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Case of Phillips Factory

Philips produced radio frequency
chips for mobile phones in
Semiconductor factory at
Albuquerque, NM.
Major customers : Nokia and
March 17, 2000 : Fire strikes
semiconductor factory -All silicon
stocks destroyed, products line
severely impacted

News of fire reached senior leadership
after 4 weeks
Philip informed Ericsson 3 days after
the fire- Ericsson moved into action
after 5 weeks
Started exploring other options of
By that time, Nokia had taken over
remaining supply sources
USD 400 million in potential sales lost
Component shortage, incorrect
marketing, rigid product design caused
a loss of USD 1.68 Billion.
Company exits Cell phone market

3 days after the fire:
Nokia detected delays in incoming orders-
Philips reported a weeks shutdown at plant
Nokia sends engineers to plant: Denied
access by Philips
Nokia increases monitoring weekly to daily-
Philips confirms a delay of months.
Decisive response
Engaged other chip suppliers
Immediate change in products design
Made other suppliers commit 5 day lead
One out of five components could not be
replaced - convinced Philips to provide this
components from China/Netherlands
Impact & Response

Philips Factory fire :
Right Managerial Information
at the right time is crucial !
Disruptions in Information
flow can be catastrophic
Information flows are not
always automated
Proper Information flow is
dependent on other factors
such as people , processes as

Occurs when supplier cannot respond to changes in
Cause :
Poor-quality output at supplier plants
High levels of handling or inspections during
border crossings
Changing transportation modes during shipping
Mitigate by :
Appropriately and economically place and size
capacity and inventory reserves
Maintain excess flexible capacity in production
Adequate levels of inventory
Example : Dell holds very little inventory of high
value components in US but uses air transport to get
such parts from east


Disruptions to material flows :unpredictable and damaging.
In , February 1997 fire at a parts factory owned by Japanese manufacturer
Aisin Seiki Co. Ltd., a key supplier for Toyota, let to shut down production
at most of its Japanese plants.,
Immediately after the attacks of September 11, 2001, U.S. auto
manufacturers ran short of parts because transport trucks had been delayed
at the Canadian border.
Holding inventory cost can get very high as it is incurred continually, the
inventory would be used only in the rare event of a disruption.
Stockpiling inventory as a hedge against disruption also makes sense for
commodity products with low holding costs and no danger of
For products with high holding costs and/or a high rate of obsolescence, using
redundant suppliers is a better strategy.

Intellectual Property
Cause : Todays supply chains
Less vertically integrated and more global
Competitors often outsource to the same
Mitigate by :
Bring, or Keep, some production in-house, or at
least under direct company control
Intellectual property limited to countries with
legal protection
Example : Cisco outsources all manufacturing
creates business processes that cannot be easily
replicated by a single manufacturer

Unanticipated increases in acquisition costs
due to fluctuating exchange rates or supplier
price hikes
Cause :
Exchange-rate risk
Price increases by suppliers
Mitigate by :
Build global capacity, financial hedges
Long term contracts, redundant suppliers,
rarely maintain inventory
Toyotas manufacturing plant allows to
cater one local market & one other market
across the world

Excess inventory and falling prices
Inventory risk hinges on three factors:
Value of product
Rate of obsolescence
Uncertainty of demand and supply.
Pooling Inventory
Creating common components across products
Postponing last stage of production until orders are in hand.
Amazon.com serves all its customers in US with inventory
housed in a handful of warehouses.
Borders Books & Music supplies its customers with inventory in
several hundred stores.
Amazon warehouse pools demand large geographical area,
stable forecasts & lower total inventory.
Amazon achieves 14 inventory turns/year, which is 2 for

Building excess capacity usually becomes a
strategic choice.
Excess (underutilized) capacity hurts financial
Making existing capacity more flexible.
Flexibility is a form of pooling that allows use
of the same capacity for a variety of products.
Plants owned by Japanese truck manufacturer
Hino Motors Ltd. employ multiple assembly
lines on which the number of workers
determines line speed.
This flexibility lets Hino change production on
any line by moving workers (capacity) to meet
fluctuating demand.
Greatly reduces the excess capacity of workers

Cause :
Failure anywhere can cause failure everywhere due to highly
networked information systems.
The greater use of more highly automated technology has the
potential to transform risks from manual processing errors to
system failure risks

Mitigate By :
Robust backup systems and well-designed, well-communicated
recovery processes that duplicate all data and transactions.
Such approaches helped securities firms recover quickly and
convincingly following the World Trade Center attacks in 2001.

Forecast Risk
Cause :
Mismatch between a companys projections and actual demand.
Long lead times, seasonal demand, high product variety and smaller
product life cycles increase forecast error.
Mitigate By :
Adjusting pricing and incentives to decrease variation in orders.
Increase the visibility of demand information across the supply chain.
Selectively hold inventory by building responsive production and
delivery capacity.
Motorola practices responsive delivery each day when it flies in phones
from China in response to demand by customer Nextel Communications
Dell also flies in high-value items from Asian suppliers on an as-needed

Mitigation Strategies-

What managers Should
Tailored Risk

Used to determine the stability of a given system or entity.
Identify key suppliers, customers, plant capacity, distribution centers &
shipping lanes.
Survey locations and amounts of inventory : components, work-in-
process & finished goods
Probe each potential source of risk- assess possible supply-chain
impacts & companys level of preparedness.
Helps company prepare for unforeseen events
Identify risk-mitigation priorities for the near, medium and long term.


Tailoring Risk Management

Managers must keep a vigilant eye on the trade-off
between the risk and the cost of building a reserve to
mitigate it.

Three key relationships influence this
optimal balance.

Balancing Supply-Chain
Risk/Reward Relationships

Balancing Supply-Chain
Risk/Reward Relationships
The first relationship is the increasing cost of risk reduction. This
simply means that using inventory to cover a high level of demand
risk costs much more than covering a low level of risk.

The second relationship shows that pooling forecast risk, receivables
risk or some other risk reduces the amount of reserve required for a
given level of risk coverage.

The third relationship shows how the benefit of pooling grows with
the level of risk covered: The benefit of pooling inventory is great
only if the product has high forecast or inventory risk.

Rules Of Thumb For
Tailored Risk Management

Rules Of Thumb For Tailored
Risk Management

When the cost of building a reserve is low, reserves
should be decentralized
When the cost is high, reserves should be pooled. If
the level of risk is low, focus on reducing costs. If the
risk is high, focus on risk mitigation.
By tailoring reserves for all risk-mitigation strategies,
companies can maximize rewards for the same level
of risk, or lower risks for the same reward.