Nokia Electronics is the Finland-based manufacturer of consumer electronic products, most famously its cell phones. The company was founded in 1865, and is headquartered in Espoo, within the Greater Helsinki area.

The semiconductor market is characterized by the rapid development of new components, the very rapid fall in price of components once launched, and the dominance of a few US and Japanese producers. The pace of research and development (R&D) renders new components obsolete within a matter of months in some cases, but the high cost of R&D means that profit margins on new products at launch can be as low as 5%. The situation for buyers in electronic components is therefore very volatile, and mistakes can be fatal for-profit margins.

Nokia has two buying offices, one in central Helsinki and the other in Espoo, where it shares premises with the electronic manufacturing division and the R&D division. This means that buyers in Espoo are in regular contact with the engineers who develop and manufacture new products. This office is responsible for telecommunications products the Helsinki office manages other group purchases, including components for computers and other Nokia electronic products.

Nokia also has buying offices in Atlanta, Georgia, and California. These offices are more concerned with organizing market research and developing contacts with suppliers, although they will occasionally carry out emergency component buying activities if circumstances require them to.

The buying process begins with the R&D engineers, who decide what characteristics they need from a component such as a memory chip. They consult with the production engineers, who investigate which existing chips would have the necessary characteristics. Obviously, it is far cheaper to buy something which is already on the market rather than try to invent something new. Once the engineers have agreed on what they want, they provide the buying office with a material code. This includes factors such as component specification, current manufacturers, probable volume needed for the first years manufacture, and the target price. The buying office then asks the relevant manufacturers (usually between two and five of them) to supply some sample components for the engineers to work with in producing prototypes.

The market for memory chips is dominated by relatively few large producers such as NEC, Hitachi, Intel, Texas Instruments, and Fujitsu. Nokia is a relatively small company, although it is important in the Scandinavian market, so the power lies with the chip suppliers. Until the late 1970s, Nokia dealt exclusively with US manufacturers, because at that time the innovation in semiconductors was led by US companies. Nokia only agreed to use Japanese manufacturers after a factory visit to Japan by a team of Nokia engineers, during which they agreed that Japanese manufacturing standards and quality control were high enough for them to be included in the consideration set.

Nokia buyers are visited regularly by deputations from manufacturers, normally when there are new developments in chip manufacture or design. These deputations include engineers who have technical talks with Nokia engineers. However, Nokia have found that the US salespeople and engineers often promise features that do not yet exist they try to sell products which are still in development, whereas the Japanese visitors never promise anything they dont already have. The belief is that the US salespeople are trying to assess market potential, and if the market for the new chip isnt big enough, the project will be quietly dropped. This causes problems for Nokia and other customers, since they may already have started developing a new product based around a non-existent chip.

The buying office sets the price, guarantee, and delivery issues. One US supplier was dropped altogether for not meeting delivery schedules, but normally the buying office would negotiate with suppliers to correct this kind of problem. The buying office would aim to have agreements with more than one supplier, for two reasons: first, there is a backup in case of a glitch with one supplier, and second, the suppliers know of each others existence and are more likely to be careful about meeting their obligations. Having two or three suppliers gives Nokia more control, but does mean losing out to an extent on economies of scale. Suppliers are asked to quote for 30%, 70%, and 100% of the expected annual requirement. The technical specification is, of course, the same for all suppliers, so Nokias buyers focus on price and delivery terms. In the case of equal prices, the more flexible producer will win the contract. Nokias aim is to create competition between suppliers even after the contracts have been awarded: the volume ordered from each supplier is sometimes adjusted on the basis of previous performance, so a supplier which doesnt meet (for example) a delivery schedule will be told that volumes will be cut in future. The producer offering the lowest price gets the bigger order, but in the case of two suppliers, this will be a 70/30 split. In the case of three suppliers, it might be 50/25/25. In other words, the more expensive suppliers might still get some business, because Nokia needs to have security of supply.

Nokia is quite a small fish in a very big shark pool. By adopting the policies it does, the firm ensures that it is not at the mercy of its component suppliers, nor is it at risk of not having components on hand during the manufacturing process. This has helped the company remain well-established in a highly competitive consumer market.

Answer the following based on the paragraph.

What is the role of the buying unit in Nokias purchasing process?

Why does the company not buy solely on a price basis?

What role does cultural difference play in the suppliers roles?

What environmental influences are there on Nokia?

What informal relationships might you expect to see developing in the buying unit of Nokia?