In
an effort to lower costs, promote innovation
within the chipset industry, and address
increasing concerns about supply chain risk,
Nokia announced last week a new multi-sourcing
model for its chipset strategy.
In the past, the industry practice has been
to exclusively rely on a single source for
baseband chips. However now, in this
major milestone, the world’s largest
handset maker has broken with the trend
as it moves to augment a long-standing relationship
with Texas Instruments by adding additional
suppliers.
Nokia announced
its plan to have dual source capability
within each of its product categories, and
that it is currently involved in discussions
with more vendors to meet the target.
Among the
many reasons that Nokia cited for the change
to multi-sourcing, Executive VP Niklas Savander
commented that the increased pool of potential
chipset suppliers would lessen the company’s
supply constraint risks, critical “given
Nokia’s massive volumes.” He
added that “it is important that we
don’t have potential bottlenecks caused
by supply constraints,” and that “it
is also important that we have a range of
cost competitive solutions available at
any given point in time.”
With the
recent number of high profile issues in
the electronics industry related to single
source supply (e.g., Sony Playstation, Microsoft
Xbox), no one can question that the multi-sourcing
strategy will reduce supply chain risk.
But what will be the impact on component
costs?
On one hand,
reducing total volumes to a soul source
supplier, in theory, should increase the
price the supplier can produce and sell
the components. On the other hand, the advent
of a competitor for the business may force
both suppliers to keep pencils sharp. Clearly,
if the price remains at least constant,
the dual sourcing strategy is the clearly
preferable alternative.
As
more and more companies are increasing their
number of suppliers to mitigate risk, Nokia
is the just the latest example of companies
who are taking the threat seriously and
resorting to dual, or even triple, sourcing
strategies to diminish the danger.
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