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 (Husdal, 2008).
Philips’ response.
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.
Nokia’s response.
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’s response.
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.
End result.
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.
References:
DeAngelis, S. (2010). The
split second disruption to the supply chain. Enterra Insights.
Retrieved from
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Hopkins, K. (2011, December
21). Value opportunity three: improving the ability to fulfill
demand. Bloomberg Business Week,
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Sheffi, Y. (2005). Big lessons
from small disruptions. The resiliant enterprise.
Retrieved from http://resilient-enterprise.mit.edu/public/res_ent_chap1.pdf
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About Jimmy
Alyea (James Alyea):
