American Connector-A

Case discussion

American Connector-A

Competitive environment

Connectors are everywhere

Electrical, electronic device

In homes- radio, telephone, TV

Offices, aerospace, defence

Cents to $100

Typically ~ 2% of product

Worldwide sales US$16 billion

1200 suppliers

Top-10 account for $6.67 billion [41.7%]

Gs/ AmCon-A/Apr10

American Connector-A

US connector market in 1991

Intense competition

900 firms

Declining sales

Sales revenue down 8% for US Top-10

OEMs reducing supplier base

Demanding lower price, discounts, higher

quality, faster delivery

Consolidation in companies expected

Gs/ AmCon-A/Apr10

Companies to reduce to 400

American Connector-A
Competitive Position: American Connector

Top-10 manufacturer worldwide

Market share 5%

1991 sales = US$800 million

Sunnyvale plant serves

computer

telecom

scientific instruments

High gross margin~ but declining

Sales primarily to US market

1984: 52% reduced to 1991: 43%

Broad product range & high customisation

4500 SKUs

15% products customised

Flexibility in meeting customers demands

Gs/ AmCon-A/Apr10

American Connector-A

Competitive Position: DJC

Top-10 manufacturer worldwide

Primary market- Japan

Market share 4%
1991 sales between US$ 500- 800 million
Computer, telecom & consumer electronics

Gross margin ~50%

Low cost competitor

Narrow product range

Relatively high volumes

Gs/ AmCon-A/Apr10

Is DJC a threat to American Connector?

DJC-86

ACC-86

DJC-91

ACC-91

RM, Prod

14.32

10.40

12.13

9.39

RM, Pack

3.27

2.25

2.76

2.10

Labour, D

7.63

3.02

Labour, Ind

2.30

0.75

Total labour

9.93

8.53

3.77

10.30

Electricity

2.47

1.80

1.40

0.80

Depreciation

7.63

5.52

1.80

5.10

Other costs

4.12

4.41

4.24

6.10

Total

$41.74

$32.91

DJC costlier $8.83

Gs/ AmCon-A/Apr10

$26.1

$33.79

DJC cheaper by
$7.69= 23%

Is DJC a threat to American Connector?

Costs
In 1991

DJCKawasa
ki

JapanUS
Index

DJC-US

ACCProposed
Sunny
plant
vale
7.28
9.39

RM, Prod

12.13

0.6

RM, Pack

2.76

0.6

1.66

2.10

Total labour

3.77

1.1

4.15

10.30

Electricity

1.40

0.8

1.12

0.80

Depreciation

1.80

1.80

5.10

Other costs

4.24

4.24

6.10

Total

Gs/ AmCon-A/Apr10

$26.1

$20.25

$33.79

DJC-K Cheaper by
$7.69 =22.75%=

DJC-US $13.54=
40% cheaper

American Connector-A

How serious is the threat from DJC?

DJC has lower cost today?

DJC has better ability to reduce cost

1986 DJC was costlier than ACC by $8.83

1991 DJC is cheaper by $7.69

Reasons for cost reduction?

Utilisation?

Operational effectiveness?

Strategy?

Gs/ AmCon-A/Apr10

American Connector-A

Cost difference due to equipment utilisation

Less than full capacity utilisation raises
cost
If the cost difference is volume driven:

DJCs threat by entry to USA is less serious

If ACC is unable to run full capacity due to
poor demand, DJC would have the same
problem
If demand, improves, ACC can increase
production, reduce cost
ACC target utilisation is 85%; currently
70%
15% less capacity utilisation due to poor
demand

Gs/ AmCon-A/Apr10

American Connector-A

American Connector

DJC

Current Depcn

$5.10/1000

$1.80/1000

Current prodn

420 million

Annual Depcn

$2.14 million

$1.26 million

Rated
capacity

600 million

800 million

Target cap
utilisation
Full capacity at
target utilisn
Depcn at full
capacity
Gs/ AmCon-A/Apr10

85%

100%

510 million

800 million

$4.20/1000

$1.58/1000

[2142000/510]

[70%]

700 million

American Connector-A

Analysis of depreciation~f[capacity utilisation]

At current production; cost difference is
$[5.10-1.80]=$3.30 in DJCs favour
If demand rises;

both would increase production

decrease depreciation cost per unit

At increased production, depreciation cost

difference:$[4.20-1.58]=$2.62
ACC can only make minor difference by
increasing utilization!
DJC is able to get more output from less
investment in equipment

Gs/ AmCon-A/Apr10

American Connector-A

Is the cost difference due to strategy?

