Hang on for another wild ride.
Just when we get good news, some media source has
to release negative story about CPQ. Here it is:
Hope it won't affect CPQ too much.
Compaq's readiness for iPaq launch
uncertain
By Joe Wilcox and Michael Kanellos
Staff Writers, CNET News.com
December 21, 1999, 4:00 p.m. PT
Houston, we have a problem.
As Compaq prepares for the January launch of the iPaq, there are growing signs the
computer maker does not have all the operational assets in place needed to lift an
important product line into orbit.
The iPaq--a miniaturized, modernized corporate desktop--is at the center of Compaq's
revitalization strategy. Selling for $499 and up, the iPaq's low price is designed to
recapture lost market share, and could potentially account for more than 50 percent of
business shipments in a few years.
Although relatively inexpensive, the systems will cost less to make, say Compaq
executives, and will be sold directly by the Houston-based company rather than through
dealers and distributors.
The distribution system is arguably the most important, and troublesome, factor in the
product's launch. Compaq has been trying to sell PCs direct for years with mixed results
because of it has not had adequate logistical systems.
This shortcoming in the company's strategy likely accounts for recent rumors that Compaq
is in talks to buy assembly and manufacturing facilities from distributor Inacom, say
analysts.
There are also alternatives to acquisitions being bandied about. For example, the company
could tighten its relationships with Inacom and/or other distributors, build its own assembly
capabilities or acquire a direct competitor, such as Micron Electronics.
Whatever the company decides, the clock is ticking, say analysts.
"With the iPaq being rolled out for direct sale to the customer, Compaq needs to ramp up
that build-to-order capability," said Technology Business Research analyst Lindy
Lesperance. "Their build-to-order capabilities are still not what they want them to be, and if
the iPaq takes off they need something in place."
To compound the problem, the PC maker is also expected
to unveil a consumer version of iPaq at next month's
consumer electronics show, also sold direct to customers.
"They've got to do something fast," said Jeff Matthews,
general partner in Ram Partners, a Greenwich, Connecticut
investment firm. "The inertia of human nature is to not bite
the bullet and to make incremental changes."
Compaq has made some painful decisions this year as it
reaches for increased profitability, such as unloading
AltaVista and killing development on porting Microsoft
Windows 2000 to the Alpha processor. To solve its
supply-chain problems, Compaq may have to take more
drastic measures, Matthews said.
That could mean buying a PC wholesaler, such as Inacom.
"I wouldn't rule [an acquisition] out at all," said Kurt King,
an analyst with Banc of America Securities. "They realize
they need to bring the capability in house and rely less on
the channel."
Although Compaq needs more logistical and delivery systems, Compaq may technically
avoid an acquisition and instead strike a deal where the company is more tightly aligned
with a back-end distributor. Essentially, what the company needs is an efficient way to get
product to customers without having to send it through third parties, which will reconfigure
the product or mark it up in price, said King.
Compaq's direct/indirect dilemma has been a long-simmering issue. "I think they first
started telling us that they wanted to go direct in...1996," King said.
Lesperance questioned the sense of buying a distributor and speculated that a cozy
alignment would be more likely. Inacom's Nebraska location would only further complicate
distribution, she added. Direct manufacturers typically keep the bulk of their assembly and
distribution operations in one location. Moreover, Inacom has its own problems: last week
it laid off 1,000 employees.
Lesperance also ruled out Compaq beefing up its own assembly and distribution facilities.
"The problems are obviously beyond internal repair, so they need to look outside to the
resources that are there," Lesperance said.
Compaq also recognizes its back is against the wall. In a recent filing with the Securities
Exchange Commission, the company acknowledged it "does not currently have in place
processes for order entry, production of individualized units and direct distribution that can
operate efficiently to manage a large portion of its current personal computer sales."
Another option would be Compaq buying a direct manufacturer, but Matthews said it
might be too late for that. "Compaq needed to buy Gateway two years ago, and
they missed that chance. They wouldn't be in the trouble they are today if they
had."
Unlike direct PC makers, such as Dell and Gateway, Compaq has traditionally used
computer wholesalers and dealers to get product to customers. In August, Compaq
reduced from 39 to four the number of distributors it uses but increased their role in
building and selling PCs.
Compaq's only choice in the short term may be relying more on its hybrid model,
where the four distributors play an increasingly important role, said International
Data Corp. analyst Joseph Rigoli.
Since last summer, Compaq and its distributors have used a common configuring
and ordering system provided by PCOrder.com. This has helped Compaq greatly
reduce inventory, close to two weeks, said some analysts.
"Not only did Compaq pare down the number of distributors, they rely on them more
for fulfillment and the build-to-order ordering process," Rigoli said.
Through the restructuring, Compaq reduced to 30 from nearly 100 the number of
stocking locations it uses to build PCs and the number of distribution centers from
90 to 24. While an improvement, the changes are still not as efficient as Dell, which
typically builds PCs for half what Compaq does, Lesperance said.
With iPaq, Compaq hopes to cut some cost out of its supply chain. By shedding
legacy ports and connectors, Compaq can use simpler components that are
cheaper to produce. Shipping direct to customer is also cheaper than using a
dealer.
But Compaq still has to meet demand for iPaq, and that could be a problem. While
Compaq may sell the new PC direct, it wonût match Dell's build-to-order
capabilities, say analysts.
"What Compaq will do is maintain inventory at the distributor level, so they will have
the ability to same-day ship these products. But it is not true build to order," Rigoli
said.
If Compaq is to meet its goal of 40 percent sales, it must do better than that,
Lesperance said.
Think Dell pays these guys off?
Chris P. |
