Question

In 2000, in the facility of a New Mexico subcontractor of integrated circuits, a fire
started but was rapidly managed. Integrated components plants require highly
sterilized environment, and the fire plus the intervention compromised several months
of integrated circuits supply to Nokia. Nokia share prices drop on average by 8% due
to this accident when the company announced disruption in their supply chains. In
addition to the financial element, the rest of the supply chain has to support the strain
from replacing a supplier in a minimum amount of time. Furthermore, with wide product
ranges and multiplicity of parts, the challenges are growing every month. The lean
concept, when pushed to the extreme, could also be a cause of supply chain rupture
when an issue arises.
Nokia has to decide to either stay with this integrated circuit supplier or source an
alternative plant in China. The expected cost of sourcing a new supplier and
implementing the necessary quality assurance procedures is estimated at $2million.
Once in place, this partnership has 50% chance of yielding $100000 in savings of each
of the three following years. The other alternative is to stay with its suppliers in New
Mexico. The cost of the damage to Nokia’s supply chain is estimated $1.5million.
Supply chain risk assessors have estimated that there is a 60% percent chance the
New Mexico’s supplier will not yield any additional savings for the three following
years. However the supply chain environment is by nature complex and uncertain.
Supply chain designers have recommend to implement the robust communication
systems coupled with geo-localization devices and RFID technologies which enable
Nokia to track and monitor shipments’ progress around the world, thereby accurately
managing its inventory levels. Conversely, IT system requires high levels of
standardization from the supplier’s perspective, forcing them to adapt to systems with
which they are not necessarily familiar and relatively expensive.
Questions:
1. Evaluate the decision of Nokia’s alternative with justification between the two
suppliers which are New Mexico, the exiting one and China.
2. What is your decision on this matter as you are a Nokia’s CEO in this situation
and what will be your further recommendation for similar cases in the future.

Answer 1

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Answer 2

Nokia often has been praised for the effectiveness of its supply chains and it has been among the first to implement such techniques on a large scale.

Explanation:

1.  Evaluating the two options available to Nokia:

China:

• Expected cost = $2 million
• 50 percent chance of yielding $100,000 in savings and 50 percent chance that it will yield $150,000, for each of the three following years

Discount Rate $= (\frac{Future Cash Flow}{Present Value} ) ^1^/^n-1$

where n is number of years.

Discount rate $= (\frac{0.5(100000)+0.5(150000)}{2000000} ) ^1^/^3-1$

Thus, discount rate is 3 percent.

New Mexico:

• Damage cost = $1.5 million
• 60 percent chance the New Mexico’s supplier will not yield any additional savings and 40 percent chance that it will result in a yearly $50,000 loss (addi­tional cost), for the three following years

Discount Rate $= (\frac{Future Cash Flow}{Present Value} ) ^1^/^n-1$

where n is number of years.

Similarly, discount rate is 9 percent.

2.  My decision on this matter as you are a Nokia’s CEO in this situation would be to go with new supplier of China since a lower discount rate leads to a higher present value. This implies, when the discount rate is higher, money in the future will be worth less than it is today and thus company would face huge losses.

Recommendation for similar cases in the future:

• Implement the robust communication systems
• Use geo-localization devices and RFID technologies
• Invest in good effective and efficient IT systems
• Promote high levels of standardization among the suppliers