Case: AMERICAN

CONNECTOR COMPANY

Sanjay Jharkharia

Case Objectives
To have an understanding of different production
strategies followed by companies producing same
products
To understand the threats from the competitors and
how to defend.

Sanjay Jharkharia

Case Questions
How serious is the threat of DJC to ACC
How big are the cost differences between the DJCs
Kawasaki and ACCs Sunnyvale plants
What accounts for these differences? How much of
the difference is inherent in the way they compete?
How much is due to efficiency of operations?
What should ACC Management at Sunnyvale do?

Sanjay Jharkharia

The Competitive Environment

A. General Industry Environment
1. Electrical connectors are ubiquitous products,
found in virtually every electrical and electronic
device. Prices vary from a few cents for simple
connectors to several dollars for complicated
custom designed connectors used in military
hardware. Typically, the cost of connectors
accounts for less than 2% of total product
costs.

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2. Worldwide sale of connector products were $16 billion

in 1991. There were 1200 suppliers. The ten largest
firms accounted for $ 6.67 billion of these sales.
3. In the US, the connector market was intensely
competitive. While these were more than 900
competitors, total sales volume in had been declining
in recent years. In 1991, industry sales down by 3.9%
from the previous year, the ten industry leaders, on
an average, were down 7.9%. Simultaneously, buyers
had begun to reduce their suppliers to as few as four.
OEMs were demanding lower prices, discounts,
improved quality and faster delivery.

Sanjay Jharkharia

4. Consolidation was being anticipated in the US

Industry. Analysts predicted that the number of
would drop from 900 to 400 by the end of the
1990s.
5. In 1991, the dominant company, AMP Inc held
16% market share with sales of $2.6 billion. The
second tier companies consisted of 6 other
companies, with sales in the $500 - $800 million
range. DJC and ACC were among the second tier
companies worldwide. Companies in the third tier
had sales in the $250 - $500 million range. There
were a total of 28 firms with sales greater than
$100 million

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B. American Connectors
Position

Competitive

It is among the top 10 companies worldwide,

with market share of 5%. Its sales were $800
million in 1991.
It serves primarily the electronics based
industries in the US market. Sunnyvale plant
serves
customers
in
the
computer,
telecommunications and scientific instruments
industries.
ACCs gross margins were 52% in 1984, but
declined to 43% by 1991.
ACCs competitive strategy was to offer a broad
variety of products (4500 SKUs), including
customized products (representing 15% volume).
They offered solutions to customers, and
emphasized flexibility in meeting customer
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demands.

C. DJCs Competitive Position

Is among the top 10 competitors in world market,

with market share 4%. Its 1991 sales were
between $500 - $800 million
It
primarily
serves
the
computer,
telecommunications and consumer electronics
industries in Japan
DJCs gross margins were historically about 50%
Its competitive strategy was a low cost position. It
supplies a narrow range of relatively high volume
connectors

Sanjay Jharkharia

D. ACC vs DJC

Historically, they did not compete against one

another. They were separated in terms of market
focus (geographical) and strategic market
position (low cost, standard products for DJC,
customization and flexibility, service oriented for
ACC)
With DJCs intention to locate a plant in the US,
will it pose a strategic threat to ACC in the
American market?

Sanjay Jharkharia

Assessing the Potential Threat

Posed by DJC
(Start from here on 19th Sept)

We must analyze the cost structures of the two

competitors. For this, we will compare changes over
time, and also do a static analysis of the cost structures
for 1991.

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A Static Comparison in 1991

For this, we will use data in Exhibits 7 & 8. A

comparison of the 1991 unit costs at DJC/Kawasaki
($26.10/thousand)
and
ACC/Sunnyvale
($33.79/thousand) indicates that DJC has a
significant cost advantage. (23%)
If we adjust DJC costs to the American situation,
the results are even more striking

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RM Product

DJC/Kawasaki($) Index
DJC/US($) ACC ($)
12.13
0.6
7.28
9.39

RM Packaging

2.76

0.6

1.66

2.10

Labour(Total)

3.77

1.1

4.15

10.30

Electricity

1.40

0.8

1.12

0.80

Depreciation

1.80

1.0

1.80

5.10

Other

4.24

1.0

4.24

6.10

Total

26.10

20.25

33.79

So DJC/US is 40% lower ($13.54/thousand

units)
Where are the differences
coming from?
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B. If we compare the costs over time, without

adjusting for differences in the US market
(Exhibit 7), we have

DJC/Kawasaki($) ACC/Sunnyvale($)
1986
1986
41.74
32.91

DJC/Kawasaki($) ACC/Sunnyvale($)
1991
1991
26.10
33.79

Where have the savings come from?

