Notebooks: The scramble for stock

Notebooks: The scramble for stock

There has been a lot of hoo-ha in recent months about the haphazard release of new notebook models to market. Toshiba has come under fire for giving Harvey Norman first dibs on a "consumer version" of new models four to six weeks before other independent retailers (ARN, June 19, p28). Meanwhile, all the majors have sustained criticism for shortages of P4 models; resellers on the whole report having a devil of a time just trying to source product.

"You can't find any of the models you want anywhere in Sydney," says Asher Solomon, senior account manager at Sydney-based IT services firm The Missing Link. More often than not, he says, high-demand brands like Toshiba are on back order. Distributors, it seems, face similar problems. "Dicker Data and Tech Pacific are not even getting the full quota of notebooks that they submit orders for in advance," says Solomon.

In a competitive industry where dealers are anxious to close sales immediately, this situation is both disappointing and frustrating. Solomon says he constantly has to warn clients that ETAs for new models are unstable and prone to being pushed back. "Take Toshiba's P4 range of Satellite 6100s, for example. The initial ETA was at the end of May, they revised it to June 15, and now the current release date is June 27."

Pressure in the supply chain

In a recent article on business models (AFR Boss magazine), Joan Magretta pointed out that a by-product of Dell selling direct was that it learnt how to manage inventory better than its channel-oriented competitors. Because the rate of innovation in the industry is so fast, particularly with regard to notebooks, everyone from component manufacturers to retailers live in constant fear of being left with obsolete stock. Notebooks operate on four-month refresh cycles, according to Laurie White, product marketing manager for Toshiba Australia. He says that any vendor who tells you otherwise is selling old stock. "Intel updates their processors every four months; in March the entry-level P4 was selling with a 1.4GHz processor, now we're in June it's 1.6 and by October we'll be at 1.7."

Mike Yell, general manager of Fujitsu Australia's technology group, one of the largest manufacturers of notebook hard-drives worldwide, says the renew cycle is even tighter, at three months. "Two months to make money and one month to clear stock." For every month that product sits in a warehouse, Yell estimates that it is costing 2 per cent of its value. "I tell people I'm in the fresh fruit business - the longer product sits in my warehouse, the more off it gets," he says. Similarly, Wilson Ho of Hitachi Australia, Yell's competitor in the hard drive business, says if stock is not moving after two weeks he has to start looking at alternatives to get it turning over.

Being caught with old stock is an expensive mistake that tends to linger on the balance sheet. "If we get stuck with old stock we can't just reduce the price," says White. "If we give away $200 of our profit margin to get rid of machines with outdated processors we have to raise the list price of the next release to recoup that loss. What happens then is you get skew-whiff pricing strategies that jump around all over the place."

In an effort to avoid this, vendors will delay the release of new models, like P4, while they clear out old stock. There is usually some telling overlap. For example, Dell is advertising 1.6GHz and 1.4GHz P4s on its Web site for the same price, suggesting that it has surplus of the latter and is trying to avoid absorbing the expense. In this respect, smaller assemblers (white-box manufacturers) are more agile and will often have higher-spec machines out to market before the big brands. Hitachi's Ho estimates that there are 50 per cent more notebook assemblers in the Australian scene than were present 12 months ago, most of them are supplying government and corporate markets with a few focusing on the retail space. Yell confirms this trend, saying that he is currently turning over 12,000 notebook hard drives a month, as opposed to around 5,000 18 months ago. These drives are consumed almost exclusively by local white-box assemblers. "When Fujitsu quit the desktop 3.5-inch hard drive business last year, we met with resellers to explain our strategy and it became quite clear that a lot of these guys didn't have a mobile strategy in place. Now they do," says Yell.

Meanwhile, the worst repercussion of overstocking is when vendors start thrusting end-of-line products upon partners, or "channel stuffing" as it is often called. Some vendors are particularly prone to this behaviour - ARN has been tipped off to several instances of IBM lumping partners with desktops and point-of-sale systems.

As a result of this supply chain angst, notebook manufacturers are holding limited stock onshore, opting for a supply-on-demand model with as tight lead times as possible. White says Toshiba has a passenger plane flying out of Japan every Friday carrying mobile PCs and components. It uses passenger jets rather than cargo carriers so that stock will have cleared customs and be ready for delivery on Monday morning.