ACC avg selling price= COGS/[1-Gross Margin]=

$33.79/ [1-0.43]= $59.28
Price difference due to competitive
strategy~ manufacturing strategy
ACC emphasises flexibility & responsiveness
to customer as competitive priorities
Flexibility causes higher cost due to repeated set
up, smaller batches ,spare capacity
ACC is marketing/ engineering driven
company

Gs/ AmCon-A/Apr10

American Connector-A

DJC avg selling price= COGS/[1-Gross Margin]=

$26.10/ [1-0.50]= $52.20
Customers pay $[59.28-52.20]=$7.08 extra
for American Connector products because of
customisation
DJCs competitive priority is cost
DJC is manufacturing strategy follows
Stress on capacity utilisation
Larger batches, low variety, lower cost material
through value engineering
Less innovative, less flexible

Gs/ AmCon-A/Apr10

American Connector-A

Summary

Both companies have their manufacturing

strategy closely aligned to corporate strategy
Cost differences reflect strategy
If DJC enters US market:

Gs/ AmCon-A/Apr10

Many not be able to replicate high utilization

ACC will be able to defend niche market
[customised solution & responsiveness]
If this segment grows, ACC grows, DJC cannot
compete
If cost-sensitive market grows, ACC cannot
compete, vulnerable
If DJC gains flexibility+ operating efficiency=
serious threat for ACC

American Connector-A

Summary

Cost differences reflect strategy

If DJC enters US market:

Gs/ AmCon-A/Apr10

Many not be able to replicate high

utilization
AJC will be able to defend niche market
[customised solution & responsiveness]
If this segment grows, ACC grows, DJC
cannot compete
If cost-sensitive market grows, ACC cannot
compete, vulnerable

HIGH

American Connector-A
ACC

COST

Service &
customised
solutions

Possible customer migration, due

to product standardization with
industry ,maturity

DJC

LOW

Cost-sensitive
customers

LOW
Gs/ AmCon-A/Apr10

FLEXIBILITY

HIGH

American Connector-A

Operating Efficiency
$0.21
$0.48
$0.18
$1.05

Mould
design
Cheaper
resin
Smaller
housing
Reduced
waste
Total

Strategy related

$3.50

Tin plating

$0.59

2000 piece
reel pack
Total

$1.92
$4.09
Per 1000
Per 1000
ACC higher cost due to ACC costs higher due
Gs/ AmCon-A/Apr10
design & material
to strategy- packaging

American Connector-A

Labour cost
ACC output per employee=1.06 million
DJC output per employee=7.45 million
@DJC's productivity, ACC would require
only 420/7.45=56 people [not 396
ACC has $[10.30-4.15]=$6.15 cost
disadvantage
Even if ACC ran at 100% capacity; labour
cost=$7.21; still cost difference=$[7.214.15]=$3.06

Gs/ AmCon-A/Apr10

American Connector-A

Plant running hours [24x350=8400 hrs]

ACC- 24x5x50=6000 hours
DJC=330x24=7920 hours
Difference DJC-ACC=1920hours~
ACC can produce 4.2x1920/6000=1.344
million connectors extra by increasing plant
running hours
Exh 6: ACC not running plant 28.6%
[running 2400 out of 8400 hrs available]
Lower asset utilization
Gs/ AmCon-A/Apr10

American Connector-A

What should ACC do?

Improve operational efficiency, but do not
change manufacturing strategy focus on
customisation & flexibility [save $1.92 per
1000 connectors]
Follow DJC, leave customisation, adopt low
cost strategy, if the market has matured &
price becomes order winner [only 15%
ACC products are customised!]
Separate both businesses, focus differently
in different PWP
Gs/ AmCon-A/Apr10

American Connector-A

What should ACC do?

Improve operational efficiency, but do not
change manufacturing strategy focus on
customisation & flexibility [save $1.92 per
1000 connectors]
Follow DJC, leave customisation, adopt low
cost strategy, if the market has matured &
price becomes order winner [only 15%
ACC products are customised!]
Separate both businesses, focus differently
in different PWP
Gs/ AmCon-A/Apr10

American Connector-A

Thank you for

your
participation!

Gs/ AmCon-A/Apr10