Supply Chain Risk Management

 

 
    
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Nokia acted swiftly and moved to tie up spare capacity at other Philips plants and every other
supplier they could find. They even re-engineered some of their phones so they could take chips
from other Japanese and American suppliers. Ericsson, meanwhile, had accepted early
assurances that the fire was unlikely to cause a big problem, and settled down to wait it out.
When they realized their mistake it was too late: Since Ericsson a few years 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 of supply; Nokia had already taken it all.

Ericsson lost many months of production, and hence many sales in a booming market that could
now be dominated by Nokia. Bummer. Eventually Ericsson merged with Sony in order to survive,
and eventually I too had to switch back to Nokia. Read a detailed account of the events here:
Financial Times The fire that changed an industry.

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Nokia verus Ericsson
Nokia acted swiftly and moved to tie up spare capacity at other Philips plants and every other
supplier they could find. They even re-engineered some of their phones so they could take chips
from other Japanese and American suppliers. Ericsson, meanwhile, had accepted early
assurances that the fire was unlikely to cause a big problem, and settled down to wait it out.
When they realized their mistake it was too late: Since Ericsson a few years 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 of supply; Nokia had already taken it all.
Ericsson lost many months of production, and hence many sales in a booming market that could
now be dominated by Nokia. Bummer. Eventually Ericsson merged with Sony in order to survive,
and eventually I too had to switch back to Nokia. Read a detailed account of the events here:
Financial Times The fire that changed an industry.

Ericssons new approach

Ericsson learned its lesson and now has a completely different supply chain risk management
system in place. It starts with mapping all the components and and products many tiers upstream
the supply chain and identifies critical suppliers and sites that have to be prioritized and assessed
further. After a rough assessment on how shortage will affect the supply chain, a more thorough
investigation into probability and impact of different accidents at different suppliers is
conducted to assess the impact on the supply chain as a whole, particularly the impact on

business recovery time. Finally, risk management actions (protection) are evaluated against risk
costs (impact and consequences), 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 may lead to increased lead time,
in order to have buffers, should something happen. In essence though, risk exposure always has a
price, and as a company one should think through what price (or rather cost, as in disruption
cost) that is acceptable or not.

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Ericsson versus Nokia the now classic case of supply chain disruption
http://husdal.com/2008/10/18/ericsson-versus-nokia-the-now-classic-case-of-supply-chaindisruption/

The Fire That Changed an Industry: A Case Study on Thriving in a Networked World
http://www.ftpress.com/articles/article.aspx?p=1244469

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