American Connector Co. (ACC), a US supplier of electrical components, has been forced to reevaluate operations at its plant in Sunnyvale, California, in response to the plans of a Japanese competitor (JDC Corp.) to construct a rival plant in the United States. The essential issue at hand is whether American Connector’s customization manufacturing strategy should be modified or replaced to meet the threat posed by JDC Corp.’s low-cost manufacturing approach. The situation is particularly critical as ACC’s Sunnyvale plant has recently been experiencing rising costs and deteriorating product quality. Consequently, the present analysis will examine the manufacturing strategies of American Connector Co. and JDC Corp. from a SWOT (Strengths, Weaknesses, Opportunities, Threats) perspective in order to determine the potential impact of JDC’s entry into the US connector market.
JDC Corp. has successfully employed a low-cost manufacturing strategy in Japan and hopes to replicate that success in the US. In particular, JDC has been able to capitalize on the following strengths:
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JDC’s Kawasaki plant produces a small variety (640) of connectors. This reduces production costs and complexity. |
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Products are standardized, improved copies of US-made connectors. |
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Steps and features that do not add value are eliminated. |
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Continuous 24-hr a day production reduces variable costs and eliminates startup and shutdown expenses. |
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Goal is 100% utilization of plant and equipment. |
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Use of tin-plated pins and new type of resin maintains quality while reducing costs. |
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Processing lead times and work-in-process inventories average two days. |
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Just-in-time (JIT) delivery results in low raw materials inventory. |
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Long production runs minimize yield and capacity losses. |
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Products are delivered frequently, usually daily but sometimes hourly. |
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All technology development activities are coordinated. |
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Not surprisingly, JDC’s weaknesses are due primarily to the company’s low-cost manufacturing strategy. Some of the disadvantages surrounding this approach include: |
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Standardization and limited variety restrict the company’s ability to meet customized needs. |
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Success of low-cost approach is highly dependent on full utilization of capacity to reduce costs. |
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Relatively high finished goods inventory adds to costs. |
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Production of standardized, low-cost connectors might not be optimal strategy if customers place a higher value on other product characteristics. |
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JDC’s production capacity could lag demand. |
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Production schedules are very inflexible. |
JDC’s opportunities include seizing market share from American connector manufacturers such as ACC through introduction of its low-cost, yet effective manufacturing strategy in the US market. If JDC can successfully implement in the US the manufacturing and production strategies that have brought it so much success in Japan, then the company can position itself as a major player in the US connector market and successfully challenge
the dominance of American manufacturers. Indeed, the opportunities for JDC to profitably expand in the US are almost limitless.
As the latest competitor in the US connector industry, JDC is more likely to pose a threat to other manufacturers than face direct threats itself. Indeed, were JDC’s low-cost strategy to prove more effective than ACC’s mass customization approach, the future prospects of many American connector producers would definitely be at risk. From a more optimistic perspective, however, JDC may not pose as much of a threat as some believe given that the company does not compete directly with ACC; that is, JDC produces low-cost connectors for customers who neither seek nor demand product customization, whereas ACC produces highly customized connectors for customers demanding specialized products. In brief, there could be enough space in the marketplace for both ACC and JDC to serve their respective niche markets.
American Connector Co. has successfully employed a mass customization approach in the US and expects to remain competitive by fully exploiting the strengths of its strategy, namely:
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ACC’s Sunnyvale plant produces a large variety (4,500) of connectors. This allows the company to provide just about any kind of connector that a customer could want. |
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Products are customized and state-of-the-art. They also exceed customers’ expectations. |
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Batch processing and automated assembly facilitate production of large quantity of products (600 million units per year). |
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ACC is committed not only to product variety and quantity but product quality as well. |
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Production process is flexible and easily accommodates customers’ needs. |
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Mass customization approach focuses on product innovation rather than cost reduction. |
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Processing lead times and work-in-process inventories are held down through efficient production scheduling. |
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Just-in-time (JIT) delivery results in minimal raw materials inventory. |
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Short production runs maximize operational flexibility. |
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Products are quickly modified to meet needs of customers. |
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Production capacity is increased ahead of increased demand. |
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Despite ACC’s dedication to producing mass quantities of high quality, custom-made connectors, the company does have several weaknesses: |
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Although defects are rising (approx. 26,000 per million units), ACC continues to employ post-production inspections rather than statistical process control. |
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Customization and high variety place tremendous pressure on company’s forecasting and production schedules. |
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High level of work-in-process inventory promotes flexibility but increases finance costs. |
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Despite its commitment to technology and product quality, the company has not made any significant plant investments since 1986. |
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Although 15% of the company’s products are geared toward meeting the specialized needs of customers, the remaining 85% are prone to price undercutting by rivals such as JDC. |
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A relatively high percentage (46%) of the company’s workforce is employed in indirect labor activities. |
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The company’s connector output per employee (1.06 million units) pales in comparison to JDC’s (7.45 million units). |
There are tremendous opportunities for ACC to revamp its production and manufacturing processes to better meet the threat posed by low-cost competitors such as JDC. There is no reason for ACC to discontinue meeting the needs of customers seeking customized, innovative product solutions; nevertheless, ACC must seize the opportunity to undertake a top-to-bottom restructuring of its operations if it does not wish to be priced out of the
market. Indeed, the company must:
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Adopt a product-focused strategy for standardizing production of the 85% of connectors that do not require customization. |
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Decide whether it wishes to continue meeting the needs of both standard and specialty customers or concentrate on only one type of customer |
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Depending on which strategy it adopts, invest in new plant and equipment to meet the highly customized needs of the specialty market; or, rely on continuous improvement of existing plant and equipment to produce reliable, low-cost standardized connectors. |
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Decrease the percentage of employees dedicated to indirect labor by redesigning and improving product development and manufacturing activities. |
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Institute statistical process control methods to ensure product quality. |
The threats faced by American Connector Co. are substantial. Unless the company completely changes its manufacturing process from a mass customization approach to a product-focused strategy, it faces the very real risk that it will be undercut by low-cost rivals such as Japan’s JDC Corp. Moreover, if low-cost rivals were to make a concerted push to enter the specialized connector market, ACC could feel that segment of its customer base threatened as well.
In essence, ACC must decide whether it wishes to service the standardized connector market, the mass customization market, or both. First, if ACC decides to channel all its efforts to meeting the needs of the standardized connector market, it will have to make the changes noted above and become much more like its low-cost rivals. There is no guarantee that it can do this. Second, if ACC opts to focus exclusively on meeting the customized needs of its customers, then it will essentially be foregoing 85% of its core business. This would likely require a radical restructuring effort as well as massive layoffs of personnel. In reality, such a step might be too draconian to put into practice. Finally, if ACC chooses to continue catering to both segments of the market, customized and standardized, it will essentially have to bifurcate operations to meet the unique process engineering demands imposed by each type of manufacturing process. That such a system could work has yet to be proven. In sum, the challenges facing ACC are daunting, and it will require a concerted effort on the part of the company’s management to establish clear priorities and select the best path forward in view of the company’s strengths, weaknesses, opportunities and threats.