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Mitel Semiconductor Case Study

Essay by   •  April 8, 2016  •  Case Study  •  1,330 Words (6 Pages)  •  3,124 Views

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Mitel Semiconductor case study

Operations management Case study

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Table of Contents

Introduction:        

History:        

The corporation:        

Products:        

Customers:        

Channels:        

Production:        

Finance        

Problem definition:        

Alternatives:        

Status Quo        

Convert Bromont to larger wafers        

Contract out fabrication:        

Secure external capacity through Acquisition:        

Recommendation        


Introduction:

History:

Mitel was founded in 1971 by Michael Cowpland and Terry Mathews, Mitel launched its first product in 1973, it was a device that allowed companies to use touch-tone phones without replacing existing lines designed for rotary phones; followed quickly by a PBX system that was cheap and reliable.

In 1982 Mitel was one of the world’s five fastest growing companies with more than $200 million in sales

In 1992 Schorder ventures purchased 51 percent of Mitel with a significant reduction in share price

In 1994 the company stabilized with the emergence of a new product line and new management

The corporation:

Mitel developed, manufactured, and sold electronic communications products and semiconductors.

Mitel’s product lines were divided into three principal types: CPEs, semiconductors, and other communications products.

Products:

Mitel manufactured its products in Canada, US, and UK

Mitel semiconductors designs, manufactures and markets integrated circuits

It counts on approximately eight percent of its annual sales, and was expected to be largely self-financing for capital investment.

Mitel semiconductors competed in a small niche of semiconductor industry-business communications-which presented almost 0.5 percent of the entire semiconductor market; Mitel’s market share was around 7%.

Mitel’s had two main integrated circuit product lines

  1. Analog line cards: were essential components of modern communications equipment
  2. Telecom and networking components: The switching, transport, and shaping products which were the key to the PBX and telecom solutions.

Customers:

Mitel customers were a diverse group of over 300 companies in the business communications sector and sales were well diversified throughout the world

The four principal markets for Mitel semiconductor products were:

  • Customer premises and network communication equipment manufacturers.
  • PBX manufacturers
  • Central office networks and high speed network providers.
  • Wireless and CTI product makers.

Channels:

About 70% of sales were done through manufacturer’s representatives and distributors, and the remaining 30% generated through sales directly with the end customers.

Production:

Production of semiconductor integrated circuits was split between two locations in Canada: kanata, and Bromont

Chip design was performed in Kanata location by R&D staff, Masking was contracted out to a local company under the supervision of the R&D staff.

The completed masks were forwarded to the wafer foundry in Bromont, in which the entire FAB portion of the integrated circuit manufacturing process was performed.

The Chips were returned back to Kanata for testing and shipment to distributors and customers.

The capacity of the entire operation was 112,000 of 100mm wafers annually, although the demand FY 94/95 was equivalent of 90,000 units.

Finance

FY 94/95, revenues was $77.7m combined with annual growth rate of 30%, cost of goods sold was 50%, total expenses were 30%, operating income was 20%, cash and cash equivalents available was $141.3m, shareholder equity was $263.0m, and the long term debt was $34.5m


Problem definition:

The primary limit on current capacity was the size of the Bromont factory and 100mm wafer technology employed there however the operations at Kanata could be expanded relatively easily for a low fixed investment and the mask contractor had virtually unlimited capacity.

Mitel sourced its wafers from a large European supplier, however the supplier had just indicated that it would soon start converting to a larger wafer size; also most equipment manufacturers no longer produced the 100mm equipment which made obtaining spare parts and servicing existing equipment more difficult.

Mitel contracted out part of its integrated circuits production from an East Asian firm but this firm announced that it no longer be able to provide Mitel’s capacity.

Mitel Semiconductors management tries to balancing the opposing challenges facing the business unit, growth within the business communications segment was rising at more than 17% annually on a hand and the supply of 100mm wafers was threatened, and the additional capacity supplier wouldn’t be available on the other hand.


Alternatives:

Status Quo

Invest $10m in the current Bromont factory to upgrade its current equipment and license 0.8m technology from its current equipment supplier.

Pros:

  • Quick solution: could be done in 8 months without plant shutdown.
  • Increased capacity: increase annual 100mm wafer capacity by 44,800.

Cons:

  • Will not meet the increased demand for a long period

Risks:

  • An alternative 100mm wafer supplier must be found or develop the wafer in house, which would cost $40 to $50 million.

Convert Bromont to larger wafers

Conversion of Bromont plant to larger wafers; 150mm, 200mm, and 300mm were all options.

Pros:

  • Conversion to any new size had the added advantage of allowing the division to convert to smaller line width for relatively low cost
  • Increasing capacity to 112,000 wafers
  • Overcome the problem of 100mm wafers suppliers unavailability
  • Extend the useful life of the plant substantially in case of 200mm, and 300mm wafers.
  • Converting to the 150mm wafers option has low upfront investment $35m to $40m without plant shutdown and can be completed in 2 years; however it would suffer the same fate as the 100mm wafers very soon.

Cons

  • The ability of the firm to sell the additional integrated circuits resulted from the additional capacity is questioned.
  • Increased costs and huge upfront investments, $150m for the 200mm wafers, and $250m for the 300mm wafers.
  • The supply situation would be critical because so many other 200mm FABs were under construction.
  • Long period to plan, build and get the foundry operational; 4 years in case of 200mm plant

Contract out fabrication:

Pros:

  • Increase capacity with no upfront investment

Cons:

  • Increase the cost per wafer to $600, which could cut significantly into Mitel’s gross margins.
  • Increase fixed costs by $1m annually because of the additional engineers needed to manage the suppliers

Risks:

  • Securing supply in the time of a worldwide capacity problem

Secure external capacity through Acquisition:

Pros

  • The acquired plant products can be easily integrated into Mitel product line
  • Capacity increase up to 48,000 100mm wafers with purchase cost of $45m to $50m

Cons

  • Changing the orientation of R&D organization to one of production was tough and a completely different culture.
  • No capacity relief for Bromont until reaching beyond the 20,000 wafers.

Risks

  • High failure rate of foreign acquisitions

Recommendation

We recommend to go with the a combination of options 2 and 4, in which organization would convert Bromont factory to larger wafers (specially 200mm wafer) and secure external capacity through acquisition.

This combined solution will achieve:

  • Increasing capacity to 112,000 wafers
  • Overcome the problem of 100mm wafers suppliers unavailability
  • Extend the useful life of the plant substantially
  • The acquired factory will keep the organization productive in the 4 years period to plan, build and get the 200mm wafer foundry operational.
  • The acquisition cost of $45m to $50m can be funded through cash and cash equivalents found within company assets.

Company has many to do to mitigate the below risks

Risk

Mitigation

Changing the orientation of R&D organization to one of production was tough and a completely different culture.

New HR strategy to change the culture of the company to adopt both R&D and production cultures.

The ability of the firm to sell the additional integrated circuits resulted from the additional capacity

Make a long term partnerships with the major telecom producers, and increase the sales share of direct customers sales (currently 30% only)

Increased costs and huge upfront investments, $150m for the 200mm wafers

The upfront investment is required to be done over 4 years so it can be secured through cash and cash equivalents found within company assets.

And company can get a loan and make use of the strength that they have a low debt to equity ratio.

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