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Case Study on

Nokia’s Supply Chain Management

INDEX

1. INTRODUCTION

1.1 Philips…………………………………………………………………………………………………………… 1

1.2 Nokia……………………………………………………………………………………………………………. 1

1.3 Ericsson………………………………………………………………………………………………………… 2

1.4 Case Overview……………………………………..………………………………………………………. 2

2. PROBLEMS IDENTIFIED

2.1 Problems at Philip’s end: Supply Chain Interruption…………………………………….. 3

2.2 Problems at Ericsson’s end…………………………………………………………………………… 4

2.3 Telecom Industry Bubble Burst…………………………………………………………………….. 5

3. NOKIA’S ACTIONS TO STABILIZE SUPPLY CHAIN MANAGEMENT

3.1 Early speculations of possible crisis………………………………………………………………. 5

3.2 Preparedness against supply crisis………………………………………………………………… 5

3.3 Finding alternative source of chip supply………………………………………………………. 6

4. SOLTIONS AND RECOMMENDATIONS

4.1 Solutions to Philips………………………………………………………………………………………… 6

4.2 Recommendations to Ericsson………………………………………………………………………. 6

5. RFERENCES

1. INTRODUCTION

1.1 PHILIPS

Royal Philips (commonly known as Philips) is a Dutch technology company headquartered in

Amsterdam, Netherlands with primary divisions focused in the areas of electronics, healthcare and

lighting. It was founded in Eindhovenin 1891 by Gerard Philips and his father Frederik. It is one of the

largest electronics companies in the world and employs around 105,000 people across more than 60

countries. Philips has a primary listing on the Euronext Amsterdam stock exchange.

In 2000 Philip’s semiconductor division was manufacturing about 80 million chips every day. Eighty

percent of the mobile phones sold worldwide used Philips chips. Other than mobile phones their chips

were being used in the other electronic devices, such as, new cars, digital cameras and mobile memory

devices. Owing to this increasing demand, their supply capacity was scarce.

The increasing demand of mobile phone in the market, consumer’s increased purchase capacity and

constant demand for fashionable model resulted in shortened product life cycle of the mobile phone

industry to an average of 18 months. Phillips increasingly relied on the replacement market, which meant

speed to market became a critical sales factor for them.

1.2 NOKIA

Nokia Corporation is a Finnish multinational communications and information technology company,

founded in 1865. Nokia is headquartered in Espoo, Uusimaa, in the greater Helsinki metropolitan area. In

2014, Nokia employed 61,656 people across 120 countries, conducts sales in more than 150 countries

and reported annual revenues of around €12.73 billion. Nokia is a public limited-liability company listed

on the Helsinki Stock Exchange and New York Stock Exchange. It is the world's 274th-largest company

measured by 2013 revenues according to the Fortune Global 500.

Nokia is a global leader in the technologies that connect people and things. They combine global

leadership in mobile and fixed network infrastructure, with the software, services, and advanced

technologies to transform how smart devices and sensors tap the power of connectivity. With state-of-

the-art software, hardware and services for any type of network, Nokia is uniquely positioned to help

communication service providers, governments, and large enterprises deliver on the promise of 5G, the

Cloud and the Internet of Things.

In 2000, Nokia was the world’s leader in cell phone sales and the largest corporation in Europe by market

capitalization.

1.3 ERICSSON

Ericsson is a Swedish multi-national corporation that provides communication technology and services.

The company was founded in 1876 by Lars Magnus Ericsson and is headquartered in Stockholm,

Sweden. The company employs around 110,000 people and operates in around 180 countries. Ericsson

holds over 37,000 granted patents as of May 2015, including many in wireless communications. The

company offers services, software and infrastructure in information and communications technology

(ICT) for telecommunications operators, traditional telecommunications and Internet Protocol (IP)

networking equipment etc. Ericsson had 35% market share in the 2G/3G/4G mobile network

infrastructure market in 2012.

1.4 CASE OVERVIEW

On March 17, 2000, a lightning bolt struck a high-voltage electricity line in New Mexico. As power

fluctuated across the state, a fire broke out in a fabrication line of the Royal Philips Electronics radio

frequency chip manufacturing plant in Albuquerque. The plant was a key supplier of semiconductor chips

used in cell phones for both Ericsson and Nokia Corporation: together they received 40 per cent of the

plant’s chip production. At that time, both companies were about to release new cell phones into the

market and those tiny chips were the key component to their product’s functionality. Plant personnel

reacted quickly and extinguished the fire within ten minutes. At first blush, it was clear that eight trays of

silicon wafers on that line were destroyed, but the extent of the damage to Philip’s “clean-rooms” was

unknown.

In its initial reports of fire to Ericsson and Nokia, Philips relayed that it would take around a week before

production would return. Philips soon realized it had underestimated how much damage the clean rooms

had sustained and reported to Ericsson and Nokia that the process to resume normal operations would

take six weeks.

At Nokia, word of the setback spread quickly up the chain of command. Nokia's team, which had a crisis

plan in place, sprang into action. With an aggressive, multipronged strategy, Nokia avoided any cell

phone production loss.

In contrast, the low-level technician who received the information at Ericsson did not notify his

supervisors about the fire until early April and had to scramble to locate new sources for the chips. This

search delayed production and proved a fatal blow to Ericsson's independent production of mobile

phones. By April 2001, Ericsson was done with independent manufacture of mobile phones and had

created a 50/50 venture with Sony that became Ericsson’s new production shop. In 2010, Ericsson was a

much smaller company, at 82,500 employees with plans for further reduction.

Nokia's handling of its supply chain disruption provides a dramatic example of how a company's strategic

risk management can alleviate financial disaster and lay the groundwork for success in the future.

