Case Analysis

on

American Connector
Company

Submitted to:

Prof. Haritha Saranga

By:
Group 2, Section B
Arjun Mehra 2017010
Shubham Ramesh Gole 2011092
Divya Rajagopal 2011123
Prateek Sahu 2011127
Utkarsh Srivastava 2011134
Nishant Thacker 2011139
Question 1: How serious is the threat of DJC to American Connector Company?
Ans. Historically the US connector industry had grown very rapidly leading to many
suppliers coming in. There was enough demand to absorb the supply, making ACC earn a
52% gross margin. However, the demand peaked in 1986 followed by a decline since 1987. It
led to excess capacity in the industry leading to higher bargaining power of the customers.
They started demanding lower prices, improved quality and faster delivery.
In the present market and competitive environment, DJC can be quite a serious threat to ACC
due to the following reasons:
Strategic Reasons
 In pre-1986 times, ACC’s positioning of a superior design, high performance and
customization thrived. But in the present situation when attempts are being made to
standardize product specifications, DJC’s proposition of lower costs and at par quality
might become a threat providing a competitive advantage.
 OEMs which previously had 10-12 suppliers have been working to reduce it to ~4
suppliers. This means suppliers will now have larger orders of the same connector
variant, in which case the customization strategy of ACC will become redundant and
the low-cost strategy of DJC will be valuable.
 Historically ACC has been manufacturing in minimum efficient batch size leading to
excess WIP. It wasn’t a problem earlier since extra inventory carrying costs were
recovered by increased sales. However, this will have to be changed in the current
sales decline situation.
Operational Reasons
 ACC is stuck with excess capacity (Effective Utilisation = 30.2%, Exhibit 6) leading
to high depreciation costs ($5.10/1000 units Vs DJC’s projected $1.80/1000 units,
Exhibit 7).
 ACC has made no major investments in technology since 1986 whereas DJC has been
making continuous improvements. This is also in contradiction to ACC’s positioning
as a technology leader.
 ACC requires major capital investments to upgrade technology now for a turnaround,
leading to severe reduction in utilization of previously built infrastructure.
 ACC has high defect rates of 26,000 PPM as compared to 1 PPM at DJC. The quality
control has been happening only at the final inspection stage leading to increased
costs at ACC due to higher wastage.
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 and its
potential in the United States.
Ans.
CI- Adjusted %Differenc
  ACC DJC US/JPN DJC e
Raw Material,
Product 9.39 12.13 0.6 7.278 -22.492013
Raw Material,
Packaging 2.1 2.76 0.6 1.656 -21.142857
 Labor, Direct - 3.02 1.1 3.322  
Labor, Indirect - 0.75 1.1 0.825  
Total Labor 10.3 -   4.147 -59.737864
Electricity 0.8 1.4 0.8 1.12 40
Depreciation 5.1 1.8 1 1.8 -64.705882
Other 6.1 4.24 1 4.24 -30.491803
TOTAL 33.79 26.1   20.241 -40.097662
As can be seen from the table above, DJC can have significant potential cost advantages from
the raw materials heads (~22% lesser costs than ACC) and larger cost advantages in labour
and depreciation heads (~60% lower costs than ACC).
Raw material
The Kawasaki plant of DJC has an inter-functional coordination team, ‘Technology
Development Division’ which coordinates between different departments ensuring all of
them work together towards the same goals. It coordinated the activities of all different
departments to develop a robust design and production process which helped in bringing
down the material cost for a standard chip-to-board-connector. But the final material costs are
still higher for DJC because some raw materials are almost twice as costly in Japan than in
United States.
However, if DJC operates in United States then the material cost will be only 0.6 times the
cost in Japan (Exhibit 8). This will result in a saving of $2.566 per 1000 units (22.2%) on cost
of raw materials for DJC in United States.
Labour Cost
DJCs Kawasaki plant is very labour efficient compared to the Sunnyvale plant. From 1986 to
1991, for 5 years, DJC invested in automation leading to a reduced number of direct
production workers. Whereas, the American Connector Company’s Sunnyvale plant,
accepted custom orders from their customers which DJC did not and continuously bought in
newer equipment whenever there was an innovation, the requirement of employees for which
was also higher. ACC also has a higher percentage of indirect labour over direct labour again
