The Great Inventory Correction

The Great Inventory Correction

The economic downturn left tech companies with mountains of goods. Now, they're rethinking how they manage their supply chains.

Edward Teach - CFO Magazine

John Chambers likened it to a 100-year flood, although the problem was dearth, not plenitude. The swift evaporation of technology demand that began in the latter part of 2000 was indeed exceptional, as the CEO of Cisco Systems famously suggested. Chipmakers and PC companies suddenly found themselves with a glut of inventory and capacity. Networking and telecom equipment makers were particularly hard hit; Cisco, more irrationally exuberant than most, was forced to write off a staggering $2.25 billion worth of gear. Throughout the first half of 2001, a procession of high-tech companies — including such bellwether as Nortel Networks, Lucent Technologies, Corning, and JDS Uniphase — announced huge write-downs of unsalable inventory.

Today, high-tech companies are still loaded with rapidly depreciating goods. At one end of the food chain, the cyclical semiconductor industry is suffering through its deepest trough in demand since 1998, the year of the Asian crisis. In the middle, electronics contract manufacturers and their suppliers, customers, and distributors are trying to figure out who owns which surplus components. At the other end of the chain, PC makers are waging price wars, and the gray market in networking equipment is thriving.

Flood of the century or not, tech companies are taking steps to limit their exposure to the next traumatic event. Some are revising their inventory models; others are implementing supply chain software and setting up Web supplier hubs. Everyone wants tighter collaboration with suppliers and timelier information from customers. Tech companies are trying, in short, to make their supply chains shorter, transparent, and as flexible as possible.

New Logic

Check out the recent earnings releases of semiconductor makers (not the pro forma kind) and...