The DJC Company invested heavily in the quality of their production process. This resulted in less errors being made and a production that was almost never halted by broken machines. Although high investments were required to achieve such an efficient production, in the end the benefits outweigh the costs. The DJC Company regards manufacturing excellence as the source of the low cost position and high quality products. This mission is clearly reflected by the high investments, mentioned above, in the manufacturing process.
Does DJC pose a threat to ACC when they would enter the US market? Sub question: to which extent is the difference in cost due to the different strategies that both companies have? In our opinion the answer to the main question is; yes, DJC does post a threat to ACC when they would enter the American market but only for their standardised products. The answer to the sub question is that in our view the difference in cost is almost totally caused to the difference in strategy. Below we will give arguments to explain our statements.
The market is described as “hostile and saturated”. Furthermore, we know from the business cycle that there are four stages for a market introduction growth maturity and decline. The market resembles all characteristics of a declining market. Second DJC is producing the same articles as ACC does and is thereby targeting the same customers. When DJC started they bought the machines developed for ACC thereby copying their concept. Both companies produce the four basic types of connectors the difference lies in the number of product variations. 85% of the sales of ACC are standardised products; the other 15% is customised.
DJC is only producing standardised products because of their low cost strategy. In 1991 the DJC plant produces only 640 stock keeping units (SKU’s) quite a small number compared to ACC who is producing 4500 SKU’s. This implicates that ACC makes 3860 different products for 15% of their clients; a large number of customised items for such a small customer group. Sales in this product group will be heavily affected when DJC will enter the American Market because DJC is delivering solely the standardised products. To illustrate this see the picture below:
Not only does DJC produce the same standard products and therefore serve the same customers, they can also produce these products in a more efficient way. DJC proved in Japan that they are able to produce the same standardised products for a lower price through an optimal configuration of their resources. This difference comes from a dissimilar strategy. Where ACC is customer orientated, driven by marketing and engineering, DJC is clearly production organised where manufacturing plays a key role. The competitive advantage ACC now has is their ability to make customised products. ACC is flexible and knows its customers.
DJC has higher plant utilization and they have no need for a large R&D and design department as all products are standardised. By having their plant organized in a different way they DJC is able to save costs. The advantage for ACC here is their flexibility. The difference in plant layout is illustrated below. As you can see the ACC plant has a process layout where five production areas are able to produce each product. DJC has a product layout, being less flexible but more cost efficient.
Quality will not be directly an issue because both factories are able to supply excellent quality, the difference again is that DJC is able to do this more cost efficient by demanding a higher product quality from their suppliers. ACC even needs a costly separate quality control after the production process to make sure their quality levels are on top. So although quality is alike, the way it is obtained again is very costly in the case of ACC underlining again the cost advantages for DJC.
Other cost reducing factors for DJC are less indirect labour and a better production planning
There are two possible scenarios, the Japanese will enter or they’ll stay out of the American market. No matter what happens ACC should develop a clear strategy in order to stay alive in this declining market. Apart from that they should improve their operational effectiveness. If they do not change, sales will continue to decrease, costs remain relatively high, they have got no sustainable competitive advantage that is well enough developed and the end of the story is near.
To be competitive operational effectiveness is necessary. But ACC should strive to distinguish itself. Right they are doing the exact same thing as the Japanese by producing the standardized products. As mentioned before although it is not very likely that the Japanese will enter the American market, if they do, it is going to be very hard to stay competitive. The companies will both try and serve the same customers lowering costs, lowering prices, lowering margins, creating losses. The current way of working seems a self-enforcing destructive plan.
We suggest that ACC should develop a sound strategy.
Right now they try serving a too broad market trying to make everybody happy. It’s time to focus and perhaps makes some trade-offs. Our advice is that ACC should heavily invest in R&D and focus on their real competitive advantage; their ability to supply customized products. By doing this they create a unique value proposition as the Japanese are not able to deliver this with their way of working. Focus on the customer that is paying for this flexibility and quality and let the small margin customers go. Try to build a company around several activities like quality, flexibility, innovation and employee training and fit all the activities together.
The specialty you have towards your customer can also be used towards your supplier. Build a relationship and create an atmosphere like the Japanese have. By building this relationship you’ll be able to control the quality of the raw materials and thereby enhance your product quality. By using the higher level quality of raw materials you will reduce the amount of deficit products after production. Secondly as a result of this you can get rid of the department that is checking each product, this will automatically lead to an extra reduction of your costs.
By keeping in touch with their customers and market they will know what their market wants and always be on top of things. It remains necessary to have a look at the manufacturing process because in our opinion ACC should be able to reduce the total amount of overhead and the total cost of your production per unit. The standardized products should not be completely forgotten but it’s not where the focus should be.