I think you're going to see a lot more of these type of stories. I've always said JIT and Dell's model is great during falling prices and plenty of supply. It sucks during shortages.
Long Wait for Electronics Parts
Is Wreaking Havoc on Profits
By JON E. HILSENRATH
Staff Reporter of THE WALL STREET JOURNAL
Parts shortages are wreaking havoc on electronics makers' carefully crafted just-in-time
supply chains, and that is leading to price increases and hurting corporate growth prospects.
Friday afternoon procurement meetings at JIT Holdings Ltd. in Singapore, for example,
have become long screaming sessions about inventory control, customer relationships and
supply shortfalls. Parts that last year could be obtained in a few weeks now might take
months, creating a logistical nightmare.
"I'm in a crazy job," says Danny Tan, who buys materials and manages supplier
relationships for JIT, a small contract manufacturer of electronics equipment.
Four Weeks Before, 40 Weeks Now
It is the same throughout much of the electronics sector. Tantalum capacitors, which help
control the flow of electricity in telecommunications equipment, used to take just four weeks
to obtain; now they take 40 weeks. Some high-frequency cellular-phone transistors must be
ordered 18 months in advance, according to one Hong Kong distributor. Basic memory
chips are in short supply, leaving cell-phone makers and computer manufacturers battling
one another for allotments and paying for the privilege: Spot prices for standard 64-megabit
memory chips are up more than 80% from a year ago.
Some shortages are showing signs of easing during the slower summer months. And some
analysts are beginning to worry that the chip industry will be stuck with a glut of capacity
next year as aggressive capital-spending plans are completed.
No End in Sight
Yet, many executives say the chip shortages are unlikely to fully abate anytime soon. "I
would not be surprised to see shortages in the [semiconductor] industry over the next six to
12 months or 18 months before some of the new capacity comes on line," Craig Barrett,
chief executive officer of Intel Corp., told reporters recently.
This wasn't anybody's idea of how supply chains would work in the New Economy,
particularly in electronics. Inspired by the success of Dell Computer Corp.'s build-to-order
production models, electronics companies around the world marched into the Internet age
with big plans to turn their supplier networks into seamless, efficient operations.
By getting supplies just in time, keeping inventories at razor-thin levels and bringing new
products to the market with lightning speed, makers of electronic devices would conserve
cash and be on the road to better profits. The Internet would contribute by putting suppliers
into constant contact with their customers. Indeed, the dot-com universe today is filled with
business-to-business companies promising to revolutionize supply chains.
Too Little Capacity
But in the electronics sector, ambitious New Economy plans have been tripped up by an
old economic problem: Nobody imagined how strong demand would be. Much of the
electronics industry is stuck today with too little capacity for parts.
On-time deliveries and inventory control were easy to manage when the electronics world
was filled with excess assembly capacity more than a year ago. Eager to keep their
machines running, Asia's suppliers could push products out their doors at a moment's
notice. Today, with many electronics-related factories running full tilt, the game has become
much harder.
"Just-in-time has become just-in-trouble," says Chay Yee Meng, chief financial officer for
NatSteel Electronics Ltd.
That's not all. The just-in-time model itself may be contributing to the problems, because
manufacturers such as Dell and their suppliers came into the boom unprepared for
undersupply. "In the past, the huge multinationals had at least one month of buffer stock,"
says Klaus Festl, vice president of the electronics group of Schmidt & Co. (HK), a Hong
Kong-based distribution company. "This time, nobody wanted to have any inventory."
The result: Asian contract manufacturers such as NatSteel and large multinationals such as
Dell and Motorola Corp. have announced in recent months that supply shortages were
hurting their ability to grow. JIT Holdings says it hasn't taken a hit to its bottom line from the
shortages, but it has had to increase inventories to ensure that it could cover orders.
The Benefits of Inventories
In some cases, the shortages have had a strange way of turning textbook supply-chain
conventions on their head. Inventories, for example, are the bogeyman of an efficient supply
chain, because they cost money to hold and can become obsolete if held too long. But Mr.
Festl profited handsomely after he agreed with parts makers five months ago to stock up on
supplies -- which he is now selling back to some of them at a premium.
In the U.S., there are spotty cases of shortages in other industries, from brick-making to
book-printing to electric-turbine manufacturing. But it's difficult to estimate the impact that
any of these shortages will have on inflation and economic growth. In the electronics sector,
for example, a flood of new capacity is coming on line that is expected to reduce the
shortages next year. And elsewhere in the world, serious excess capacity still rules the day.
China, for example, has 40% more capacity in the home-appliance sector than it needs,
says John Wong, a vice president with Boston Consulting Group.
Still, companies may be learning a longer-term lesson from today's shortages -- supply
chains are proving tougher to revolutionize than hoped. When inventories are thin and
turnaround times are expected to be instantaneous, the perils of miscalculation run high.
And in a just-in-time world, parts suppliers are less inclined to expand too aggressively,
says Zulkifli Baharudin, vice president in charge of logistics for Circle International Asia
Pacific Holdings Pte., a Singapore-based logistics company.
"We have a situation where we have a model that overpromised everything and a system
that has underdelivered," says Mr. Baharudin. "Suppliers and producers are struggling with
it."
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