Ms. Larsen said the above mentioned words when she was reading a report on competitors plan as they were thinking of entering the US market of electrical connectors.
American market had been selling electrical connector since 1970’s when the US experience rapid growth as firms capacity were building up to meet the growing demand. However, soon by 1980, the market started to go down and since because of the boom in 1970’s there were a lot of suppliers in the market which lead to excess capacity production but less demand which lead to price competition amongst all the companies that had entered the US market since 1970’s. Electrical connector were in so demand in the first few years of its launch but because of very large amount of supply in the market, sales for each company went down by 3.9% and the customers had demanded better quality and lower prices which lead to lower profit at year end. AMP inc. which had the most market share of 16% was the market leader as their sales were over $800 million. American Connector and DJC were however, coming in the second tier of the market as there sales were in between $500 million to $800 million.
American Connector company (ACC) was one of the companies that supplied the electrical connectors is the US, however recent news of DJC, a Japanese corporation which is in the same business is looking to expand its production in US which brings tension amongst its competitors because DJC is known for its cheap production in Japan and if they brought the same strategy in US, DJC would take over a good amount of market share from the US manufacturers. US have a very competitive market for the electrical connectors but according to Ms. Larsen, US manufacturers would have the cost advantage over DJC if DJC decides to enter the US market.
Electrical Connectors are devices that are made to attach 2 different wires together or attach wire to outlets, attach wire to different components or chip to PC boards, or attach PC boards to other boards. These connectors that are being produced are able to run different product application like military and aerospace electronics, industrial electronics, telecommunications equipment, computer and office equipment, automobiles and consumer electronics and appliances.
DJC, the competitor for ACC produced a variety of electronic connectors that could be used in computers, telecommunication, and consumer electronics as they produces the same products like other competitors which are, wire to wire, wire to outlet, item to board and board to board. DJC competitive strategy was that they cultivated and maintained links with major computer, telecommunication and electronic companies and distributors in Japan which made an entry barrier for others to enter in the Japanese market. DJC was much innovated because of their simple and manufacturing ability as stated in their design strategy.

DJC before had their designed based on reverse engineering of other companies design because they would copy the products in the market and supply them for lower prices. USA had spent a lot on R n D and thus they would produce products accordingly which was then copied by DJC and supplied in the market. DJC didn’t just copy the design and supplied in the Japanese market but made it very customized to sell the products in the Japanese market, as their products were designed to maximum compactness to cater OEM. DJC’s hierarchical structure had a president of the company, Mr. Esaka who was a hand on leader had appointed eight managers who would manage their department and would report directly to him to reduce communication gap and save on time and cost by making decision quickly.

ACC, the US based company, operated four plants in US and two plants in Europe. Each plants produced the four basic component which are wire to wire, wire to outlets, attach wire to different components or chip to PC boards, or attach PC boards to other boards. And each of the components was serving a different segment of the market. ACC provided high quality product that no competitor was able to provide and therefore was known for superior design and better performance and excellent customer support. ACC provided customized products that customer needs. Large customers were worked with employees to develop a good relationship and develop a more unique solution to specific connector problems. ACC, a very profitable company with margins as high as 52%, were putting in efforts to market the company globally and increase its profitability by growing its brand name around the world.

Japanese market was facing intense pressure and problems due to increase in labour and raw material cost, YEN went up, and increase import penetration. Due to all these problems, company was losing its objectives of achieving 50% margin on its product. Due to all the above mentioned problems, company’s president had decided to open up the plant in Kawasaki so that they can achieve asset utilization of 100% and to reach 99% level of yield on raw material. They also set a standard of customer complaints: 1per million unit of output. All these lead them to a position that would reduce their cost in Japan because their main cost that was comparatively higher than the US competitors was the raw material cost in the country which rose their cost up.

