#Lessonsfromthebest : Nokia vs. Ericsson

 Author’s Note: Over the last 5 weeks, I have been using this space to write about the lessons I learn from organizations with respect to their supply chain management, but not limited to it. I have also been attempting to convey my learnings as a narrative, and a story of sorts. So, if you want to learn something informative whilst having some entertainment, go ahead and read away! Also, if interested, make sure you catch-up on my remaining blogposts as well. Click here! 😊

Shanmugeshwari, MBA '21

Amrita School of Business, Coimbatore

 

 

MANAGING RISKS IN THE SUPPLY CHAIN

When a lightning struck a high-volt electric line in Albuquerque in New Mexico, a fire broke out in a fabrication line of the Royal Philips Electronics radio frequency chip manufacturing plant. Though the plant personnel quickly extinguished the fire in 10 minutes, this incident changed the mobile phone industry forever!

How?

At first, it was evident that only eight trays of silicon wafers were destroyed. A minor setback, sure. These wafers had they been fully processed, would have become the chips in thousands of mobile phones. But when dug deeper, this looked even worse! The fire, the smoke, and the water from the sprinklers contaminated millions of chips that had been stored for shipping. Now, this is a calamity.

A Look Inside: Semiconductor manufacturing plants are usually cleaner than hospitals

When the Philips engineers and managers were grappling with this issue, they realized that the clean-up would take at least a week. They decided to prioritize Nokia and its arch-rival, Ericsson, who accounted for 40% of the plant’s shipments once their facility was up and running.

Four thousand miles away, at a Nokia plant outside Helsinki, failed to get a routine input from Philips. The failure could well have been an anomaly. Nevertheless, the personnel informed the plant’s purchasing manager. A few hundred miles away, Ericsson also received a similar call from Philips. But since they hadn’t sensed any discrepancy in Philips’ performance until then, they did not perceive a need for concern or stepped-up action.

Over time, Nokia lost confidence that its partner had the problem under control. They moved towards adopting the response routines they had developed for such eventualities. Exactly two weeks after the fire, Philips admitted it would need more time to fix the problem; ultimately, the plant remained out of action for six weeks.

Recognizing that the problem with Philips could affect the production of several million mobile phones, Nokia took three pro-active steps:

• One team of executives and engineers focused on Philips, seeking a major role in developing alternative plans, it pressed Nokia’s case with Philips executives. By reorganizing its plans in its factories even as far as Shanghai, Philips responded.
• A second cross-continental team redesigned some chips so that they could be produced in other Philips and non-Philips plants. It consulted with Philips, where appropriate, to assess the potential effect of its decisions.
• A third group worked to find alternative manufacturers to reduce pressure on Philips. Two current suppliers responded within five days.

At the end of March, Ericsson finally started to appreciate the gravity of their issue. However, for reasons about which one can only speculate, it still did not act speedily. By then Ericsson had very few options left.

Nokia’s initial sensing of the problem and its rapid and effective response carried the day. Its profits rose 42 percent in the third quarter of 2000 as it expanded its share of the global market to 30%. The fire was not even mentioned in its quarterly statements and annual report for the year 2000.

On the other hand, six months later, Ericsson reported divisional annual losses of $1.68 billion, a 3% loss of market share, and corporate operating losses of $167 million. It also announced the outsourcing of cell phone manufacturing to Flextronics and the elimination of several thousand jobs; Flextronics took over Ericsson in October 2001. Ericsson's woes extended beyond cell phones and persisted in the years that followed. It finally returned to health in 2004, but as a much smaller company. The face of the mobile phone industry had changed forever, all due to a fire contained within ten minutes.

So, what do we learn from here?

Regaining the whole global production capacity after COVID-19 will not be a short process. It is highly likely that supply chain shortages will exist for a long time afterward. It is also likely that some parts of the supply chain will be more affected than others. Rather than looking for alternate vendors to deliver the parts or components that one needs, innovative companies can look at their products to identify whether they can be re-engineered to use the available supplies.