The Great Inventory Correction

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

manage their supply chains.

SRI KIRAN KOSURI Ritwik Anand09BS0002413 09BS0001922

Background Chipmakers and PC companies suddenly found themselves

with a glut of inventory and capacity. Networking and telecom equipment makers were particularly hard hit by piling up of inventory.

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.

A sharp decline {2000-2001}

Altera was eventually forced to write-down a whopping $115 million worth of inventory.

Agere Systems, $270 million; Micron Technology, $260 million;

Vitesse Semiconductor,$50.6 million; Alliance Semiconductor, $50 million; Xilinx, $32 million. But in the fatal fourth quarter, units shipped to distributors fell

25 percent short of expectations. The slide continued into 2001, a major declining demand from

Altera's major customers, communications companies. Q2 2001, 25% percent sequentially

Overview of Altera Altera designs programmable logic devices (PLDs). It's a

"fabless" chipmaker, outsourcing manufacturing to giant foundry Taiwan Semiconductor Manufacturing Corp.

It would build its mainstream PLDs through to finished goods, stockpiling them in Asian facilities in anticipation of customer demand.

It would essentially build new products on spec, producing quantities well beyond what the customer needed for prototyping.

Support statement of Holding stocks of inventory is that to “Enhance the cost advantage of PLDs for our customers."

New logic { Lead Time=months to weeks }

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, but the inventory is in its most flexible form, with a minimum of value added. Only when orders are confirmed will Altera's subcontractors package, test, and ship the PLDs.

The lead time for these products will be measured in weeks. 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.

Collaboration of technology

To reduce its exposure, a chip company can postpone adding value to die bank inventory. It can also seek better information from its customers.

Altera's---- i2 Technologies system http://www.i2.com/ i2 Technologies is a supply chain management software and

services company, founded in 1988 , UMC's customers can forecast collaboratively with the foundry

via its myumc web portal. http://www.umc.com/English/ Only about 20 percent of companies with more than $500 million

in annual revenues have installed SCM tools, Acc to AMR Research.

1. How has Altera modified its strategy? Why?

Ans) Altera modified its new strategy to build-to-order. This strategy has increased lead time for its customer. The main reason for this strategy was to protect the company’s agisnt unexpected market condition. Technological industry is always evolving and fast too. Therefore, Altera has decided to only practice build-to-order approach to avoid past mistake which cost them $115 millions.

2. Do you think Altera’s new strategy will be successful? What are some advantages and disadvantages of the new strategy?

Advantage s: Less risk and more profit. Disadvantage is that Altera’s customer will have to take on

long lead time. In addition, customer will have to fully commit in order to purchase. I think this strategy will be successful.

Dell for example, has taken direct model approach along with make to order concept that are the highlight of its success. Perhaps Dell did not have the most sophisticated process in place, however, over time it made changes and created most efficient Dell that we see. From that perspective, Altera’s new approach in handling its manufacturing and inventory process might be an excellent decision.

3. How do you anticipate Altera’s customers will react to this new strategy? What are advantages and disadvantages for Altera’s customers?

Ans )Altera’s customer will have fit at the beginning due to long lead time. However, eventually they will adapt. The advantage of this strategy will bring both customer and Altera together. The new strategy will allow both to collaborate at high level creating efficient process and in return both the customer and Altera will be better off.

4. What information does Flextronics have that its clients do not? Why? How can Flextronics leverage this information?

Ans) Since Flextronics manufactures equipments for many clients that it has opportunity to see the aggregated demand and supply that they are producing. This information in regards to demand and supply can benefit both its suppliers for VMI inventory and clients for its requirements. Flextronics is very good at manufacturing equipments. They got to where they are by using the information that benefits everyone including its clients, supplier and partner.

5. How does IBM manage its suppliers in order to make its pull strategy more effective?

Ans) IBM manages its suppliers in order to make its pull strategy more effective by producing forecast that goes out 90 days out. This forecast is updated on weekly basis and made available to all its suppliers which allow them to make appropriate adjustment to meet the demand. One of the goals of IBM is to predict accurate forecast. A lot of time, effort and money are spent trying to predict most accurate forecast as it has huge impact on bottom line. Inaccurate forecast can cause material shortage, lost of sales, inventory cost, and poor profit. It is therefore, important for IBM to do its best to predict most accurate forecast. There is no such thing as 100% correct forecast.