The operations strategy of ACC - The key elements that form the operations strategy of ACC are flexibility, quality and customization, driven by marketing and engineering.

University Degree Business and Administrative studies

Question 1

Operations strategies

The operations strategy of ACC

The key elements that form the operations strategy of ACC are flexibility, quality and customization, driven by marketing and engineering.

Plants

ACC has four plants in the U.S. and two in Europe, which produce four basic types of connectors and each service a particular segment by customization. The U.S. Sunnyvale plant in particular, utilizes 85% of its total capacity. However in 1991 the plant ran at a capacity of 70%. Keeping an excess of utilization however leads to higher costs.

Products

ACC really focuses on the quality and on offering a large variety of products. With salesmen who are also engineers, ACC works together with its customers to optimize customization. Within the Sunnyvale plant approximately 15% of the production is customized and the other 85% are standard designs. In order to produce high quality and innovative products the company invests vast amounts in high-end equipment and plants.

Production process

Sunnyvale has a very flexible assembly and production process, which can be changed at the last minute. The ACC plant operates 120 hours a week. It has relatively long lead times and short production runs and a reasonable small finished goods inventory of 38 days. These features are typical for companies, which apply flexible and customized production.

A disadvantage of the short production runs is that it takes more changeover time and thus leads to higher costs. The WIP inventory is rather high but it buys them the ability to quickly respond to unexpected orders.

Quality

As mentioned before ACC wants to provide their customers with what they want. The quality of the connectors is based upon the specific needs of the customers. ACC often uses expensive materials in the production process of their connectors. They also have a very tight delivery system, which enables to company to deliver on time. Quality does come at a relatively high price as an extra quality check is set up in the end of the production lines to prevent faulty products to be sent to customers.

Organization

Like many American and European companies, ACC is an organization that does not primarily focuses on production. The real forces that drive ACC are marketing and engineering.

The operations strategy of DJC

The operations strategy of DJC is totally based on low-cost.

Plants

The DJC/ Kawasaki plant, located in Japan, produces approximately 800 million connectors per year. Although the company’s goal is to operate at 100% utilization, it ran at 85% utilization in 1991.

Products

All the products of DJC are standardized. Although the connector live up to the needs of their customers, customization is almost impossible. A key issue in the total production process of DJC is simplicity. Simplicity enables a company to produce large volumes of products. This simplicity can be found back in their product-design and form, but also in their production processes.

Production process

The company relies on old reliable processes that have proven themselves in the past. The production processes are all synchronized and will not produce at maximum speed. An in-house technology development group controls the production process and makes sure that there is a high utilization, high raw material yield, and low product failure and defects.

The DJC plant runs 24-7 for about 330 days per year. Changes to the production schedule, such as for special orders, are not possible. The lead times are relatively short and the production runs are long.

Quality

The total production process of DJC is based on low defect rates. The company tries to optimize the yield of raw materials and reduce the number of effects almost down to zero.

Raw materials for example are delivered on a JIT- basis without even needing a quality check. This of course is only possible by establishing intensive relationships with the suppliers and setting up tight contracts.

Organization

DJC is a company with a pure focus on manufacturing. The manufacturing department does not have to justify its actions to other departments. Departments like sales and marketing are completely inferior to the manufacturing department.

Comparing the two operations strategies

The American Connector Company has an operations strategy that emphasizes flexibility and customization. By being flexible and totally live up to de needs of their customers ACC sells more like a particular service than a product. ACC is totally customer focused and continues to meet the demands of the service customer by continuously innovating, increasing flexibility and consumer responsiveness. This process is a high cost situation but gives ACC a highly competitive edge. The customised product is clearly their competitive advantage of ACC. Unfortunately this is only 15% of their sales.

DJC has an operations strategy that is fully focused on reducing cost. By doing so DJC meets the demands of the mass production consumer in simple, reliable and efficient way.

High utilization, long production runs, low cost raw materials, low product variety all lead to lower costs. Due to the focus on mass production, DJC is not flexible and less innovative.

Question 2

What accounts for the significant cost difference between ACC and DJC?

Answer this question by considering the following sub-questions.

If DJC would operate in the US, how would their costs be ...

This is a preview of the whole essay

DJC has an operations strategy that is fully focused on reducing cost. By doing so DJC meets the demands of the mass production consumer in simple, reliable and efficient way.

