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Supply Chain Turmoil Looms

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.

10 comments on “Supply Chain Turmoil Looms

  1. DataCrunch
    October 6, 2011

    Hi Bruce, it will be interesting to see the sales results from retailers this upcoming Holiday season.

  2. stochastic excursion
    October 6, 2011

    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.

  3. Anand
    October 7, 2011

    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?

  4. Anand
    October 7, 2011

    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.

  5. DataCrunch
    October 7, 2011

    @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.

  6. Daniel
    October 7, 2011

    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.

  7. Bruce Rayner
    October 7, 2011

    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. 

  8. Bruce Rayner
    October 7, 2011

    @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.

  9. Jay_Bond
    October 7, 2011

    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.

  10. Bruce Rayner
    October 7, 2011

    @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.

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