Kawasaki plant was chosen because of its location. It was located near the competitors and the major supplier of raw material. Their raw material cost went down as transportation cost went down because DJC required transportation of raw material almost every day for some products and some product were transported within a week’s/months’ time. Kawasaki plant area had an ample amount of highly skilled labour available. Kawasaki plant had helped DJC to increase the skilled labour so that a lot of work can be done by having few people as they could soon reduce the size of the workforce of all types of workers involved in production. Kawasaki plant was layout in such a way that four large cells were made and each was responsible for producing one of the four general types on connectors like: Wire to wire, Wire to outlet, Item to board, Board to board, exception of plating, all the process needed to manufacture a complete connector were located in each cell.

However, Plating was separately organized to utilize the high fixed cost equipment and protect the rest of the factory from exposure to corrosive chemicals and noxious fumes. Each cell had about 2-6 production lines, with each line consisting of terminal stamping, housing molding, assembly and packaging. Successive stages were located by each other in a line to minimize cost and travel time. Kawasaki layout was carried in a very efficient way as assembly operations were located few feet away from each other therefore; product was easily transported to next cycle. Thus Kawasaki catered to many customers in different type of packaging with different quantity.

Kawasaki’s production reflected the goals and gave reliable operational ways to manufacture the product. Raw material was economized by adapting durable material and produce connectors to use pin plated with tin rather than gold. This lowered the cost because even though gold was more reliable but it was more expensive than tin and was a better performer in low power applications. DJC packaged its product on tape and reels to reduce cost. All these above points made it easier for DJC to produce the product without compromising on quality or performance and still reduce the cost by reducing other unnecessary items in the production process. Pre automation was carried out in such a way that every process had an individual assigned to it, and each individual was dedicated to a single assembly line. And each assembly line was laid out in such a way that the product would continue to go in a straight line from start to the final assembly.

Kawasaki plants relied on upgrading the current system rather changing the system which may incur failure because reliable process was considered absolutely essential in keeping the process running smoothly and in such a speed to avoid downtime in the production process. The plant had an absolute reliability in up streaming molding processes to make molding virtually faultless. Repairs and maintenance was conducted monthly on the molds. As mold was a very expensive material, costs about $29000. Kawasaki was able to produce in house technology development which succeeded in achieving the expected results. As this division coordinated and manage the activities of the product planning section, the material section, process engineering, and the molding technology group.

The cost of the two competitors, American Connector Company and DJC are as follows:
ACC product design and packaging’s material would’ve costs $20.90 per thousand units.
Kawasaki of DJC produces at $14.89
Sunnyvale of ACC produces at $11.49
Sunnyvale could produce cheaper connectors than ACC. However, ACC should keep in mind that Raw material in Japan costs about almost twice as much as it does in USA

Kawasaki maintained close relationships with few suppliers of its key raw material and trusted the suppliers with the quality. Once shipment was received from the suppliers, it was used directly in the production without any inspection. Kawasaki demanded frequent deliveries from suppliers because most of the parts like resins for housing, metals for the pins and packaging had to be delivered on a daily basis. Frequent deliveries allowed Kawasaki to maintain its average raw material for 5 days compared to ACC with an average of 10.8 days. Kawasaki didn’t have to store any of the material which brings the inventory cost down. Just in time system could be used as its provides inventory right away as deliveries would take place often and final product would be customized as they are made when they are ordered.

At DJC’s Kawasaki plant, production runs were scheduled to be as long as possible, on average a production run of a particular model lasts about a week. Kawasaki plant had complete control over its schedule and mix and refused to make changes for unplanned orders. All aspects of the process and plant layout were designed to achieve a smooth flow of material and minimize work in process inventory. Management expected that they would need to devote relatively fewer resources to inventory control and it seemed like actually Kawasaki’s lead time and WIP inventories each averaged 2 days. Kawasaki maintained a relatively high finished goods inventory of 56 days.

