Ericsson’s Proactive Supply Chain Risk Management

Project Infomation

When faced with a supply chain disruption, proactive and reactive supply chain risk management can in fact make or break a company’s existence. One of the most famous (or rather infamous) cases is the fire at the Philips microchip plant in Albuquerque, New Mexico, 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.
In the late 1990s, Swedish-owned Ericsson was one of the big international players in the mobile phone industry, together with the Finnish company Nokia. My first mobile phone in 1996 was in fact a Nokia, but I switched to Ericsson in 1999, because they made much better phones, so I thought. While the phones may have been better, risk management for sure wasn’t.
  • Client : Insight Studio
  • Date : 20 Feb, 2018
  • Skills : Project Planning

Challenge & Solution

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 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.
Improve sales and operations and production planning:
I haven’t been able to find much research literature on Nokia’s supply chain risk management, maybe because it went so well for Nokia. Ericsson, on the other hand, is another story. The incident turned disaster cost the Swedish company $400 million in lost sales, and it had to quit the mobile-phone business, leaving Nokia to cement its position as the European market leader. What went wrong?
Determine the right inventory level
On March 17, 2000, a small fire hit a microchip plant owned by Philips, the Dutch company. 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 plant’s entire stock.
Optimize the supply chain for perfect order planning
This article was written in 2004, when Nokia was still a major player in the mobile market. While Nokia may have learned a lesson in supply chain resilience, Nokia did not learn what it would have taken to stay a major player.

Our Process

Finally, risk management actions (protection) are evaluated against risk costs (impact and consequences), to avoid over-action or over-insurance against incidents. 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 form 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.
Improve sales & operations & production planning
Determine the right inventory level
Optimize the supply chain for perfect order planning
Improve sales & operations & production planning

Result Driven

In his 2006 article Robust strategies for mitigating supply chain disruptions, Christopher Tang uses Nokia’s approach as one of three prime examples of how to counter supply chain disruptions. Most recently Jon Hansen of Procurement Insights decided to reopen the case and ask 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.
(Credit: )
Reduced lead time by 43%
Decreased variability by 50%
Lowered the risk of back-order by 95%
Increased stock for finished goods by 10%