Nearly a decade ago, lighting struck a Philips microchip plant in New Mexico, causing a fire that contaminated millions of mobile phone chips. Among Philips’ biggest customers were Nokia and Ericsson, the mobile phone manufacturers, but each reacted differently to the disaster. Nokia’s supply-chain management strategy allowed it to switch suppliers quickly; it even re-engineered some of its phones to accept both American and Japanese chips, which meant its production line was relatively unaffected. Ericsson, however, accepted Philips’ word that production at the plant would be back on track in a week and it took no action. That decision cost Ericsson more than US $400 m in annual earnings and, perhaps more significantly, the company lost market share. By contrast, Nokia’s profits rose by 42% that year.
On Ivlarch 17. 2000. a power surge caused a fire at the Royal Philips Electronics (Philips) plant in Albuquerque. New Mexico. The plant was a key supplier of semiconductor chips used in cell phones for both Ericsson aiid Nokia Coiporation: together they received 40 percent of the plant’s chip production. At the time, both companies were about to release new cell phone designs that required these chips.’ Although 4bsmaller than the nail on a baby’s pinkie,” the chips were of utmost importance to the phones’ functionality.2

In 2000 Philips’s semiconductor division was manufacturing about 80 million chips everyday. Eighty percent of the mobile phones sold worldwide used Philips chips.3 Apart from mobile phones. consumer markets were demanding many other electronic devices that required the chips. such as new cars. digital cameras. and mobile memory devices. Owing to this burgeoning demand. surplus capacity was scarce. A steady suppiy of chips was critical to cell phone manufacrnrers. as their customer base often replaced phones for the latest or most fashionable model. Suppliers increasingly relied on the replacement market, which meant speed to market became a critical sales factor.4 This was Post Fire: The Nokia Response

A few days after the fire. a supply manager noticed a flag in the system about chip inflow from Philips. Following a pre-established process. word eveurnally reached component purchasing manager Tapio MarkkiKorhonen then implemented a series of tracking applications in the system for the five components PhiliJs made at the plant and began placing daily, instead of weekly. calls to Philips about inventory.’ First, engineers considered whether a chip redesign would allow Nokia to access alternative suppliers. The team then looked into new suppliers for three of the five components available independently of Philips—two suppliers in the United States and Japan responded with the equested inventory within five days. Finally, under pressure. Philips secured more inventories

from the Netherlands and Shanghai plants after expanding production. By the end of the global effort. Nokia had its chips and as a bonus. the engineers had devised a way to boost production so that an additional two million chips could be made when the plant came back online. 16 This effort successfully resulted in Nokia avoiding any production loss because of supply chain disruption. an event which years earlier had cost the finn millions.’7 Owing to the previous

Post Fire: The Ericsson Response

Ericsson did not know about the fire until a low-level technician received Philips’s initial message. One-week delays were common, and “the fire was not perceived as a major catastrophe.” When Philips phoned technicians again on March 3 1 to acknowledge the previous timeline was too idealistic and that the short-term suppiy of chips was uncertain, the top brass continued to remain in the dark. It was early April before anyone on the executive team knew about the fire. By then. The outlook was bleak because Ericsson had previously moved to streamline its supply chain by making Philips its sole provider.

Repercussions

The component shortage at Ericsson helped delay the launch of the first mobile phone to fearnre Bluetooth technology. the T36. Company officials estiiiiated S400 million iii direct revenue losses. which insurance would somewhat cover.22 However. the continued muddle in the mobile phone division was obvious. and the new phone liad lost critical shelf time. Although Ericsson adjusted its shipping configuration to mitigate future shortages. analysts agreed the continued endeavor in mobile handsets was floundering.

The Bubble Bursts

The telecom bubble more or less coincided with and was largely a consequence of the larger dot-corn bubble, bursting in mid- to late 2000. The telecom industry experienced bankniptcies.fraud. and destruction of shareholder value on a massive scale, in part because investments were based on inconect predictions about the growth of the liitenier and accompanying goods and services:6 As mentioned above. some sources believed Internet traffic was doubling about every

Post Bubble: Ericsson and Nokia

The bubble showed lip at Ericsson in early 2001, when the company laid off around 20 percent of its workforce and outsourced its cell phone production. By April 2001, Ericsson was done with independent manufacture of mobile phones and had created a 50/50 venture with Sony Nokia weathered the telecom bubble better than its competitors by anticipating the downturn:it slowed hiring, shelved new product development, and cheapened expenses by outsourcing production.29 Although there were layoffs. they were not as significant. As of 2010, the company liad more than 123,000 employees with net sales of $58.7 billion (down 19 percent from 2008)and an operating profit down 76 percent year-on-year to Sl .6 billion. Despite these less-than-ideal figures. the company liad grown considerably since 1999 and liad continued to maintain its position as a sales leader. with a 2012 market share of 22.5 percent. It liad lost much of its market

Supply Chain Risk

Nokia’s ability to manage a supply chain disruption with alacrity and flexibility demonstrated to its shareholders and the public its competency in not only supply chain management but also operational risk management.
As globalization allowed for truly worldwide supply chains, disruptions were more likely for myriad reasons: border issues.terrorists. natural disasters. and labor disputes. To avoid these costs. companies must implement an operational risk design with standards for strategy. processes. and values supported by technology, which gives the company enough orewarning to adapt and respond to supply chain problems. Although less costly, it creates risk because of the complete reliance on a sole provider. Thus, companies need to consider the tradeoffs in their risk management strategy between holding inventories or using multiple supply sources and avoiding disruption. However, a completely risk-averse strategy in a supply chain may result in canying too much inventory or spreading suppliers over such a large geographic range that the strategy is prohibitively costly—which smaller firms could ill afford.

Recovery efforts :
The fire in New Mexico was a costly setback for Ericsson that contributed to the end of its independent mobile phone production. Additionally. it revealed that the company’s mismanagement of its cell phone brand extended to its operational risk practices. as it failed to recognize how costly disruptions were to the bottom line. On the other hand. Nokia’s keen insight into its manufacrnring operations and its cognizance of the importance of getting products to shelves. including its acute monitoring of input supply. helped the company handle the fallout from the fire.