As companies continue to report their Q2 fiscal results, a picture is emerging regarding how high tech, consumer electronics and automotive supply chains responded to the crisis caused by the Japan earthquake and tsunami that occurred in March. The headline now reads excess inventory, but the implications may not be all that bad.
An article appearing in today’s Financial Times (paid subscription or metered free view required) concludes that fears of supply chain shortages, occurring as an immediate response to the quake, are turning into worries about excess inventory. Companies exercised precautionary stockpiling of key components to buffer for a potential longer term disruption in supply. A quicker than expected comeback from Japan’s high tech manufacturers coupled with declining consumer demand in Europe and U.S. markets has inventories remaining extraordinarily high. The FT quotes the head of Taiwan research at HSBC noting: “Nothing is tight right now. Those components where there was a risk of shortage are now having the biggest problems (in terms of over supply).” In the article, FT goes on to note that because potential shortages were addressed so quickly, it was a testament to the flexibility and diversity of supply chains. Unfortunately, the move coincided with ongoing weaker demand in the two biggest PC markets, Europe and Japan.
Nanya, Taiwan’s largest DRAM manufacturer by sales, has indicated that its inventory levels are now double the normal two to three weeks of stock. The Wall Street Journal noted that Freescale Semiconductor, which derives more than one-third of its revenues from the auto sector, confirms weakness in the automotive and industrial sectors while confirming a buildup of inventory at certain customers and distributors. Similarly, Microchip Technology has indicated a similar trend.
So what’s the deal?
Wall Street and the financial markets praise the fact that many supply chains have performed extraordinarily in the midst of the Japan earthquake crisis. Manufacturers took decisive action to buffer critical component inventories, while quickly locating and qualifying alternative components. Now, the financial community seems concerned about high inventories. Go figure !
Supply Chain Matters has its view regarding this dilemma, and readers are welcome to share their viewpoints as well.
Is it not better to be dinged for excess inventory than not being able to support the company’s revenue plan in the midst of a crisis?
It is better to have select excess component inventory for sales teams to take advantage of an industry competitor’s lack of inventory, and perhaps leverage new business? After all, the incremental cost of carrying additional inventory pales to the cost of losing significant business from a key customer because teams failed to hedge for a shortage. Many high tech and other manufacturers also continue to sit on boatloads of cash, so what’s the big deal?
Today’s more responsive supply chains have proven time again their ability to quickly deal with occurrences of excess inventory. The crisis of the Japan earthquake has tested the ability for various industry supply chains to deal with potential financial catastrophe. Responsive S&OP based planning and what-if scenario analysis have proved to be valuable. Supply chain planning teams will also respond to temporary excess inventory bubbles.
Wall Street- which problem would you like to complain about?