Acting on Supply Chain Disruptions

Supply Chain Risk manifests itself in many ways. Today the German airlines restored their regular flight schedule again after six days of no or limited air traffic, after the latest eruption of the Eyjafjallajökull vulcano on Iceland.

The consequences of such events only rarely become evident, but in the background emergency plans have to be executed (or developed).

Case

10 years ago a disruption affected the supply chain at Ericsson, luckily the effects of this event on Ericsson have been published. Its about the so called “Albuquerque accident” in 2000, which was documented by Norrman and Jansson (2004).

Disruption

The Albuquerque accident was a small (30 sqm area), short (10 minutes) fire within one of the clean rooms of a supplier at Ericsson. The supplier was responsible for a important RF-chip for the cell phone production. The consequences therefore were very severe. It took the supplier three weeks to get the production running again and after six month the yield was only 50% of the pre incident rate. The cost for Ericsson were estimated at $200 million (which was compensated by insurance companies).

Analysis

A review in the Wall Street Journal concluded that Ericsson

• took too long to take action after the incident
• its reporting to upper management was flawed
• had no alternative suppliers for this component
• has not been prepared for this kind of accident

Results

The goal was to minimize the risk exposure within the supply chain.

To achieve this they took action on two sides:

• Organisation
  Assigning clear responsabilities and establish a matrix organization
• Processes
  Reinforce processes for risk identification, risk assessment, risk treatment, incident handling & business continuity planning

Business impact

Since the financial consequences of the disruption were carried by the insurance companies it was at first harder for Ericsson to renew the insurance policies, but just the other way around after implementing those strict SCRM program mentioned above. As a result Ericsson was paying less afterwards.

It is noteworthy, that after experiencing this disruption Ericsson percieves that the concepts of agility, responsiveness and leanness are inducing higher risks.

Conclusion

The article seams strongly influenced by Ericsson and the objective research and presentation might be questioned. I am definitively missing some more insights on the a priori analysis, since it is one corner stone of the design of the measures. Within the article only a short excerpt from the WSJ has been quoted.

Other authors (as Lockamy et al. (2008)) find a much more positive connection between business performance and supply chain risk management, so this should be further analyzed.