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The Great Inventory Correction

The economic downturn left tech companies with mountains of goods. Now, they're rethinking how they manage their supply chains.

Freak Show

Other kinds of tech companies are using SCM planning tools, from such vendors as i2, Manugistics Group, and SAP. Cisco, for instance, uses Manugistics to run its Web supplier hub. At server maker Sun Microsystems, a combination of i2 and Rapt Inc. software enables “short, predictable lead times with the lowest possible costs,” says Helen Yang, vice president of supply management.

But if SCM software is so great, why didn’t it prevent the inventory glut? One reason is that not everyone uses it: Only about 20 percent of companies with more than $500 million in annual revenues have installed SCM tools, according to AMR Research.

A more compelling reason, however, is that software can’t eliminate the problem of garbage in, garbage out. Supply chain planning tools rely on algorithms to crunch a mix of historical data, production numbers, and “guesswork,” says Kevin O’Marah, service director for supply chain strategies at AMR. “How good is your guess? You’re speculating on trends going forward.”

This is feasible in mature industries, says O’Marah, but high tech, with its volatile swings in demand, is a very different story. In semiconductors, long cycle times mean that companies are always making a bet on an uncertain future. And at Cisco, “growth changed from 40 percent to negative 10 percent. That’s a real freak show!” exclaims O’Marah. “Can you imagine a forecasting system even encompassing this scenario?”

“We recognize that forecasts will not be accurate,” says Yang. “The game is how fast we can respond to changes.”

O’Marah blames habit, in part, for the inventory overhang. Component shortages have plagued electronics manufacturing for the past decade, he points out, “and the habit of market leaders is to lock up allocations available for components. It’s a reasonable way to think.”

“When a new technology comes along — a faster chip, a new bus — there are constraints in supply,” says Karen Peterson, research director at Gartner. “A lot of the [original equipment manufacturers] or contract manufacturers will lie about what they need. If I’m an OEM, I may say I need 200 percent more than I think I need. It’s going to put my priority higher [with the supplier].”

Double ordering of chips, capacitors, and resistors from manufacturers and distributors also contributed to the glut, adds Pamela Gordon, president of Technology Forecasters, an Alameda, California-based consulting firm for the electronics manufacturing services (EMS) industries. Those parts were in particularly short supply in 2000, she says. As for other kinds of high-tech equipment, such as networking and telecom gear, Gordon faults manufacturers for not doing sufficient due diligence on shaky customers, dot-com or otherwise.

Don’t Know Much about History

“The telecom guys thought, ‘We can do no wrong,’ ” says Dan Pleshko, vice president of global procurement and strategic supply-chain management at Flextronics International Corp. “They forgot to look at history, at business cycles. The PC guys had been through a couple of cycles. They had been through pain.”

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