Kawasaki’s had one of the explicit goals to reduce the workforce of all kind like direct production workers, support and overhead staff. Management expected that as plant increased to become automated, less people would be needed to continue the production processes. Kawasaki aimed at attracting people with high skills and aptitudes who could be developed through training and job rotation. Wages were above the average for recent graduates but below average for experienced workers which de motivated all the old employees to stay in the company. On an average, an employee stayed for 9 years at Kawasaki while for other company’s average of any employee was 14.5 years.

At DJC, goals were set for all the managers by the president, but divisional managers were free to pursue those goals in whatever ways they would like. The hierarchical structure at DJC was pushing decision making down in the organization followed at the plant as well so the decision making is done faster without waiting for approval. Plant manager and his top staff were responsible for long term planning issues faced by Kawasaki which is why most production problems were solved by production employees. Number of employees dedicated to various control and support activities was relatively low because all of plants technology and operating policies that was designed to reduce the sources of problems that creates a need for control staff.

ACC opened the plant in 1961 which was called Sunnyvale plant. It was established to serve the electronic based industry around the Silicon valley. However, the new plant had a capacity to produce only one million connectors per year. In 1963, demand for connectors in the industry went up because of which operations were moved to a newly built facility on the site of the present factory. ACC tried to expand capacity at the Sunnyvale site ahead of expected growth due to increase in demand but the problem they faced was that the capacity would increase if long term forecast would indicate a utilization level of 85% or more for the period. In 1986, major expansion took place which brought the capacity to 600 million unit/year as the same year proved to be the peak year in the industry of electronic connector because just after a year, growth slowed down which left excess capacity in the industry. In economics term, excess supply and less demand lead to price wars amongst competitors and better quality demand by customers.

However, problems arose in 1988 when utilization level went down to 50%, even though they expected 85% utilization level. 1991, brought the utilization level back to 70% which was still below the expected level as the ACC expected to bring the demand back to its expected level of 85% by 1996. Sunnyvale Plant, therefore were depressed of the market condition, because the plant has had no major investments in capacity or a newly established technology since 1986 after that boom period. In regards to that, director of production engineering, Bob William stated “that the Sunnyvale plant has been a technology leader and that the company never hesitated to buy the production equipment if they thought it could improve quality or productivity. However, the equipment that ACC currently have is now getting older and that new molding equipment is available in the market but the finance department isn’t approving of it which could hurt ACC in the long run”.

Sunnyvale plant produced 4 major types of connectors that were used in computer, telecommunication equipment and scientific instruments. Sunnyvale plant produces about 4500 different models which included pin configuration, pin plating, packaging formats and they all varied in shape and colour. Sunnyvale Plant was divides into 5 production areas: terminal stamping and fabrication, terminal plating, plastic housing molding, assembly and testing, and packaging. Most of the products were carried out via an automated assembly process. After the process was completed, the full batch of completed batch of connectors were tested and sent to packaging where different packaging was offered.

Following are the way of how Sunnyvale carried out is production: * The process lead time for a batch of connector was typically 10 days for standard item and 2 – 3 weeks for special order item and Average run in molding is down to 1.5 days * Product lines were run for 1.5 to 2 days * Sunnyvale maintained finished goods inventory of 38 days. * Production schedule for an given day was supposed to be frozen thirty days in advance * Average run in molding is down to 1.5 days
ACC had an outstanding reputation for quality. In 1990, quality control effectiveness was going down, 26000 out of the million defects rose tension, yield was considered a problem at first because a newly designed product entering production for the first time were sometimes as low as 55%, however, it improves about 98% once a product was in production for at least a year.

