Nokia Case Study

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University of Massachusetts, Amherst *

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437

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Industrial Engineering

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Apr 3, 2024

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docx

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Uploaded by ChefFlamingo391

Nokia’s Proactiveness and Ericsson’s Laziness Phillips was the primary manufacturer of semiconductor chips for Nokia and Ericsson's production of cell phones. They received close to 40% of all of the Albuquerque, NM branch's chip production. However, in 2000, the plant caught fire due to a power surge, and with it burnt down the stockpile of the chips that were to be sent out to the companies. When the news reached Nokia and Ericsson, their responses to the delay in production were drastically different and shaped the companies as they are today. Ericsson used Phillips as its sole producer of chips for its cell phones. By doing so, they aimed to streamline the production of their cellphone models. Ericsson was essentially a network provider that wanted to take its success into the handheld devices market. Their margins on these devices were slim, so they took every step to attempt to make production more accessible and cheaper. However, this hurt them as the Phillips plant in Albuquerque caught fire. Initially, when the lower level technician was informed about the slight delay, it was looked at as any other delay that would not affect production too much. Hence, not much was communicated at any level in the corporation. The technician likely believed that the sense of panic was unnecessary in the company at the time and that operations would be back to normal sooner rather than later. However, a couple of weeks down the line, when Phillips informed Ericsson that the timeline would be lengthened by a few weeks, the executives were still kept in the dark while a solution was attempted to be found. However, it was only early into the next month did the top-level executives find out, and it was already late as there was no alternative to Phillips, a mistake created by making them the sole provider, and Nokia had already claimed any excess stock. This caused Ericsson to lose $400 million in the short term and billions of dollars in the long term. In addition, Ericsson was dependent on the chip to produce the first Bluetooth phone ever, T36, and they were forced to delay it, losing vital shelf time. Eventually, the delay pushed the phone back long enough that Ericsson scrapped the model and instead focused on realizing the T39 the following year. This shift lost 3% of its market share to Nokia and cost them $1.6 billion in the mobile phone division. Ericsson's first issue was caused by making Phillips their sole provider of chips. This would have meant that their phones were designed around the Phillips chip, and moving it to another producer would cost much money as the design would have to be marginally tweaked along with code. Ericsson was already working with slim margins, which would have killed any profitability of the phone. However, a fire to the plant is a problem in hindsight. Once the issue occurred, the lower-level technician should have at the very least come up with an action plan if the delay was to subsist. The action plan could have revolved around slowing down production, constantly communicating with Phillips, and looking for alternative companies that could provide a similar chip that would not require a significant tweak in the cell phone. They could slightly delay the T36 launch and not completely lose out to Nokia like they ended up doing. After hearing the news of the fire in the Phillips plant, Nokia immediately got to work and changed its processes with Phillips. They shifted to daily calls with Phillips rather than weekly to keep up with the progress of recovering chips and updating the supply chain. Nokia

implemented a series of tracking applications in their system for the five components Phillips made at the plant. They made calculations of the effect of doing nothing but waiting would do. When they were told that the delay would continue for over six weeks, they calculated that the shortage would halt production of four million handsets which was 5% of yearly production. Rather than stopping there, they continued to be proactive; they began looking for new suppliers for three out of Phillips's five parts. Within a week, they got responses from three companies, two from the US and one from Japan, who responded with the inventory. Phillips responded by securing inventory from its Netherlands and Shanghai plants for the chips. In the end, Nokia had its chips and discovered a way to add 2 million chips into production when the Phillips plant came back online. Nokia avoided any production loss. This plan can be attributed to a previous setback that a few years ago caused supply chain disruptions causing losses amounting to millions of dollars. All in all, Nokia proactively did everything rather than sitting back and accepting losses that were out of their control. In doing so, they affected another company's bottom line. However, Ericsson's response was lackluster and lacked communication in their own company, which proved vital as the company continued growth over the next decade. Overall, I do not think that Nokia did anything out of malice to Ericsson and worked in an ardent manner which benefitted them through their pressure on Phillips and search with other companies. Nokia pressured Phillips to accommodate their needs while also providing them with a way to better develop their product by planning a way to develop 2 million more chips when the factory was back up to speed. However, Nokia pressured Phillips with the prospect of having multiple bidders take their spot, its typical business, when Phillips did not have a contingency plan for its lost product. Nokia did not want to front a loss to the company's bottom line that could range up to 5% of sales for the year due to a loss of one part. Ericsson's losses saw that Nokia had to do what it did to stay competitive and continue making money.

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