1GSCM – Group 3

The Great Inventory Correction

2001

Edward Teach

Group member:Huynh Quang VuLe Huu DienLe Thi Phuong TuPham Duc HaiTran Ho Thanh Dong

2GSCM – Group 3

Outline

• Summary

• Answers to case questions

• Conclusion

• Q&A

3GSCM – Group 3

Case summary I

• the remedy = rethinking of supply chain management

at large networking, telecom equipment, PC and chipmakers

• Consequences: huge amount of write-off or write-down of inventory

+ at Cisco : 2.25 billion dollar

+ at Altera : 115 million dollar

• the problem cause

• communication gaps among partners of the supply chain

• volatile demand forecast uncertainty inventory glut = mountains of unsalable inventory

4GSCM – Group 3

Case summary II

ALTERA

• California-based chipmaker (Programmable Logic Devices)

• Supply to a giant Taiwanese company

• Chute in revenue due to declining customer demand

• Write-down 115 mio. worth of inventory

FLEXTRONICS

• One of world’s largest EMS (electronics manufacturing services)

• Makes everything : from printed circuit boards to cell phone

• Customers: Cisco, Lucent, Ericsson

• Inventory growth 2000: from 470 mio. to 1.7 bil. dollars

IBM

• Giant, diversified risk

• no exception in the dotcom crash

• Flat sales

5GSCM – Group 3

Questions on Altera I

1. How has Altera modified its strategy? Why?

BEFORE

• build-on-spec(ulation)

build finished productsstock inventory

at distributors, sub-contract manufacturers

• PUSH strategy

? to have product available for delivery upon order

6GSCM – Group 3

Questions on ALTERA II

1. How has Altera modified its strategy? Why?

AFTER THE BUST

A. postpone adding value to die bank inventory

• build-on-order

• PUSH-PULL strategy

push to die bank inventory (stores of chips before packaging & testing) pull to customer specific order

B. requiring more customer’s input regarding their inventories

to build Altera’s plans

C. applying SCM software i2 85% automatically production scheduling to shrink planning cycle time from 4 to 1 week.

7GSCM – Group 3

Questions on ALTERA III

2. Do you think Altera’s new strategy will be successful? Advantages and disadvantages of this new strategy.

• a good strategy

the exchange of information between Altera and its customers

• if Altera is able to build a trustful collaboration with partners

8GSCM – Group 3

Questions on ALTERA IV

Advantages

• reduction of inventory cost

reduction of COGS improve bottom-line

• increase of customer value:

+ optimal match product-customer’s requirement

• well-matching supply-demand

• reducing risk of huge obsolete inventory

Disadvantages

• lead time – long in case of sudden increasing demand

• customer’s readiness and ability (organisation, finance)

• how well does such strategy reflect adversity?

• dependence of the chain on such software as i2 what is plan B if this fails?

9GSCM – Group 3

Questions on ALTERA V

3. Altera’s customer reaction to this new strategy. Pros and cons for the customer.

Reluctance at first

Advantages

• close-tie collaboration

mutual benefits

• ability to get better customised products to the new trend in market

• in a well-informed lead time to better plan their own production and time-to-market

Disadvantages

• Disclosure of strategic information esp. big important customers

• Lock-in with Altera

• Limited ability (finance, organisation) and interest

10GSCM – Group 3

Question on FLEXTRONICS

4. What information does Flextronics have that its clients do not?

• good track of historical data, business cycle and product life cycles

• good record of demand via aggregated supply that Flextronics and other EMScs were producing

benefit both their suppliers (for Vender – Managed Inventory)

and their clients (for better knowledge of market demand)

11GSCM – Group 3

Question on IBM I

5. How does it manage suppliers and make its pull strategy better?

• Strategy : it builds fast on pull or just-in-time basis

• Managing of suppliers

- material hub = located close to suppliers’ facilities

- provide visibility of inventory level of IBM

- limit number of suppliers

- enabling e-business and EDI save time and better collaboration with suppliers

12GSCM – Group 3

Question on IBM II

• Make it strategy better

- forecast at different level of details

very detailed for shorter period: 90-day forecast update weekly

fairly detailed for 90-day to 1-year forecast

strategic for longer periods

- with involvement of all suppliers

to cope with the unexpected change in demand

• other practices simultaneously to work down inventories: focus on sharing parts

• crystal ball = the energetic salespeople

13GSCM – Group 3

Conclusion

• inventory correction: supply network management

• Technology in forecasting demand

- helpful but still a “guesswork” uncertainty

- need input from close interactive market monitoring

• other practices to keep lean inventory

• Question:

- pushing inventory upstream of the chain how should we understand “collaboration” in supply network?

14GSCM – Group 3

Thank you