Analysis of Cost Fixed asset utilization % (operating %) | Kawasaki | Sunnyvale | Difference (Sunnyvale-Kawasaki) | plant not operating | 94.30% | 71.40% | -22.90% | non schedules | 86.80% | 76.50% | -10.30% | process failure | 99% | 91.10% | -7.90% | preventative maintenance | 98% | 97.60% | -0.40% | process changeover | 98% | 95.20% | -2.80% | quality losses | 99.30% | 98.40% | -0.90% |
In comparing the productivity, Kawasaki is operating at almost full capacity, as stated in the above table, there is very minimum idle capacity of fixed assets. However, Sunnyvale plant “not operating” and “non-schedule” is in 70's% which shows that management need to step up and make sure that plant isn’t idle and is operated as close as 100%. Sunnyvale, as mentioned in the last column is finding it hard to compete with Kawasaki to operate at full operating level.
Connector output at Kawasaki is 700.3 connectors/employee which shows that the team is dedicated in company’s performance compared to the team at Sunnyvale which only produces 419.76 connectors/employee at Sunnyvale. In other words, ever employee at Kawasaki is able to produce 280.54 connectors more than the employee at Sunnyvale. This can be a big threat for the ACC if they don’t train their employees. These results show lack of experienced/skilled labour. As mentioned in the case, Sunnyvale pay less than average wage to experienced employees which end up leaving and the company would be left with no experience employees compared to its competitors.

use of labour 1991 | Kawasaki | Sunnyvale | Difference | Indirect Labour- control | $81.90 | $70.14 | ($11.76) | technology development | $89.60 | $28.56 | ($61.04) | material handling | $22.40 | $43.68 | $21.28 | mechanics | $30.10 | $49.98 | $19.88 | direct labour -production | $476 | $226.80 | ($249.20) | total | $700 | $420.00 | ($280.00) |

Use of labour: Indirect Labour: Even though Kawasaki employs 94 employees, there cost of labour is higher than Sunnyvale, because of its high production. Even though the company incurred higher indirect labour cost (control) of $11.76, they ended up producing 280 million units more than Sunnyvale, Technology development, even though had a 6% lower percentage in cost, it incurred an extra cost of $61.04. Material handling and mechanics at Sunnyvale had a higher cost by $21.28 and $19.88 respectively which means that even though Sunnyvale produced lesser units, their cost of handling and mechanics per unit is way higher than Kawasaki, which could harm ACC when DJC enters the US market.
Direct Labour at Kawasaki’s was more expensive probably due to overtime hours because Kawasaki had just 94 employees in compare to Sunnyvale with 396 employees. Labour at Kawasaki could be well paid as they are able to produce such high amount of units that 396 employees couldn’t produce at Sunnyvale or production capacity must be very limited at Sunnyvale Cost of goods sold for standard chip to board connector (dollars per 1000 units) | | Kawasaki 1991 - 1986 Change % | Sunnyvale 1991 - 1986 Change % | Raw material/product | -15.29% | -9.71% | Raw material/packaging | -15.60% | -6.67% | labour, direct | -60.42% | - | labour, indirect | -67.39% | - | total labour | | 20.75% | electricity | -43.32% | -55.56% | depreciation | -76.41% | -7.61% | other | 2.91% | 38.32% | Total | -37.47% | 2.67% |
Kawasaki has improved over the year in saving their cost as their raw material cost for product and packaging, direct and indirect labour, electricity and depreciation bills have gone down which saved them about 37.47% of cost in 5 years. (26.1-41.74)/41.74. On the other hand, Sunnyvale has increased their cost over the period of 5 years by 2.67% which gives Kawasaki a great advantage in coming to US. US has a cheap raw material cost which could even reduce the cost of Kawasaki even further. Serious actions need to be taken to reduce cost much lower than Kawasaki by outsourcing or cutting down labour cost, hiring skilled labour to produce the same amount or higher number of units.
ACC needs to cut down on its cost at Sunnyvale plant because Kawasaki plant is operating at full capacity for low cost and if they enter the US market and operate at Kawasaki level then they would affect ACC in a negative way. As said by Jack Mitchell, “DJC should be considered a threat if they come to US and operate a plant like Kawasaki in US”.

In conclusion, Cost of producing connectors needs to be looked after by the management at Sunnyvale. Sunnyvale needs a good motivated team that can do the same work faster and in a more efficient way. ACC should also seeks ways of getting patents on their technology so that DJC doesn’t benefit with the research conducted by ACC.