Cheryl and John--Is interesting reading, eh?
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February 9, 1999
Tech Center
Manufacturers Plan to Set Aside
Extra Inventory as Y2K Safeguard
By TIMOTHY AEPPEL
Staff Reporter of THE WALL STREET JOURNAL
You've heard of the Y2K bug. Now get ready for the Y2K blip. An inventory
blip, that is.
While rushing to make sure their computers and other machines keep humming
through the changeover to the year 2000, some manufacturers are also
planning to set aside extra inventory at the end of this year as a buffer
against unforeseen disruptions in their supply and distribution chains.
Consider it a little extra Y2K insurance policy.
"Given the vastness of our supply chain and the number of suppliers, this is
a kind of safety net," says Earl Mitchell, a global purchasing manager at
Xerox Corp., which plans to build up a month's supply of all the parts
needed to produce its copiers and printers -- about four times the usual
level for some items -- by year end. "If no supplier ships us any parts for
the whole month of January, we'll keep our plants operating," he says.
Xerox considers this just an added layer of safety on top of its efforts to
make sure it and all its suppliers avoid problems in the first place by
fixing their systems ahead of time. Xerox is one of many companies that have
sent questionnaires to suppliers, probing their Y2K preparations and
readiness. For key suppliers, some companies even insist on making personal
inspections.
Supply-Chain Insurance
Driving such efforts is the specter of factory machines stopping or
malfunctioning because the computers that control them -- designed to
recognize only the last two digits of a year -- fail to recognize the year
2000. Many companies say they are confident they will have their own houses
in order. Their worry is that they can't fully control what everyone else is
doing up and down the web of the supply chain.
Corning Inc. plans to inventory items on a "case-by-case basis." Because
many of that company's high-tech glass products go straight to other
manufacturers -- such as optical fiber used by cable makers and flat glass
used by computer companies to make monitors -- it expects some of its
customers to ask it to build up buffers on their behalf.
A recent survey commissioned by the Cap Gemini Group, the big European
software and services firm, found that 38% of U.S. companies plan to
stockpile items as part of their contingency planning for the Y2K, or year
2000 bug. That kind of thinking is being encouraged by some inside
government.
In a speech to the National Economic Association Forum in New York last
month, Federal Reserve Gov. Roger Ferguson said: "Later this year, many
firms will want to hold larger inventories of goods as insurance against
year 2000-related supply disruptions and these are likely to run off those
stocks in the first half of 2000."
Scarce Storage Space
Of course, the notion of plumping up inventories flies in the face of
everything manufacturers have sought to do in recent years. So-called
just-in-time manufacturing hinges on suppliers delivering small batches of
parts, sometimes several times a day, to factories. Many companies have even
reorganized their shop floors because they no longer needed the space once
taken up by boxes of extra parts.
"We don't know where we'd put extra materials in our plants if we got them,"
says Roger Buck, a year 2000 manager at DaimlerChrysler AG. "So our
objective is to have business continuity -- business as usual." He adds,
however, that one possibility being considered is to have suppliers that the
company thinks might experience problems hold extra inventory earmarked for
the car maker.
No one is suggesting companies will go back to the old days of keeping big
warehouses. But in the near term, Y2K inventories are even factored into the
projections of many economists. "One thing that should uphold growth for
manufacturing in 1999 is some inventory building in preparation for January
2000," says Priscilla Trumbull, senior industrial economist at WEFA Inc., an
economic-consulting firm in Eddystone, Pa.
A Y2K-inspired buildup would even have an impact on the closely watched
report on gross domestic product, the nation's official measure of economic
growth. A recent survey of 33 forecasters by the Philadelphia Federal
Reserve Bank concluded that inventory buildups and other Y2K-related
investments would probably boost GDP by 0.1% in 1999, and the subsequent
drop in investment would subtract 0.3% from growth in 2000.
Macroeconomic Impact
Neither the Federal Reserve nor the White House Council of Economic Advisers
has its own official estimate of the impact on growth. But the Fed, based on
a review of the financial reports of Fortune 500 companies, estimates those
firms will spend a total of $50 billion on Y2K fixes. The CEA, in its
Economic Report of the President released last week, said that Y2K spending
"probably helps explain why real investment in computers and peripheral
equipment in late 1998 was running more than 60% above its level a year
earlier."
Of course, inventory figures are notoriously volatile anyway, though they
have grown less so in recent years as a result of the shift to just-in-time
manufacturing. Using just-in-time principles, companies presumably notice
subtle shifts in demand well before they have built up huge stocks of excess
products. Inventory figures can also be tough to interpret. Rising levels
can mean consumers have stopped spending, but it can also mean companies are
expecting sales to rise. A Y2K buildup doesn't fit either pattern.
Some economists are skeptical of the notion that an inventory buildup will
occur. Ian Shepardson, chief U.S. economist at High Frequency Economics, an
independent economic-research firm in Valhalla, N.Y., notes that inventory
levels have already risen slightly over the past year and a half, largely as
a result of collapsing overseas business in Asia and elsewhere. That has
given many manufacturers a small buffer already. Given the costs of building
inventories, he thinks most producers will decide against it, especially as
the year advances and more large companies announce that they are fully
prepared for the rollover on the calendar.
Still, Knoll Inc., the maker of snazzy office furniture, is scouting around
its plants looking for extra warehouse space to accommodate extra inventory.
Meredith Stevens, vice president of purchasing and logistics, says it's too
early to know exactly which items her company will add to inventory or the
quantities. Knoll sent out a thick questionnaire to all its suppliers in the
third quarter of last year. Based on the responses, the company will decide
which suppliers seem prepared.
"The ones who still seem weak in June are the ones we'll build inventory
from," says Ms. Stevens.
Meanwhile, many companies insist they are confident no buildups will be
necessary and shudder at the very suggestion. "Inventories don't do anything
but suck up capital," says William Kassling, chairman and CEO of
Westinghouse Air Brake Co. Mr. Kassling says his company is working with
suppliers and customers to make sure they can keep production rolling "on a
very short lead-time basis."
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