Designing A Supply Chain Network

The geographical shift in the electronics manufacturing industry to Asia and other Pacific Rim countries has meant that companies have had to redesign their supply Chain Network. With customers moving to Asia, and new markets opening up, several K&S competitors have

already invested in new sites. By examining figure 2 (semiconductor equipment spending by geographic region), it is evident that the Asia-Pacific spending on Semiconductor equipment is increasing year on year, and outpaced Europe’s spend slightly in the year 2000, and is expected to continue to grow over the next few years. In order for K&S to continue to hold its dominant position in the market it must investigate possible opportunities and ensure that their supply chain is agile enough to be able to meet customer requirements in this growing market.

Increased Competition/Pressure

In order to sustain their current market stronghold, it is important that K&S examine their current supply chain. With the geographical shift in the market comes increased pressure from competition. Some Semiconductor firms have already taken action and have relocated, with new plants being built in Singapore, Taiwan, the Philippines and South Korea. This allows them to be more closely connected to their customers and increases the firms buying power by taking advantage of cheap labour, reduced operating costs, tax incentives and raw material costs thus gaining possible competitive advantage. Although K&S have a healthy market position, competition within their primary market is intense. Factors such as performance, quality, customer support, price and delivery all influence the nature of K&S’s multicountry competitive interaction.

Limited Flexibility and Agility

Currently, K&S’s Israeli site, hold 50% of the worldwide market share of supplying bonding tools. If the site has production problems, no competitor has the capacity to fill the gap. There are positives to be taken from this point however there are also many negatives. The Yokneam plant in Israel is currently operating at maximum production capabilities. If the Asia-Pacific market continues to grow, the Yokneam site has not got the production capabilities to meet demand of new emerging markets. K&S need to focus on optimizing there supply chain so that it is both agile enough to adapt to market change and efficient enough to meet customer demand. By opening another site it will reduce the supply risk associated with holding the largest worldwide market share of wire bonding tools.

With competition increasing as K&S’s close competitors move into emerging Asian markets, it is inevitable that K&S needed to possibly redesign there supply chain network or even change their strategy. Here we can see how some of Porters 5 forces model of competitive position can be implemented. Michael Porters five forces of competitive position model provide a firm with a simple perspective for assessing and analysing the competitive strength and position of a business.

Bargaining power of buyers/suppliers: with the Asian market booming, and as K&S hold a 50% market share of supplying bonding tools worldwide, it means that their already strong market position can be furthered by prospects of expanding current production to meet market requirements.

When looking at other cost saving possibilities it is apparent that expanding/redesigning and optimizing their supply chain they achieve higher customer satisfaction whilst achieving lower costs. Figures 10 and 11 show how the cheap labour cost can yield a higher return from investment. This is evident when comparing the possible investment return from China against Israel.

There are many factors that K&S need to take into account that will affect their decisions when redesigning their supply chain. Factors in the macro-environment such as government laws, tax changes, trade barriers and demographic change all will influence K&S’s decisions. To help analyse these factors, K&S can use a PESTEL Model to help categorise these factors.

Political factors

This refers to government policy and what influence it has on the economy. It also impacts on what goods and services they wish to provide. Such political decisions could have huge implications on many areas of the business from the workforce education to the quality of the infrastructure. It is important that K&S can recognise these possible implications and factor them in where necessary when making their decision. For example although Jordan may have a relatively cheap initial investment cost and be located close to the Israeli plant, it does have uncertain diplomatic relationships and that can limit K&S’s operations.

Economic Factors

These factors can include Economic growth, taxation changes, inflation and exchange rates. K&S must be especially aware of factors such as inflation and economic growth. With prospected areas of expansion including China, K&S must closely monitor these areas as it may affect the future investment. Currently the Chinese government are taking a hands on approach of how their economy is developing and are welcoming foreign investment with offers including tax incentives which of course make it an attractive location for many firms. And although there are other underlying factors that make China an attractive option, K&S must be aware of the many economic factors in each location that could potentially affect there expansion.

Social Factors

This relates to the pattern of behaviour, tastes and lifestyles. By analysing the population or by monitoring if there is a major change in consumer behaviour can give a better feel for the future market situation. K&S need to create a better understanding of the social dynamics of each area that they are considering for expansion. This will provide them with the knowledge to better communicate with local firms, access target markets, create a labour force and successfully manage operations.

