Step 04 Product Risk Analysis - Case Study: Fire at Philips

1.0 THE IMPORTANCE OF A RESILIENT SUPPY CHAIN- HOW ROBUST IS YOUR SUPPLY CHAIN AGAINST EXTERNAL AND INTERNAL RISKS?

OEMs typically opt for one of the following purchasing options:

1.      Multi Sourcing

Definition: Items/components are manufactured by multiple OCMs (Original Component Manufacturers) and available through multiple distribution sources.

Risk Level: Lower Risk

2.     Single Sourcing

Definition: A deliberate decision by the OEM to purchase an item/component from a single distributor, even though multiple manufacturing sources exist.

Risk Level: Medium Risk

3.     Sole Sourcing

Definition: The OEM has no choice but to rely on a single OCM because it is the only manufacturer available.

Note: Purchasing may occur through multiple distributors, but dependence on one manufacturing source makes this option…

Risk Level: Higher Risk

When an OEM sources critical parts from only one supplier, it becomes highly exposed to supply chain disruptions—sometimes severe, even catastrophic.

2.0 CONSIDER THE FOLLOWING EXAMPLE

On March 17^th, 2000, a lightning strike during a thunderstorm caused a power surge on the electric power grid feeding the Royal Philips’ semiconductor fabrication plant in Albuquerque, New Mexico.

This resulted in a small fire within the facility that was extinguished by the automatic sprinkler system within ten minutes.

The building suffered only minor damage, but the production of chips was shut down for three weeks.

Tens, if not hundreds of thousands of semiconductor chips being fabricated at the plant were destroyed by water damage while the debris and smoke particles from the fire compromised the sterile environment contaminating millions of chips in storage.

Six months later, Philips was only able to return to producing half the capacity it was producing before the incident.

The overall damage caused by the fire at Philips was, in fact, far more severe than expected. Ericsson, a leading cell-phone manufacturer at the time, purchased many of its chips from Philips exclusively.

2.1 CELL PHONE MARKET - 2000

A snapshot of the Cell Phone Market in the year 2000…

In the 1990s 2G (2^nd Generation) cell phones started to become more and more popular with consumers.

Manufacturers were developing phones with greater functionality which were eagerly snapped up by consumers. The market was extremely buoyant, increasing 45% year-on-year.

Rarely, if ever has there been such growth in a consumer product.

Of the total Cell phone sales in the year 2000 of 97.8 million, the top 3 Cell Phone manufacturers through market share were:

Nokia – 30% (27million cell phones per year)

Motorola – 15% (15 million cell phones per year)

Ericsson – 10% (10 million cell phones per year)

How did the fire at the Royal Phillips fabrication facility affect these manufacturers, and how did they mitigate their loss of production?

2.2 THE FALLOUT

Motorola:

Motorola did not use the Royal Phillips facility for production of their semiconductors and was therefore unaffected.

Ericsson:

The loss of semiconductors contaminated and therefore destroyed during the fire caused a drastic reduction in production and sales of their current cell phone models.

According to Ericsson’s statement in 2001, the drastic reduction in production and sales attributed to the shortage of millions of chips, led the company to lose more than $400 million ($710 million in 2025).

Perhaps, more importantly, was the loss of semiconductors for their new phones that were eagerly anticipated by their dealerships and their customers.

Their disappointment led to mistrust in Ericsson and their ability to fulfil orders.

That year, Ericsson’s mobile phone division alone lost $1.7 billion ($3 billion in 2025) for a variety of reasons related to the fire at Philips and eventually withdrew from cell phone manufacture.

Nokia:

Nokia, a Finnish competitor to Ericsson in the communications industry who attributed 70% of its $20 billion ($35 billion in 2025) annual revenue to mobile phones, purchased chips from the Philips facility also.

In fact, semiconductor procurement from Nokia and Ericsson together accounted for 40% of Philips’ production.

As soon as Nokia directors were alerted to the incident at Philips, they immediately mobilized their alternative sources, increasing and diverted capacity from other U.S. and Japanese suppliers, and managed to continue production with almost no consequences.

Their cell phone production suffered a slight slowdown for a short time but were able to maintain their position in the world market.

2.3 CONSEQUENCES

Due to their reliance on a single manufacturer of strategic components for their products, when that supplier suffered a catastrophic event, (albeit brief) Ericsson’s production suddenly halted, without the ability to mitigate their lack of supply.

Although the fire lasted only 10 minutes, the ultimate cost to Ericsson (due to loss of sales, and ultimately leaving the market) can be calculated as:

$3,000,000,000 in total

$300,000,000 per minute, or

$5,000,000 per second

Today, Ericsson produces equipment for cell phone infrastructure, but Ericsson cell phones can only be found in museums.

2.4 LESSONS

There is an inherent risk in the reliance of a single manufacturer or manufacturing location for components that are intrinsic to the design of a product.

As well as fire, there are many natural phenomena that can affect suppliers:

·        Earthquakes – Fukushima, Japan, 2011 & 2022; Taiwan 2024; Burma 2025

·        Covid – Mostly Supply Chain delays, but also closure of manufacturers’ facilities

·        Floods – Bangkok, 2011

Geopolitical considerations:

·        Conflict – Russian invasion of Ukraine for example

·        Trade ‘Wars’ – Tariffs imposed by one country on another country’s goods, export prohibition of components or materials, etc.

Some of these can be forecasted, while others can occur without notice.

3.0 CONSLUSION

Component supply disruption risk decreases with the greater number of manufactures and manufacturing locations for each component.

Ideally, each component within the Bill of Materials (BOM) of a product, should have 2 or more alternates, being from different manufacturers.

Any Sole or Single source component should be acknowledged as a greater obsolescence risk and noted as such within the product folder.

Such components are also a greater counterfeit risk when obsolescence occurs.

DISCLAIMER

This document is intended for informational purposes only and provides general guidance on product risk management practices. While efforts have been made to ensure the accuracy and relevance of the content, the strategies, recommendations, and examples included are not exhaustive and may not be suitable for every organization or situation.

The authors and publishers do not accept any responsibility or liability for any actions taken based on the information provided in this document. Users are advised to conduct their own assessments and seek professional or technical advice tailored to their specific operational, regulatory, and business requirements before implementing any product risk management strategies.

This document does not constitute legal, technical, or professional advice. The use of any information contained herein is at the reader’s own risk.