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Threat Perception
How serious is the threat?
DJC could be a serious threat. Not only are the
costs significantly lower, but they have
demonstrated successfully how to reduce them
over time.
We will consider three possible sources of the cost
differences
1) Utilization cost differences
2) Differences inherent in each companys strategy
3) Differences in operating effectiveness

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Utilization driven cost differences

1)

The greater degree to which these differences are

volume driven, the less serious will be the threat
posed by DJCs entry into the US market. In 1991,
ACC was operating at only 70% of its full capacity (It
produces 420 million units out of 600 it has capacity
for). With target utilization being 85%, there is a 15%
non-strategic excess capacity, resulting from
slackening demand. DJC has no such difficulty. As it
can sell all that it produces, it operates at maximum
volume (actually 88% of maximum in 1991). This
may not be possible for them in a new facility in the
US

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We also take a look at depreciation analysis

Current depreciation rate

American Connector
$ 5.1/ thousand

DJC
$1.8/thousand

Current output

$420 million

$700 million

Total plant dep.charges per year

$2.14 million

$1.26 million

Capacity (rated)

600 million

800 million

Target capacity utilization

85%

100%

Full capacity (at desired utilization rate)

$510 million

$ 800 million

Depreciation rate at full capacity

$4.20/thousand

$1.58/thousand

What does this table indicate?

DJC is getting far more output from a lower base of capital
stock.
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2. Differences in cost inherent in each

companys competitive strategy

DJCs strategy
ACCs strategy

Low cost
Innovation, flexibility
and customer service
Some cost differences bound to come from here
ACCs customers could be willing to pay more
for its products. After all, connectors represent
only 2% of product cost, but are essential to
product performance.

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ACCs operation
strategy

1. Capacity: Plant
maintains excess
capacity

DJCs operation
strategy

1. Capacity: The goal

is to operate at
100% utilizations,
producing 800
connectors/year.
In 1991, it
produced 700
million connectors

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ACCs operation
strategy

2. Facilities:
Functional layouts
(five functional
areas with WIP
storage space)

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DJCs operation
strategy
Facilities: 4 cells,
with 4-6 production
lines each. Each cell
is dedicated to
running one basic
connector type.
Plating and shipping
are functionally
specialized, and
centrally located
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ACCs operation
strategy
3. Product Technology:

DJCs operation
strategy
3. Product Technology:

Design, quality and

product variety are
emphasized. Work
closely with
customers engineers.
15% volume is
customized.
Customized products
soon become
standard products
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All products are

standardized.
Relatively low number
of SKUs (640).
Product designs
reflect the need of
most customers.

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ACCs operation
strategy
4. Process Technology:
relies on state of the art
equipment
and
processes. Initially, for
customized
products,
yields are lower and they
are less efficient due to
smaller lots

DJCs operation
strategy
4. Process Technology: old
reliable
processes
preferred to new ones.
New processes are preautomated. It has an inhouse
technology
development
group,
molding expertise and
maintenance operations
skills. Reliable processes
result in low defects,
high
utilization,
low
process failures, & high
Sanjay Jharkhariaraw material yield.
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ACCs operation
strategy

5. Work force:
employs 396 workers, 54%
are direct labour and 46%
are indirect labour

DJCs operation
strategy
5. Work force: employs 94
workers, 68% are direct
labour and 32% are
indirect
labour.
Management s goal is
to
decrease
labour
further over time.

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 ACCs operation
strategy
6.

DJCs operation
strategy

6.
Production planning: Plant
operates 3 shifts/day, 5
days/wk,
50
wks/yr.
Relatively long lead times
(10 days for std. products,
2-3 wks for special orders),
short production runs (1.5
to 2 days), finished goods
inventory (38 days). These
are typical of a plant with a
high number of SKUs
(4500),
&
flexible
production schedule that
accommodates
customer
requests
Sanjay Jharkharia

Production
planning:
operates 24 hrs/day,
7days/wk, and 330
days/yr. Changes for
special orders etc. are
not
permitted.
Relatively short lead
time, long production
runs, large finished
goods inventory (58
days)
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 ACCs operation DJCs

strategy
operation
strategy
7. Quality: what the
7.
customer wants,
when they want it,
and not
conformance to
internal standards
and specifications.
Company defines
quality as
Conformance to
Sanjay Jharkharia
customer needs