High utilization, long production runs, low cost raw materials, low product variety all lead to lower costs. Due to the focus on mass production, DJC is not flexible and less innovative.

Question 2

What accounts for the significant cost difference between ACC and DJC?

Answer this question by considering the following sub-questions.

If DJC would operate in the US, how would their costs be compared to ACC?

In order to give an answer to this question we should have a look at the way DJC has organized its production process and where exactly are DJC’s cost drivers.

Labor use:

Indirect labor Direct labor

DJC 32 % 68%

ACC 46 % 54 %

Source: HBS case 9-693-035, America Connector Company (A)

From this we can conclude that labor costs are far more production related at DJC than at ACC. This is an advantage for DJC, because those costs will only occur when it produces.

This is totally in line with DJC’s strategy. All aspects of the production process and the plant layout were designed to achieve a smooth flow of materials and to minimize work-in-process inventory. Frequent deliveries allowed DJC to maintain raw material inventories that averaged only five days. The low level of raw material inventory, in turn, allowed DJC to have a relatively small warehouse and to reduce the amount of resources devoted to managing and controlling raw material stocks.

Fixed asset utilization:

DJC 75.4 %

ACC 30.2 %

Source: HBS case 9-693-035, America Connector Company (A)

DJC has a big advantage over ACC concerning the fixed asset utilization.

Material cost ($ per 1,000 units):

Raw material, product Raw material, packaging

Direct conv. Indice conv. Direct conv. Indice conv.

DJC 12.13 12.13 2.76 2.76

ACC 9.39 15.65 (+22.5%) 2.1 3.5(+21.15%)

In bleu, the US prices converted into Japanese prices.

Source: HBS case 9-693-035, America Connector Company (A)

Taking into account the price differences between the US and Japan concerning Raw materials you can see (in blue) that DJC has a big cost advantage over ACC. The numbers have been converted using the Cost Indices table, United States / Japan (1991).

Looking at the above mentioned figures, DJC would have a competitive cost advantage over ACC when maintaining its current efficiency level. At the cost level everything looks favorable. But you should also take into consideration that a cost advantage is not always a guarantee for success when going abroad.

How has the cost of both DJC and ACC developed from 1986 to 1991?

Cost of goods sold compared for DJC and ACC from 1986 until 1991

DJC ACC

Raw material, product -15.3 % -10.5 %

Raw material, Packaging -15.6 % -6.7 %

Labor, direct -60.4 % -

Labor, indirect -67.4 % -

Total labor - + 20.75 %

Electricity -43.3 % -55.6 %

Depreciation -76.4 % - 7.6 %

Other - 2.9 % -38.32 %

Source: HBS case 9-693-035, America Connector Company (A), the 1986 figures have been compared with those of 1991 the relative difference have been calculated in percentages.

In line with its strategy we can see that DJC has clearly been working on achieving a cost reduction in its production process. It has applied several efficiency enlarging production processes that are shown in the decline of raw material usage and the enormous decline in labor costs (mostly due to automation). ACC still offers a lot of different packages, which can be seen in the rather small decline of Raw material cost.

The rise in labor costs at ACC is mainly due to the fact that few investments have been made in new machineries. Quoting Bob Williams, the director of production Engineering:

“I know things have been tight the few last years, but I’m beginning to worry that some of our equipment is no longer leading edge stuff. In the past two years, some nifty new molding machines have hit the market, but our finance people won’t let us buy them. Over the long term, we’re really going to hurt ourselves if we don’t get more aggressive in procuring new equipment”. Wages have gone up but the efficiency of the machines remained the same therefore increasing the labor costs.

We can conclude from this that DJC has reached a far bigger efficiency with the strategy it applied.

The DJC Corporation used various techniques to reduce cost; the major influences will be highlighted:

The Strategy

The overall goal of the DJC is focused at cost reduction, a former manager stated: “High quality and a low cost position is necessary for long-term success, this can be achieved by manufacturing excellence”

The DJC Corporation focuses on simplicity and manufacturability over innovation. Copying the improvements of the American products reduces research and Development costs (often referred to as straddling). The designs of the products were adapted to economize on raw materials and to simplify manufacturing (exhibit 3 in the case shows the specific reductions). The DJC Corporation also looked closely at the “value capturing” aspect of each individual product. When features did not add perceived value to a customer they were not implemented. In order to focus on the Resources of the Company as the competitive advantage, the power between manufacturing and marketing/sales shifted to the manufacturing department. This reduced cost because now a tight production schedule, that yielded the maximum output with taking the constraints such as labor costs into account, was realized.

