American Connector Company Case Study

Topics: Inventory, Manufacturing, Cost accounting Pages: 9 (2540 words) Published: November 4, 2012

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| ·          

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...
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