LONDON – IC Inventories that were building to a two-year high during the first quarter of 2011 spared the electronics industry from the worst effects of component shortages caused by the aftermath of the Japan earthquake in the second quarter, according to market research company IHS-iSuppli.
However, there may be supply problems ahead as companies now need components not only for current production but also to build inventories for the traditional strong manufacturing third quarter. Meanwhile some product lines are being disrupted for the lack of single component causing demand for complete bill-of-materials listings to be pushed back. This is the case in the automotive industry where a number of plants around the world are on short-time working due to component shortages.
And at the same time that both demand and supply are disrupted, companies are trying to re-assess their supply-chain policies to gauge whether it is necessary to accommodate more inventory held against unforeseen events, such as the Japan earthquake.
Days of inventory (DOI) among chip suppliers – excluding memory companies – stood at an estimated 80.3 days at the end of the first quarter in 2011, up 1.1 percent from 79.4 days in the fourth quarter of 2010 and an increase of 9.1 days from the same period in 2010, according to IHS-iSuppli.
This represented a two year high, with inventories reaching a level not seen since the first quarter of 2009, when the DOI was 82.4.
"Efforts by suppliers to build inventory during the seasonally slow period from the fourth quarter of 2010 through the first quarter of 2011 proved to be fortuitous," said Sharon Stiefel, analyst for semiconductor market intelligence at IHS. "These efforts resulted in a two- to four-week cushion of raw materials, work-in-process goods and finished products, which came in handy when chip supplies were disrupted by the Japan disaster. While a large inventory overhang can be a negative development for the semiconductor industry – fueling excess supply, dampening pricing and reducing profits – it turned out to be a positive factor during the first quarter as the industry contended with supply shortages."
The value of the good in inventory in the first quarter of 2011 stood at $27.2 billion, according to IHS-iSuppli.
The second quarter also experienced a more muted effect from the Japan disaster than previously thought. Many semiconductor manufacturing facilities initially damaged or affected by lack of steady electricity supply have returned to normal operations. In cases where damage was severe, manufacturing has been transferred to other company facilities or to outside foundries.
"Once internal inventories dwindle, the pipeline may not be replenished quickly enough to meet all of the end demand, creating risks for participants in the supply chain," Stiefel warned.
Companies may find that customers are second-sourcing components due to the disaster – and potentially may lose a socket to a competitor in the ensuing fallout.
What caused IC inventories to build up to such high levels in an era of just in time (JIT) inventory operations? Obviously the earthquake was not expected. There must be a story behind this trend since companies are being extremely tight with their wallets and cash flows these days.