Achieving the right balance has become so critical that suppliers are dividing sales managers bonuses between hitting forecasts and keeping a tight rein on inventory levels. "Half of my incentive is paid on my inventory count at the end of every month and the other half is paid on meeting sales targets," says White. It has also created a new market for inventory management consultants, such as Daisytek's recently unveiled Advantage-Tek model, which is rumoured to be in operation at one of the major PC brands.

IBM, on the other hand, has attempted to reduce the risk for resellers through a "workhorse" range, which is made available for a minimum of 12 months. "Dealers know they don't have to shift [the units] all within one month," says IBM's mobile computing brand manager, David Nicol. For clients who consider constancy a priority, this strategy may suffice; however, Nicol admits that even this product line will be updated through the course of the year. If a particular brand turns out to be very successful and sells out quickly, there is no real remedy for that. In the PC market, supply on demand has always been important, says Nicol. "With models and optical devices, IBM caters for what the vast majority will want. If a customer wants something specific, then they may have to wait."

How to avoid being left stock-less

The supply-on-demand system is fraught with pitfalls. Like his IBM counterparts, White assures that Toshiba has a strict first-in-first-served policy on orders - both in terms of Australia getting its quota from Japan (or from China in IBM's case) and also in distribution throughout the local channel. In reality, however, Yell says the components sector is constantly experiencing ebbs and flows; Fujitsu has just recovered from a shortage in disk platters, before that there was a widespread shortage of heads, and currently TFT screen production has almost ground to a halt because the boom in flat-screen TVs has created a shortage in glass - again. In situations like this, Yell says large OEMs get first dibs on stock, after all it only makes sense that a supplier give priority to its global accounts. However, the distribution levels end up feeling the pinch, and through them the resellers.

"The suppliers find Australia hard to deal with because it consumes small quantities and has too many small customers," says Ho. "Australia operates on an ad hoc basis, monthly forecasts are almost impossible, and each business has to drive the estimation themselves."

Yell adds that in many cases resellers' own lack of foresight ends up being their worst enemy. "The majority of [resellers] in Australia think they do great forecasting but they don't," he says flatly. "They're the first ones to scream when you aren't holding the products they want, like you should have a truckload of every component under the sun sitting there just on the off chance that they call and ask for half a dozen.

"Most resellers have a very limited view of where their business is coming from. The good ones have rolling forecasts, they give suppliers information well in advance and have a clear idea of where they're going. The guy who can tell you what his stock turnover is and who his debtors are has got a pretty good handle on it."

Similarly, White warns that an abundance of layers within a company can be a detriment to speed and response times because it keeps the decision-makers too far away from the action. The Missing Link's Solomon says manufacturers that maintain open lines of communications can ease the pressure on resellers, and their ability to do this becomes a deciding factor when dealers are looking to align themselves with particular brands. "Through the Compaq Partner Network, I can track how many units are in the distribution channel and where they are. Ingram, say, has 10 machines left and Dicker Data has two left. The assembly facility is another great tool; it's an Excel Macro spreadsheet where you select what configuration you want and it comes up with every part number and description of the part, which you can then correlate to the reseller price list. I've shown this feature to distributors that come around trying to sell me other brands like IBM. I tell them not to bother unless they can match this functionality.

"Compaq's partner support is a lot more sophisticated [than others], it makes life a lot easier for us, and it's definitely why I choose to align myself with them."

Mobile market shows potential

While resellers say sales are restricted to specific verticals, all facets of the notebook market are recording strong growth as mobile computing gets a foothold. Early releases of new innovations demonstrate a move away from the traditional clam-shell design. Toshiba will release its tablets, or slates, locally in November and its rollable notebooks, prototypes of which were being bandied around last year, are expected within the next 18 to 36 months. Fujitsu claims to be in negotiations with car manufacturers about putting hard drives in new addition cars for GPRS guiding and Intel is exploring similar opportunities. If these plans go ahead, there is a good chance that both hard drives and memory will revert from commodity items and recover some of their lost margins. It's all good for the channel, so long as it is ready to capitalise.

Reasons for uptake

l High-end notebooks have become "desktop replacements", and users no longer have to compromise on memory and hard drive capacity or processor speed.

l Notebooks reap higher margins for the PC channel.

l Vendors are releasing a wider range of entry-level laptops that are priced below $3,000, a palatable expense for small businesses and home users.

l Deployments of wireless LAN infrastructure are reinforcing the benefit of mobile computing. Part of this is renewed interest in productivity gains; employers can gain an extra 10-15 hours of work out of every employee, making the additional expense worthwhile.

l Notebooks are tax-deductible items and are becoming more common in salary packages.

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