Here it is--hope I don't get sued for copyright infrigement!
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As Holidays Near, Parts Shortages
Begin to Plague Electronics Makers
By PUI-WING TAM
Staff Reporter of THE WALL STREET JOURNAL
SANTA CLARA, Calif. -- When demand for Palm handheld computers exploded this year, nearly everyone at Palm Inc. rejoiced.
Not Dinesh Raghavan. "All of a sudden, we were scrambling," says Mr. Raghavan, Palm's 45-year-old vice president of global-supply-chain operations. The company needed more computer chips and liquid-crystal display drivers to meet demand, and it was Mr. Raghavan's job to find them.
With his small team of commodity managers, the executive immediately hopped on planes to Japan, Taiwan and South Korea to start begging suppliers for parts. At one meeting in Japan, he told the supplier that he needed to raise his order from 10,000 components a month to 150,000 a month. The Japanese executive gasped and asked, "Are you sure? What changed?"
"We made a mistake," Mr. Raghavan says he replied. "What can you do to help us?"
Unfortunately for Palm, the answer was not much. Even now, the company hasn't found all the parts it needs, and neither have lots of other tech companies that have been caught short by a surge in demand for their products. With consumers displaying a seemingly endless appetite for cell phones, handheld computers, video games and other electronic devices, shortages for all manner of chips are cropping up at levels not seen since 1995. And those shortages are hitting manufacturers right as the crucial holiday shopping season approaches.
A few weeks ago, Sony Corp. announced that production of its much anticipated PlayStation 2 gaming console would be halved, in part because of component constraints. And Sony executives have said they expect the lack of available computer chips to plague makers of products as broad-ranging as DVD players, televisions, camcorders and other digital media products. In many cases, that will translate to shortages for consumers at Christmas.
In a sign of how onerous the constraints are, prices charged to manufacturers for a type of chip called flash memory -- used in all manner of electronic gadgets -- have jumped to $4.30 a megabyte this year, up from $2 a megabyte last year, according to Gartner Group.
"We've only been able to meet 60% of demand," says Eli Harari, president and chief executive of the major flash-memory supplier SanDisk Corp., of Sunnyvale, Calif. He blames skyrocketing demand and limited factory capacity.
But new capacity is hard to add when demand rises suddenly. A flash-memory production line, for example, typically requires a $1.5 billion investment and a two-year lead time. "It's been really a stressful time for everybody," Mr. Harari says.
Concerns about shortages have already affected the stock prices of cellular-phone makers this year, though the companies say that in their case the situation has eased. A range of smaller electronics makers, such as those that produce MP3 music players, are also being affected by shortages of a variety of parts, says Jim Handy, a Gartner Group analyst.
But the pinch has been particularly strong in the burgeoning handheld-device industry. The shelves of many electronics retailers haven't had any Palms or the rival Pocket PC devices that run Microsoft Corp. software for months. At Handango.com Inc. (www.Handango.com), a handheld-device Web site, orders for Palms and Pocket PCs -- especially Palm m100s and Compaq iPaq machines -- have long been backlogged, says chief executive Laura Rippy.
"I'm a gadget guy and I've never had to wait this long for a device," gripes Marc Chancelor, a real-estate investor in Plantation, Fla., who ordered a Compaq iPaq from Handango in July and didn't receive the machine until early September. "I checked everywhere, and I even had my friends check around. But no one knew when the devices were coming in."
For Palm, the crunch has hit just as the company is trying to maintain its lead in the increasingly crowded handheld market. The constraints have hurt sales: Analysts estimate the company could have sold 50% more devices over the past quarter if it had had enough parts. And Palm executives have already said they are running short on two types of integrated circuits and thus won't be able to meet demand for one of their latest gadgets, an updated version of the Palm VII, this Christmas.
Mr. Raghavan is at the center of Palm's scramble for components. For the former Motorola manager, the crisis began unfolding last December. Just two days before Christmas, he was called into a sales meeting and told that forecasts of consumer demand were off base. "I was more than a little disturbed by the news," he says.
Late last year, using the newest consumer forecasts from Palm's sales-and-marketing department, he had told suppliers what to expect in terms of parts orders to meet expected demand over the next 15 months. But now it had become clear that those projections covered only half the demand.
How could the consumer forecasts have been so wrong? Mr. Raghavan says that historically Palm has had a good forecasting track record. But in talking to industry analysts and retail channels about production for this year, no one could have predicted that demand would jump from several hundred thousand units a quarter to several million, he says.
Mr. Raghavan knew the situation was dire. Typically, suppliers can respond quickly to fulfill a 10% to 20% swing in demand. "But if you double your order, and other manufacturers are also doubling orders, things get very difficult," he says. Many of Palm's machines also use parts that have a single supplier, exacerbating the problem.
Demand was too great for Palm to lean only on existing sources. So Mr. Raghavan and his team pulled together a road show, underlining Palm's business and growth prospects. Soon, the trips to Asia became so frequent -- at least one week a month -- that the team began to recognize the flight attendants.
"I think I became a gold [frequent-flier] member on every single airline this year," says Patrick McGivern, a senior director of supply chain operations at Palm who had to have new pages sewn into his passport.
Plenty of schmoozing with prospective suppliers ensued. Mr. Raghavan began carrying around a bag of Palm-branded golf balls to give as gifts. He also was forced to do things he might not have otherwise. During an outing to Japan, when he and three colleagues visited a semiconductor factory, he and the others had to strip down to their underwear and put on space-like suits before they were allowed to tour the facility.
As a last resort, Mr. Raghavan was also able to turn periodically to the "gray" market, a spot market populated by brokers who buy and sell chips outside company-sanctioned channels. "Brokers are like sharks, especially when they smell blood," says Mr. Raghavan, who ended up doing business with two of the more reputable ones but now says the transactions have dropped off.
But the hard work yielded some results. By July, the team had visited 20 new suppliers. They had managed to increase the number of flash-memory suppliers from one to eight. They also began urging Palm's engineering groups to make machines with parts from multiple vendors rather than using single-source components. As a result, over the most recently ended quarter, Palm shipped 1.5 million handheld computers. That may have been half what it could have shipped but it was also up from 600,000 a year ago.
Indeed, Mr. Raghavan says Palm is now so much better positioned in terms of components that he worries that over the long term he may have gotten too many new suppliers on board. "We'll be swimming in flash memory next year," he says.
Write to Pui-Wing Tam at pui-wing.tam@wsj.com |
