Ericsson’s Supply Chain Risk Management

Ericsson’s Supply Chain Risk Management 

On March 18, 2000, a fire was caused in the Phillips electronics chip factory in Albuquerque due to lightning. Although this fire lasted only 10 minutes, it took weeks for the factory to return to normal production.To make matters worse, this wafer factory is the only supplier of core components for Ericsson's mobile phone products, and accidental fires made the supply of this core component interrupted. During those months the mobile phones sold quite well, but Ericsson had to break off producing and selling its mainstream mobile phone products several months after the accident. The annual report released in the spring of 2001 indicated that the accident led to 400 million US dollars loss, and ultimately resulted in Ericsson’s exit from the wireless communications terminal business market (Andreas and Ulf, 2004). This incident made Ericsson transfer the focus of risk management from production risk to supply chain risk management and develop effective risk management strategies in supply chain area. In 2003 this corporate achieved profitability again because of the performance in risk management.

Ericsson set up a dedicated risk management committee to design and implement supply chain risk management processes and tools (Andreas and Ulf, 2004). The objective of this committee is to manage the risk of member companies in the supply chain to minimize supply chain risk. Ericsson's risk management committee adopts the form of matrix organization structure, and the personnel of various departments (including supply section, procurement section, production section, product section, etc.) participate in and share their responsibility of risk management. Firstly, the main functions of risk management organization are to assume the full responsibility of risk management and coordinate the job of each sections. Secondly, the procurement section is answerable to the business with suppliers and should participate in supplier evaluation. Thirdly, the supply section should take the responsibility of the production and supply management in the company, and the interface between suppliers and management. Finally, the function of product department is to manage product from the perspective of operation. More importantly, Ericsson adds risk monitoring processes and ongoing programme management to the general risk management procedure which covers risk identification, risk assessment and risk handling.

Ericsson's identifies risk by graphically describing the composition of the supply chain, and this approach is similar to the SCOR model-based supply chain identification approach. The basic method is based on the graphics about the relationships of related members in the upstream supply chain. From the graphics, Ericsson can clarify operating status of all the supplies, products and services (Chopra and Sodhi, 2004). The aim of the approach is to check the business process among Ericsson, suppliers, and service providers (Ou Tanga and Nurmaya, 2011). In this way, Ericsson can effectively identity the risk sources to fully grasp the probability and influence of risks in supply chain. By 2009, Ericsson had used this method to analyze more than 10,000 risk factors of first-tire and second-tire suppliers. In the process of analysis, the risk factors are marked as four different levels according to the number of products’ procurement source, namely: (1) the product owns more than one purchasing source; (2) the product has only one purchasing source, other procurement sources can be obtained but not adopted; (3) the product owns only one purchasing source, other sources are able to get but not very easy ; (4) the products only has a single source of procurement, and there is no other procurement channels. The less the source of the product is, the greater the loss caused by the business interruption will be. Therefore, Ericsson divides risk factors into four levels according to the business recovery time (BRT), namely: (1) it takes less than 3 months to obtain products from other optional sources; (2) it takes 3-8 months for the alternative source to be recognized and to provide the product. (3) after 9-12 months, it may be necessary to redefine a single source of supply. (4) it takes 12 months to redesign a highly complex product single source supply chain.

After risk identification, companies need to conduct in-depth analysis for the suppliers and sub-suppliers of key products to assess risk. To this end, Ericsson developed the Ericsson risk management e-valuation tool (ERMET) to conduct a concrete evaluation of each business sections, and to quantify the estimated risk by calculating the probability and impact of risk. ERMET focuses on production accidents and business process interruptions. Each sub-area of ERMET needs to be evaluated in a variety of ways, for example environmental risks include natural risks and artificial risks, where natural and artificial risks include multiple sub-risk factors (Tummala and Schoenherr, 2011). After the risk or uncertainty source is identified, appropriate preventive measures should be made according to specific circumstances. Moreover, the identified risks and the measures taken are required to be written into specialized archives for future reference and risk monitoring.

Following is the specific evaluation process. Firstly, the probability of each risk is estimated by the scale method, and the risk probability is divided into four grades, number 1 represents “very unlikely to occur”; number 2 represents “can not occur”; number 3 represents “may occur”; number 4 represents very likely to occur”. Secondly, the possible impact of the risk should be estimated. The delay in delivery time is also divided into four grades. Number 1 represents that the delay in delivery time is very short (negligible), which will not lead to significant losses; number 2 represents that delay in delivery time is one week; number 3 represents that delay in delivery time is month ; number 4 represents that delay in delivery time is more than a month. Finally, the risk value of artificial risk is obtained by weighting the risk value (risk value = consequence×probability) of each sub-risk: (0+2×2+ 2×3+2×1+4 ×2+1×2+2×2+0)×1/12=2.2. According to the scale table, man-made risk of delay in delivery should be between one week and a month. After calculating the risk value of each kind of risk, the field that need to be highly controlled should be determined according to the size of the risk value, preparing for developing specific risk management methods in the next step (Manuj and Mentzer, 2008).

After several years of implementation of ERMET, Ericsson adopted a more accurate evaluation indicator——business interruption value (BIV), which can be illustrated as the product of total profit for unit time and business recovery time (BRT), plus additional costs ( idle equipment and labor costs, inventory holding costs, etc.), and includes the calculation of goodwill losses. According to BIV, the risks are classified into four classes, namely: (1) severe risk: BIV is greater than 100 million dollars; (2) significant risk: BIV is between 50 million and 100 million dollars. (3) secondary risk: BIV is between 10 million and 50 million dollars. (4) negligible risk: BIV is less than $ 10 million. Compared with the above criteria, the risk consequences are divided into four levels, namely: very high, high, medium and low. For different risk levels, different control measures are taken. When the risks are very high and high, the risk markers are red and orange respectively. In this situation, the action taken is closely monitored and contingency plans are made. When the risk is moderate, the risk is marked yellow and the action taken is closely monitored, but contingency plans are not needed. When the risk level is low, the risk mark is green and no action measure is needed.

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