Case Study – JIT Failure at Sony Ericsson
Once one of the world's leading cell-phone manufacturers, Ericsson knows only too well how painful a disruption in the supply chain can be. It is a story that has become something of a legend in supplychain circles. In March 2000, a lightning bolt struck a Philips Electronics semiconductor plant in Albuquerque, N.M., triggering a small fire in a chip-processing machine that took the plant offline for months. Although the plant was Ericsson's sole supplier of chips for use in its cell phones, the company responded slowly to the problem and then found itself unable to secure an alternate source for the chips. Without the chips, the Swedish company was unable to keep up with the demand for its products, and ended up losing more than $2 billion in connection with the incident. In October 2001, less than two years after the fire, Ericsson cut its cellphone business exposure by entering into a joint venture with Sony. Considering Ericsson's tale of woe, it hardly comes as a surprise that supply-chain risks rank high on the list of corporate concerns in today's global marketplace. RISK RANKS HIGH Operational risk was identified as the most important risk that executives face today in a study titled "A Study of Corporate ERM in the U.S.," released by Towers Perrin last November. While the specific nature of a firm's operational risk varies, supply-chain risk emerged in the study as a particularly important issue across industries. One of the reasons for such a high level of concern is that supply-chain disruptions can have a profound impact on a manufacturer's sales and market share. Toyota, for example, lost production of 20,000 cars--at a cost estimated at $200 million in revenue-after the 1995 Kobe earthquake disrupted production at a plant that was the automaker's sole source supplier of brake shoes for domestic cars. While the stakes are high, the risk of a disruption has been escalating, as well, as a result of efforts to strip costs out of the system. Manufacturers have been wringing costs out of their supply chains by moving to just-in-time inventory management. This has made supply chains more vulnerable than ever before. "The more they have integrated just-in-time into their manufacturing processes, the more vulnerable they are," says James H. Costner, senior vice president of the property practice at Willis Risk Solutions. "Because what they do in just-in-time is remove all of the redundancies, and redundancies actually provide some margin for error." At the same time, manufacturers now rely on supplies from all across the globe, meaning that bad weather or political unrest in some distant foreign country could ground planes or halt production on critical components. "Certainly what we've seen in a much more accelerated fashion has been the globalization of the supply chain, where the interdependencies are spread throughout the world," says Gary Lynch, global leader of risk intelligence strategies and resiliency solutions at Marsh & McLennan Cos.
Over the last few years, there has been so much emphasis on increasing productivity and keeping operations lean that it has created huge single points of failure exposure, Lynch says. IDENTIFYING THE SUPPLY-CHAIN RISKS Identifying those points of failure has become ever more important as companies work to keep their lean supply chains running. While companies have spent a lot of time and energy over the last couple of decades trying to set up efficient, cost-effective supply networks, there hasn't been as much emphasis, until recently, on risk management of the supply chain. Supply-chain risk management focuses not on how to set up a supply network but rather on how and where a supply chain might fail, says Prakash Shimpi, the practice leader with global responsibility for enterprise risk management at the Tillinghast business of Towers Perrin. "What are the points of failure, what are the costs of failure and how do you mitigate...
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