Perturbations in supply chain management are inevitable, and grow harder and harder to assess as the

marketplace becomes more globalized.

2. PROBLEMS IDENTIFIED

2.1 Problems at Philip’s end: Supply Chain Interruption

Fire breakout in Philip’s clean-rooms:

At the Philip’s semiconductor chip factory, production takes place in “clean-room” conditions. Since

Philips was a major chip supplier to Nokia and Ericsson, both expecting a new product launch in their

near future at that time, the sudden fire outbreak was a huge setback for all the three companies.

Inability to determine the exact damage to clean-rooms:

The clean-rooms are such facilities which have no more than one speck of dust per cubic foot, and therein

lay the problem. Fire produces smoke and triggers sprinklers. Fire and smoke take lives, and sprinklers

save them, but all—fire, smoke, and water—wreak havoc on property. As they dug deeper, plant

personnel found that smoke and water had contaminated millions of chips that had been stored for

shipment.

Inability to determine their ‘time for normal production resuming’

Immediately after the fire outbreak at their clean rooms, Philips informed Nokia and Ericsson of 1 week

maintenance time before they resume their operations, on the basis of assumptions and without proper

analysis of their damage. Philips soon realized it had underestimated the extent of damage to its clean

rooms and had to re-inform Ericsson and Nokia that their process to resume normal operations would

take six weeks.

Lack of emergency preparations

Philips production plant in New Mexico lacked in the pre-planned management in case of uncertainties.

They had no backup planned to resume their supply chain once the clean room production stalled after

fire outbreak. This resulted into their strong criticism in the market, and loss of business partners and

faith too.

2.2 Problems at Ericsson’s end:

Weak crisis judgement:

Until they were informed by Philips about the damage to existing chips and upcoming shortage of chip

supply, Ericsson’s planners and managers had not sensed any discrepancy in Philips’ performance. As

such, its management had no reason to disbelieve Philips’ explanations. They certainly did not perceive a

need for concern or stepped-up action or inform higher authorities. This resulted into their second

problem listed below.

Failure to take prompt actions in time

Since, managers and officials were unable to identify the gravity of the problem upcoming from the lack

of chip supply from Philips, they did not take any measures to create action plan and waited for Philips

production to recover after a week. Later, when Philips announced about its further delay in production

process, Ericsson had no alternatives preplanned and eventually had to face huge setbacks in their new

mobile phone launch. Components shortage at Ericson helped delayed to launch the product and

company officials estimated $400millions direct revenue losses.

Single supplier reliability

Ericsson had previously moved to streamline its supply chain by making Philips its sole provider of

semiconductor chips. It was three weeks post fire that anyone on the executive team knew about the

complete issue and as Ericsson announced the loss to the market, their shares fell more than 11 percent.

2.3 Telecom Industry Bubble Burst

During 2000, the telecom industry experienced bankruptcies, fraud, and destruction of shareholder value

on a massive scale, in part because investments were based on incorrect predictions about the growth of

the Internet and accompanying goods and services. However, cell phones at that time were chunky, had

small screens, and failed to utilize the Internet in an appealing way. The bubble showed up in Ericsson in

early 2001, when company laid off its workforce and outsourced its cell phone production.

3. NOKIA’S ACTIONS TO STABILIZE SUPPLY CHAIN

MANAGEMENT

3.1 Early speculations of possible crisis

A production planner at Nokia followed a well-articulated process for managing chip inflows from

Philips and failed to get a routine input he needed from Philips. He identified small defects in the chips

and informed the possible problem to his manager unlike the worker at Ericsson.

3.2 Preparedness against supply crisis

Nokia’s production planner adopted a monitoring process, developed in Nokia over the prior five years,

to frequently monitor the parts made in his plant.

3.3 Finding alternative source of chip supply

Nokia estimated the chip supply shortage from Philips to effect the production of their four million

handsets. The team identified alternative suppliers to temporarily meet the crisis created due to shortage

of supply from Philips.

4. SOLTIONS AND RECOMMENDATIONS

4.1 Solutions to Philips:

Recognizing that Philips’ problem could affect the production of several million mobile phones, Nokia

took three key steps:

One team of executives and engineers focused on Philips, seeking a major role in developing

alternative plans. Guided by Mr. Korhonen and assisted by CEO Jorma Ollila, it pressed Nokia’s case

with Philips executives, including its CEO, Cor Boonstra. Philips responded by rearranging its plans

in factories as far away as Eindhoven and Shanghai.

A second cross-continental team redesigned some chips so that they could be produced in other

Philips and non-Philips plants. Where appropriate, it consulted with Philips to assess the possible

impact of its actions.

A third group worked to find alternative manufacturers to reduce pressure on Philips. Two current

suppliers responded within five days.

4.2 Recommendations to Ericsson

Due to negligence and non-recognition of major crisis, Ericsson had to face heavy losses from where it

was never able to rise up again in the market. It could have avoided the catastrophe by:

Promptly responding to the availing chi crisis rather than waiting for the supply from Philips to

resume.

Devising an emergency production recovery strategy in advance for handling sudden supply chain

crisis.

Identifying alternative source of semiconductor chips immediately, to cope up with the deficit

created du to stalled production at Philips.

REFERENCES

1. Walker, R., (n.d.), “Nokia’s Supply Chain Management”, Kellog School of Management, KEL673.

2. Mukherjee, A.S., (2003), “The Fire That Changed an Industry: A Case Study on Thriving in a

Networked World”, The Spider’s Strategy: Creating Networks to Avert Crisis, Change, and Really

Get Ahead, 3-5(3).

3. Fourtane, S., (2014), “Supply Chain Agility: Nokia's Supply Chain Management Success”, Retrieved

from: http://www.ebnonline.com/author.asp?section_id=1364 &doc_id=273562