Technological factors

The level of technological advancement in a region can positively or negatively affect the opportunities available for a business. If K&S can identify a region with a strong technological foundation, it then enables them to streamline operations and eliminate bottlenecks. New technologies create new products and innovation; it can reduce costs whilst improving the quality of the end product.

Environmental factors

Environmental factors include the weather, climate change and ecological issues such as global warming. K&S must take into account these factors very carefully as their plan to expand in particular regions may be affected by weather conditions/climate. For example, a rainy season or natural disaster can affect whether transportation systems are active, thus having a chain reaction throughout the supply chain creating a logistical nightmare when it comes to distribution of both raw materials and finished goods to the consumer.

Legal Factors

Legal factors can differ between the district, city, state and national levels. K&S must be aware of the complicated administrative, financial and regulatory processes involved when merging into new locations. However this really should not be a problem as K&S are already a multinational firm, operating in different continents let alone countries. The fact that K&S already operate within Israel and Singapore is of a huge benefit when it comes to the legal processes involved. This hugely simplifies the idea of possible expansion in these two sites.

K&S have had a presence in Israel for over 30 years, and without thorough investigation it looked as though expanding the current location in Yokneam made sense in some regards. The investment needed to expand the current plant would be significantly less than the set up cost of a new plant in a different country. The infrastructure is well developed and by operating with only one large site would mean that they would have the flexibility to share overheads. By locating different aspects of the business (e.g. R&D and manufacturing) on the same site, it means utilities and other services can be shared resulting in lower operating costs. Their local knowledge of business, laws, supplier network and the reliability of the workforce are again factors that make Israel’s plant an attractive option for K&S.

Although there are many positives to be taken from the option of expanding current operations in Israel, there are also factors that cannot be overlooked that could affect the long term profitability of expanding current operations. One of the biggest detractors of being located in Israel is the tax burden. This worked out to be 43% of Gross Domestic Profit (GDP) in the year 2000. Although initial set up costs are low, with Israel’s high taxes, and with an average hourly wage of $10.78 this would majorly affect long term profitability.

Israel has a well-developed, solid infrastructure; however it is not guaranteed that this site could logistically supply a global market. Its proximity to market is sufficient to supply the European and US market in the future but in order to take advantage of the growing Asia-Pacific market, K&S need to expand operations in a location that will enable them to grow with the market, locate within close proximity to customers, suppliers and to stay competitive within the market place.

With these factors taken into consideration, K&S should seriously consider the option of opening another plant. Low labour cost, tax incentives, proximity to market and long term profitability all outweigh the positives that expanding the current Israeli site have to offer.

(A) By 1999 Kulicke & Soffa Industries Inc. controlled more than 50% of the wire bonding equipment market share and they were the largest manufacturer of semiconductor equipment in the world. Due to its size the company sought out ways to expand into new markets while maintaining their current positions. With large numbers of K&S competitor’s setting up operations in Asia in order to meet the growing demand in the area it seems the best option for K&S would be to choose an area in Asia as the setting for their new operations. Besides holding a growing market share in the semiconductor equipment industry Asia also held advantages due to the low costs throughout the region on operating, materials, labour etc.

In 2000 less than 10% of net sales were to customers within the United States, whereas areas like Taiwan held 31% of net sales and Korea, China etc. was 22%. Due to the companies foothold in the market a second source could prove very advantageous the only problem was coming to a decision on the most advantageous location to set up in. “Our customer base was moving to Asia,” Torton said, “So we decided to look at China, Jordan, and Singapore.” Each location has several advantages and disadvantages:

Jordan

Jordan shares a large border with Israel where K&S has had a presence for over 30 years giving Jordan an immediate strategic advantage, and although not the first language, English is quite commonly understood and spoken. Due to its close proximity to Israel setting up in Jordan would prove very cost effective in addition goods produced between Israel and Jordan can be brought into the US duty free this was an effort to encourage stability within the region by the US as they funded Qualified Industrial Zones. High unemployment rates means there will be large numbers of opportunities and with an hourly wage of 1.05 means low labour costs.

