American Connector-ACase discussion

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-ACompetitive environmentConnectors are everywhereElectrical, electronic deviceIn homes- radio, telephone, TVOffices, aerospace, defenceCents to $100Typically ~ 2% of product Worldwide sales US$16 billion1200 suppliersTop-10 account for $6.67 billion [41.7%]

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-AUS connector market in 1991Intense competition900 firmsDeclining sales Sales revenue down 8% for US Top-10OEMs reducing supplier baseDemanding lower price, discounts, higher quality, faster deliveryConsolidation in companies expectedCompanies to reduce to 400

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-ACompetitive Position: American ConnectorTop-10 manufacturer worldwideMarket share 5%1991 sales = US$800 millionSales primarily to US marketSunnyvale plant servescomputer telecom scientific instrumentsHigh gross margin~ but declining1984: 52% reduced to 1991: 43%Broad product range & high customisation4500 SKUs15% products customisedFlexibility in meeting customers demands

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-ACompetitive Position: DJCTop-10 manufacturer worldwideMarket share 4%1991 sales between US$ 500- 800 millionPrimary market- JapanComputer, telecom & consumer electronicsGross margin ~50%Low cost competitorNarrow product rangeRelatively high volumes

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10Is DJC a threat to American Connector?

DJC-86ACC-86DJC-91ACC-91RM, Prod14.3210.4012.139.39RM, Pack3.272.252.762.10Labour, D7.63-3.02-Labour, Ind2.30-0.75-Total labour9.938.533.7710.30Electricity2.471.801.400.80Depreciation7.635.521.805.10Other costs4.124.414.246.10Total$41.74$32.91$26.1$33.79DJC costlier $8.83DJC cheaper by $7.69= 23%

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10Is DJC a threat to American Connector?

Costs In 1991 DJC-KawasakiJapan- USIndexDJC-USProposed plantACC-SunnyvaleRM, Prod12.130.67.289.39RM, Pack2.760.61.662.10Total labour3.771.14.1510.30Electricity1.400.81.120.80Depreciation1.8011.805.10Other costs4.2414.246.10Total$26.1$20.25$33.79DJC-K Cheaper by $7.69 =22.75%=DJC-US $13.54= 40% cheaper

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-AHow serious is the threat from DJC?DJC has lower cost today? DJC has better ability to reduce cost1986 DJC was costlier than ACC by $8.831991 DJC is cheaper by $7.69Reasons for cost reduction?Utilisation?Operational effectiveness?Strategy?

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-ACost difference due to equipment utilisationLess than full capacity utilisation raises costIf 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 problemIf demand, improves, ACC can increase production, reduce costACC target utilisation is 85%; currently 70%15% less capacity utilisation due to poor demand

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-A

American ConnectorDJCCurrent Depcn$5.10/1000$1.80/1000Current prodn420 million [70%]700 millionAnnual Depcn$2.14 million$1.26 millionRated capacity600 million800 millionTarget cap utilisation85%100%Full capacity at target utilisn510 million800 millionDepcn at full capacity$4.20/1000[2142000/510]$1.58/1000

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-AAnalysis of depreciation~f[capacity utilisation]At current production; cost difference is $[5.10-1.80]=$3.30 in DJCs favourIf demand rises; both would increase productiondecrease depreciation cost per unitAt increased production, depreciation cost difference:$[4.20-1.58]=$2.62ACC can only make minor difference by increasing utilization!DJC is able to get more output from less investment in equipment

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-AIs the cost difference due to strategy?ACC avg selling price= COGS/[1-Gross Margin]= $33.79/ [1-0.43]= $59.28Price difference due to competitive strategy~ manufacturing strategy ACC emphasises flexibility & responsiveness to customer as competitive prioritiesFlexibility causes higher cost due to repeated set up, smaller batches ,spare capacityACC is marketing/ engineering driven company

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-ADJC avg selling price= COGS/[1-Gross Margin]= $26.10/ [1-0.50]= $52.20Customers pay $[59.28-52.20]=$7.08 extra for American Connector products because of customisationDJCs competitive priority is costDJC is manufacturing strategy followsStress on capacity utilisationLarger batches, low variety, lower cost material through value engineeringLess innovative, less flexible

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-ASummaryBoth companies have their manufacturing strategy closely aligned to corporate strategyCost differences reflect strategyIf DJC enters US market:Many not be able to replicate high utilizationACC will be able to defend niche market [customised solution & responsiveness]If this segment grows, ACC grows, DJC cannot competeIf cost-sensitive market grows, ACC cannot compete, vulnerableIf DJC gains flexibility+ operating efficiency= serious threat for ACC

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-ASummaryCost differences reflect strategyIf DJC enters US market:Many not be able to replicate high utilizationAJC will be able to defend niche market [customised solution & responsiveness]If this segment grows, ACC grows, DJC cannot competeIf cost-sensitive market grows, ACC cannot compete, vulnerable

Gs/ AmCon-A/Apr10

American Connector-AGs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-A

Operating EfficiencyStrategy related$0.21Mould design$0.48Cheaper resin$0.18Smaller housing$3.50Tin plating$1.05Reduced waste$0.592000 piece reel pack$1.92Per 1000Total$4.09Per 1000TotalACC higher cost due to design & materialACC costs higher due to strategy- packaging

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-ALabour costACC output per employee=1.06 millionDJC output per employee=7.45 million@DJC's productivity, ACC would require only 420/7.45=56 people [not 396ACC has $[10.30-4.15]=$6.15 cost disadvantageEven if ACC ran at 100% capacity; labour cost=$7.21; still cost difference=$[7.21-4.15]=$3.06

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-APlant running hours [24x350=8400 hrs]ACC- 24x5x50=6000 hoursDJC=330x24=7920 hoursDifference DJC-ACC=1920hours~ACC can produce 4.2x1920/6000=1.344 million connectors extra by increasing plant running hoursExh 6: ACC not running plant 28.6% [running 2400 out of 8400 hrs available]Lower asset utilization

Gs/ AmCon-A/Apr10

Gs/ AmCon-A/Apr10American Connector-AWhat 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

Gs/ AmCon-A/Apr10American Connector-AWhat 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

Gs/ AmCon-A/Apr10American Connector-AThank you for your participation!

Gs/ AmCon-A/Apr10

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