Kulicke & Soffa Case Study

1. What are the underlying forces that led K&S’s desire to make changes to its current supply chain network?

The first underlying force we can name which led K&S’s desire to make changes to its current supply chain network is the fact that there was a shift in K&S’s customer base towards Asia and other Pacific Rim countries. The opening of new markets, the opening of competitor’s new plants in Asia and the erosion of the application server provider market were also motives for K&S to make changes in their current supply chain network.

As showed in figure 2 of the case, Asia-Pacific spending in terms of semiconductor equipment overtook Europe’s spending in the year 2000 and this gap is expected to grow more in the years to come. As the Asian demand keeps growing, K&S needs to increase its production capacity by expanding.

The fact that K&S holds the largest market share is another underlying factor to make changes in their supply chain. In fact, K&S has to reduce the risks associated with having the largest market share in the world by opening up another plant. As mentioned in the case, a “dual source” is advantageous to the company, it will allow it to produce more.

2. Based on financial considerations, should K&S expand the current capacity in Israel or open a new plant elsewhere? Use the data in the case to calculate the three-year cost for each of the options as well as the amount of demand (Asia versus other parts of the world) to be satisfied from each location. Show your calculations.

As mentioned in the case, demand in the year 2000 was equal to 6 000 000 units. This demand was although expected to grow to 8 000 000 per year. In the table below, we thus computed the demands for the time period (2000-2002).

Year 2000 Year 2001 Year 2002

Asia (87%) 4 980 000 6 640 000 6 640 000

Rest of the world (17%) 1 020 000 1 360 000 1 360 000

Global demand 6 000 000 8 000 000 8 000 000

To know whether K&S should expand in Israel or open a new plant elsewhere we are going to compare the costs of doing so for each respective region. We will be computing these costs for Israel, Jordan, Singapore and China.

The parameters we will take into account in our computations are:

Shipping costs

Number of workers

Labour costs

Cost of investment

We know that the construction of the plant will take two years (year 2000 and year 2001), during these two years, K&S will only be able to satisfy a demand equal to 6 000 000 units. It is only in 2002, the third year, that it will be able to satisfy the 8 000 000-unit demand. According to figure 3 in the case, Asian demand represents 83% of global demand, we assume that this figure will remain stable throughout the 3 years.

We also made the assumptions that employees work 252 days per year and 8 hours a day. We also assume that shipping costs remain stable over the three-year period as well as the labour efficiency.

EXPANSION COSTS IN ISRAEL IN USD

Year 2000 Year 2001 Year 2002

Satisfied demand 6 000 000 6 000 000 8 000 000

Shipping costs (USD) 5 745 000 5 745 000 7 660 000 1 USD for Asia

0,75 USD for ROW

Number of workers

298

298

397

(Satisfied demand)/((Labour eff. x 8 x 252))

Labour costs

(USD) 6 468 000 6 468 000 8 624 000 Number of workers x average wage x 8 x 252

Cost of Investment

(USD) 2 000 000

TOTAL COST 14 213 000 12 213 000 16 284 000 42 710 000

For the total cost computations of Jordan, Singapore and China, in years 2000 and 2001 the cost structure (without investment cost) will be exactly the same as the cost structure of Israel in those same two years. In fact, since the construction takes two years, the extra plant being implemented in Israel, Jordan, Singapore and China will only be functioning in year 2002.

For the computations of the countries Jordan, Singapore and China we assume that they produce at their maximum capacity since it is cheaper to produce in those countries than in Israel itself.

Countries Jordan Singapore China

2000 and 2001

(USD) 24 426 000 24 426 000 24 426 000

Investment (USD) 4 500 000 6 000 000 6 500 000

SUB TOTAL 28 926 000 30 426 000 30 926 000

Computations for Year 3

Satisfied demand in new country 3 500 000 3 000 000 4 000 000

Shipping costs (USD) 3 351 250 1 500 000 2 000 000

Number of workers in new plant

217

186

283

(Satisfied demand)/((Labour eff. x 8 x 252))

Labour costs

(USD) 459 375 3 446 250 285 714 Number of workers x average wage x 8 x 252

Satisfied demand in Israel 4 500 000 5 000 000 4 000 000

Shipping costs (USD) 4 308 750 4 660 000 3 660 000 Shipping the rest to Asia and to the ROW

Number of workers in new plant 223 248 198

(Satisfied demand)/((Labour eff. x 8 x 252))

Labour costs

(USD) 4 851 000 5 390 000 4 312 000 Number of workers x average wage x 8 x 252

SUB TOTAL 12 970 375 14 996 250 10 257 714