Supply Chain News Bites - Only from SCDigest

-August 15, 2007


Procurement News: Nokia Decides Dual Sourcing is the Right Strategy


Long Standing Relationship with TI will Change; Supply Chain Risk is Reduced, but Will Component Costs Rise or Fall?


By SCDigest Editorial Staff


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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