In Times of Euphoria, Always Keep a Keen Eye on the Horizon

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These past few days have brought some euphoric news in the high tech and consumer electronics sector, but I could not help but ponder lessons of the past.  Times of euphoria are a time to celebrate the fruits of long hours and hard work, but after the celebrations, there needs to be some reflection on the complex supply chain challenges that lie ahead.

Two specific timely stories of note are Intel and Apple.

Intel just reported its best financial year ever, recording a 24 percent increase in 2010 revenue and a whopping 167 percent increase in profits from a year earlier.  In reporting background on these results, Intel executives noted growing corporate and consumer demand for personal computers, business demand for server, and robust demand for other Intel products.  Since Intel products represent the lower echelon of high tech value-chains, a speculator year for Intel could portend another great year for the industry. CEO Paul Otellini noted that results can get even better in 2011 as the economy improves and Intel brings new products to market.

However, market analysts have been noting that sales of personal computers are being quickly overtaken by the explosion of sales in smartphones and other mobile devices, and Intel needs to be better positioned to take advantage of this new wave.  Semiconductor technology innovation cycles remain constant, and Intel has again allocated billions for new plant and equipment to support the next generation of chip technology. There are also different channels of distribution and demand fulfillment in mobile consumer devices, and Intel will continue to adjust its product demand forecasting and management processes to accommodate a more dynamic demand signals.

Speaking of this sector, yesterday, Apple continued its unprecedented momentum, reporting enviable fiscal 2011 first quarter results which involved this past holiday buying season.  Apple revenues increased 70% and profits increased 78% from year ago. The company produced $6 billion in profits while generating $9.8 billion in cash flow from operations. Volume shipments were impressive, and included an 86 percent increase in iPhone, and a 23 percent increase in Mac shipments.  However, iPod shipments declined 7 percent from a year ago.

A commentary penned by John Boudreau of the San Jose Mercury Times noted: “Apple’s current performance would be spectacular even for a startup a fraction of its size.” Another Wall Street analyst notes that other similarly sized industry players such as Hewlett Packard or IBM while also growing, are not growing at the 60 percent annual pace that Apple has right now.  Steve Jobs himself noted: “We are firing on all cylinders and we’ve got some exciting some exciting things in the pipeline for this year including iPhone 4 on Verizon, which customers can’t wait to get their hands on.”

However industry watchers have raised cautionary tones regarding the announcement of another undetermined medical leave for Steve Jobs, as well as the ongoing strategic race for market dominance between Apple’s iPhone and the Google’s Android operating systems. Nokia, and Research In Motion are each embroiled in this race for who will prevail in platform dominance. It should be no secret that Apple’s supply chain capabilities, while the envy of the industry, remains constantly being challenged with balancing explosive demand with the realities of constrained supply and constant product innovation cycles.

Members of this community may also have a different lens to what occurred behind the scenes in 2010.  In the midst of the gloom and after effects of two years of severe global recession, high unemployment and generally negative news, consumers determined that having the latest PC, smartphone or tablet computer was a priority.  That caught certain semiconductor, OEM’s and key component suppliers off guard, since capacity and inventory had been cutback and many suppliers were not prepared for the sudden upticks in demand.  Throughout 2010, supply chain teams had to manage numerous component shortage situations and longer lead times, seeking either alternative sourcing, temporary design changes or sheer willpower to insure that customer fulfillment was accomplished.

It was truly a year of ‘rapid response’ and agility.

For 2011 and beyond, the challenges continue, and more caution signs remain.  How long will current consumer demand for the latest gadgets continue when continued high unemployment levels persist?  Commodity costs are rising across the board, and certain rare earth materials have become a bargaining chip in geo-political affairs. High unemployment levels in the U.S. and looming uncertainties of more financial crisis in Europe loom as a dampening effect to consumer demand. Will supply chain teams once again succumb to the ‘bullwhip effect’ of redundant orders and inventory?  New product and innovation cycles continue on an intense, non-stop basis.  One significant glitch or miscalculation and the results can be somewhat disastrous.

Perhaps at this point, readers may be presuming- why is this Ferrari guy being such a curmudgeon? After all, look at all the great things that have happened.

My point in this commentary is to provide some wisdom.

Results and hard work should indeed be a cause for celebration and reward.  But, it is precisely in the times of euphoria that there may be the tendency for leaders to take their eye away from certain longer-term signs.  Perhaps names such as Digital Equipment, Apollo Systems, Wang Systems, RCA or others come to mind.  Each had times of euphoria and perhaps ignored the signs of caution and diligence in always keeping a keen eye out for overcoming constant value-chain challenges. After all, the people, processes and systems that are the fabric of any value-chain are the key facilitators of outstanding performance, and are often the lookout of what is to come.

Bob Ferrari

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