HO CHI MINH CITY UNIVERSITY OF TECHNOLOGY
OFFICE FOR INTERNATIONAL STUDY PROGRAM
SCHOOL OF INDUSTRIAL MANAGEMENT
REPORT OF SUPPLY CHAIN MANAGEMENT
CASE STUDY
GLOBAL SUPPLY DESIGN FOR THE FUTURE: NOKIA
GROUP: 4
SEMESTER: 221
Members
Lê Phước Tuấn - 1952517
Cù Thị Hoàng Lam - 1852045
Mai Tâm - 1952437
Hoàng Nhật Khang - 1952758
Lê Võ Uyên Phương - 1952109
Lê Văn Long - 1852527
Supervisor
Dr. Nguyễn Thị Đức Nguyên
OUTLINE
CASE STUDY OVERVIEW ........................................................................................ 1
QUESTION 1 & 2 .......................................................................................................... 2
QUESTION 3 ..................................................................................................................6
THE REAL-LIFE EVENT ........................................................................................... 7
CONCLUSION ...............................................................................................................7
QUESTIONS FOR KAHOOT ..................................................................................... 8
CASE STUDY OVERVIEW
In 2000, Nokia’s integrated circuit supplier in New Mexico was struck with lightning,
causing the company’s supply chain to a halt for several months. Facing this challenge,
Nokia had 2 choices, either reaching out to a new supplier in China or staying with the
existing supplier in New Mexico, hoping it would recover soon. For reaching out to a
new supplier in China, Nokia would incur a fixed cost of $2 millions. However, this
new partnership had a 50 percent chance of yielding $ 100,000 in savings and a 50
percent chance in $ 150,000. For this scenario, the discount rate was 3%. The other
alternative was staying with the New Mexico supplier which would incur a fixed cost
of $1.5 million. This partnership had a 60 percent chance of not yielding any
additional savings for the three following years and a 40 percent chance that it would
result in a yearly $50,000 loss (additional cost) for each of the three following years.
For this scenario, the discount rate was 9%.
1
QUESTION 1 & 2
- Draw a decision tree illustrating Nokia's alternatives between the two suppliers
(the existing one and the perspective one in China) and the related sequences.
- Calculate the NPV for both suppliers. Compare them and select the appropriate
supplier.
Figure 1. NPV formula
Based on the information provided in the case study, we calculate the NPV of each
supplier then use these NPVs to draw out the decision tree with each corresponding
consequence.
Table 1. NPV of new supplier
SOURCE A NEW SUPPLIER IN CHINA
50 percent chance of yielding $ 100,000
YEAR
CASH
CASH INFLOW
OUTFLOW
NET
DISCOUNTED
CASHFLOW
CASHFLOW
0
-2,000,000.00
0.00
-2,000,000.00
-2000000
1
0.00
100,000.00
100,000.00
97087.37864
2
0.00
100,000.00
100,000.00
94259.59091
3
0.00
100,000.00
100,000.00
91514.16594
NPV
-1717138.865
50 percent chance of yielding $ 150,000
YEAR
CASH
CASH INFLOW
OUTFLOW
NET
DISCOUNTED
CASHFLOW
CASHFLOW
0
-2,000,000.00
0.00
-2,000,000.00
-2000000
1
0.00
150,000.00
150,000.00
145631.068
2
0.00
150,000.00
150,000.00
141389.3864
3
0.00
150,000.00
150,000.00
137271.2489
NPV
-1575708.297
2
Table 2. NPV of existing supplier
STAYING WITH EXISTING NEW MEXICO SUPPLIER
60 percent chance with no yield
CASH
CASH
NET
DISCOUNTED
OUTFLOW
INFLOW
CASHFLOW
CASHFLOW
0
-1,500,000.00
0.00
-1,500,000.00
-1500000
1
0.00
0.00
0.00
0
2
0.00
0.00
0.00
0
3
0.00
0.00
0.00
0
YEAR
NPV
-1500000
40 percent chance of yielding $ 50,000
CASH
CASH
NET
DISCOUNTED
OUTFLOW
INFLOW
CASHFLOW
CASHFLOW
0
-1,500,000.00
0.00
-1,500,000.00
-1500000
1
-50,000.00
0.00
-50,000.00
-45871.55963
2
-50,000.00
0.00
-50,000.00
-42083.99966
3
-50,000.00
0.00
-50,000.00
-38609.174
YEAR
NPV
-1626564.73330
3
Table 3. Excel calculation of NPV of each supplier (in $ million)
The calculation formula of the Table 3 is illustrated in the Table 2 below:
Table 4. NPV calculation of each supplier
Using the results from Table 3, we draw out our decision tree below:
Figure 2. Decision tree of Nokia
4
The present value of a future stream of cash flows is what that stream is worth in
today’s dollars. A negative NPV (net present value) for an option indicates that option
will lose money for the supply chain. Thus, based on calculation of different scenarios
in the case study, in order to minimize the damage caused by fire in New Mexico, we
will choose the option with the lowest cost which has an NPV of -1,500,000. This
option has not only a 60 percent chance of happening but also the lowest cost out of
these scenarios. Because staying with the existing supplier in New Mexico is less
costly than sourcing a new supplier in China (-1.55 > -1.65), Nokie should stay with
its existing supplier (Figure 1).