The Manufacturing

The Kawasaki plant was designed to be one of the lowest cost producers in Japan because of the following goals:

Asset utilization of 100%
Yield on raw material of 99%
Reducing the number of bad products (having a low standard deviation in the output)

These goals were merely (for instance the 75.4 asset utilization above) achieved by the following (this also accounts for the ‘old’ plants):

Logistical advantage: being close to the raw materials
Close to suppliers and customers therefore low transportation costs.
The plant lay-outs: combining production lines in cells to unify the production of a single product and thereby achieve efficiency advantages as opposed to a more distributed production. Also, the automation of assembly greatly benefited the efficiency and thereby the reduction in costs.
Pre-automation: maximum efficiency using automation can only be achieved when a process is completely understood. Pre-automation is used to model the business process to the maximum reachable efficiency border.
If it isn’t broken, don’t fix it. The DJC Corporation focuses on continuous improvement of existing processes.
In-house process engineering.
Reliability in the upstream molding process.
The inter-functional coordination off all the technology development activities.

Outsourcing

Close relationships with external suppliers and rigorous quality demands reduced the necessity of checking a shipment; outside materials could immediately be used in the production process. The improvement of quality of the materials was a joint effort between the DJC Company and the suppliers.

Workforce

The DJC Company used a HR strategy of hiring young and skilled workers, thereby achieving a maximum utilization of the workforce and was able to hire fewer employees. Also because processes became more effective fewer employees were needed.

Organization

The plant operated under a high level of autonomy, though the goals were clear.

Because of optimization processes only 32% of the employees were needed in the indirect labor positions.

Trade off’s

The “high quality, low costs” strategy the DJC Corporation chose required the following trade off’s:

Product design was standardized to reduce the number of product variations
Standardized packaging (only tape and reels).
Costly employees because skilled workers were hired to achieve a utilization advantage.
Relatively high expenditures on fixed assets. To achieve high utilization and low “downtimes” the best equipment was selected investments in maintaining equipment with the goal of eliminating unscheduled downtimes.
Relatively high expenditures
Production processes ran below maximum speeds to ensure error free production and reduced downtime.
High costs in replacing molds for the upstream molding processes.

Overall

The DJC Company invested heavily in the quality of their production process. This resulted in less errors being made and a production that was almost never halted by broken machines. Although high investments were required to achieve such an efficient production, in the end the benefits outweigh the costs. The DJC Company regards manufacturing excellence as the source of the low cost position and high quality products. This mission is clearly reflected by the high investments, mentioned above, in the manufacturing process.

Question 3

Does DJC pose a threat to ACC when they would enter the US market?

Sub question: to which extent is the difference in cost due to the different strategies that both companies have?

In our opinion the answer to the main question is; yes, DJC does post a threat to ACC when they would enter the American market but only for their standardised products. The answer to the sub question is that in our view the difference in cost is almost totally caused to the difference in strategy. Below we will give arguments to explain our statements.

The market is described as “hostile and saturated”. Furthermore, we know from the business cycle that there are four stages for a market introduction growth maturity and decline. The market resembles all characteristics of a declining market. Second DJC is producing the same articles as ACC does and is thereby targeting the same customers. When DJC started they bought the machines developed for ACC thereby copying their concept. Both companies produce the four basic types of connectors the difference lies in the number of product variations. 85% of the sales of ACC are standardised products; the other 15% is customised. DJC is only producing standardised products because of their low cost strategy. In 1991 the DJC plant produces only 640 stock keeping units (SKU’s) quite a small number compared to ACC who is producing 4500 SKU’s. This implicates that ACC makes 3860 different products for 15% of their clients; a large number of customised items for such a small customer group. Sales in this product group will be heavily affected when DJC will enter the American Market because DJC is delivering solely the standardised products. To illustrate this see the picture below:

Not only does DJC produce the same standard products and therefore serve the same customers, they can also produce these products in a more efficient way. DJC proved in Japan that they are able to produce the same standardised products for a lower price through an optimal configuration of their resources. This difference comes from a dissimilar strategy. Where ACC is customer orientated, driven by marketing and engineering, DJC is clearly production organised where manufacturing plays a key role. The competitive advantage ACC now has is their ability to make customised products. ACC is flexible and knows its customers.

