E-business Commentary: Just in time, or just too late?

Inventory shortages create havoc for high-tech manufacturers.

Can you imagine having to place orders for parts 18 months in advance to be assured of delivery? How about modifying your flagship product to work around a shortage of parts? Welcome to the wacky world of the high-tech supply chain. Microprocessors, optical-storage drives, capacitors, and memory chips lead a long list of high-tech parts that are in short supply worldwide. Almost any kind of part you can think of is creating havoc for some company or another, whether it's IBM Corp., Nintendo Co. Ltd., Gateway Inc., Intel Corp., Jabil Circuit Inc., Solectron Corp., Palm Inc., Dell Computer Corp., or Cisco Systems Inc. One leading high-tech manufacturer, Agilent Technologies Inc., blamed its weak performance in the latest quarter on an inability to obtain parts. And it's not alone. Several companies have announced revenue and earnings shortfalls stemming from inability to secure parts. You have to wonder, after all these years of hype about the importance of the supply chain, what went wrong? I mean, wasn't the Internet supposed to enable manufacturers to stay in constant contact with their suppliers? Weren't all those B2B online exchanges supposed to revolutionize the supply chain? The answer lies in one word: inventory. The just-in-time mantra that so many manufacturing companies have adopted so religiously has come back to haunt them. Sure, just-in-time works great most of the time. It means that, unlike the old days, you don't have to stockpile mountains of parts, units, and assemblies in troughs, bins, or on racks along the walls of the plant, waiting for the time -- days, weeks, or months out -- when they will be removed and welded, bolted, or soldered into place. Just-in-time works well during normal business times. Companies that once kept months of safety stock now get by with days, or even hours, of materials. At the Dana Corp. automobile frame manufacturing plant in Stockton, Calif., for instance, big rigs arrive like clockwork, unloading parts and loading up with finished frames to be delivered, in turn, to the New United Motor Manufacturing Inc.'s combined GM/Toyota assembly plant in nearby Fremont, Calif. Unless your industry is hit by an unexpected strike, as happened in the auto industry a few years back, parts shortages are pretty much a thing of the past. But how about when your industry suddenly undergoes a tremendous boom, and demand far exceeds projections for parts? Without much warning, everyone -- all your plants and all your competitors' plants worldwide -- is clamoring for a certain kind of chip or memory device. It seems that all of those that have been built, as well as all that are planned to be built for the next year, are spoken for. It's as if DaimlerChrysler AG received orders for two million PT Cruisers, but the company was unable to fill them because its only source for transmissions had 18 months' worth of back orders from other automakers that it had to fill first. Not many car buyers are willing to wait 18 months for a new car. Manufacturers are coping with parts shortages any way they can. PC-maker Gateway attributed lower-than-expected earnings in the fourth quarter last year in part to Intel's inability to ship it enough microprocessors. To fill the gap, Gateway decided to double purchases of microprocessors from another chipmaker, Advanced Micro Devices Inc. Palm saw its production of handheld devices hamstrung by a lack of radio crystals and flash-memory integrated circuits. As a result, the company modified the design of its Palm VII handheld device to work around the shortage. Admittedly, holding 18 months' worth of inventory isn't the solution. But having some inventory on hand would help. Before the industry adopted just-in-time, some large electronics firms held a month of buffer stock. So would better planning. One national newspaper stated recently that "nobody imagined how strong demand would be" for certain electronics products. That's a weak excuse in my book. Just look at cell phones. The worldwide boom in cellular phone sales wasn't exactly a surprise -- sales of these units have been on a fast climb for years. Yet one distributor reports a wait of 18 months to obtain high-frequency transistors for the handheld devices. Welcome to the wacky world of the high-tech supply chain. And it's likely only to get worse before it gets better. Doug Bartholomew is an IW senior editor based in San Francisco.

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