5
QUESTION 3
- Illustrate the benefits of evolving toward dynamic alignment compared to
standardization in supply chains involving hundreds of suppliers.
Table 5. Illustration of the benefits of evolving toward dynamic alignment compared
to standardization in supply chains involving hundred of suppliers
No.
Standardization
Dynamic alignment
Standardization ensures that each
1
item is similar, conforming to the Reducing cost-to-serve
rules set out by the supplier.
It helps to smooth out the activities
2
that it processes for business
partners which can translate to
higher efficiency.
Increasing collaboration potential,
with
3
standard
procedures
and
metrics in place, the supply chain
can be much more transparent and
thus more efficient and effective.
6
Delivering
additional
customer
satisfaction in parallel, it has a
positive impact on revenues as well.
THE REAL-LIFE EVENT
In 2000, lighting struck a Philips microchip plant in New Mexico, causing a fire that
contaminated millions of mobile phone chips. Among Philips’ biggest customers were
Nokia and Ericsson, the mobile phone manufacturers, but each reacted differently to
the disaster. Nokia’s supply-chain management strategy allowed it to switch suppliers
quickly; it even re-engineered some of its phones to accept both American and
Japanese chips, which meant its production line was relatively unaffected. Ericsson,
however, accepted Philips’ word that production at the plant would be back on track
in a week and it took no action. That decision cost Ericsson more than US $400
millions in annual earnings and, perhaps more significantly, the company lost market
share. By contrast, Nokia’s profits rose by 42% that year.
CONCLUSION
In reality, not every strategy that has a better optimized outcome is guaranteed to
happen as expected. In the case of Nokia, even our calculation suggests staying with
the New Mexico supplier due to lower costs, Nokia still bears some risks of getting
much higher costs. This was confirmed by the example of Ericsson who decided to
stay. This type of risk is called a rare event. Rare events are risks that do not threaten
businesses everyday, but when they happen, businesses often get inflicted with a huge
amount of costs. With rare events, it is often counterintuitive to rely solely on
expected value of decisions because this type of calculation is typically true for events
that occur a lot of time, not events that maybe happen only once in a business lifetime.
For the case study above, applying the decision tree analysis is one of the logical steps
of making decisions but it should not be the only step in the entire decision-making
process.
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QUESTIONS FOR KAHOOT
1) Among the sources of risk identified in global supply chains, the highest among
these four is
A) shortage of skilled resources.
B) natural disasters.
C) inflexible supply chain technology.
D) customs delays.
2) A negative NPV (net present value) for an option indicates that the option will
A) gain money for the supply chain.
B) lose money for the supply chain.
C) maximize profit for the supply chain.
D) minimize profit for the supply chain.
3) A decision tree is
A) a graphic device used to evaluate decisions under certainty.
B) a graphic device used to evaluate decisions under uncertainty.
C) a tabular device used to evaluate decisions under certainty.
D) a tabular device used to evaluate decisions under uncertainty.
4) The opportunities from globalization are often accompanied by
A) a lack of domestic opportunities.
