**Case Study**

On 17 March 2000, there were thunderstorms in New Mexico, and lightning hit an electric power line. This caused a surge in power, which started a small fire in Philips' chip-making factory in Albuquerque. The automatic sprinkler system put this out within 10 minutes, and fire damage to the building was slight. Unfortunately, thousands of chips that were being processed were destroyed. More importantly, the sprinklers caused water damage throughout the factory, and smoke particles got into the sterile area, contaminating millions of chips held in stock.

Four thousand miles away, Ericsson was Sweden's largest company with annual revenue of $30 billion, 30 percent of which came from mobile telephones. For many years, Ericsson had worked on the efficiency of its supply chains, and single sourcing was a key element in its drive towards lower costs and faster deliveries. Now the Philips plant was its sole source of many radio frequency chips, including those used in an important new product.

At first, Philips thought that the plant would return to normal working within a week, so Ericsson was not too concerned when it heard about the fire. However, it soon became clear that there was more extensive damage. Philips actually shut the factory completely for three weeks; it took six months for production to return to half the previous level, and some equipment took years to replace. Ericsson had no alternative suppliers, and at a time of booming sales, it was short of millions of chips.

In 2001, Ericsson said that the drastic reductions in production and sales caused by the fire cost it more than $400 million. When this figure was published, its share price fell by 14 percent in a few hours. For a variety of reasons, including problems with component supply, marketing mix, design, and the consequences of the fire, Ericsson's mobile phone division lost $1.7 billion that year. It decided to withdraw from handset production and outsource manufacturing to Flextronics International. It changed its approach to procurement, moving away from single sourcing and ensuring that there were always backup suppliers. It also introduced systems for risk management to avoid similar problems in the future.

Source: Norman, A and Jansson, U (2004) Ericsson’s proactive supply chain risk management, International Journal of Physical Distribution and Logistics Management, 34 (5), pp 434–56

**Required:**

a) Based on the information in this case, is it good to keep inventory? Why or why not? Support your position with relevant quotes from the case. (8 marks)

b) How has the fire outbreak in this case influenced the operations of the organization? (6 marks)

c) From the situation, what could make Philips believe that it could bounce back to normalcy within a week, and could that have contributed to Ericsson's woes? Explain your answer. (8 marks)

d) What strategy was Ericsson's Supply Chain practicing that caused it to suffer huge loss when the fire broke at Philips' plant? Explain your answer. (6 marks)

e) What is Ericsson's new Supply Chain strategy regarding procurement, and do you think this strategy would work for Ericsson this time around? Discuss three significant benefits of the new strategy to support your answer. (12 marks)

*This is a Supply Chain Risk Management question*