Agilent Technologies Inc. says it has worked hard to develop a Distribution Inventory Management Process to balance stock and backlog with its channel partners.
Erratic supply and demand cycles that Agilent has experienced for nearly three years have helped the company establish a successful program, according to Frank Robertazzi, vice president of worldwide distribution at Agilent's Semiconductor Products Group in Palo Alto, Calif.
"The key is for suppliers and distributors to keep inventory and backlog levels based on consumption and not on someone's speculation," Robertazzi said.
The Agilent model, implemented in 1999, operates on a three-month rolling inventory cycle. This means the company's distributors, Arrow Electronics, Avnet, and Future Electronics, can have three months of inventory on hand but are restricted, for the most part, to not more than a three-month backlog. Orders are based on the distributors' consumption run rates during the prior two months and on book-to-bill ratios, not on speculative demand and forecasts, Robertazzi said.
"If the industry ramps up quickly and customers start feeding forecasts, we might increase orders," said Jeff Ittel, president of Avnet Inc.'s Cilicon business unit in Phoenix. "Agilent has an extra set of eyes watching the pipeline, so it doesn't get out of control."
When RF demand spiked in 2000, distributors rushed to place higher-volume orders for RFICs. But when Agilent's marketing team did its own calculations, it determined that ordering was excessive, perhaps due in part to some double-booking.
Agilent calculated that it avoided cancellations of about $85 million by not allowing distributors to continue ordering backlog after the market collapsed in 2001.
"Our distributors were able to bring inventory levels down and back in balance faster than the industry average," Robertazzi said, adding that suppliers need to monitor forecasts more closely.
While distributors' inventory management skills are generally acknowledged, historical data from the National Electronics Distributors Association (NEDA) reveals a distributor inventory buildup during 1999 and 2000. Levels peaked in January 2001, followed by a sharp drop in demand.
"Distribution started to make a correction almost immediately in January," said Robin Gray, executive vice president at NEDA, Alpharetta, Ga. "They did a good job of responding and keeping inventory below shipment levels expected in May and August 2001. Since then, everything has been brought into line, where shipments exceed inventory." OR