American Connector Company Case Study

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Table of Contents

1.0        Introduction        

2.0        Question 1        

3.0        Question 2        

4.0        Question 3        

5.0        Question 4        

1. Introduction

In the American Connector Company case study, we look at the threat imposed by DJC to it. We observe the difference in cost structure of DJC’s Kawasaki plant and American Connector Company’s Sunnyvale plant and look at the potential of DJC in United States.  We finally come up with the suggestion at what American Connector’s management at Sunnyvale should do.

1. Question 1

How serious is the threat of DJC to American Connector Company?

According to our group, entry of DJC can pose threat to the American Connector Company in following ways:

1. Possible price war: Current landscape of the US connector industry (1200 competitors roughly in 1991) is marked by a very high competitive intensity. A new entrant would try to grab the market share initially by willing to offer its products at low margins thereby undercutting the competitors on price. This would impact the American Connector Company as far as its profitability is concerned as it would be forced to lower its price in order to maintain its market share.
   
2. Lower production costs:
   

1. Higher fixed asset utilization: In 1991, effective utilisation of DJC (Kawasaki Plant) is 75.4% whereas the number for American Connector Co. is only 30.2%. Process failures are 8.9% for American Connector Co. as compared to 1% for DJC.
2. Lower inventory costs: Costs incurred by DJC is lower as compared to American Connector Company. The inventories can be classified under the following heads:

1. Inventory related to Raw material:
   Average raw material inventory days is only 5 days for DJC as compared to 10 days for American Connector Company.
2. Inventory related to Work in progress:
   Since American Connector Co. offers more customization, it has higher work in progress inventory as compared to DJC.
3. Inventory related to Finished goods:
   DJC had higher finished goods inventory of 56 days as compared to 38 days for American Connector Company.

1. Superior production technology:
   By employing high degree of automation and highly advanced production technology coupled with continuous improvement plans, DJC has superior manufacturing capability. 
   Connector output per sq. foot (in ‘000 units) is 10.9 for Sunnyvale as compared to 15.1 for Kawasaki.
   DJC has developed a highly efficient molding process with mold yields in excess of 99.99% which can give it advantage over American Connector Co. when it enters US as the latter still relies on outsourcing for its equipment.
   
   DJC has superior production setup as compared to American Connector Co. In DJC, all the processes other than plating are located within a cell. Each production line is straight, and thus it reduces material handling costs.
   One worker can simultaneously handle 2 lines at a time. As a result of which, the workforce in DJC is smaller as compared to American Connector Company. (94 in DJC vs 396 in American Connector Company)
   
2. Analysis of Production Runs:
   DJC (Kawasaki plant) works on a push model where manufacturing efficiency is more important as compared to customer demand. Long production runs are maintained of 1 week which minimizes changeover losses. American Connector Co. works on a pull model and production system is flexible based on customer demands. Production runs average 1.5-2 days on an average. Lower costs may help DJC to sell products at a lower price providing it a cost advantage. But, if demand for customized products is more, then DJC won’t pose much of a threat for American Connector Co.
   
3. Manufacturing costs:
   If we compare the manufacturing costs of American Connector Company and adjusted costs for DJC in US (using US/Japan cost indices), we find DJC (Kawasaki) costs to be lower. (as can be observed from table below)
   Availability of cheaper raw materials for both production and packaging will lead to substantial cost savings for DJC.
   

COST OF GOODS SOLD ($/ 1000 units)

1. Better product quality: American Connector Company’s Sunnyvale plant has been suffering with the problem of quality over some time. It had a high defect rate of 26000 per mn. units of production in 1990 resulting in high inspection costs. On the other hand, DJC follows a process centric model where quality control occurs at every process by Quality control department. DJC has also built efficient manufacturing techniques over the years which form the significant part of its competitive strategy.
   Lower quality losses of 0.7% in DJC (Kawasaki Plant) vs 1.6% in American Connector Company (Sunnyvale Plant) can be explained by aforementioned points.
   
2. Faster delivery: American Connector Company offers a high degree of customization to its customers and thus has improved flexibility over DJC. But this causes frequent changes in product manufacturing lines as compared to the case when standardized products are offered leading to lower efficiency and low speed of customer order delivery.
   DJC on the other hand has a very low delivery time owing to its highly automated production process.
   American Connector Co.’s processing lead time is 10 days for general orders and ramged from 2-3 weeks for customised orders which is much higher as compared to DJC’s due to more frequent changeovers. DJC’s lead time is just 2 days. However, DJC’s relationship with US suppliers would determine its ability to maintain its low lead times.

There are some factors which also negate the threat:

1. Standardization and limited variety of its product offerings (640 different SKUs) may limit the ability to satisfy the demands of all US consumers.
   
2. DJC and American Connector Company cater to customers with different needs. DJC focusses on low cost connectors without much customisation whereas American Connector Co. produces specialised products according to customers’ preferences. So, they may not compete directly.
   
3. DJC offers a significant advantage to its buyers in Japan owing to close links developed over the years with major computer, telecom and electronics cos. and distributors in Japan. Replicating all in this in US would be difficult in a short time.
   

1. Question 2

How big are the cost differences between DJC’s plant and American Connector’s Sunnyvale plant? Consider both DJC’s performance in Kawasaki plant and its potential in United States.