Risk Management (30 Marks)

Read the following case study and ANSWER all questions Fire at the Plant Hazard as a Trigger for Operational Risk

On March 17, 2000, a fire occurred at the Royal Philips Electronics plant in Albuquerque, New Mexico as a result of a power surge. The plant supplied critical semiconductor chips for both Ericsson LM and Nokia Corporation companies that together received 40% of the plants chip production. At the time, both companies were about to release new cell phone designs that necessitated the chips. While smaller than the nail on a babys pinkie, the chips were of utmost importance as they allowed the mobile phone to do anything from sound amplification to finding radio frequencies. Operators at Philips initially suggested that chip production would resume within a week of the incident. This information was conveyed quickly within Nokia where managers began to monitor the situation daily and discuss solutions to remediate the situation. At Ericsson, the technician that received the initial report from Philips did not sense the urgency of the matter and failed to pass the information along to his superiors. When Philips later communicated that normal production would be delayed for several more weeks, Nokia was able to expeditiously locate alternative suppliers. Ericssons management however was unprepared for the news and the further delay. As a result, Ericsson had to postpone the launch of a new phone at a critical point in the cell phone industry, and its market share suffered. The subsequent losses helped bring about Ericssons decision to exit the independent manufacturing sector of mobile phones and propel Nokia as one of the largest mobile phone manufacturers in the world.

The Nokia Response Reacting to the Risk A few days after the fire, a supply manager at Nokia noticed a flag in the system about chip inflow from Philips. Following a pre-established process, word eventually reached Tapio Markki, the top component purchasing manager. On March 20, Philips briefed the Nokia team about the incident, which detailed the news about the fire and the estimated week-long delay. Markki sent word of the fire up the chain to Pertti Korhonen, the Senior Vice President of Operations, Logistics, and Sourcing, in Nokias mobile handset division. Korhonen then implemented a series of tracking applications in the system for the five components Philips made at the plant and began placing daily, instead of weekly, calls to Philips about inventory. On March 31, Philips phoned Nokia with news that the damage to the clean rooms was worse than earlier estimates and that it would be weeks before they could restart production. The Nokia team assessed that the shortage could prevent the production of some 4 million handsets and could have an impact on 5% of their annual production. The assessment was unacceptable, and a team of 30, including Korhonen and the CEO Jorma Ollila, took action from several angles. First, Nokia engineers re-examined whether a chip redesign would allow Nokia to access alternative suppliers. The team then found new suppliers for three of the five components available independently of Philips two suppliers in the US and Japan responded with the requisition within five days. Under pressure, Philips secured more inventory from the Netherlands and Shanghai plants after expanding production. By the end of the search, Nokia had their chips and as a bonus, engineers had developed new ways to boost production at the Albuquerque plant (Philips plant) creating an additional two million chips when the plant came back online.

This global effort resulted in Nokia avoiding production losses because of supply chain disruption, an event which years earlier had cost the firm millions. Owing to the previous setback, Jorma Ollila had instituted the practice of sending executive hit squads to bottlenecks and giving them authority to make on-the-ground decisions. After the fire, this practice worked in tandem with other company practices, such as an input monitoring system and a clear channel of communication between all personnel levels. As a result, the fire was a minor hiccup for Nokia.

The Ericsson Response Risks Persists Ericsson managers did not know about the fire until weeks after the staff technician received Philips initial message. One-week delays were common and the fire was not perceived as a major catastrophe, according to an Ericsson spokeswoman. When Philips phoned technicians again on March 31 for revised estimates and to inform them that the short-term supply of chips was uncertain, the top brass at Ericsson continued to remain in the dark about the fire. It was early April before the Ericsson executive team was informed of the fire. By then, the outlook was bleak because Ericsson had streamlined its supply chain by making Philips its sole provider. Moreover, Nokia had already ordered all extra supplies of chips that existed elsewhere. When Ericsson finally announced the loss to the market, Ericsson shares fell more than 11%.

The component shortage at Ericsson helped delay the launch of the first mobile phone to feature Bluetooth Technology, the T36. Company officials estimated $400 million in direct revenue losses, which insurance would somewhat cover. 30 However, the disruption in the mobile phone division was obvious and the new phone had lost critical shelf time. While Ericsson adjusted its shipping configuration to mitigate future shortages, analysts agree Ericssons endeavour in mobile handsets was floundering. By the end of October 2000, Ericsson lost 3 percentage points in global market share to Nokia. By the end of the year, Ericsson had to discontinue mass-market expansion of the T36 citing too short of a market life. The company incorporated it into another model that came out in 2001, the T39 more than half a year after it had initially announced the T36. 31 The losses were astounding in the annual report, with nearly $1.68 billion lost in the companys mobile phone division, which the company blamed on a slew of component shortages. Unlike Ericsson, Nokias annual report that year made no mention of component shortages or the fire. Moreover, even with the rapid response with which it handled the fire, Nokia continued enhancing its supply chain operation and installed dynamic visibility systems to track major shipments of all of its major suppliers establishing a thorough risk management assessment of each of its major suppliers, and creating contingency fall back plans for disaster planning at each location. Walker, Russell. Winning with Risk Management, World Scientific Publishing Co Pte Ltd, 2013. ProQuest Ebook Central, . Created from durbanut-ebooks on 2020-03-17 01:36:47.

QUESTION 1 [30 MARKS]

1.1 How is risk management manifested as a competitive advantage in the case study. (2 Marks)

1.2 Read the case study and identify SIX key activities that contributed to Nokias advantage in handling of this risk. (6 Marks)

1.3 State the ways of managing supply chain risk to avoid disruptions in supplies. You can state actions done by Nokia in the case and any other ways of managing supply chain risks. (4 Marks)

1.4 How does the case study highlight the impact of the treatment of information on how risk is manifested at the firm and the perils of single supplier operations? (6 Marks)

1.5 Why is it important for Nokia to create a system to track major shipments of all of its major suppliers and establishing a thorough risk management assessment of each of its major suppliers? (2 Marks)

1.6 When considering a companys risk profile, a detailed review of the companys legal compliance programs and their impact needs to be supplied to the board by the senior management. When assessing the adequacy of compliance efforts in a company, there are various principles to consider. Provide FIVE (5) principles that should be considered. (5 Marks)

1.7 It has recently been brought to the attention of senior management that the company is highly exposed to Equity price risk due to a recent international turmoil that will impact the business negatively. You are required to explain in detail the concept of Equity price risk and how it is impacted by political turmoil of a country. (5 Marks)