B) the need to eliminate the accounting function.
C) significant additional risk.
D) the need to eliminate the logistics function.
5) Offshoring to low-cost countries is most attractive for products with
A) large production volume.
B) high variety.
C) low labor content.
D) a high ratio of transportation cost to product value.
6) The net present value (NPV) of a stream of cash flows is equal to
A) the sum of all cash flows for all periods being considered.
B) the sum of all cash flows for all periods being considered divided by the number of
periods.
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C) the average of all cash flows for all periods being considered multiplied by the
number of periods.
D) the sum of all cash flows for all periods being considered discounted by the rate of
return for each period.
7) The present value of a future stream of cash flows is what that stream
A) was worth yesterday's dollars.
B) is worth in today's dollars.
C) will be worth in future dollars.
D) might be worth in future dollars.
8) What are the primary reasons for the supply chain becoming global?
A. Comparative Advantage, Lower labor cost
B. Comparative Advantage, higher labor cost
C. Competitive Advantage, higher labor cost
D. Competitive Advantage, lower labor cost
9) Global outsourcing is only sending production overseas
A. True
B. False
Large production volume
10) What are supply chain disruptions?
A. Cyber and security, Financial and company viability
B. Natural disaster, Reputational and compliance
C. Geopolitical, Man-made
D. All of the above
11) What cannot mitigate supply chain risk?
A. Identify backup suppliers
B. Build up inventory
C. Conduct supply chain vulnerability audit
D. Using the alternative product
12) The company A wants to invest in a new supplier with 3 millions. For the three
following years, this partnership has a yield of 200,000 annually and the discount rate
is 5% for this scenario. What is the net cash flow of the second year for this
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investment?
A. -150000
B. 200000
C. 150000
D. -200000
Net cash flow = sum of inflow and outflow, in year 2 there is only cash inflow so
net cash flow = 200,000
13) The company A wants to invest in a new supplier with 3 millions. For the three
following years, this partnership has a yield of 200,000 annually and the discount rate
is 5% for this scenario. What is the discounted cash flow of the first year for this
investment?
A. 3000000
B. 190476.1905
C. 181405.8957
D. 172767.5197
Discounted cash flow = Net CF/ (1+ discount rate)^year
14) The company A wants to invest in a new supplier with 3 millions. For the three
following years, this partnership has a yield of 200,000 annually and the discount rate
is 5% for this scenario. What is the NPV (Net present value) for this investment?
A. -2455350.394
B. -2413518.892
C. -2434277.729
D. -2482434.729
NPV = sum of discounted cash flow of each year
CASH
CASH
NET
DISCOUNTED
YEAR
OUTFLOW
INFLOW
CASHFLOW
CASHFLOW
0
-3,000,000.00
0.00
-3,000,000.00
-3000000
1
0.00
200,000.00
200,000.00
190476.1905
2
0.00
200,000.00
200,000.00
181405.8957
3
0.00
200,000.00
200,000.00
172767.5197
10
NPV
-2455350.394
15) Among the sources of risk identified in global supply chains, the lowest among
these four is
A. shortage of skilled resources.
B. currency fluctuation.
C. inflexible supply chain technology.
D. terrorist infiltration of cargo.
16) A global supply chain with offshoring would tend to see which of these
performance dimensions decrease?
A. Working capital
B. Hidden costs
C. Supply chain visibility
D. Product returns
17) A global supply chain with offshoring would tend to see which of these
performance dimensions increase?
A. Labor costs
B. On time delivery
C. Supply chain visibility
D. Minimum order quantity
18) The decision with the highest NPV (net present value) will provide a supply chain
with
A. the highest financial return.
B. the lowest financial return.
C. a reasonable financial return.
D. the least desirable financial return.
E. none of the above.
19) A major factor that makes the decision tree methodology quite powerful is
A. the choice of certainty.
B. the choice of discount rate.
C. the choice of uncertainty level.
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D. the choice of additive factor.
E. all of the above
20) The evaluation of supply chain networks
A. should use only one metric.
B. should use multiple metrics.
C. should not use more than one metric.
D. should not use multiple metrics.
E. should be subjective.
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