Build-to-order model getting first real test -- Experts question validity of process
during major component shortage
Oct. 22, 1999 (Electronic Buyers News - CMP via COMTEX) -- As OEMs scramble to meet production
demand amid widespread component shortages, supply-chain experts are questioning whether the popular
build-to-order manufacturing model will work effectively in the current industry environment.
Strong demand, frugal capital-spending budgets, and last month's earthquake in Taiwan have dried up the
supply of several key components, including flat-panel displays, DRAMs, and capacitors. That could cut
into global PC unit shipments, which were expected to climb 15% in the fourth quarter, analysts said.
Dell Computer Corp., the build-to-order pioneer, was one of several PC makers last week to warn that the
capacity crunch could hurt its financial results. Since Dell builds its PCs on a BTO basis, it is more
exposed to fluctuations in component prices than companies that carry buffer inventory.
"Maybe the Dell announcement will be a good wake-up call," said Hau Lee, a supply-chain management
professor at Stanford University in California. "So many high-level executives say forecasting is dead. But
you can only do BTO when supply is always there. Forecasting is still necessary."
Indeed, the need for accurate and collaborative forecasting initiatives is a hot topic among supply-chain
executives and industry experts. And the requirement becomes even more crucial as BTO, for the first time,
collides with a string of less-than-favorable supply conditions.
"In a time of abundance, the model works fine," said Mark Giudici, an analyst at Dataquest Inc., San Jose.
"When times get tight, that's the test."
As BTO becomes the manufacturing process of choice for many high-tech companies, devising independent
forecasts will no longer be an acceptable-or proactive-solution, Lee said.
"The problem is that most companies are doing their forecasting independent of others in the supply chain,"
he added. "If everyone is doing it independently, no one has the full information or demand signals.
Uncoordinated BTO is a recipe for disaster."
That practice has put companies in a reactive mode today, scrambling to make sure supply and demand
remain in some sort of balance, he said.
But unlike shortages of years past, improvements have been made to the allocation process, which may be
curtailing the ill effects often associated with short supply, according to Lee.
Information technology, software tools, and the Internet have improved the supply chain's flexibility in
responding to different scenarios. By reacting quicker, companies avoid dealing with the extremes of over-
and undersupply, or at least can better manage the spikes and valleys.
As a result, suppliers and distributors are making strides in "reallocating" components. If one customer's
order is adjusted because projected demand didn't materialize, the vendors can quickly shift any excess to
another customer, Lee added.
As of last week, OEMs were taking different paths to minimize the effects of component shortages and
price hikes. Some may increase their use of repair programs; instead of throwing out defective
motherboards, many are simply fixing them, said Richard Doherty, an analyst with Envisioneering Group
Inc., Seaford, N.Y. And others are raising inventory levels to avoid fulfillment problems in a traditionally busy
selling season.
At Austin, Texas-based Dell, a 25% DRAM price hike is forcing the company to lower main-memory
content in its PCs from 128 Mbytes to 64.
Rival Compaq Computer Corp., Houston, will not cut memory content in its systems. "Classically,
Compaq's approach is to go out and get creative on how to get more supply," said Dan Pleshko, a
corporate procurement executive at Compaq's memory and MPU division.
Compaq also does not plan to build up component inventory levels, Pleshko said, but he declined to
elaborate on Compaq's "creative" sourcing strategy.
The plan of attack at Newbridge Networks Corp., the Kanata, Ontario-based networking-systems maker,
can best be described as aggressive.
While the company's manufacturing model is different than its PC counterparts, Newbridge is vying for the
same allocated parts, particularly DRAM, flash-memory devices, and chips sourced through Taiwan, said
Don Hnatyshin, Newbridge's corporate vice president of worldwide procurement.
"One of the first things we did when problems became apparent was to get on a plane to talk to our
suppliers," Hnatyshin said. "We talked to suppliers like AMD and Xilinx to find out that our demand was
covered. As soon as we got all the details on that, we did what all companies were doing: We raided the
spot market."
Newbridge is also increasing inventory as a way to circumvent any glitches. While the amount of inventory it
holds varies by commodity, it has doubled inventory levels in some cases, he said.
Market dynamics have also caused other PC bellwethers, such as Hewlett-Packard Co. and IBM Corp., to
stumble.
HP reported earlier this month that its fiscal fourth-quarter revenue growth is likely to be at the low end of
the predicted 10% to 13% range because of the quake that rocked Taiwan. Delays in its PC supply chain
stem from semiconductor shortages in the DRAM and ASIC segments.
IBM, Armonk, N.Y., last week pointed to the FPD shortfall as an influential factor.
"Even though we were pleased with our ThinkPad results, sales were constrained by short supply of
flat-panel displays," said Douglas Maine, senior vice president and chief financial officer, in a conference call
with analysts.
Overall, IBM's hardware revenue fell 1%, to $8.84 billion, vs. $8.92 billion in the third quarter of 1998.
Despite these initial waves, there is a considerable amount of speculation on Wall Street about the true
impact these market forces will have on the electronics space.
"There is a mixed pattern of signals," said Roger W. Norberg, an analyst at U.S. Bancorp Piper Jaffray Inc.,
Minneapolis. "Inventories at the manufacturing level are down. Orders and bookings seem strong, but it
doesn't look like double-ordering is a huge issue yet."
In the contract electronics manufacturing sector, it appears that companies are not having problems
procuring items such as DRAMs, tantalum capacitors, or LCDs, according to Norberg. But several CEMs
are building inventory cushions, he said.
Regardless of how OEMs and CEMs are reacting to the current situation, the clamor for better visibility and
forecasting is resounding through the pipeline.
Will Mulhern, product marketing manager for advanced DRAMs at NEC America Inc., Santa Clara, Calif., for
instance, said some structural changes in the supply chain must be made if the shortages continue.
"Chip makers and OEM customers are going to have to get much closer on forecasting product
requirements," he said. "We need robust forecasting programs that will survive in periods of shortage as well
as in times of oversupply."
Mulhern said current OEM forecasts work fairly well but until now have depended on a "fudge factor" to get
JIT for last-minute product needs.
"In an oversupply situation, there is usually inventory in the pipeline someplace that can be diverted quickly
to meet an immediate order," he said. "There may not be any pools of inventory around to cover mistakes in
forecasts."
-Additional reporting by Jack Robertson
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