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8. Explain how demand for a product like televisions can be shaped? How does this compare to the ways in which demand for a product like canned soup can be shaped? 9. Other than the examples listed in Section 5.4, what are some more examples of failed Internet supply chain strategies? Successful Internet supply chain strategies? 10. Consider a large discount store. Discuss sonie products and suppliers for which the discount store should use a cross-docking strategy, some products and suppliers better suited to a direct shipment strategy, and, finally, some products and suppliers for which the discount store should utilize a direct shipment strategy. 11. Answer these questions about the case at the beginning of this chapter: a. Should MBD implement a push strategy? A pull strategy? A push-pull strategy? What would it require? What is the impact? b. What distribution strategies are appropriate for MBD's businesses? What questions should MBD management ask when assessing these strategies? c. How can MBD benefit from changes in the book distribution industry? d. What are the advantages to MBD in having fewer warehouses and a more centralized operation? More warehouses and a more decentralized operation?

The Great Inventory Correction

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 200 I, a procession of high-tech companies including such bellwethers as Norte! 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 you'll find a litany of inventory write-downs: Agere Systems, $270 million; Micron Technology, $260 million; Vitesse Semiconductor, $50.6 million; Alliance Semiconductor, $50 million; Xilinx, $32 million. Worldwide, chip sales in June were down 30.7 percent from a year ago, according to the Semiconductor Industry Association, and analysts predict a decline in 2001 revenues of more than 20 percent-the steepest ever.

Source: Edward Teach, CFO Magazine, September 1, 2001.

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"I've been in the chip industry for 20 years," says Nathan Sarkisiarc "and I've never seen anything like it" Sarkisian is senior vice president and CFO of Altera Corp., a San Jose, California-based chipmaker with 2000 revenues of $1.4 billion. 'We grew roughly 65 percent last year with less than four months' supply of inventory throughout most of the year," he recalls. "That's pretty good when you think about semiconductor product cycles." But in the fatal fourth quarter, units shipped to distributors fell 25 percent short of expectations. The slide continued into 2001, thanks to declining demand from Altera's major customers, communications companies. For Q2 2001, revenues were down 25 percent sequentially and 37 percent from Q2 2000. Altera was eventually forced to write down a whopping $115 million worth of inventory. Going forward, A!tera wants to ensure that future market dips won't savage the bottom line, and to that end it's revising its inventory model, for starters. Altera designs programmable logic devices (PLDs). It's a "fabless" chipmaker, outsourcing manufacturing to giant foundry Taiwan Semiconductor Manufacturing Corp. Previously, it would build its mainstreamPLDs through to finished goods, stockpiling them in Asian facilities in anticipation of customer demand. "We own the inventory as soon as it leaves the fab," notes Sarkisian. Also, it would essentially build new products on spec, producing quantities well beyond what the customer needed for prototyping. The virtues of this model are highlighted in Altera' s annual report "We, our distributors, and subcontract manufacturers-not our customers-hold stocks of inventory, thereby enhancing the cost advantage of PLDs for our customers." Now, Altera will continue to build its mainstream products to stock, but only in die banks (stores of chips before packaging and testing). "By building die, we have taken out the biggest portion of the manufacturing lead time, but the inventory is in its most flexible form, with a minimum of value added," says Sarkisian. Only when orders are confirmed will Altera's subcontractors package, test, and ship thePLDs. The lead time for these products will be measured in weeks. For Altera's mature products, "we will be strictly build-to-order," says Sarkisian, and the lead time for those will be measured in months. Finally, new products will no longer be built on spec; a customer order will be required.

