IHS just released a troubling report about the high level of semiconductor inventory piling up in the electronics supply chain. According to the report, days of inventory (DOI) held by chip companies at the end of the second quarter was an unusually high 83.4 days.
That's above the level seen right before the economic meltdown in 2008 and 11 percent higher than the historic average for the second quarter. IHS estimates DOI for inventory held by semiconductor companies in the third quarter will moderate to 81.3 days and is predicting a measured reduction in inventory over the next three to four quarters.
Not only is there excess inventory at semiconductor companies, but there's excess inventory in the channel and at EMS providers, according to Sharon Stiefel, semiconductor analyst at IHS. "The industry's at a pivot point -- it needs to respond quickly," she said.
The inventory overhang is just one more indicator of a growing global economic malaise. Indeed, 2011 GDP projections for the US, Europe, and the world are being revised downward, as is capacity utilization and run rates at chip and finished goods manufacturers. All because uncertainty continues to mount over the direction the US and European economies are heading. Is the European debt crisis leading us toward another economic meltdown? And if so, is the electronics supply chain nimble and resilient enough to respond in an orderly fashion? (See: Will Global Economic Problems Hurt Electronics?.)
There are two opposing views on how well the supply chain will respond to another economic shock. At the one end of the spectrum, you have the technologists who point to improvements in the software tools used to manage production and inventory and the advances in electronic connectivity between members of the extended supply chain. The faster information flows, the quicker the supply chain will adjust.
At the other extreme, proponents play down technology and focus instead on the actions of the humans who manage the supply chain. They focus on the integrity and accuracy of forecasts, which have not improved very much since the dawn of the modern electronics era some 60 years ago. They also argue that humans don't always put the greater good of the collective supply chain ahead of their own self interests. Meaning they focus on minimizing their own risk of carrying inventory in times of extreme market volatility, like now. It's human nature.
The reality is that the trajectory of today's inventory overhang will probably be somewhere in between. Yes, technology and interconnectedness have improved. Yes, the supply chain is more sophisticated, and players are better behaved than they were in 2001 and 2008. But forecasts are still notoriously bad.