American Connector Company

American Connector Corporation makes electrical connectors at a plant in Sunnyvale, California. With applications from military, aerospace to consumer electronics and appliances, there is great difference in terms of specifications also. Standard designs were established by International Institute of Connectors and Interconnect Technology, the National Electronics Distributors Association or by the end user. There is rumor of entry of DJC Corporation of Japan which was a dominant supplier of electrical connectors in Japan. DJC had not established itself in the US as it had no plants in the US and but a small sales force.

This created problem for ACC who also had problems of their own with regard to Sunnyvale plant where costs were increasing and quality of production was decreasing. Threat of DJC to American Connector Company

Due to the operational excellence that DJC has, ACC should be extremely concerned with their entrance to the US. DJC will be willing to operate at smaller margins to capture the market share.

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The intensity of the market competitiveness can result in compounding of the threat of the lower prices. ACC will have a limited amount of time for the realization of this threat and to evaluate the next course of action. Main threat to ACC from DJC comes from the operational efficiency and static cost difference and hence disregarding the arrival of unnerving competitor like DJC can immediately disrupt ACC’s pricing strategy and long term profitability. Following factors reinforces the threat of DJC to ACC-

(1) Lower Material products cost – Following table shows that cost incurred by DJC as compared to ACC is lower in both the years 1986 and 1991.

In 1986, DJC had 7% more COGS incurred as compared to ACC while at the end 1991, they were reduced by 40%. If DJC sets up manufacturing base in US Landscape, there will be substantial raw material cost reduction for DJC as compared to ACC. (2) Lower defect rate and greater efficiency- The quality losses for ACC is 1.6% against 0.7% of DJC. The defect rates at Sunnyvale’s are as high as 26000ppm of production and its quality control is end product inspection as compared to process centric quality control in DJC. (3) Higher Fixed Asset utilization- The effective utilization of fixed assets (in %) for DJC is 75.4% as compared to mere 30.2% of ACC. (4) Lower Work In process inventory- Kawasaki Plant of DJC had processing lead times and work-in-process inventories averaging for only two days against high inventory levels of ACC’s Sunnyvale Plant. (5)

Lower Raw Material Inventories- The raw material inventories of ACC averaged for 10.8 days which is more than double than DJC’s average of only 5 days, which in results in less inventory cost and reduced finished good cost. (6) Higher responsiveness to customer order delivery- Because of highly automated production process at Kawasaki plant of DJC, the speed of order delivery is one day whereas ACC works on batch production process which produces about 4,500 varieties of connectors, hence they have more than one day

However, DJC will face a number of challenges in implementing its Kawasaki Factory model in USA which are mentioned below- (1) Customer Contacts- DJC would not be able to leverage its strength to the fullest in USA as it would have to compete in a new market with no major contacts. (2) Flexibility of Production process- Batch production process of ACC renders it great flexibility in terms of customization of products to its customers as compared to DJC. (3) Production and Inventory Control- There are 700 standard connector product lines in North America alone and ACC makes 4500 SKU’s and some product lines were run on almost continuously basis. So it would be very difficult for DJC to be able to maintain such long run times when they need to produce almost 8 times the number of varieties of connectors they produce at Kawasaki. (4)

Finished Goods Inventory- DJC carries 56 days of finished goods inventory as compared to 38 days of ACC and given the short life cycles of electronics, DJC faces high risk of being obsolete. (5) Demand Variability- DJC’s product oriented layout operated on high volumes and low variety production, thus reducing costs. However USA does not have a certain demand for such high volume products. How big are the cost differences between DJC’s plant and ACC’s Sunnyvale plant? Consider both DJC’s performance in Kawasaki and its potential in the United States. To study the cost difference between DJC’s Plant and ACC’s Sunnyvale plant, we need to remember the important fact that the two plants operate in an entirely different scenarios (Countries). Thus in order to bring in a direct comparison between the two the cost indices between United States and Japan in 1991 comes very handy. The various indices that compare Japan with US are given in the following table Cost Indices (Us to Japan)