re: DELL has succeeded in shifting inventory costs from DELL to INTC
Gary, you are taking Rudedog's position. He contends, morever, that because of this supposed cost shifting Dell should expect to pay higher prices:
... companies which maintain a larger inventory position (and I assume we are talking about raw parts and WIP, not finished goods) can typically get better pricing on components in general. Companies like Intel are not into charity. If Dell asks them to pick up the cost of carrying inventory, and the uncertainty of the order stream as well, you can bet that Intel will reflect that in their pricing to Dell.
Nice argument. While I appreciate the spirit of it I can't agree with its premise.
Here are a few points to consider:
1. Whether Dell is in the picture or not, Intel must carry a finished-goods inventory to meet the needs of other boxmakers. Now, what does Dell's presence do? The question is whether Intel would want to carry less inventory if Dell moved away from JIT. Alternatively, would Intel want to carry additional inventory if CPQ somehow converted to JIT? I submit the answer to both of these questions is no.
2. Occasionally you will hear someone claim that the main idea behind JIT is to force the upstream suppliers of a firm to bear its inventory burden - and absorb the costs. I think this is totally wrong. It looks at inventory control as a zero sum game. It assumes that if firm A carries less inventory, then firm B - a supplier - must carry more. The truth may in fact be just the opposite: if A moves closer to JIT, it may also allow B to move closer too.
3. What would JIT mean for Intel? JIT in finished goods would mean that a chip coming off the production line would arrive in inventory precisely at the moment an order for it is received - not one moment sooner!
4. Dell has devoted a great deal of attention to increasing its component-inventory flow or "velocity." In reality it is not a JIT system, which implies infinite velociy, but a 7-8 days system. This means that components in inventory on a value weighted basis need to be replaced on average every 7-8 days. Dell's stated goal is to accelerate the flow to a 5-day system.
If Dell accelerates how would this affect Intel? Let's perform a conceptual experiment. Suppose Dell were somehow able to raise velocity to a one day system. Let's say Dell on the morning before each daily production run acquires only enough chips for that day. How would this affect Intel? The Rudedog- Gary hypothesis is that Intel would need to carry more inventory, but how can this possibly be? Dell's inventory needs on a one day system are more predictable, not less. Intel's task of smoothing its own inventory would be made easier, not more difficult, because fluctuations generated by Dell's order flow would be less disruptive. This suggests to me that Intel would, if anything, carry less inventory not more.
Geoff |
