by Jimmy Alyea
On March 17, 2000, lightning hit a power line in Albuquerque, New Mexico, and caused a fire at the Philips (Philips Electronics, NV of the Netherlands) radio frequency chip manufacturing plant. Although the fire was extinguished within ten minutes, millions of microchips were damaged, which triggered a far-reaching chain of consequences for two of Europe’s largest electronics companies: Nokia Corp. in Finland and Telefon AB L.M. Ericsson in Sweden. The damaged chips were crucial components in the mobile phones that both companies sold worldwide. Their dramatically different responses to the disruption in the flow of chips inspired one Norwegian supply chain researcher to title the incident “Ericsson versus Nokia – the now classic case of supply chain disruption,” a clear illustration of how to and how not to handle supply chain disruptions h(Husdal, 2008).
Philips’ first action was to notify its 30-plus customers that would temporarily be affected by delays in chip production. The fire had been minor, and key personnel projected that the cleanup would take about a week. Three days after the fire, both Nokia and Ericsson received the same phone call from Philips about the disruption to its shipments. Since Nokia and Ericsson accounted for 40 percent of the plant’s shipments, Philips also decided these two companies’ orders would be filled first when the plant resumed operations. However, it took Philips six weeks to restart production and months to catch up on its production schedule. With the cell phone market growing at over 40 percent annually, this was a delay which neither company could afford.
Even before the call from Philips about the problem, Nokia’s Chief Component Purchasing Manager had noticed a problem with Philips’ shipments. In a culture that encouraged bad news to travel fast, he promptly notified the company’s senior officials (DeAngelis, 2010). Nokia’s production planner began a daily check of the production status of the parts needed from Philips instead of the customary once-a-week check required by Nokia’s advanced monitoring process. Nokia was scheduled to roll out a new generation of four million handsets that depended upon Philips’ chips (Sheffi, 2005). As soon as it became apparent that the delay would be prolonged, Nokia implemented the response routines it had developed for such situations, and a team of 30 supply chain managers and officials was assembled to spread out over Europe, Asia, and the U. S. to work the problem.
Within two weeks, Nokia had taken three key steps. Nokia first tied up spare capacity at other Philips’ plants and every other supplier it could find. Within five days, two of Nokia’s current suppliers of other parts had responded. Secondly, because Nokia’s cell phones were based on a modular product design concept, it was able to reconfigure its basic phones to accept slightly different chips from other suppliers in the U.S. and Japan. Lastly, a team of Nokia and Philips engineers collaborated to develop alternative plans. As Nokia’s top trouble-shooter stated, “For a little period of time, Philips and Nokia would operate as one company regarding these components” (DeAngelis, 2010). Nokia was thus able to maintain production and satisfy customer demand. By year end, its profits had risen 42 percent, and its share of the global market had increased from 27 to 30 percent (Sheffi, 2005).
Ericsson was not so fortunate. Ericsson’s managers had not noticed any discrepancies in Philips’ shipments prior to its phone call, and lower-level employees did not communicate news of Philips’ problem to their bosses. They assumed Philips would ship the parts after a one-week delay and did not investigate further. Even when Ericsson realized the seriousness of its problem at the end of March, the head of the mobile phone division did not get involved until early April. By then¸ the company had few options. Nokia had tied up Philips’ and other suppliers’ free capacity. Ericsson had no other source of supply because several years earlier it had decided to buy key components from a single source to cut costs and to simplify its supply chain. As later stated by Ericsson’s Marketing Director for Consumer Goods, the company did not have a “Plan B” (DeAngelis, 2005). The impact of Philips’ shutdown took more than nine months to resolve. At the end of 2000, Ericsson reported a US $2.34 billion loss in its mobile phone division (Sheffi, 2005). The following year, the company announced plans to begin withdrawal from the mobile phone production market, and it eventually merged with Sony in order to survive.
Lost sales amounted to most of the financial hit suffered by Philips because direct damage to the plant was covered by insurance. The impact to Philips was relatively minor compared to the impact on its customers. Ericsson bore the brunt of the disruption because it did not have alternative suppliers, and it did not proactively manage supply chain risk. Ericsson subsequently signed on secondary suppliers for key parts and now has a completely different supply chain risk management system in place. Nokia demonstrated a classic textbook solution to the supply chain disruption, not only surviving but also emerging in a much stronger market position than before the fire.
Copyright 2012 James L. Alyea. All Rights Reserved.
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About Jimmy Alyea (James Alyea):JimmyAlyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of BusinessAdministration degree. Follow JimmyAlyea (James L. Alyea) on LinkedIn, Twitter, or Blog.