IHS just released a troubling report about the high level of semiconductor inventory piling up in the electronics supply chain. According to the report, days of inventory (DOI) held by chip companies at the end of the second quarter was an unusually high 83.4 days.
That's above the level seen right before the economic meltdown in 2008 and 11 percent higher than the historic average for the second quarter. IHS estimates DOI for inventory held by semiconductor companies in the third quarter will moderate to 81.3 days and is predicting a measured reduction in inventory over the next three to four quarters.
Not only is there excess inventory at semiconductor companies, but there's excess inventory in the channel and at EMS providers, according to Sharon Stiefel, semiconductor analyst at IHS. "The industry's at a pivot point -- it needs to respond quickly," she said.
The inventory overhang is just one more indicator of a growing global economic malaise. Indeed, 2011 GDP projections for the US, Europe, and the world are being revised downward, as is capacity utilization and run rates at chip and finished goods manufacturers. All because uncertainty continues to mount over the direction the US and European economies are heading. Is the European debt crisis leading us toward another economic meltdown? And if so, is the electronics supply chain nimble and resilient enough to respond in an orderly fashion? (See: Will Global Economic Problems Hurt Electronics?.)
There are two opposing views on how well the supply chain will respond to another economic shock. At the one end of the spectrum, you have the technologists who point to improvements in the software tools used to manage production and inventory and the advances in electronic connectivity between members of the extended supply chain. The faster information flows, the quicker the supply chain will adjust.
At the other extreme, proponents play down technology and focus instead on the actions of the humans who manage the supply chain. They focus on the integrity and accuracy of forecasts, which have not improved very much since the dawn of the modern electronics era some 60 years ago. They also argue that humans don't always put the greater good of the collective supply chain ahead of their own self interests. Meaning they focus on minimizing their own risk of carrying inventory in times of extreme market volatility, like now. It's human nature.
The reality is that the trajectory of today's inventory overhang will probably be somewhere in between. Yes, technology and interconnectedness have improved. Yes, the supply chain is more sophisticated, and players are better behaved than they were in 2001 and 2008. But forecasts are still notoriously bad.
re:stock levels be unusually high because some companies over estimated their need for these components, and other companies fearful of the global economic turmoil decide to scale production back to not be saddled with extra inventory? Bruce Rayner10/7/2011 11:08:39 AM
@Jay_Bond When public companies hold their guidance calls with analysts, they often talk about forecasts, run rates, capacity utilization and inventory levels. Analysts take these comments into account in how they value the stock. So yes, it is typically reflected in the stock prices.
Could the stock levels be unusually high because some companies over estimated their need for these components, and other companies fearful of the global economic turmoil decide to scale production back to not be saddled with extra inventory?
It should be interesting to see how the fourth quarter sales turn out with holidays around the corner and another economic slowdown.
@StochasticExcursion (love the photo!) When it comes to significant contractions, like one caused by, say, a banking meltdown in Europe, no one can ever be prepared. The best defense against such a crisis is to make sure your holding as little inventory as possible. Minimize your risk.
You're right Dave. A single data point out of context is not very useful. That's where the "human" element comes in. Interpretation of the data, adding a probability factor, and then incorporating it into all the other data points you use to make a forecast is the hard part. When financial and commodity markets are swinging wildly day to day, it's an indicator that no one really knows where we're heading. OEMs and their supply chain partners just need to to stay as lean as possible.
As per the current market and economic statics, there may be a chance for one more economic slowdown. So I don’t think the supply chain can really rely on projected rolls.
@anandvy - It may help to put a reality check on the situation.It reminds of the ongoing news reports on oil.One day they are reporting shortages and the other surpluses.
it will be interesting to see the sales results from retailers this upcoming Holiday season.
@Dave do you think sales results from retailers will be of any help to forecast ? We have seen so many different datas released by US which are self contradictory. Its hard to take a call based on any single data point.
They focus on the integrity and accuracy of forecasts, which have not improved very much since the dawn of the modern electronics era some 60 years ago.
@Bruce thanks for the post. What is the main reasons for such less accurate forecasts ? Is it the market is behaving so badly that none of the forecasting model works or is it that we have failed to build system which can forecast accurately?
Leads to the question of how prepared supply chains are for a significant contraction in the electronics market and reduction in capacity. Might be expected that improved technology will keep the links together and good managers will keep any one link from dissolution.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
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Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Euro-Crisis: What It Means for High-Tech Firms Join EBN Editor in Chief Bolaji Ojo and Contributing Editor Jennifer Baljko on Thursday, July 12, at 10:00 a.m. EDT for a Live Chat on high-tech and Europe's economic difficulties.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.
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