Managing Supply Chain Risk: The Nokia and Ericsson Case Study by Jon Hansen

Posted on May 18, 2011

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Everywhere you look whether in the blogs, or social networking groups or for that matter even the more traditional media streams, the term supply chain risk pops up with increasing frequency.

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Of course catastrophic events such as the recent earthquake in Japan have a way of igniting widespread interest if only for the time that the media keeps it in the forefront of our collective awareness or consciousness.  Beyond these flashpoint events however, the subject of risk continues to be overlooked by most executives, the vast majority of whom have acknowledged some form of supply chain interruption in the previous 12 month period.

A kind of when everything is said and done (and there is a great deal being said about supply risk) . . . there is more said than done!

Here is the question . . . why?

Is supply chain risk and its effects not entirely understood by those who possess the decision-making capabilities to take action?  Does risk, and its myriad of interconnecting or overlapping areas of organizational impact cause a no you take it paralysis that ultimately results in an after the fact “I thought you had it” deflective response?  Or, is identifying and managing the risks associated with an organization’s supply chain too daunting a task with questionable rewards so as not to warrant the allocation of limited resources?

A 2009 report from the Economist Intelligence Unit titled “Managing supply-chain risk for reward” certainly goes a long ways towards establishing why it is important to address the variables and complexities of this important subject in the paper’s opening paragraph.

In a kind of comparison that is reminiscent of Dr. John Tantillo’s famous Winners and Losers brand, The Economist report relates the following story:

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.

So here is the question . . . where did this risk originate (and don’t say when the lighting struck the Philips plant in New Mexico), and at which touch points within the organization should it have been addressed?  Was it during the contract negotiations?  How about at the point of hand-off between proof of concept product development and production environment output?  Perhaps it was an issue that should have been considered in terms of supplier relationship management?

While Nokia stayed connected . . .

Similar to when a major airline’s jet crashes, there are countless interconnecting events that if only one had not occurred the crash would have been avoided.  In essence, an unforeseen chain of events and unintended consequences that collectively came together in an unavoidable disaster for Ericsson.

Ericsson’s line was off the hook . . .

Why did it happen?

Of even greater importance, what should you do to prevent a situational outcome such as the one experienced by Ericsson from happening within your organization’s supply chain?

Over the next week to ten days we will be posting this case reference to our various social media outlets asking industry experts to weigh in with their opinion as to what happened at Ericsson and why, and what they believe should take place to address the obvious shortfalls on a go forward basis.

You can of course offer your two-cents directly through this blog post’s comment stream as well, so don’t be shy dear reader as this is your turn to shine as well.

Note: remember to check out the follow-up post “24/7 Wall Street has predicted the demise of the Nokia brand in 2012 . . . if it’s true then one might ask if effective supply chain risk management actually matters.”

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Posted in: Commentary