Improve network visibility

5 Improve network visibility

Many supply chains suffer from limited visibility. What this means is that a particular entity in the network is not aware of the status of upstream and downstream operations of the levels and flow of inven- tory as it progresses through the chain.

L O G I S T I C S A N D S U P P LY C H A I N M A N A G E M E N T

In such a situation it can often be weeks or months before problems become visible, by which time it may be too late to take effective action. The case study of Nokia and Ericsson featured below demon- strates the advantage that supply chain visibility can confer.

Nokia and Ericsson

Nokia obviously has better supply chain management than its com- petitors, and that definitely helps margins by allowing them to get components when others can’t – and at lower prices … While Nokia does get priority because they’re a large customer, they’ve been a much better customer by ordering sufficient quantities in advance, not cancelling orders, and sharing their projections with customers. 1

Just how good Nokia’s supply chain management is was demonstrated in March 2000. Worldwide demand for mobile telephones was booming and shortages of critical components regularly represented a threat to growth. Two of the international market leaders were Finnish electron- ics company Nokia and its Swedish rival Ericsson. This is the tale of how a thunderstorm over central New Mexico would trigger a series of events that would eventually severely disadvantage one of the players.

On 17 March 2000, a lightening bolt hit a power line, which caused

a fluctuation in the power supply. With no power to keep fans running,

a fire broke out in a furnace in a semiconductor plant owned by Dutch firm Phillips Electronics NV. The fire was brought under control in minutes, but eight trays containing enough silicon wafers for thousands

of mobile phones were destroyed in the furnace. 2 The damage to the factory from smoke and water was much more extensive than the fire itself, contaminating the entire stock of millions of chips.

Phillips immediately prioritized its customers, according to the value of their business. Between them, Nokia and Ericsson accounted for

40 per cent of the plant’s output of the vital radio frequency chips, so these companies were put at the top of the supplier’s list. They would

be notified of the fire in due course. Over in Finland Nokia’s supply chain managers had almost immediately detected that there was a problem. Within two days of the fire Nokia’s event management systems indicated that something was badly amiss. Even then orders were not coming through as predicted. A components

8 M A N A G I N G R I S K I N T H E S U P P LY C H A I N

purchasing manager telephoned the supplier, who informed him that there had been a fire in the plant, which was likely to disrupt production for around a week. As a matter of routine, Nokia’s staff immediately placed the five components produced at the Phillips plant on ‘special monitor’ list. From then onwards Nokia increased monitoring of incoming supplies from weekly to daily checks.

It soon became clear to both Nokia and Phillips that the problem was so serious that supplies could be disrupted for months. Pressure was brought to bear at the highest levels between Nokia and its supplier to ensure that all other Phillips plants were commissioned to use any addi- tional capacity to meet Nokia’s requirements. In addition, Nokia immediately sent representatives out to its other suppliers in the US and Japan to secure priority status for all available supplies of chips and to persuade them to ramp up production as quickly as possible. Because Nokia was such an important customer, they obliged with a lead time of less than one week. Nokia also set about reconfiguring its products to take slightly different chips from other sources.

Ericsson had remained oblivious to the fire or its effects on the phone maker’s incoming orders until three days after the event, when a techni- cian from Phillips called a counterpart in Ericsson to notify him of the fire. Accepting the initial assurances from the supplier that the fire was only a minor event, Ericsson did not recognize the need to act until early April. By then Nokia had already moved to secure its supplies, and unlike the quick-acting Finns, Ericsson had no alternative sources of supply. It had taken the decision some years earlier to single source key components in a bid to simplify its supply chains as a cost-reduction measure.

Ericsson lost an estimated $400m in new product sales as a result of the fire. An insurance claim would later offset some of the losses, but nevertheless Ericsson was forced to cease manufacturing mobile phones. In contrast, the vigilant Nokia was able to maintain production levels throughout, enabling it to cement its position as European market leader.

References

1. Gregory Teets, Analyst, in: Gain, B. and Dunn, D., ‘Nokia Stays Firmly on Path While its Competitors Stumble’, Electronic Buyers’ News, 30 October, No. 1235, 2000, p. 4.

2. Latour, A. ‘Was Sisu the Difference?’, Wall Street Journal, 29 January 2001.

L O G I S T I C S A N D S U P P LY C H A I N M A N A G E M E N T

We referred in Chapter 7 to the potential of supply chain event man- agement (SCEM) to enable better identification of the occurence of unplanned events (or the non-occural of planned events). Tools such as these can significantly reduce supply chain uncertainty and thus reduce the need for additional inventory buffers. Another emerging technology that is enabling dramatic improvements in visibility is Radio Frequency Identification (RFID).

RFID tags enable a supply chain ‘track and trace’ capability to be created. Tags are either ‘active’ or ‘passive’. Active tags transmit infor- mation to receiving stations and passive tags are read by scanners as they move through the chain. As the cost of these tags falls, and as more and more organizations require their suppliers to use them, then the adoption of this technology will accelerate. The impact, for exam- ple, of the decisions by Wal-Mart and the US Defense Department to utilize RFID has already had an impact on the rate of adoption.

A parallel technological development that will greatly assist the global management of assets in the supply chain is satellite tracking. Containers and trucks can be fitted with devices that enable the geo- graphical position of the asset to be monitored by satellite, including information on variables such as temperature.

The challenge, as ever, is not technological but is the need to engender

a greater willingness amongst supply chain entities to share information with each other, even if that information may not always be good news.