The Threat Of Djc To American Connector Company Accounting Essay
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DJC, who built in Japan the most efficient connector plant of the world, is planning to build its first connector plant in the United States. It can utilise its highly efficient manufacturing process and supplying electrical connectors at a lower cost thereby causing a serious threat to ACC's market share.
In this report, we have analysed the reasons behind both, the DJC's cost efficiency and the operating problems that ACC is facing. We have suggested the solution which ACC can implement and thwart away the threat of DJC eating into its share of orders.
How serious is the threat of DJC to American Connector Company?
American Connector Company (ACC) and DJC are two very different companies, both in terms of the strategies employed and the results that they show. A complete analysis of the strengths and weaknesses of the two firms is included in the Appendix A. The following represents an analysis of the scenario when DJC enters the US market:
Reasons why DJC can be a threat
DJC has a lower cost of production compared to the Sunnyvale plant of ACC. The cost per 1000 units for DJC is lower by around 40% compared to the Sunnyvale plant (please refer to the Appendix for detailed calculation). The market in US has become very saturated and competitive. In such a market, DJC's lower costs will give them a very good competitive advantage.
There is a possibility that DJC will only concentrate on the few SKU's that they have. Due to their highly efficient manufacturing process, they will have a lower cost than ACC and thus can price their product cheaper. This seems like a very probable outcome considering that custom orders form only 15% of the total production volume. So because of their lower price, DJC will be able to eat into the rest 85% of ACC's orders.
DJC manages to keep a low raw material inventory of 5 days due to which they will enjoy a strong advantage over ACC which has a raw material inventory of 10.8 days. This results in higher costs for ACC due to handling of this raw material
DJC enjoys an advantage in having a lower lead time than ACC (processing lead time of 2 days for DJC). This will allow them to ship products in a faster manner. One reason for this is due to the high variety in product mix for ACC.
The Kawasaki plant of DJC has a very high employee productivity of 7.45 compared to 1.06 for Sunnyvale plant of ACC. This allows them to keep low employee strength but still achieve higher profits. This has been largely possible due to automation of processes.
The Kawasaki plant of DJC is able to enjoy continuous runs of the machine which helps in reducing costs due to reduction in number of start/stops for the machines. But in the case of ACC, due to the variety in the product mix, most of the product lines were run for 1.5 to 2 days. This also contributed to an increase in the costs for DJC.
Effective utilization of the plant for Kawasaki is 75.4%, which is more than twice that of Sunnyvale (30.2%). This shows that DJC will require a lower capacity to meet the demand and thus would be able to reduce costs.
The defect rate for the Kawasaki plant is only 1 per million, while for the Sunnyvale plant of ACC it is 26000 per million. Due to this, there are higher costs involved for ACC due to intensive final testing. This also leads to increase in lead times.
Reasons why DJC might not be able to replicate the success in US markets:
DJC has a very rigid production schedule and will not be able to satisfy the unpredictable demand requirements of US companies which need custom products
If DJC enters the US market, they might have to introduce a higher variety in their product mix. There is a demand for flexibility in terms of design in the US market due to which ACC will enjoy a competitive advantage
DJC manages to keep a low raw material inventory of 5 days, but this is dependent on the frequent delivery by the suppliers. They will need to form strong relations with the suppliers in the US market to ensure that this competitive advantage is maintained.
Looking at these factors, we realise that DJC poses as a credible threat to American Connector Corporation as they can target the standardised product market and capture a high market share due to their low cost of production and efficient production processes.
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.
ACC's Sunnyvale plant's total manufacturing cost is higher than DJC's Kawasaki plant by $13.549/1000 units for 1991 which produces a cost difference of 40.10%.
The cost difference is mainly due to difference in the labour cost. For ACC the labour costs show an increase from $ 8.53 to $ 10.30 from 1986 to 1991. On the other hand for DJC the labour costs have decreased considerably from $ 9.93 to $ 3.77.
A detailed analysis of the cost difference is provided in Appendix C.
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?
The excel sheet attached compares the cost differences in different categories. Some of these are due to the differences in their competitive strategy and some are purely due to efficiency. We shall analyse the cost differences category-wise and see the various reasons behind them and try and understand if they are inherent in the way the companies compete or is something that flows from the differences in efficiencies
Raw Materials: Raw material costs are substantially higher in Japan but using the cost indices and doing the calculation, it turns out that they might be able to procure and manage raw materials at a lower cost. The reason for this might be:
In Japan, DJC is a big name and had very close relationships with its suppliers due to which it could purchase in large quantities and demand high quality & frequent delivery. However, it is not clear from the information available in the case whether this will be possible in the US when it is new to the market or whether the US suppliers would be open to the concept of Joint Quality Development programs like the suppliers in Japan
DJC's raw material suppliers in Japan followed a JIT strategy with frequent deliveries due to which DJC was able to maintain a low inventory (5 days) and maintain low warehousing costs. However, they might not be able to do this in the US where JIT is not practiced.
