Excess inventory causing real pain, now we know the figures

3 Comments

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  By Terry Volpel on April 24, 2009 2:56 PM | Reply

  It is a fundamental truth that the Supply Curve lags behind the Demand Curve, usually by the lead time plus a safety margin. Given this it has often puzzled me that in a downturn, companies "write off" inventory in order to improve their "bottom line" reporting rather than holding onto it and using it when the sales rise again. Did this inventory have an expiry date or a "use by" date? In reality, this tactic seems to be purely an accounting exercise and if actual product got thrown away physically, then someone needs to start dumpster diving for this material as the cost is now effectively $0.

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    Richard Wilson replied to Terry Volpel on April 24, 2009 3:03 PM | Reply

    Terry, good point. I always assumed the "wiritten-off" inventory was recycled ie scrapped, it may of course find its way into the gray market. This again proves your point. It hasn't actually left the supply chain - just changed ownership.

By John P. Brown, Verical on May 9, 2009 12:26 AM | Reply

Terry makes an important point. Wall Street analysts track inventory figures as a gauge of how healthy manufacturers are so every company in the supply chain wants to have as little inventory as possible when they close their monthly or quarterly books.

This inventory is written off to mere pennies on the dollar and then sold in bulk into the gray market to brokers who trade it amongst themselves until they finally resell it market price to buyers who have shortages.

The inventory is perfectly good (the components have shelf-lives of decades sometimes) but it has no accounting value once written down to near zero.

To use Terry's phrase, the brokers are the ones "dumpster diving" but there is real (counterfeit) garbage in the dumpster along with the perfectly good inventory so it is always a bit of a gamble to purchase from the gray market. Brokers are nervous buying from other brokers too for this reason.

The real shame is that TI and other companies lose hundreds of millions of dollars just because for a whole host of reasons they lack the means to market those perfectly good parts to end buyers.