Business
1. What are the underlying forces that led to K&S’s desire to make changes to its current supply chain network?
Cheap labor and raw materials were the defining forces that led to K&S’s move to Singapore. Even though Israel site held 50% of the worldwide market share of bonding tools, the shift in the electronic manufacturing industry to Asia and other Pacific Rim countries meant that K&S would enhance their business and profitability of they also moved a part of their operations to that region. There is a definite shift in the way businesses are conducted by Small and Medium Scale Enterprises (SMEs) globally, and this includes the development of collaborative networks based on core competencies to compete and gain competitive advantages. Profits came from low cost raw materials and small components availability, performance, delivery and customer support. Considering that most of K&S’s competitors like ASM International and Shinkawa (bonders), Disco Corporation (blades), and CoorsTek, PECO and Small Precision Tools, Inc., moved to regions which offered these conditions, it was ideal for K&S to do the same. K&S had transferred their automatic ball bonders manufacturing unit to Singapore to cut down on price escalation. As K&S produced capillaries in large quantities, the profit obviously came from labor-intensive job profiles. Therefore, it makes a lot of sense for K&S to make changes to its current supply chain network.
2. What factors should K&S take into account in each decision to redesign its supply chain network?
The major issue which K&S had to take was to address the escalating operational costs. Next would be the reliability of supply and service. There is no doubt that their unit in Israel was doing exceptionally well, but there was little scope for expansion. Political stability was another factor that K&S has to consider. The Middle East was unpredictable wit its ongoing political and economic upheaval. Even though Israel was free from such contingencies and could have been considered for the second plant, the high tax regime negates this. Given this, the best possible option K&S could take into account in each decision to redesign its supply chain network was to shift to China. With tax incentives offered to foreign investors, a continuously growing private business sector, highly competitive industries to boot and a bustling international trade regime, China was ideal. With a number of foreign business houses already establishing and doing business in and from China, K&S could use their time-tested business theories to make a strong statement. They could target their primary buyers in China, and enjoy the low cost of living, abundant supply of raw materials and labor available there. 3. Should K&S expand the current capacity in Israel or open a new plant elsewhere?
There is no doubt that China was the most favored and attractive proposition for K&S to explore and expand their business reach. Therefore, it would be logical for K&S to expand their current capacity by investing in China.
4. Assuming K&S opens another plant, what are the advantages and disadvantages of the different locations? What recommendation would you give K&S management regarding the location choice? What implementation challenges do you foresee? How would you address those challenges?
Globalization has changed the business outlook of many conglomerates the world over. It has enhanced the buying and selling power of more nations, and this has mandated the push for further reduction in production costs to meet the ever-growing global demand and competition. Cheap labor and raw materials are necessary to meet global demands, and countries like China and India have become prime destinations for many of these companies. In China, facilities are established in cheaper rural areas, where the local governments offer subsidized rates on land procurement and infrastructure development, tax benefits and incentives to attract investment. Chinese advantage of competitive production includes its labor force, land and natural resources. China is the most populated country in the world with a population of over 1.2 billion people, and this huge population allows China to supply abundant labor force that can work on low salaries. Workers salaries remain relatively low. However, China has field shortages in the areas of skilled managers, engineers and technicians. The language barrier is another concern that K&S will have to overcome. The technological gap is also an area of serious concern. What the foreign investors sought and obtained from the liberalization was easy access to the local market, and incentives in the form of cheap land, raw materials, tax exemptions and ultimately attractive profits. Many countries tried to emulate the Chinese in their attempt to attract foreign investors with little or no success. The Chinese initiative was extremely attractive; they had the geographical advantage which most other countries could only dream about.
As K&S will have to invest a lot in infrastructure development, it would be wise for K&S to look at a location that allows them access to free and quick flow of materials and supplies. They should be located in an area that is accessible by air, land and sea. This will help K&S supply their products within China, and also to other parts of the globe where they supply capillaries and other products, with minimum effort and reduced operational costs.
As skilled labor remains a challenge, K&S would have to train the Chinese workers in running their machines and the likes and also learn their native language; Mandarin. Huge investment will also be necessary to begin a full-fledged manufacturing unit, but all these are essential if K&S looks to establish a permanent base in China to cater to the needs of the markets there. As long as the Chinese feel the need for foreign participation in its economic development, all the major companies relocated to China will retain their manufacturing and servicing units there. Therefore, it is beneficial for K&S to invest and establish their new operations in China itself. For starters, the company can look forward to bringing some of their skilled workforce to China on a rotational basis until the Chinese workers are able to handle the operations independently under their management’s (K&S) supervision.