leading to increased costs.
Electricity Cost
The electricity cost for DJC decreased from $2.47/1000 units in 1986 to $1.4/1000 units in
1991 which is a decrease of 43.31%. Whereas the electricity costs for ACC decreased from
$1.80/1000 units in 1986 to $0.80/1000 units in 1991 which was a decrease of 55.56%.
Depreciation Cost
The depreciation cost for DJC decreased from $7.63/1000 units in 1986 to $1.80/1000 units
in 1991 which is a decrease of 76.40%. Whereas the depreciation costs for ACC decreased
from $5.52/1000 units in 1986 to $5.10/1000 units in 1991 which was a decrease of 7.61%.
It can be observed that if DJC were to open a plant in USA and operate it with the same
guiding principles as in Kawasaki, it would have a major advantage over ACC in terms of
manufacturing costs. The DJC plant would be able to operate at around 60% of the costs of
the ACC plant.
Question 3:  What accounts for these differences? How much of the differences is
inherent in the way each of the two companies compete? How much is due strictly to
differences in the efficiency of the operations?
Ans. The differences in the costs between a potential DJC’s US and ACC manufacturing unit
are as given below:
Strategic Factors
 DJC has a 21% lower cost of Raw Materials used for packaging. This can be
attributed to its standardization strategy of supplying only in strips containing 2000
units of connectors. In contrast, a much wider range of packaging was being offered
by ACC which ranged from a 10-piece plastic bag to a 1500 piece loaded reel, in line
with its customization strategy. This causes it to have higher packaging raw materials
cost.
 ACC has been keeping its start-up costs low by producing a minimum efficient
quantity of order leading to higher WIP. The resulting increase in inventory carrying
costs could be recovered by increased sales, which is no longer true. DJC, on the other
hand, kept its start up costs low by running its plant on a continuous basis. This has
led ACC to have lower number of operating days than DJC (250 days Vs 330 days)
and so lower asset utilization.
 The customization strategy and responsiveness to change in orders has been another
factor which has led ACC to have higher start up costs due to unscheduled change
overs. This has also led it to have 1.5-2 days production run compared to DJC’s one
week, again leading to lower asset utilization due to wasted time in change overs.
 DJC’s strategy to remove non-value adding features has enabled it to have lower
product raw material costs without sacrificing on the quality or design.
Operational Factors
 DJC implemented improvements in mold-design, reduced wastage and were thus able
to bring down their product raw material costs to 22.5% lower values than ACC. They
also had a defect rate of 1 in 1mn compared to ACC’s 26000 in 1mn, leading to
increased raw material costs for ACC. ACC’s final inspection approach to quality
control also contributed to its high waste generation.
 DJC has been able to keep its labour costs low because of significant investments in
Automation. It was able to produce 700mn units with a meagre 94 employees
compared to 420mn units produced by ACC with a workforce of 396.

4. What should American Connector’s management at the Sunnyvale plant do?

Ans.
 Process Improvement: Instead of bringing about a reduction in the Start-up time and
the shut-down time, the inspection process is still being done at the end and hence
steps must be taken to increase the utilization of their assets including increasing
standardization. We would also suggest increasing the tendency of meeting the
production schedules.
 Reduction in Variability: Looking at the significant number of suppliers on the
Connectors’ business, investing in Customization is extremely unfeasible. Some
 amount of standardization of product specifications needs to be carried out among
many different industry associations.
 Material Cost Savings: An increase in investment in R&D capabilities to reduce
formation of material wastes in each of their products be it mold, resin or plating.
 Reduce WIP inventory: Through the information we have available with us, in the
case, DJC has lower Work-In-Progress Inventory compared to ACC. The
management at Sunnyvale can take a look into this and try to reduce the WIP
Inventory.
 Improve economic life: They need to invest in updating their technology and
ensuring its maintenance such that economic life of the machine can be increased and
the effect of wear and tear be reduced.
 Increase inclination of higher management from Marketing towards the Production
department.