Disadvantages

The unstable nature of the region makes in an unattractive region die to the on again off again peace agreements and if any unrest were to occur this would affect some Israeli employees ability to work there. There is also the fear that Jordan does not have the Infrastructure necessary when running a business with such an in depth supply chain.

Singapore

One of the main benefits to setting up in Singapore is that K&S already have a production facility therefore saved time and money as machines and a logistics centre was already in place. Its positioning is also a great deal closer to the market then Israel.

Singapore has a free market economy meaning it is a free market with little or no government control allowing little interference in the form of taxes etc.

Disadvantages

A very high cost of living is one of the major drawbacks of is the high cost of living and an average wage of 9.19 per hour.

Due to its close proximity to the market, large educated workforce, stable government and excellent workforce there is very few drawbacks to Singapore.

China

Multinational Corporations are encouraged to set up in China by being offered privileges and tax incentives and other attractive offers. A large presence of computer chip makers in China means a well-educated workforce is available to K&S. Low production costs and the lowest hourly wage from all the possible options makes China a very attractive spot.

The two possible cities within China Suzhou and Wuxi are located closely to several of K&S well established customers. Both cities have well developed infrastructures and while Suzhou is located close to the international hub of Shanghai Wuxi has a cheaper cost of living and both cities have impressive infrastructures that can support the large supply chains of K&S.

Disadvantages

Although in recent years the government has given more responsibilities to organisations within China they still are very involved in the running of business.

There is a high initial investment in infrastructure if K&S intends on moving operations to China.

To best choose a location for K&S we made a weighted average table to fully examine all the variables when relocating. The table took into account Availability of labour, Infrastructure, Costs, Stability of government and proximity to market making it a comprehensive view of the options.

As shown in figure 1. although all the options have positives Suzhou of China is the best choice for K&S new facilities as it is situated perfectly within the growing market of Asia and close to the international city of Shanghai and while the other options are close to the market they do not have the same proximity as Suzhou. Tax incentives among other things are also offered to encourage new investment in China meaning the cost of implementation will be lower. We developed a weighted average table based on costs which took into account the different types of costs, this proved China to be a very low cost country from cost of living to hourly wage at an average of .50 the total weighted average in cost accumulated to 87 as seen in Figure 2, and although the cost of investment in the city of Wuxi is lower than in Suzhou, it is outweighed by the other variables. As stated in the case study there will be a steady flow of labour in China as due to the industrialisation in China there is no shortage of manufacturing employees. Therefore Suzhou is our recommendation, as shown in Figure 1 although it does not have the best infrastructure or government it as a whole is the most secure option for K&S as it will work out the most cost effective while having very few shortcomings.

4. (C)

Possible implementation challenges that may arise from opening a new site are costs there is an estimated implementation cost of 6.5million to open the new facilities in Suzhou, due to opening in new territory unforeseen costs may arise whether they are from infrastructure, labour, taxes etc. Cultural differences can lead to serious misunderstandings; in Suzhou Mandarin is the official and most common dialect. Communication barriers when dealing with new partners can decrease business performance. Political issues when entering new territories can also be a large implementation challenge in China as the local government have laws taxations etc. designed to protect local business the Chinese government is also known for having a very hands on approach when it comes to the running of business. When business enter a new territory it must have extensive knowledge of the area it is entering as if they do not anticipate customer behaviour correctly they may lose out on possible profits badly and furthermore a lack of knowledge about the area may lead to them acquiring overpriced, poor quality suppliers etc. Due to the fact Suzhou Industrial Park is considered by some to be the “the new Silicon Valley” competition may be a problem for K&S due to dense population of competitors within the area. K&S must be aware of economic factors within the future for the Chinese economy ensuring the exchange change remains stable and there’s no future sign of an economic downturn. Therefore when entering Suzhou K&S must be aware of these possible challenges and take the necessary precautions to avoid them.

4. (D)

In order to address these challenges K&S must do all the necessary research before entering the Chinese market in order to fully understand the culture and business practices in the area to ensure when they set up in China they are able to communicate efficiently in order to ensure good business performance. More research must be done to anticipate the direction of the country’s economy if there is evidence of a possible economic downturn they should take the necessary steps and possibly reconsider their decision. In order for K&S to open a new facility in Suzhou they need to raise $6.5 million initial capital, the company may struggle in trying to raise that sort of finance for a risk of setting up new facilities.