American Connector Company Case Essay Example

offered by ACC.

In terms of actual effects, the sluggish demand in the U. S. causes a drop in volume and would affect depreciation of capital. As fewer units are produced per machine in the U.

S. environ-ment, the cost of the machines and depreciation is spread over a smaller amount of units, which increases the cost of depreciation. The strategic positioning of the two companies affects a multitude of items including all three major cost elements of material, labor, and depreciation.The ACC employed a strategy that emphasized an increased variety of products and flexibility in production, while DJC emphasized a strategy of cost reduction and utilized a number of tactics to decrease their costs overall. Among the major tactics was a cultivation and maintenance of close ties with suppliers and distributors in Japan, simplicity of design and manufacturability over innovation, and an emphasis on being highly efficient in manufacturing.

This strategy difference appears to be the sole driver in the cost difference of the materials as the close ties with suppliers, lower costs associated with a simpler cheaper design, and the attention to details such as the use of a 2,000 piece packaging reel instead of a standard 1,500 piece reel minimize the cost of materials. Furthermore, the ACC strategy of offering increased variety requires shorter production runs which inherently increases the cost associated with each product and packaging, as idle time due to process changeover would increase between each product production (4. % of time com-pared with 2% for DJC). The strategy of increased variety and production runs by the ACC would also affect labor in a number of ways.

Direct labor costs would

go up due to a larger amount of idle time associated with process changeover and the chance of increased problems associated with the increased number of changeovers (Process Failure: DJC, 1% compared to ACC, 8. 9%; Non-Scheduled Stoppages: DJC, 13. 2% compared to ACC, 23. 5%).

The emphasis on flexibility would also increase indirect labor as a larger number of people would be needed to manage the processes (Control: DJC, 11. % compared to ACC, 16. 7%), materials handling labor to manage the increased variety (Materials Handling: DJC, 3. 2% compared to ACC, 10.

4%), and an increased number of mechanics needed to handle process changeover (Mechanics: DJC, 4. 3% compared to ACC, 11. 9%). Furthermore, DJC employs a strategy in which they attract highly qualified entry workers with high starting salaries and do not continue to increase salaries, which ensures that they con-tinue to have higher percentages in direct labor as opposed to management positions.Finally, the strategy difference affects depreciation as the greater variety and flexibility requires more equip-ment for fewer units, which increases costs of depreciation.

The third aspect in terms of cost difference is in operational inefficiency. This can be hard to separate from strategy in that the ACC’s strategy inherently increases the chances for operational inefficiency. However, the obvious effects of operational inefficiency are reductions in utilization and productivity, which increases the costs of labor and depreciation of equipment due to the same arguments resented previously. Exhibit B on page 6 shows that DJC produces far more units per person than ACC, by a factor of ten.

This alone indicates a huge challenge for ACC should they be forced to compete

directly with DJC on cost. Recommendation for ACC/Sunnyvale It has been made clear that American Connector Company will not be able to compete on cost based on their current strategy. As DJC enters the U. S.

market, they will be able to quickly produce lower cost items and ACC can compete in one of two ways.The company can either choose to compete using their current strategy of increased variety and flexibility or completely change their strategy to focus on cost. ACC needs to determine what the needs of the customer are, and determine if the increased product variety is truly valued or if reduced variety and cost are val-ued. Exhibit A on page 5 shows that nearly 60% of ACC’s increased costs over DJC come from their strategy of offering a broad product range. If the increased product variety is proven to be valued, efforts need to be focused on improving operational efficiency as many costs stem from inefficiencies within the plant.Furthermore, they would then need to emphasize service and quality as their strengths instead of cost.

Even if they eliminate all operational inefficiencies, American Connector will still offer a product that is 30% more expensive than DJC. It should be further noted that an entrant of another major player in the marketplace would likely increase volume costs for ACC as demand would drop by some amount. Is the marketplace willing to pay a 30%+ premium for custom connectors?This is a question that must be seriously considered by ACC, as it is likely that many customers will find ways to adapt their products to use more generic connectors at a lower cost than this premium.

If cost is the main value, ACC needs to reduce the number of units produced and increase utilization both from a labor and facilities standpoint. The best option for ACC is to do a little bit of both.

It would be foolish to completely abandon their competitive advantage of delivering a customized product, but they should limit this flexibility only for orders within an acceptable volume.However, as their strategy is their largest cost, they should begin to reduce their number of SKUs to a more reasonable level (and allowing expansion of this quantity is certainly to put them at a further disadvantage. ) They should make every effort to eliminate all operational inefficiencies and begin to refocus their efforts on produc-tion quality to further reduce costs. These efforts should bring the cost difference more in line with what the marketplace would be willing to pay for flexibility and customization. Exhibits Exhibit A. Cost Differential Analysis between ACC and DJC Exhibit B.

Labor Use Analysis of ACC and DJC