Location advantage: In Japan, DJC followed a strategy of having their plants very close to raw material suppliers and end buyers of machines. This helped its suppliers pursue its JIT strategy. But this may not be possible in the US given its large geographical spread unlike Japan if it needs to satisfy demand
Packaging Costs: We can see that DJC has substantial savings in packaging. This is due to the fact that they pack their products in fixed reels of 2000 whereas AC has varying packaging sizes (from a 10-piece box to a 1500-piece reel). This is due to the fact that DJC focuses on standard products whereas AC manufactures custom products of smaller order size. So, this is something inherent in the way the companies compete
Labour: The largest difference in costs between the companies is in labour costs. This is down to the amount of automation that DJC uses in its processes. Also because of its concept of making its processes more reliable, controlling inventory and high quality (1 defect per 1 million vs 26,000 defects per million), it did not require workers for monitoring these. Thus, in spite of paying its employees higher than the industry average, DJC is still able to maintain low labour costs. This is down to its efficiency due to automation. Another factor is the amount of asset utilization, which is low in the case of AC which means wasted labour costs
Electricity: Though a small number in the larger scheme of things, the electricity costs are higher for DJC in the US. This is due to the large number of automated machines that are used by DJC that contribute to higher electricity consumption, although this might be offset to some extent because of its extremely high asset utilization. Because of its high R&D focus, DJC was able to acquire machines from vendors and customize it to meet their needs. Thus this is something inherent in the way DJC has positioned itself - high quality using automation
Depreciation: This is substantially higher in the case of AC. This can be attributed to higher wear and tear from comparatively more frequent start-up shut-down of machines because of the lower run time (average of 1.5 days at AC vs 7 days at DJC). This is understandable as AC has to take lower-volume orders because it caters to customers who seek customized products. Thus this is again inherent to the manner in which the companies compete.
What should American Connector's management at the Sunnyvale plant do?
ACC can also incorporate the Kawasaki plant layout by having 4 different cells catering to the four broad categories of connectors. This will help in improving efficiency of the process. Also, if custom orders are required, a separate cell/production line can be dedicated to them to make sure that any changes in production schedule due to rush orders does not affect the other products
Reduce need for extensive quality checks by reducing the defect rate. One way of reducing defects was to focus on the moulding technology. The moulds need to be replaced in a more frequent manner (currently have a life of 8 years) and the current technology should be used to reduce defects.
ACC can try and focus on developing in-house technology to reduce dependence on suppliers. Also, ACC should control the quality of incoming parts coming from suppliers. This would help in reducing the high defect rate of 26,000 in a million.
ACC can reduce the number of package sizes that it offers. Currently it offers a large range of sizes (10 to 1500), leading to large packaging costs. There is scope to reduce packaging costs by doing this.
Another suggestion for ACC would be to incorporate the design changes of the product that had been implemented by DJC to reduce their material costs.
If Sunnyvale Plant incorporates the improvement
Less Expensive Resin
Reduced Mass of Housing
TOTAL COST REDUCTION
* Having a common 2000 piece reel may not be feasible as 15% of its orders are custom orders which are typically of low number
After analysing, we find that for American Connector, 30.48% of the total costs come from labour costs, which is extensively high when compared to DJC, for which it is around 3%. This calls for increasing automation in the process so that it can reduce the labour cost effectively. This should be preceded by synchronising the manufacturing process to increase the productivity, which is lagging at 30.2% as compared to 75.4% for DJC. (Please refer to attached spreadsheet for extensive calculations)
ACC should relook its policy of accepting a last minute change as it is affecting the plant in terms of backlogs and higher production costs. The Sunnyvale plant should try to reduce the setup costs so that they can cater to frequent last minute changes. Otherwise, they should bring in a policy of charging premium for incorporating last minute changes. Thus Sunnyvale plant will have to take a more aggressive approach of either not accepting most of these rush jobs or making a higher profit on these jobs.
The number of product variants of the Kawasaki plant is only 640, which makes it easier to achieve economies of scale on materials and to make it easier to manufacture. On the other hand Sunnyvale produced 4500 variants which results in significantly higher production costs. The product variants should be rationalized to improve production scheduling and reduce inventory costs. Also, it can do away with extra costs like colour-coded housings which do not add perceived value to the customer.
