Pleshko says Flextronics wants to obtain a better understanding with customers of consumer demand and product life cycles. Also, "we're moving very aggressively to a supplier-managed inventory environment," he says. The company wants to establish material hubs, where suppliers' facilities are located close to Flextronics's factories. "Compaq, Dell, and IBM have done this already," says Pleshko. "The EMS guys are just coming up to speed."
Meanwhile, there have been some disputes over the ownership of inventory in the EMS world. Some distributors have complained, for example, that they were being stuck with surplus parts. But that's a reversal of the situation in 2000, when "everyone was looking under every rock to find parts," says Pleshko. "When times were good, distributors were making a lot of money. They forgot."
The Crystal Ball
Times are bad, and tech companies are still working down inventories. They await an upturn of the business cycle, a new new thing that will drive computer sales — Microsoft's Windows XP operating system, for instance, or an unforeseen killer app — and the start in 2002 of an especially robust three-year PC replacement cycle (companies stocked up because of the year 2000 problem).
Meanwhile, two computer companies are better positioned than most to weather the downturn, thanks to superior supply chain management. One is Dell Computer. With its build-to-order business model, Dell is the lowest-cost PC maker; it never has more than a few days' inventory on hand.
The other company is IBM. True, a third of Big Blue's revenues come from annuity-like businesses such as services and software. And even with its diversified risk, IBM isn't immune to the downturn. Sales were relatively flat in the second quarter ($21.6 billion), and IBM has warned that its chip sales will fall in the second half of the year. But IBM's inventories have also remained flat. Overall, they are at their lowest level since 1988, according to Steve Ward, general manager for IBM's Global Industrial Sector. That may owe something to old- fashioned vertical integration. Still, AMR's O'Marah and others regard IBM's supply chain management as among the best in the business.
Lean inventories are "absolutely critical," says Ward. "In parts of our business, the value of components drops about 1.5 percent per month." IBM does build some items to order, but mostly it builds fast, on a pull or just-in-time basis. "Our suppliers have visibility to how much inventory we have," says Ward.
An SAP system provides crucial automation, but other practices also promote smaller inventories. For example, IBM has reduced the number of different parts by emphasizing commonality across platforms and products. Thus, for example, the flat screens used on ThinkPads and the flat-panel monitors sold for PCs are the same.
The number of suppliers is kept small, too. Purchasing is structured by commodities, with a market expert assigned full-time to each commodity. IBM buys all of its production parts electronically, via the Internet and EDI. "That means we can have much faster transactions, moving to much faster collaboration with suppliers," says Ward.
How far into the future does IBM peer? Ward says the company maintains a "very detailed" forecast for the next 90 days out, updated weekly and rolled out through all suppliers; a "fairly detailed" forecast for 90 days to a year; and a "strategic" forecast for longer periods. "I can't tell you right now what kind of hard file [disk] we're going to put in our ThinkPads two years from now," says Ward, "but I know how many we'll need."
The principal sources of inputs for those predictions are, of course, IBM's salespeople. They may not have quite the sobriety of their white-shirt-and-black-tie forebears, but they know their customers' businesses inside out, boasts Ward. Managers meet frequently to discuss and anticipate demand ("is this a conceptual need, or has it been confirmed by the customer?").
A rationally exuberant sales force. These days, that's about as close to a crystal ball as a high-tech company can get.
Portrait of a Bust
Capacity utilization, semiconductors and related electronic components (seasonally adjusted)
- Q3 2000: 97.0%
- Q2 2001: 66.2%
Book-to-bill ratio, semiconductor equipment industry
- January 2001: 0.80
- April 2001: 0.44
Value of manufacturers' inventories, % change May 2000-May 2001
- Electronic computers: +6.4
- Computer storage devices: +11.0
- Semiconductors: +17.6
- Electronic components: +6.1
New orders, % change, June 2000-June 2001
- Computer and related products: -22.3
- Communications equipment: -60.8
- Semiconductors: -24.9
Producer price index, % change June 2000-May 2001
- Computers and related products: -18.7
Sources: Federal Reserve; Semiconductor Equipment and Materials International; U.S. Dept. of Commerce; U.S. Dept. of Labor
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