VISIBLE IMPROVEMENTS

Chipmakers are at the mercy of the laws of physics. It takes anywhere from three to seven weeks to turn a raw silicon disk into a wafer with hundreds of chips, depending on the complexity of the chip and how much a customer is willing to pay, says Jim Kupec, president of United Microelectronics Corp. USA, a division of Taiwan-based foundry UMC. Additional time is required to separate, package, and test the chips. And in the real world, "things get spoiled in the fab," says Arnold Maltz, associate professor of supply chain management at Arizona State University College of Business. "Every now and then, somebody brings the wrong batch. Capacity isn't always available. Then you have the mismatch of supply and demand." In a 1999 study of major U.S. chipmakers, Maltz and his fellow researchers found that the average cycle time for semiconductors, from the fab to the customer, was 117 days-plenty of time for demand to change direction. To reduce its exposure, a chip company can postpone adding value to die bank inventory. It also can seek better information from its customers, as Altera is now doing. "We're asking customers to give us more visibility in their inventories and build plans," says Sarkisian. That may seem like an obvious solution, but it isn't always available, says Maltz, because "there's some concern on the customer side that you're giving away strategic information." Nevertheless, Altera recently took two big steps toward greater visibility, announcing joint ventures with Norte! and Motorola to collaborate on product development Chipmakers also can shrink cycle times around wafer fabrication using supply chain management (SCM) software. Altera's i2 Technologies system, which is linked to its fabs, suppliers, and distributors, has cut weekiy planning cycle time from 10 days to I day and reduced the long-term planning cycle time from four weeks to one week. About 85 percent of production is automatically scheduled by the system. "i2 runs our foundries," says Tom Murchie, vice president of operations. "It starts wafers by technology process, by fab, and by the strategic inventory targets
we've chosen."

UMC's customers can forecast collaboratively with the foundry via its MyUMC Web portal, using i2 augmented by an available-to-promise order system. "What [MyUMC] does is automatically take a request

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for a customer's order, then almost instantaneously find the best manufacturing slot," explains Kupec.
FREAK SHOW

Other kinds of tech companies are using SCM planning tools, from such vendors as i2, Manugistics Group, and SAP. Cisco, for instance, uses Manugistics to run its Web supplier hub. At server maker Sun Microsystems, a combination of i2 and Rapt Inc. software enables "short, predictable lead times with the lowest possible costs," says Helen Yang, vice president of supply management. But if SCM software is so great, why didn't it prevent the inventory glut? One reason is that not everyone uses it: Only about 20 percent of companl.es with more than $500 million in annual revenues have installed SCM tools, according to AMR Research. A more compelling reason, however, is that software can't eliminate the problem of garbage in, garbage out. Supply chain planning tools rely on algorithms to crunch a mix of historical data, production numbers, and "guesswork," says Kevin O'Marah, service director for supply chain strategies at AMR. "How good is your guess? You're speculating on trends going forward." This is feasible in mature industries, says O'Marah, but high tech, with its volatile swings in demand, is a very different story. In semiconductors, long cycle times mean that companies are always making a bet on an uncertain future. And at Cisco, "growth changed from 40 percent to negative 10 percent. That's a real freak show!" exclaims O'Marah. "Can you imagine a forecasting system even encompassing this scenario?" "We recognize that forecasts will not be accurate," says Yang. 'The gaflle is how fast we can respond to changes." O'Marah blames habit, in part, for the inventory overhang. Component shortages have plagued electronics manufacturing for the past decade, he points out, "and the habit of market leaders is to lock up allocations available for components. It's a reasonable way to think." "When a new technology comes along-a faster chip, a new bus-there are constraints in supply," says Karen Peterson, research director at Gartner. "A lot of the [original equipment manufacturers] or contract manufacturers will lie about what they need. If I'm an OEM, I may say I need 200 percent more than I

think I need. It's going to put my priority higher [with the supplier]." Double ordering of chips, capacitors, and resistors from manufacturers and distributors also contributed to the glut, adds Pamela Qordon, president of Tech- nology Forecasters, an Alameda, California-based consulting firm for the electronics manufacturing services (EMS) industries. Those parts were in particularly short supply in 2000, she says. As for other kinds of high-tech equipment, such as networking and telecom gear, Gordon faults manufacturers for not doing sufficient due diligence on shaky customers, dot-com or otherwise.
DON'T KNOW MUCH ABOUT HISTORY

