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How Product Lifecycle Management makes a difference in your industry: 
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Value Opportunity Three: Improving the Ability to Fulfill Demand By Kevin P. Hopkins The experience of cellular telephony leader Nokia demonstrates that, with modular product designs, manufacturers can respond quickly to unforeseen circumstances and gain a significant and often lasting market advantage One of the classic hypotheses of Chaos Theory, popularized in the movie "Jurassic Park" and elsewhere, is a thesis called "The Butterfly Effect." It is the speculation that the random flapping of a butterfly's wings in one location can eventually alter weather patterns on the opposite site of the world. Strange as it might sound, just such a circumstance occurred in March 2000, and it changed the landscape of the global cellular telecommunications industry forever. On that March day, a random lightning bolt struck a manufacturing plant in Albuquerque, N.M., sparking a fire that endured for only about ten minutes. But across the globe, notes The Wall Street Journal, that brief fire "touched off a corporate crisis that shifted the balance of power between two of Europe's biggest electronics companies..." The winner in the ensuing crisis was Nokia, at the time Europe's largest corporation and now the world leader in cellular telephony. The reason for its success: Nokia had both the foresight and the flexibility to modify its products' design and supply chain dynamics, virtually on the spot, in order to accommodate rapidly changing supply conditions. It was an adaptive response and modular product design that epitomizes what product development software maker PTC calls its third Value Opportunity, "Improving the Ability to Fulfill Demand." (As discussed in previous columns, PTC's Product First Roadmap defines paths and strategies that companies can take to create and capture value for their firms.) By being prepared for any eventuality, Nokia was able not only to survive a very difficult situation, but emerge from it in a much stronger market position than before. A Fire Breaks Out The story of Nokia's crisis-generated triumph begins with a simple fact: both Finland-based Nokia and Sweden-based Ericsson, a prime competitor, purchased a critical cellular phone component called radio frequency chips (RFCs) from a Phillips Electronics semiconductor plant in Albuquerque. It was this plant that caught fire during March of 2000. The backstory to the crisis adds even more details. Unlike many older style manufacturing sectors, with years-long design cycles and months-long production schedules, the cellular telephone industry operated then (and still does) on hypertime. Fueled by double-digit growth rates in consumer demand, cell phone market conditions were changing frequently--and manufacturing operations had to follow suit. What's more, with other competitors always ready to step in, there was very little room for error. The Albuquerque fire underscored these principles as never before. Despite the fire's brevity, the blaze took the New Mexico plant offline for months, and in an instant eliminated a key link in an essential supply chain on which both Nokia and Ericsson had come to depend. A Tale of Two Responses Subsequently, the companies were forced to react to this crisis, and did so in ways that could not have been more disparate. In analyzing production reports from its facilities throughout Europe, Nokia executives discovered within just three days of the fire--even before Phillips officials had notified them of the problems at the Albuquerque plant--that something was amiss in its supply chain. Nokia analysts estimated the potential effects of this supply crisis, and found them to be huge, affecting as many as four million cellular handsets, or the equivalent of 5% of the company's revenue. Nokia's response was two-fold. The company immediately created an executive-led "strike team" that pressured Phillips to dedicate other plants to making the RFCs that Nokia needed. Nokia engineers also quickly re-designed the RFCs so that the company's other suppliers in Japan and the United States could produce them. Ericsson, however, reacted much more slowly. The company did not become aware of the supply problems for weeks, by which time its ability to meet customer demand had been seriously compromised. And because Ericsson relied exclusively on the Albuquerque plant for the RFCs, Ericsson--unlike Nokia--found itself with nowhere else to turn for these vital components. The Financial Repercussions The financial consequences of this brief crisis vividly demonstrate the benefits of having modular product designs that enable manufacturers to satisfy demand in unexpected circumstances. Through quick action, Nokia was able to meet its production goals, and even boost its market share from 27% to 30%--a level more than two times that of its nearest rival. Ericsson, by contrast, posted a nearly $1.7 billion loss for the year, and ultimately had to outsource its cellular handset manufacturing business to another firm. The key lesson from the Nokia experience? Quite simply, flexible product designs and the ability to make quick product modifications are essential to retaining and building market share. That's a basic tenet of PTC's Product First strategy: being prepared to fulfill demand in all circumstances can pay big--and often lasting--dividends. PTC's Product First Roadmap highlights this and eight other Value Opportunities, which we will continue to explore in upcoming columns. |
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Copyright 2003, Bloomberg L.P. |
