Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Lee Penick who wrote (39529)	11/7/1997 11:26:00 PM
From: pt	Read Replies (1) \| Respond to of 186894

Lee, re: Why is JIT or "made to order" causing so much stir now? Built to order is the culprit, not JIT. It is because of the number of companies trying to replicate Dell's success by adopting the Dell model. In the past CPQ and most box makers bought lots of CPUs long before they made it in to the consumers' hands. With CPQ and others at least partially adopting the Dell model, they don't need to purchase CPUs (and other components) so far in advance. So they slash orders temporarily while working off inventory. Although it is a temporary slowdown for INTC, it amounts to what we call an "indefinite deferral." When you factor in present value, an indefinite deferral is effectively a permanent change. Example: your compamy pays $10,000/month for rent on a 100-year lease. The landlord lets you skip a payment this month, but tacks it on to the end of the lease. PV of $10,000 100 years from now is effectively zero. So the indefinite deferral is as good as a permanent savings to you, a permanent loss to the landlord. In this case CPQ et al are getting the equivalent of a permanent savings while INTC suffers the equivalent of a permanent loss of sales. Where it gets harder to evaluate, however, is that if CPQ et al can cut box prices due to this savings, and therefore move more units, (without just stealing share from Dell) some percentage of the loss to INTC could be made up in the future; the percentage could even exceed 100%, depending on elasticity of demand--though I highly doubt that would be the case here. Hope this helps. Paul T.

To: Lee Penick who wrote (39529)	11/8/1997 12:25:00 AM
From: Paul Engel	Read Replies (3) \| Respond to of 186894

Lee - Re: "Why is JIT or "made to order" causing so much stir now?" This matter caused quite a stir and deserves some explanation. Up until recently, DELL Computer has been selling B-T-O - Build To Order - systems. DELL's manufacturing approach has been to order components AFTER receipt of a PC order, receive the components and begin insertion into the manufacturing line. They require JIT delivery of processors from Intel (as well as all other components) to make this work effectively. Compaq, on the other hand, built PCs in large batches and shipped them off to their dealers in large batches. Hence, they always had a large inventory of CPUs from which they built these batches. This past summer, Compaq tried to do a DELL - because of the lower overhead - and started a BTO program. The result was that ALL THOSE Pentiums in INVENTORY just sat there until the orders came in from customers. SO, COMPAQ STOPPED their orders (or curtailed them big-time) while working off their existing inventory. This rippled back to Intel as CPU orders shrank by 500,000,000 to 750,000,000 dollars. However, it is a one time (HOPEFULLY) deal. Once Compaq worked down their inventory levels and reached a steady state build rate, they began to order CPUs from Intel on a JIT basis, much as DELL has beeen doing. A second factor related to inventory was also discussed. Intel claimed that the OVERALL PC market grew FASTER than Intel's CPU shipments for most of 1997. The implication here is that many customers were working off a bloated inventory, selling more PCs than the number of CPUs ordered from Intel. Otellini believes that most of this inventory adjustment hiccups will have been completed by the end of this quarter - that's the HOPE. On the plus side, the newer BTO scenario will help Intel in the long run. The inventory "pipes" will be shorter. Thus, when Intel tries to introduce a new processor or technology, the "pipes" will have a lot less older product inside them and Intel can begin to insert the newer product without the inherent delays associated with "flushing the pipes" of a large manount of older product. Since Intel is agresssively introducing new technology, this may bring benefits a lot faster than people thought, making the inventory adjustment issue very minor, in retrospect. Paul