Defining New Business Models for the Mobile Device Supply Chain by Ethan Y Xu Bachelor of Science in Electrical Engineering University of California, San Diego, 2006 Submitted to the MIT Sloan School of Management and the Electrical Engineering and Computer Science Division in Partial Fulfillment of the Requirements for the Degrees of Master of Business Administration and Master of Science in Electrical Engineering and Computer Science In conjunction with the Leaders for Global Operations Program at the Massachusetts Institute of Technology ARCHIVES June 2012 MAISSACHUSETTS NSTITUTE FE L © 2012 Ethan Y Xu. All rights reserved. '7I1 RNF Signature of Author Electrical Engineering and Computer Science Division, MIT Sloan School of Management \ May 11, 2012 Certified by_ Nncent W.S. Chan, The'Supervisor Professor, Electrical Engineeriygg anyomputer Science Division Certified by ' Vahram Erdekian, Thesis Supervisor Industry Co-director, L aders-fe%Global Dpeations Program Certified by Don Rosenfield, Thesis Reader SenjerjLecturer, MIT Sloan School of Management Accepted by Leslie Ko1ZidEj E S Graduate Officer Professor, Flectrical Engineering and Computer Science Division Accepted by Maura M. Herson, Director of MBA Program MIT Sloan School of Management The author hereby grants to MIT permissionto reproduce and to distributepublicly paper and electronic copies of this thesis document in whole or in part in any medium now known or hereafter created 2 Defining New Business Models for the Mobile Device Supply Chain by Ethan Y Xu Submitted to the MIT Sloan School of Management and the Electrical Engineering and Computer Science Division on May 11, 2012 in Partial Fulfillment of the Requirements for the Degrees of Master of Business Administration and Master of Science in Electrical Engineering and Computer Science Abstract Mobile device companies typically manage supply and pricing for components that are used in production by their Vertical Integrators (VIs). By controlling the component pricing and supply chain, mobile device companies are able to increase their pricing and supply chain leverage over smaller component suppliers. Maintaining this leverage is crucial in ensuring that mobile device companies can mass-produce high quality products at efficient costs. However these advantages require that companies incur additional operational expenses associated with supply chain management. To reduce costs and improve lead times, OEM companies should consider having 1st Tier suppliers directly manage 2 nd Tier suppliers. This project will investigate VI capabilities to manage quality, design, and cost across the entire range of hardware used in Nokia phones. Alternatively, we will also identify specific program and commodity areas which may benefit from having a more integrated supply chain. We will also investigate how Nokia can reduce supply chain management costs to meet future business needs related to cash flow.' By analyzing Nokia's historical supply chain performance, we will develop a model to quantify Nokia's "level of control" over its supply chain. We define this "level of control" in terms of the Operational Expenses and Investment which Nokia incurs in managing its supply chain. With this model, we will assess how future business constraints will affect Nokia's supply chain control. By evaluating key parameters which influence supply chain control, we can recommend how Nokia can allocate control across its supply chain. Finally, we will apply this model to recommend how Nokia should outsource supply chain management responsibility. Thesis Supervisor: Vahram Erdekian Title: Industry Co-director, Leaders for Global Operations Program Thesis Supervisor: Vincent W.S. Chan Title: Professor of Electrical Engineering and Computer Science 1 "Fitch Downgrades Nokia," Wall Street Journal, April 24, 2012 3 This page intentionally left blank. 4 Acknowledgments I would like to thank Vah Erdekian for his broad and in-depth perspective on the electronics supply chain industry. I would like to thank Professor Vincent Chan for his advice on building an analytical description of Nokia's supply chain performance. I would like to thank Heikki Vuorenmaa, my supervisor at Nokia, for creating the opportunities which enabled me to understand Nokia's supply chain, from both a strategic and hands-on perspective. I would like to thank Brad Mitchell for the time he has taken to review and provide feedback for this thesis. 5 This page intentionally left blank. 6 Table of Contents Abstract ......................................................................................................................................................... 3 A cknow ledgm ents.........................................................................................................................................5 Table of Contents ........................................................................................................................................... 7 1 Introduction ......................................................................................................................................... 12 1.1 Background ................................................................................................................................. 12 1.2 Nokia's Purchasing M odel (AVAP)........................................................................................ 13 1.3 Problem Statem ent ...................................................................................................................... 14 1.4 Key Considerations ..................................................................................................................... 14 1.5 Purpose of Study ......................................................................................................................... 15 1.6 Approach ..................................................................................................................................... 15 2 Background & Context........................................................................................................................15 2.1 N okia Corporation.......................................................................................................................15 2.1.1 N okia's Product Developm ent........................................................................................ 16 2.1.2 N okia's Supply Chain Organization................................................................................. 17 2.1.3 N okia's Sourcing Organization........................................................................................ 17 2.1.4 N okia's Supply Chain - Informal Advantages ................................................................. 18 2.1.5 N okia's Supply Chain - Form al Structure........................................................................ 19 2.2 Survey of the M obile Device Industry ................................................................................... 21 7 2.2.1 In-house vs. O utsourced Design ..................................................................................... 22 2.3 Key Com petitors in the M obile Device Industry ..................................................................... 22 2 .3 .1 S a m su n g .............................................................................................................................. 2 2 2 .3.2 A p p le................................................................................................................................... 24 2 .3.3 M o to ro la .............................................................................................................................. 2 5 2.4 Briefing on Ecosystem s: Android, Apple, and W indows........................................................ 26 2.4.1 Ecosystem A nalysis and Conclusions................................................................................. 29 2.5 Contract M anufacturer Landscape.......................................................................................... 30 2.6 Overall Observations .................................................................................................................. 1 3 Project Scope & Current State............................................................................................... ... 33 3.1 M obile Device Hardware Com m odities .............................................................................. 33 3 .1.1 D isp la y ................................................................................................................................ 33 3 .1.2 M e c h a n ic s ........................................................................................................................... 3 4 3.1.3 Electrom echanics................................................................................................................35 3.2 N okia Factories & Suppliers....................................................................................................... 36 3.3 Business M odels Considered................................................................................................... 38 3.3.1 Assigned V endor Assigned Price................................................................................... 38 3 .3.2 Bu y & Se ll .......................................................................................................................... 3 9 8 3 .3 .3 T urn k ey ..............................................................................................................................