Quality: it is
defined as
conformance to
specifications. (low
defect rates, fewer
than 1 defect per
million), targeted
raw material yield
of 99%
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 ACCs
operation
strategy

DJCs
operation
strategy

8. Organization: is a
marketing
and
engineering driven
company.
Manufacturing
plays a secondary
role

8. Organization:
manufacturing
plays a key role in
determining
the
strategy of the
company.

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Material Cost Differences

(Exhibit 3)
Amount Design Element

Amount Design Element

$0.21
mold design
$0.48
less expensive resin
$3.50
tin plating
$0.18
reduced runs of housi $059
2000 piece reel
$1.05
waste reduction
---------------------------------------------------------------------------$1.92
Total
$4.09
Total

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Labour Cost Difference

This reveals the most striking inefficiency.
ACC requires a higher % of indirect labour, and labour
is less productive.
See Exhibit 5 & 6
ACC output/employee is 1.06
DJC output/employee is 7.45
If ACC had Kawasakis productivity, it could produce
420 million connectors with only 56 people instead of
396.
We can also compare cost of labour/unit

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Fixed Costs
For this we refer to Exhibit 6 in the case
Kawasaki effective utilization = 75.4%
Sunnyvale effective utilization = 30.2%
Sunnyvale operates 6000 hrs versus 8400 available
hrs. So it is not operating its plant 28.6% of time.
Looking at Exhibit 6 again, for asset utilization, in the
case of Sunnyvale

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Competitive Advantage
DJCs competitive advantage comes from low-cost highquality standardized products, adapted to customers
requirements
ACC s competitive advantage comes through leading
edge technical solutions, customized design and flexible
delivery capabilities

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When is DJC a threat?

700 million units
640 SKUs

420 million units

4500 SKUs

DJC

ACC

The size of this region decides whether DJC is

a Sanjay
direct
competitor or not
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Can DJC replicate a Kawasaki in

U.S.?
Cost structure is highly favorable
But huge capital costs and risk involved - A buyers
market
Establishing relationships with buyers and suppliers An
entry barrier
Implementation of JIT needs high collaborative
relationships with suppliers and buyers
The Kawasaki plant had the advantage of being located
close to buyers and suppliers - enabled JIT

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Options For ACC

Continue with the existing Strategy
Adopt DJC Strategy
A Hybrid Strategy

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Recommendations to ACC - The

Hybrid Strategy
Cut down costs
Utilization cost difference and due to difference in operating
effectiveness
Strategic differences

Customization to maintain its competitive advantage

Change in Organizational structure

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Measure 1 Cut down Costs

(Material Utilization Costs)
Material cost savings as mentioned in Exhibit 3

Mold Design
Less expensive resins
Reduced mass of housing
Waste reduction
Tin plating
Packaging in 2000 piece reel

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Measure 1 Cut down Costs

(Cost Difference due to operating
effectiveness)
Separate facilities for the Standardized and highly customized
products
Dedicated manufacturing cells for the standardized ones of the 4500
SKUs
Connected and automated manufacturing for the same with regular
maintenance
This would cut down on the direct and indirect labor requirement
(Exhibit 5 and 6 show considerable differences in labor efficiency)
Would aid long production runs and better capacity utilization and
better raw material yields
Effective quality control of the processes rather than after
production inspection
Better inventory control can be done for these standardized products
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Measure 1 Cut down Costs

(Strategic Changes)
Design simplicity and manufacturability of products
Better power balance between manufacturing and
marketing
Know the customer better - Remove non-value-added
features
Not be overtly responsive to customer
Better utilization of assets and better yield on raw
material a part of the core strategy

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Measure 2 : Customization For

Competitive Advantage
Manufacturing process of customized products needs to
be separated from the standardized ones
Could follow the existing functional layout
Charge a premium for the customized products
Would present a sustainable competitive advantage over
low cost competitors like DJC

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Measure 3 Change in
Organizational structure
Cut down the long chain of management possible by
better control with change in the operating process
Clear vertical hierarchy in the plant management

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More on Manufacturing /
Operations Strategy of ACC
Sell its own operational strength by aggressively selling
customized products
Dont let DJC plant run near to the theoretical capacity

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Recap
Investigate How to Assess The Competitive Threat of
a Foreign Competitor Setting Up Operations Here
cost differences
strategy differences

Risk Analysis of Capital Investments

discussed problems of basing decisions simply on expected
values
illustrated how spreadsheet can be used to perform risk
analysis of capital investments

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