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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.

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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