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Supply Chain Lessons From Samsung’s Galaxy Note 7

Posted by Tin Tinio | October 14, 2016

The debacle over Samsung’s overheating flagship phone is far from over. More than a month after its initial recall of the Galaxy Note 7 due to reports of exploding batteries, Samsung announced that it is completely stopping production and sales of the smartphone. Users were also advised to switch off their devices and return them for a refund or exchange for another Samsung phone. Analysts estimate that company losses as a result of this could amount to US $2.8 billion, potentially wiping out the mobile division’s operating profits for the fourth quarter of 2016.

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Following the first recall announcement in early September, Samsung told a Korean regulatory agency that the problem of overheating may have stemmed from a battery manufacturing error. The flaw reportedly affects less than 0.01 percent of all Note 7 units sold, but the company nonetheless offered to refund or replace some 2.5 million handsets.


Within three weeks, customers in the U.S. and South Korea were getting replacement units with batteries from a different supplier. The problem was some of those units were also catching fire. Samsung is still investigating the cause of the overheating replacement devices.


Key supply chain management lessons have arisen from the crisis:

Spread the Risk.

Samsung’s strategy of sourcing a majority of Note 7 batteries from one supplier was problematic, market research firm TrendForce pointed out. The manufacturing issues were found in batteries made by Samsung SDI, which supplied more than 60 percent of total orders. This move exposed more units to risks of production defects, and increased the pressure on Samsung to quickly find alternative suppliers. Major companies often allocate orders evenly among several providers to mitigate the risks of quality control failures. Apple, for instance, gets no more than 40 percent of iPhone batteries from its largest supplier Amperex Technology (ATL).

Mind the Timeline.

In its desire to take the top spot in the premium phone market, Samsung decided to speed up the launch of its flagship device while loading it with impressive features such as iris recognition, a stylus that can work underwater, and a fast-charging battery. Suppliers had to meet tighter deadlines and faced more pressure to adjust to various changes in specs and work flow. While there is no direct link at this time between the Note 7’s problems and the accelerated production timeline, analysts agree that the rush to launch the phone may have been a factor in manufacturing lapses.

Coordination is Key.

Samsung may have acted fast in announcing the first recall of the Note 7, but it failed to coordinate with regulatory agencies tasked with facilitating the process. Instead of notifying authorities of the safety risk right away, the company issued a recall on its own. This led to confusing messages to consumers on how and when they can exchange their phones, and also caused delays in providing replacement units.


Samsung faces a tough challenge ahead in repairing its reputation and restoring consumer trust. As so often is true, its future lies in supply chain management.

 

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