DJC has higher plant utilization and they have no need for a large R&D and design department as all products are standardised. By having their plant organized in a different way they DJC is able to save costs. The advantage for ACC here is their flexibility. The difference in plant layout is illustrated below.

As you can see the ACC plant has a process layout where five production areas are able to produce each product. DJC has a product layout, being less flexible but more cost efficient.

Quality will not be directly an issue because both factories are able to supply excellent quality, the difference again is that DJC is able to do this more cost efficient by demanding a higher product quality from their suppliers. ACC even needs a costly separate quality control after the production process to make sure their quality levels are on top. So although quality is alike, the way it is obtained again is very costly in the case of ACC underlining again the cost advantages for DJC. Other cost reducing factors for DJC are less indirect labour and a better production planning

Q4 Suggestion

Key question: what would you do?

Sub questions:

What are the pro’s and con’s given by Jack Mitchell?
What are the pro’s and con’s given by Andrew Li?
Are there any other options that are worthwhile considering?

These are the alternatives:

Jack Mitchell’s alternative is actually the reengineering of the complete manufacturing process to stay competitive in this market. In his view ACC should copy the Japanese concept.

Pro:

Copying the Kawasaki concept will make it possible to reduce cost.
Better use of assets through better configuration of your resources.
Anticipating DJC arrival by conducting this strategy will discourage DJC to enter the American market. It creates a higher barrier to entry.
Higher production speed

Con’s:

Less flexible
Resistance within company
High investments, costly process

Andrew Li is suggesting sitting back and waiting. There’s no need to panic and make any dramatic changes. He does see the need of reducing costs and wants to wait and see whether DJC will enter or not.
Pro:

The easiest solution is always not taking any action.
Not taking any action doesn’t require any investment and is therefore the cheapest on the short term.
Reducing cost will higher the barrier to entry for DJC.

Con’s:

This is a reactive strategy where we prefer a proactive policy. Anticipating on future possible developments will create a company that is able to react when environment changes.
Doing nothing will not result in better performance in a declining market. Cost cutting only is not sufficient.
Cutting cost will also mean less investment in R&D; this will negatively influence the company in the future.

Other rejected options:

Alliances, with other manufacturers
Forward or backward integration

Recommendation:

There are two possible scenarios, the Japanese will enter or they’ll stay out of the American market. No matter what happens ACC should develop a clear strategy in order to stay alive in this declining market. Apart from that they should improve their operational effectiveness. If they do not change, sales will continue to decrease, costs remain relatively high, they have got no sustainable competitive advantage that is well enough developed and the end of the story is near.

To be competitive operational effectiveness is necessary. But ACC should strive to distinguish itself. Right they are doing the exact same thing as the Japanese by producing the standardized products. As mentioned before although it is not very likely that the Japanese will enter the American market, if they do, it is going to be very hard to stay competitive. The companies will both try and serve the same customers lowering costs, lowering prices, lowering margins, creating losses. The current way of working seems a self-enforcing destructive plan.

We suggest that ACC should develop a sound strategy.

Right now they try serving a too broad market trying to make everybody happy. It’s time to focus and perhaps makes some trade-offs. Our advice is that ACC should heavily invest in R&D and focus on their real competitive advantage; their ability to supply customized products. By doing this they create a unique value proposition as the Japanese are not able to deliver this with their way of working. Focus on the customer that is paying for this flexibility and quality and let the small margin customers go. Try to build a company around several activities like quality, flexibility, innovation and employee training and fit all the activities together. The specialty you have towards your customer can also be used towards your supplier. Build a relationship and create an atmosphere like the Japanese have. By building this relationship you’ll be able to control the quality of the raw materials and thereby enhance your product quality. By using the higher level quality of raw materials you will reduce the amount of deficit products after production. Secondly as a result of this you can get rid of the department that is checking each product, this will automatically lead to an extra reduction of your costs. By keeping in touch with their customers and market they will know what their market wants and always be on top of things.

It remains necessary to have a look at the manufacturing process because in our opinion ACC should be able to reduce the total amount of overhead and the total cost of your production per unit. The standardized products should not be completely forgotten but it’s not where the focus should be.