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Is More Inventory the ‘New Normal’?

At the end of every calendar quarter, publically traded electronics companies take stock of their inventory levels. For some companies, such as distributors, inventory is tallied a lot more frequently. But as Q2 closes and companies prepare to announce their earnings, inventory is being measured as both a line item on the balance sheet and as an overall indication of the industry's health.

Inventory buildup can be viewed as a positive or negative, depending on a number of factors, including the overall economy. Macroeconomic trends continue to send mixed signals to the tech industry — manufacturing continues to grow, but commodities are in short supply. Unemployment seems to be stabilizing, but job creation still lags in many regions of the world. According to market research firm IHS iSuppli, semiconductor inventories are beginning to build. Is this a good thing or a bad thing?

IHS iSuppli views this trend as positive — OEMs are replenishing depleted inventory because demand is expected to increase during the second half of the year. Specifically, the market research firm, in a press release, says:

    Increases in stockpiles during the first and second quarters reflect efforts by semiconductor suppliers to rebuild inventory for products that were in short supply during the capacity crunch of 2010. Suppliers also are moving to strategically build for the higher demand expected later this year. In a fortuitous stroke of good timing, semiconductor component manufacturers were able to take advantage of the reduced demand environment during the seasonally slow first quarter to build their stockpiles. Inventories throughout the electronics supply chain—including at semiconductor suppliers, distributors, contract manufacturers and original equipment manufacturers (OEM) — during the first quarter rose for all sectors except for computer makers. Computer OEM stockpiles declined more than 8 percent, likely because they shipped most of their products to retail outlets for restocking following the busy holiday season in the fourth quarter of 2010. In comparison, memory and analog companies had the highest percentage increases in their internal inventory, with growth of almost 15 percent, while fabless companies and distributors experienced more muted increases. With macroeconomic factors feeding the growth of the overall electronics industry and generally trending positive — except for the U.S. housing sector as well as increased gasoline and food prices — semiconductor inventories are likely to continue rising throughout 2011. Growth will be stimulated by market demand for popular consumer items like smartphones and tablets, as well as for perennial reliables such as PCs.

Additionally, the market research firm sees minimal impact on inventory as a result of the March earthquake in Japan. Prior to the quake, IHS iSuppli says, inventory had built up for two consecutive quarters and was higher than expected toward the end of 2010. This offset any shortages or interruption in supply.

So, for the next quarter at least, inventory build-up looks like a net positive. However, IHS iSuppli poses a question that many in the industry are asking: “Is this the 'new normal'?” Prior to the disaster in Japan, high inventory levels were considered dangerous — unused inventory is a liability if companies can't sell it or ship it within a reasonable timeframe. A lean supply chain has been considered desirable. After the quake, however, analysts have begun to question whether lean practices leave the supply chain at a disadvantage when any part of the chain is disrupted — in Japan's case, semiconductor wafer production remains a concern. So what's the answer?

I think that depends on Wall Street. If the market continues to view high levels of inventory as a liability, we'll see the supply chain continue to operate lean. If publicly-traded companies aren't penalized for holding inventory, we'll probably see warehouses begin to fill. One problem remains, however: The level of inventory in the channel is not being determined by the industry itself but by the financial community. It's going to take more than an earthquake to get that to change.

4 comments on “Is More Inventory the ‘New Normal’?

  1. Daniel
    July 4, 2011

    Barbara, you are right and the Q2 results are depending on many factors. As you said, “manufacturing continues to grow, but commodities are in short supply” this is a major factor, especially after the recent disaster and tsunami in Japan. From industrial point of view, we are eager to know how industry and supply chain sources has overcome such constrains and obviously it may reflect in Q2 results.

  2. prabhakar_deosthali
    July 4, 2011

    To have a right perspective of the inventory level of a company , it may be a good idea to compare the inventory level with the order booking for the next quarter  and the finsfhed goods stock as of the end of the last quarter  This will give an exact indication of how much inventory is going to be consumed to fulfill the already booked orders. If the net balance is negative or marginally positive then it is no doubt  a positive sign , showing good planning by the supply chain dept.

     

    The inventory report normally also carries information on non moving inventory. If this percentage is high then there is a cause to worry!

  3. Eldredge
    July 4, 2011

    In order for an industry to provide adequate volume in the face of a growing demand, it has to have excess capacity or build inventory in anticipation (ahead of) demand. Circumstances dictate which is the most cost effective approach.

  4. CBurkeBtB
    July 5, 2011

    My wife is a CPA, and she tells me that inventory is the same as cash.  The difference, I remind her, is that you can usually get rid of cash…

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