The Kawasaki plant carries finished goods inventory of 58 days. However, it carries very low levels of work in progress and finished goods inventory. The process and plant layout are so designed to achieve fewer resource usage in inventory control. This allows them to meet the demands of the customers dynamically by adopting the just-in-time philosophy while having a buffer to guard against in the form of safety stock. The Sunnyvale plant on the other hand carries a lot of raw material and work-in-progress inventory. This leads to higher lead times and larger monetary resources remaining tied up as WIP, which is a burden for the company. This calls for a review of their inventory management techniques so that they can effectively develop mechanisms to reduce inventory levels. Also, keeping a centrally located warehouse can help in simplifying material flows and economizing on space.
ACC's organizational hierarchy stressed more on marketing and engineering teams as compared to their production team, whereas in the case of DJC, due importance was given to the production team. This increased level of attention can be attributed as a reason for increase in productivity at DJC. ACC can follow a similar model for operations set up in their organisation.
Appendix A - Analysis of the two companies
Analysis of American Connector Company
Emphasis on quality and customization are its biggest strengths. They are able to service requests for new products from companies and these new designs often end up becoming industry standards. Currently have 4500 different models. Custom orders make up 15% of the total production volume.
Products are recognized for superior design and performance. The market recognized that ACC produced excellent technical solutions
Flexibility in the production schedule helped companies which required custom made connectors as the demand for these products was unpredictable and if the customer suddenly needed high stocks, ACC will be able to deliver.
Their profit margins are very high, around 43% and in the competitive market, this results in high price of the product
Would always increase capacity when utilization reached 85%, so 100% utilization not possible.
No investments in capacity building or new improved technology since 1986
Not operating on a continuous model and the number of work hours is less.
Wide range of packaging formats offered which results in increased packaging costs
Very high processing lead times - 10 days for standard items and 2-3 weeks for special order items
The runs were of short duration, typically 1.5 to 2 days, while some ran as long as one week. This leads to increased costs and lost time due to machine start-up and shutdown
Large scale changes in the production schedule resulted in increase in the lead times.
The excessive high WIP inventory was a problem and also resulted in some products becoming obsolete.
Very high defect rates (around 2.6 %) which made extensive final inspection a necessity. This resulted in higher lead times.
Yields on newly designed products entering production for first time were sometimes as low as 55%
Analysis of DJC
Maintain close links with major customers which resulted in high entry barriers
Company's strategy emphasized simplicity and manufacturability over innovation
Highly efficient manufacturing process
Has a high profit margin of around 50%
Kawasaki plant's layout is designed to improve efficiency by breaking into 4 cells each of which takes care of one of the four general types of connectors
Continuous production model which eliminates the cost and time lost due to startup and shutdown of machines
Optimization of product design to make sure that product is easier to manufacture and has lower material cost.
Packaging is limited to only tape and reels
Focus on moulding technology to make moulding defect free. Moulds were also replaced frequently. In Kawasaki, average life of a mould was only 3 years while it was 8 years in ACC. In Kawasaki, the average annual cost per mould was only $ 29,000 while it was $40,000 in ACC.
They believe in in-house technology development to reduce dependence on suppliers
Material costs are very low for DJC as they eliminate several design features which did not add value to the consumer. This helped them achieve a material cost of $14.89 / 1000 units in comparison to $11.49/1000 units for ACC ( with raw materials cost being higher in US)
Frequent deliveries by suppliers allowed the Kawasaki plant to maintain raw material inventory of only 5 days. In comparison, ACC had a raw material inventory of 10.8 days
The Kawasaki plant has a very low processing lead time of 2 days which allows them to meet orders in a faster manner.
Kawasaki plan has a high employee productivity of 7.45
The decision making authority was distributed throughout the organization.
Low number of SKU's showing that their production is very standardized. They will not be able to compete in the US market where a lot of companies require new designs and customizations to be done. They currently have only 640 SKU's.
They are very rigid in their production schedule. This means that in the competitive US market, they will not be able to accommodate rush orders.
Appendix B: Process flow diagram for DJC and American Connector Company
Process flow diagram for American Connector Company:
Plant layout for Kawasaki plant of DJC:
Appendix C: Analysis of the difference in cost between DJC and American Connector Company
Comparison of the change in the costs for DJC and ACC from 1986 to 1991
DJC Kawasaki 1986
DJC Kawasaki 1991
ACC Sunnyvale 1986
ACC Sunnyvale 1991
Raw Material Cost
Raw Material Packaging
Analysis of the change in costs between DJC and ACC
DJC Kawasaki 1991
Cost Indices, United States/Japan (1991)
Actual Cost in US for DJC
ACC Sunny Vale 1991
Raw Material Cost
Raw Material Packaging
The cost difference analysis shows that the costs for DJC are 40.10% lower than that for American Connector Company.
Appendix D: Analysis of the difference in productivity between DJC and American Connector Company
Appendix E: Analysis of the difference in labour utilization between DJC and American Connector Company
Appendix F: Excel file containing the extensive calculations
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