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Technology Stocks : Disk Drive Sector Discussion Forum -- Ignore unavailable to you. Want to Upgrade?

To: Gottfried who wrote (4411)	9/10/1998 2:18:00 AM
From: Mark Oliver	Read Replies (1) \| Respond to of 9256

I've thrown out this question before about who's really carrying the inventory? The following article is a discussion about the changing reality of inventory and who carrys the risk. At the end, they say this system works, for the OEM, when there is an over supply. Hmmm. Is this a fact of life for the future, or will the cyclical nature of this business return to allocations and send costs back to the OEM? If so, how long before the current cycle starts to end? (Yes, we will all be rich if we can get that one correct, but it could be fun to guess?) From the Distribution pages of Electronic News: September 7, 1998 Issue Inventory¥Double-Edged Sword OEMs want distributors to do storing; more volume but costly By Heidi Elliott Carrying inventory is a mixed blessing for distribution. As more OEMs move away from manufacturing and toward a build-to-order (BTO) or just-in-time (JIT) model, they look for distribution to take on the inventory and warehousing function. It's a double-edged sword for distributors. While the move means more volume business for distributors, it also means additional costs since in some cases, they have to store the products near the customer site, and out of the centralized warehouses they've set up. "In the Utopian world, no one would want to have inventory. But in reality, somewhere in the channel inventory has to reside," said Michael Rohleder, president and CEO of Wyle Electronics. Distributors had moved from having inventory spread out among several local warehouses, to being stored in a handful of warehouses in central locations. Now, said Arrow Electronics President and CEO Stephen Kaufman, "there's a requirement by the customer to redevelop those local warehouses. They want (inventory) parked across the street." Arrow, he noted, had two central warehouses in 1988. Now the company has inventory in 150 physical locations. "It is more inefficient for the distributor to have to carry inventory in many different areas of the country to get the product to the customer within minutes of when they want it. Distributors can't house all their inventory in one spot," said Rob Damron, principal with Cleary Gull Reiland & McDevitt Inc., Milwaukee. "But distribution is gaining share in the overall industry and it is (in part) for these reasons." "It's going to cost somebody somewhere," added Greg Frazier, president of Avnet Inc.'s Integrated Material Services (IMS) Division. Avnet too has seen a reversal of the centralization trend. For example, a proximity site in Denver houses parts for six different customers in that region. To lower its costs, Mr. Frazier said, Avnet tries to spread the inventory costs over multiple customers, as it does in Denver. Or, the company sometimes partners with a company that is also servicing a given customer and the two share costs. "We're always looking for creative ways to get material where they need to be while maintaining high quality and standards," said Mr. Frazier. "To support customers in a build-to-order environment, we realize it has to be part of the model." Mr. Damron said while distributors continue to provide incremental value for customers by providing this service, their real challenge is to get paid through slightly higher gross margins for providing the services. Right now, distributors are not typically getting paid those margins. Mr. Kaufman however bemoaned the current situation as not recognizing the risk and cost carried by resellers in holding inventory until the very last minute. "The customer has said, 'I'd rather the distributor or supplier hold the inventory for me.' The problem and frustration is distribution evolved from the '70s when every branch had a warehouse... to a centralized warehouse. Now there's a reversal of that," said Mr. Kaufman. "If the customer is trying to lower cost, they need to work with us to lower cost across the whole channel. I wish we could have a more open conversation with our customers. Risk has to be compensated for." Arrow has an estimated 60 proximity sites" that represent little pools of inventory for the customer. Pointing to the Dell model of zero inventory the Arrow CEO notes there is, in fact, still inventory--it's a short distance from the manufacturing site. "I think we're working a fiction that will at one point need to be addressed," said Mr. Kaufman. But that's not likely to happen in today's market. As long as there is an oversupply situation, the scenario is not likely to change, said executives and analysts. "It won't happen in a market where there is oversupply. We see gross margins continuing to erode... But if pricing begins to firm, it will be easier for distributors to get that," Mr. Damron noted.