"The telecom guys thought, 'We can do no wrong,"' says Dan Pleshko, vice president of global procurement and strategic supply-chain management at Flextronics International Corp. "They forgot to look at history, at business cycles. The PC guys had been through a couple of cycles. They had been through pain." Flextronics, one of the world's largest EMS companies, with $12 billion in revenues, had an unusually good vantage point of the inventory glut. The Singapore-based company makes everything from printed circuit boards to cell phones for a variety of high-tech clients, including Cisco, Lucent, Norte!, and Ericsson. In 2000, the company's inventories ballooned from $470 million at the begim1ing of the year to $1.7 billion at year's end. As orders poured in, Flextronics and other EMS companies conld see the magnitude of the aggregated supply they were producing. Couldn't they have warned their clients? "In general, I don't think any of [the EMS companies] did that before," says Pleshko. "I think that will happen going forward." Pleshko says Flextronics wants to obtain a better understanding with customers of consumer demand and product life cycles. Also, "we're moving very aggressively to a supplier-managed inventory enviromnent," he says. The company wants to establish material hubs, where suppliers' facilities are located close to Flextronics's factories. "Compaq, Dell, and IBM have done this already," says Pleshko. "The EMS guys are just coming up to speed." Meanwhile, there have been some disputes over the ownership of inventory in the EMS world. Some distributors have complained, for example, that they

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were being stuck with surplus parts. But that's a reversal of tbe situation in 2000, when "everyone was looking under every rock to find parts," says Pleshko. "When times were good, distributors were making a lot of money. They forgot"
THE CRYSTAL BALL

Times are bad, and tech companies are still working down inventories. They await an upturn of the business cycle, a new thing that will drive computer sales-Microsoft's Windows XP operating system, for instance, or an unforeseen killer app---and the start in 2002 of an especially robust three-year PC replacement cycle (companies stocked up because of the year 2000 problem). Meanwhile, two computer companies are better positioned than most to weather the downturn, thanks to superior supply chain management One is Dell Computer. With its build-to-order business model, Dell is the lowest-cost PC maker; it never has more than a few days' inventory on hand. The other company is IBM. True, a third of Big Blue's revenues come from annuity-like businesses such as services and software. And even with its diversified risk, IBM isn't immune to the downturn. Sales were relatively flat in the second quarter ($21.6 billion), and IBM has warned that its chip sales will fall in the second half of the year. But IBM's inventories also have remained flat Overall, they are at their lowest level since 1988, according to Steve Ward, general manager for IBM's Global Industrial Sector. That may owe something to old-fashioned vertical integration. Still,.AMR's O'Marah and others regard IBM's supply chain management as among the best in the business. Lean inventories are "absolutely critical," says Ward. "In parts of our business, the value of components drops about 1.5 percent per month."
DISCUSSION QUESTIONS

IBM does build some items to order, but mostly it builds fast, on a pull or just-in-time basis. "Our suppliers have visibility to how much inventory we have," says Ward. An SAP system provides crucial automation, but other practices also promote smaller inventories. For example, IBM bas reduced the number of different parts by emphasizing commonality across platforms and products. Thus, for example, the flat screens used . on ThinkPads and tbe flat-panel monitors sold for PCs are the same. The number of suppliers is kept small, too. Purchasing is structured by commodities, with a market expert assigned full-time to each commodity. IBM buys all of its production parts electronically, via the Internet and EDL "That means we can bave much faster transactions, moving to much faster collaboration with suppliers," says Ward. How far into the future does IBM peer? Ward says the company maintains a "very detailed" forecast for the next 90 days out, updated weekly and rolled out through all suppliers; a "fairly detailed" forecast for 90 days to a year; and a "strategic" forecast for longer periods. "I can't tell you right now what kind of hard file [disk] we're going to put in our ThinkPads two years from now;' says Ward, "but I know how many
we'll need."

The principal sources of inputs for those predictions are, of course, IBM's salespeople. They may not have quite the sobriety of their white-shirt-andblack-tie forebears, but they know their customers' businesses inside out, boasts Ward. Managers meet frequently to discuss and anticipate demand ("is this a conceptual need, or has it been confirmed by the customer?"). A rationally exuberant sales force-these days, that's about as close to a crystal ball as a high-tech company can get

1. How has Altera modified its strategy? Why? 2. Do you think Aitera's new strategy will be successful? What are some advantages and disadvantages of the new strategy? 3. How do you anticipate Altera's customers will react to this new strategy? What are advantages and disadvantages for Altera's customers? 4. What information does Flextronics have that its clients do not? Why? How can Flextronics leverage this information? 5. How does IBM manage its suppliers in order to make its pull strategy more effective?