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When faced with a supply chain disruption, proactive and reactive supply chain riskmanagement can in fact make or break a companys existence. One of the most famous(or rather infamous) cases is the fire at the Philips microchip plant in Albuquerque, NewMexico, in 2000, which simultaneously affected both Nokia and Ericsson. However,both companies took a very different approach toward the incident, and in hindsight,

clearly displayed how to and how not to handle supply chain disruptions.

Ericssons downfall

I havent been able to find much research literature on Nokias supply chain riskmanagement, maybe because it went so well for Nokia. Ericsson, on the other hand, isanother story. The incident turned disaster cost the Swedish company $400 million in lostsales, and it had to quit the mobile-phone business, leaving Nokia to cement its positionas the European market leader. What went wrong?

Ericsson vs. Nokia

In the late 1990s, Swedish-owned Ericsson was one of the big international players in themobile phone industry, together with the Finnish company Nokia. My first mobile phonein 1996 was in fact a Nokia, but I switched to Ericsson in 1999, because they made muchbetter phones, so I thought. While the phones may have been better, risk management forsure wasnt.

The Albuquerque fire

On March 17, 2000, a small fire hit a microchip plant owned by Philips, the Dutchcompany. The plant supplied chips to both Ericsson and Nokia, and the smoke and water

damage from the small and easily contained fire contaminated millions of chips almost the plants entire stock.

Nokia verus Ericsson

Nokia acted swiftly and moved to tie up spare capacity at other Philips plants and everyother supplier they could find. They even re-engineered some of their phones so theycould take chips from other Japanese and American suppliers. Ericsson, meanwhile, hadaccepted early assurances that the fire was unlikely to cause a big problem, and settleddown to wait it out. When they realized their mistake it was too late: Since Ericsson a fewyears earlier had decided to buy key components from a single source to simplify its

supply chain, Ericsson now had to face the bitter realization that it had no other source ofsupply. Nokia had already taken it all. Single sourcing may have its benefits, but it has itscosts, too. Ericsson lost many months of production, and hence many sales in a boomingmarket that could now be dominated by Nokia. Bummer. Eventually Ericsson mergedwith Sony in order to survive, and eventually I too had to switch back to Nokia.

Day by day

http://www.husdal.com/2010/10/06/single-sole-dual-multiple-sourcing/http://www.husdal.com/2010/10/06/single-sole-dual-multiple-sourcing/http://www.husdal.com/2010/10/06/single-sole-dual-multiple-sourcing/http://www.husdal.com/2010/10/06/single-sole-dual-multiple-sourcing/

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Read a detailed account of the events in The fire that changed an industry, an article inthe Financial Times.

Ericssons new approach

Ericsson learned its lesson and now has a completely different supply chain riskmanagement system in place. It starts with mapping all the components and and productsmany tiers upstream the supply chain and identifies critical suppliers and sites that haveto be prioritized and assessed further. After a rough assessment on how shortage willaffect the supply chain, a more thorough investigation into probability and impact ofdifferent accidents at different suppliers is conducted to assess the impact on the supplychain as a whole, particularly the impact on business recovery time. Finally, riskmanagement actions (protection) are evaluated against risk costs (impact andconsequences), to avoid over-action or over-insurance against incidents.

Lessons learned

Not only Ericsson, but many other companies have also learned from this incident.Supply chain risk management (SCRM) is a necessary component of any supply chain.SCRM may lead to increased costs in the from of prevention measures, and SCRM maylead to increased lead time, in order to have buffers, should something happen. In essencethough, risk exposure always has a price, and as a company one should think throughwhat price (or rather cost, as in disruption cost) that is acceptable or not. In his 2006article Robust strategies for mitigating supply chain disruptions, Christopher Tanguses Nokias approach as one of three prime examples of how to counter supply chain

disruptions. Most recently Jon Hansen of Procurement Insights decided to reopen thecase and ask industry experts to weigh in with their opinion as to what happened atEricsson and why, and what they believe should take place to address the obviousshortfalls on a go forward basis.

References

http://www.ftpress.com/articles/article.aspx?p=1244469http://www.husdal.com/2009/11/17/mitigating-supply-chain-disruptions-is-easy/http://procureinsights.wordpress.com/2011/05/18/managing-supply-chain-risk-the-nokia-and-ericsson-case-study/http://procureinsights.wordpress.com/2011/05/18/managing-supply-chain-risk-the-nokia-and-ericsson-case-study/http://www.husdal.com/2009/11/18/supply-chain-risk-the-dark-side-of-supply-chain-management-2009-version/http://www.ftpress.com/articles/article.aspx?p=1244469http://www.husdal.com/2009/11/17/mitigating-supply-chain-disruptions-is-easy/http://procureinsights.wordpress.com/2011/05/18/managing-supply-chain-risk-the-nokia-and-ericsson-case-study/http://procureinsights.wordpress.com/2011/05/18/managing-supply-chain-risk-the-nokia-and-ericsson-case-study/

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Norrman, A., & Jansson, U. (2004). Ericssons proactive supply chain risk managementapproach after a serious sub-supplier accident International Journal of Physical Distribution & Logistics Management, 34 (5), 434-456 DOI:10.1108/09600030410545463

Latour, A. (2001). Trial by Fire: a blaze in Albuquerque sets off major crisis forcellphone giants. The Wall Street Journal, January 29, 2001.

Author links

lth.se: Andreas Norrman linkedin.com: Ulf Jansson (perhaps?)

Links and more details

ncsu.edu: How do suply chain disruptions occur? ufl.edu: Big Lessons from Small Disruptions (pdf) Financial Times: The fire that changed an industry Business Week: Improving the ability to fulfill demand Times Online: Can Suppliers Bring Down your Firm?

Related posts

husdal.com: Single or dual sourcing which is better? husdal.com: The six ways of dealing with risk

husdal.com: Risk Management Contingent versus Mitigative

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