The High Cost Of High Tech Inventory

Acer is going to have to write down $150 million in inventory in Europe according to a June 6, 2011, Wall Street Journal article: Acer Reassesses Inventory Policy. This likely comes as a result of:

• Earlier sales stuffed the channel with inventory volumes that exceeded market demand

• Short product life cycles for high tech products render today's inventory obsolete if it is not sold rapidly

• Even heavy discounting can fail to create demand for inventory no one really wants as a product has passed its prime

I see the Wall Street Journal article as highlighting an inherent weakness of the mass production business paradigm--forecasting. This paradigm requires that:

• Inventory must be built to a forecast--a forecast that is based on "market" assumptions, not actual customer demand

• Inventory must be available in the sales channel to be sold--not having an item in stock can cost a manufacturer a sale

• Inventory that doesn't sell must be deeply discounted or written off if it doesn't sell before new products or new seasons come along

So, how does a mass production company like Acer better align supply with demand? They can't. They didn't. And, now a write-down of $150 million is the outcome.

I'm reminded of the fairy tale "Goldilocks and the Three Bears:" my porridge is too hot, my porridge is too cold--ah, my porridge is just right. The mass production paradigm ensures a manufacturer will either have too much inventory, not enough inventory, or (never), just the right amount of inventory.

Is there a solution?

• A build-to-order strategy would help solve the problem as there is alignment of specific order demand with a named customer.

However, a build-to-order strategy would be disruptive to Acer's existing sales channels (retailers) who don't want Acer to go direct. Acer is trapped by the mass production paradigm.

For manufacturers who mass produce products, these types of write-downs are a cost of doing business.

For over 30 years, Dave Gardner has helped companies discover that the royal road to the ultimate customer relationship is letting customers order "a la carte." He assists clients with strategies for "The a la carte customerTM," and in dramatic improvements in efficiencies and profits. Dave, a management consultant and speaker residing in Silicon Valley, can be reached at +1 888 488-4976 or through his website at www.gardnerandassoc.com.

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1 Comments

  • Lisa Anderson

    Dave, I largely concur.  Acer is backed into a business model that leads to these types of inventory write-offs.  Certainly if there is anything true about forecasts, it's that they are guaranteed to be inaccurate.  No matter how inexpensively Acer produces its products, it ends up losing significant margin with these sorts of write-offs.  With that said, I've found that you can sometimes combine a build-to-order strategy with some elements of forecasting to devise a hybrid strategy which can work effectively.  I find that those clients who insist on black-or-white rules instead of developing a "what makes sense" plan always perform worse than the rest.  Excellent article!  ---Lisa Anderson