Managing Risk To Avoid Supply-Chain Breakdown.pdf

FA L L 2 0 0 4 V O L . 4 6 N O. 1 Sunil Chopra and ManMohan S. Sodhi Managing Risk To Avoid Supply-Chain Breakdown Please note that gray areas reflect artwork that has been intentionally removed. The substantive content of the article appears as originally published. R E P R I N T N U M B E R 4 6 1 0 9 Managing Risk To Avoid Supply-Chain Breakdown On March 17, 2000, lightning hit a power line in Albu- querque, New Mexico. The strike caused a massive surge in the surrounding electrical grid, which in turn started a fire at a local plant owned by Royal Philips Electronics, N.V., damaging millions of microchips. Scandinavian mobile-phone manufac- turer Nokia Corp., a major customer of the plant, almost immediately began switching its chip orders to other Philips plants, as well as to other Japanese and American suppliers. Thanks to its multiple-supplier strategy and responsiveness, Nokia’s production suffered little during the crisis. In contrast, Telefon AB L.M. Ericsson, another mobile- phone customer of the Philips plant, employed a single- sourcing policy. As a result, when the Philips plant shut down after the fire, Ericsson had no other source of microchips, which disrupted production for months. Ultimately, Ericsson lost $400 million in sales.1 (Ericsson has since implemented new processes and tools for preventing such scenarios.2) These two dramatically different outcomes from one event demonstrate the importance of proactively managing supply- chain risk. Supply-chain problems result from natural