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Large Inventory of Electronic Components: Risks and Opportunities

2017-03-08 user ico Iczoom eye 124

Too much of anything can be problematic. Inventories fall squarely in that category. Accountants see finished goods, work-in-progress, components and raw materials as assets, alongside cash and account receivables. Not many CEOs will so directly describe inventories. They prefer a much more nuanced view of inventories depending upon who owns the products at any point in the supply chain.

Large Inventory of Electronic Components: Risks and Opportunities

For observers of the industry’s history, though, inventory can be a liability. The less of it your company has the better, it seems. Compelled by the requirements of their profession, chief financial officers in the electronics industry regularly join their accounting colleagues in classifying inventories as assets on corporate balance sheets. During discussions, though, electronics CFOs know large stocks have a negative connotation. They can be grilled for having too much cash on the balance sheet but this compares little with the torrent of questions financial analysts ask about inventories.


The view of most people about inventory can be summed up this way. A large stock of inventories is good when demand is strong and matches – even outstrips – supply. Selling inventories at a premium due to outsized demand is also good. Too much inventories at a time of low demand is awful, however. They tend to depress prices, erode margins and result in cost-cutting measures that could include shuttering production facilities. In other words, saleable inventories are good. They are assets. Excess inventories are bad. They are a liability.


Let’s not quibble over who is right or wrong – accountants or industry executives. What matters more about inventories is the achievement of equilibrium in the supply chain. It’s elusive, of course, but what everyone strives for with regard to the amount of inventories a company has and the total amount in the supply chain is balance, as Brian Krzanich, CEO of Intel Corp. said during a recent conference call with financial analysts.


“We have got healthy inventory levels and we are going into the seasonally stronger selling season,” Krzanich said. “It feels like we are kind of balanced in terms of the risks and opportunities.”


That should be the end of the matter, right? Find the correct amount of inventories for your product and everyone should be happy. Unfortunately, that’s not the case. Determining how much product a company should have in any form – whether finished goods or raw materials – is an art in itself and very few companies ever seem to get it right. In fact, the history of the electronics industry indicates hardly anyone can determine the optimal level of inventories to hold. Even the biggest research companies that track the industry have regularly failed to provide accurate product forecasts.


The Semiconductor Industry Association, SIA, and the World Semiconductor Trade Statistics puts out forecasts that gets updated, that is, revised upward or downward, almost every quarter. Earlier this year, for example, the SIA predicted global chip sales in 2015 would increase 3.4 percent, to $347.3 billion, up from $335.8 billion in 2014. Later in August, the WSTS, which compiles the numbers for the SIA, revised those numbers downward after reviewing the actual sales figures for the second quarter.


The WSTS now believes 2015 sales of semiconductors will be $343 billion, up only 2.3 percent. The figures will most certainly be changed again by the end of the year. The lower numbers have forced many chipmakers to cut their own sales projections as it became clear they must tamp down on production to avoid ending the year with inventories of unsold parts.


Don’t be hard on these organizations and corporate executives. Forecasting demand in the kind of fickle economic environment the world is experiencing nowadays is extremely difficult. Low visibility into end-customer demands and continuing weakness in certain parts of the globe means companies are basing projections on weak or even erroneous information.


Inaccurate forecasts can be very costly. This means companies must try even harder to weigh demand and put in place the correct mechanisms for managing unexpected shifts in market conditions. A company that has fewer products to sell than customers want may lose not just the associated sales for a particular period but also the trust and patronage of critical customers.


Not all companies in the electronics supply chain believe they should avoid large inventories, however. Some enterprises pride themselves on having inventories at hand at any time. Their value proposition is different. Many of these will hold large inventories for a long time just to assure customers that components would be available whenever needed. Verical, for example, recently proudly announced that its inventories of electronics components jumped to about $8 billion from $5 billion within only a year.


Knowing a supplier or distributor like Verical has the parts an OEM needs at any time can be comforting for purchasing managers and design engineers. They don’t fret about being saddled with parts that may not be used and can focus on optimizing the production system.


Companies that guarantee inventories consider large stocks of inventories an asset. It is the critical value they bring to suppliers and customers. It’s also risk they take for the right sales opportunities.




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