Ericsson raises Japan supply chain concerns

By Niklas Pollard and Tarmo Virki | Reuters – Wed, Mar 16, 2011 2:39 PM IST

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Ericsson raises Japan supply chain concerns

STOCKHOLM/HELSINKI (Reuters) - Top mobile telecom equipment maker Ericsson warned that
Japan's devastating earthquake would hit the supply of components, adding to concerns about a
sector already hampered by shortages.

Japan, which is a dominant chip industry player with around one-fifth of the world's semiconductor
production, has seen factories producing everything from chips to car parts closed following Friday's
huge earthquake and tsunami.

"It is reasonable to expect that the events in Japan will affect supply of components but it is too early
to say to what extent," Ericsson said in a statement on Wednesday.

Experts have warned that if the supply chain is broken for even a few weeks, the impact could be felt
in higher prices or shortages of gadgets such as Apple Inc's iPad and other tablets, smartphones and
computers for months to come.

"Pretty much everything is halted or mostly halted through April ... Even before the crisis the
industry was near capacity. I would expect an impact to Q1 because of the remainder of March and
also for Q2 because of all of April," Earl Lum, head of telecom gear and component research firm EJL
Wireless, said.

Even if damage to electronic production facilities turns out to be limited, power and transport
disruption could result in significant shortages of some electronic parts and lead to big price hikes,
research firm IHS iSuppli has warned.
NAND flash memory chips used in the fast-growing mobile devices market, dynamic random access
memory (DRAM), microcontrollers, standard logic, liquid-crystal display (LCD) panels, and LCD
parts and materials could all be hit.

This spells particularly bad news for the telecom equipment making sector, which was already
suffering from shortages.

In January Nokia Siemens Chief Executive Rajeev Suri told Reuters that component supply was tight
for the industry and forecast it would take a couple more quarters to get back to normal levels.

Ericsson said it did not expect the disaster in Japan to have any material impact on its first quarter
sales and it had no reports of injured or missing employees there.

"Although it is too early to get an accurate picture of how Japanese enterprises are affected, and how
this affects Ericsson and the industry, no material impact on Ericsson's sales are expected for Q1
2011," the company said.

Ericsson made no mention of Sony Ericsson, its joint venture with Japan's Sony, which makes
mobile handsets. Sony Ericsson was not immediately available for comment.

Nokia Siemens said it could not yet quantify any impact from the Japanese earthquake.

"Although we do source a small number of components from Japan, it is too early to assess any
impact on future supply," said a Nokia Siemens spokesman.

Lum at EJL Wireless said the effects would be felt for some time to come across the sector.

"The supply of critical radio components such as surface acoustic wave (SAW) filters and oscillators
has been disrupted. We expect that supply will remain restricted through April and this will impact
manufacturers such as Alcatel-Lucent, Nokia Siemens Networks, Ericsson, Huawei and ZTE (which
are) shipping wireless infrastructure equipment," Lum said.

And there is not sufficient inventory for the gap to be filled if the disruption persists.

"With the nuclear issue still unclear, this won't be fixed anytime soon. I don't expect inventory to be
more than 2-3 weeks in the supply chain," Lum added.

(Writing by Alexander Smith; Editing by Jane Merriman and Hans Peters)

Ericsson versus Nokia - the now classic
case of supply chain disruption
 Keywords: Eglin Roger, ericsson, Jansson Ulf, nokia, Norrman Andreas, philips, research
blogging,supply chain disruption, supply chain flexibility, supply chain resilience, supply chain
risk, supply chain vulnerability

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 tohandle supply
chain disruptions.

Ericsson’s downfall
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 (Eglin, 2004). What went
wrong?

Ericsson vs. Nokia

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.

The Albuquerque fire

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 fire
contaminated millions of chips — almost the plant’s entire stock.

Nokia verus Ericsson

Nokia acted swiftly and moved to tie up spare capacity at other Philips plants and every other supplier
they could find. They even re-engineered some of their phones so they could take chips from other
Japanese and American suppliers. Ericsson, meanwhile, had accepted early assurances that the fire
was unlikely to cause a big problem, and settled down to wait it out. When they realized their mistake
it was too late: Since Ericsson a few years earlier had decided to buy key components from a single
source to simplify its supply chain, Ericsson now had to face the bitter realization that it had no other
source of supply; Nokia had already taken it all. Ericsson lost many months of production, and hence
many sales in a booming market that could now be dominated by Nokia. Bummer. Eventually Ericsson
merged with Sony in order to survive, and eventually I too had to switch back to Nokia.
Day by day
Read a detailed account of the events in  The fire that changed an industry, an article in the Financial
Times.

Ericsson’s new approach

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 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. Finally, risk
management actions (protection) are evaluated against risk costs (impact and consequences), to avoid
over-action or over-insurance against incidents.

Lessons learned
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 from 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 acceptable
or not. 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.

References
Norrman, A., & Jansson, U. (2004). Ericsson’s proactive supply chain risk management approach after a
serious sub-supplier accident International Journal of Physical Distribution & Logistics Management,
34 (5), 434-456 DOI: 10.1108/09600030410545463

Latour, A. (2001). Trial by Fire: a blaze in Albuquerque sets off major crisis for cellphone giants. The
Wall Street Journal, January 29, 2001.

Author links

 lth.se: Andreas Norrman
  linkedin.com: Ulf Jansson (perhaps?)

Links and more details

 ncsu.edu: How do suply chain disruptions occur?

 ufl.edu: Big Lessons from Small Disruptions (pdf)
 Financial Times: The fire that changed an industry
 Business Week: Improving the ability to fulfill demand
 Times Online: Can Suppliers Bring Down your Firm?

Ericsson takes hit from component shortage

Alex Scroxton
July 26, 2010 12:40 PM

Ericsson, the Swedish networking and comms kit giant, has blamed a components shortage for an 8%
year-on-year decline in group sales, indicating that the networking supply chain is still struggling to get
back into gear after the global downturn.

Net sales hit SEK 48bn (£4.22bn) in the three months to the end of June after supply chain bottlenecks
took SEK 3-4bn out of the picture.

Gross margins showed signed of improvement due to business mix and efficiency gains, while net income
improved both year-on-year and sequentially, up to SEK 2bn from SEK 800m in the year-ago quarter.

By division, Networks sales were down 12% year-on-year to SEK 25.5bn as voice-related sales slumped,
although mobile broadband and CDMA revenues partly offset the decline.

Not reported in the Networks business figures were sales from the company's newly acquired stake in
LG-Nortel - now renamed LG-Ericsson - which was officially consolidated on 30 June. Ericsson said it
expects the unit to be accretive to earnings within the next 12 months.

Meanwhile, Global Services sales were flat at SEK 20bn, mainly due to lower network rollout activity
driven by fewer turnkey projects and the aforementioned supply chain issues.

Multimedia revenues were down 27% to SEK 2.4bn on weak demand for revenue management solutions
in emerging markets.

Sony Ericsson, the firm's mobility-focused JV with the Japanese electronics behemoth, made sales of
€1.75bn (£1,45bn), up 4% year-on-year and 25% sequentially.

The unit said it saw improved product and geographical mix, even though units shipped were actually
down 20% on this time last year.

ST-Ericsson, the company's wireless platform developer, saw sales  down 18% to $544m (£350.9m) and
posted a net loss of $139m.

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