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PC makers take a risk
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July 10, 1997: 3:59 p.m. ET
'Build-to-order' manufacturing may backfire for them, analysts warn
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NEW YORK (CNNfn) - The so-called "build-to-order" approach to personal computer manufacturing -- designed to lower total costs to consumers without sacrificing profits -- stands a chance of backfiring, analysts and consultants warned.
The new process of building computers to the specification of a customer's order, which was formally adopted Thursday by Compaq Computer Corp., brings the so-called "just-in-time" process from supplier through the original equipment manufacturer (OEM) out to the reseller and finally to end-user. (326K WAV) (326K AIFF)
Analysts generally agree this approach allows an OEM like Compaq or Dell to shift the risk of inventories away from themselves and onto their suppliers -- companies such as Western Digital, which makes disk drive subsystems for the major PC vendors.
"What Compaq is doing is sort of forcing the suppliers to have warehousing right by Compaq factories to be able to deliver just-in-time," said Gene Glazer, technology analyst at Fortis Advisors.
Indeed, many PC companies, such as Compaq and Hewlett-Packard Co. (which is expected to unveil similar re-engineering strategies to improve profitability)are joining this trend.
"What's been happening is they've been changing the whole manufacturing process. Suppliers are now required to be on the premises or pretty damned close to it," said Walter Winnitzki, computer analyst at PaineWebber.
The moves are a response to the success of direct-marketer Dell Computer Corp.
"Dell has disciplined its suppliers intensely. One of the keys that Dell has going on is they require the suppliers to maintain title of the part until Dell wants them," said Roger Kay, senior analyst at International Data Corp.
Yet, analysts warn that vendors such as Compaq and H-P need to maintain good relationships with suppliers. This is because, as suppliers take on additional costs, they also have more pricing power.
"The cost doesn't just disappear. It shifts to the supplier. It's somewhat efficient and it certainly makes Dell look efficient. But the supplier could pass along the cost to the OEM," Kay said.
And, if suppliers choose to pass along additional costs of inventory to the OEMs in the form of higher component prices, then PC vendors again face the concern of smaller profit margins, Kay said.
On paper, though, the "build-to-order" approach is still designed to create efficiencies. And, because of the importance placed on the manufacturer-supplier and manufacturer-reseller relationships, suppliers would be wise to absorb the shared risks.
"Western Digital is going to have to be able to plan and execute their relations with Compaq better than ever," said Steven Gold, partner-in-charge of KPMG National Logistics Practice.
"Suppliers can bump prices if they want to, but I think that would be a wrong move," Gold said.
Gold and other industry analysts predict, even though the fallout will shift inventories from manufacturers over to suppliers, overall backlog levels will drop.
"Is there extra risk? It depends on the vendors' ability as they ship to Compaq (or other OEMs). Theoretically, I take inventory out of the overall process."
"They (the supplier) are getting a better order. To the degree that you don't have an inventory build-up...everybody benefits," Fortis's Glazer said.
Still, with PC vendors passing any cost savings on to consumers in the form of lower product prices, profitability will suffer and international companies with overseas manufacturing and distribution facilities, such as Acer Inc. of Taiwan, are most at risk.
"The second- and third-tier vendors will be squeezed badly...The OEMs will take a margins-hit sooner or later. By the time the dusk settles on this, they will face lower margins," IDC's Kay said.
-- Robert Liu
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