Note: This blog posting can also be found on the Kinaxis Supply Chain Expert Community Site.

Recent developments regarding inventory and capacity in the semiconductor industry have rather interesting connotations for this and other related industries.   The significance is important for two important reasons.  First, semiconductors are the lowest tier of many high tech, consumer electronic, and lately automotive component supply chains.  Decline or growth in production or capacity is an important sign of what will ripple up the value-chain.  Second, trends occurring in the lowest tiers of supply chain have implication for what those at the far-end of supply chain, the component buyers, planners and brand owners can expect to encounter as they plan for 2010 supply chain needs.

Two important stories appeared almost simultaneously this week.  Taiwan Semiconductor Manufacturing (TSMC), one of the world’s largest chip foundry producers, is rushing to build new capacity to meet surging demand.  An article featured in The Industry Standard notes that TSMC is speeding up plans for new Fab lines as demand for chips used in electronics surges. The conclusion noted is that aggressive building plans in an environment of rising demand indicate that recovery in the global technology industry continues to strengthen.  That is certainly good news for the industry, but we need to dwell a bit on other industry-related news.

An article featured in Electronic Design News boasts that semiconductor inventories are in good shape, a key to 2010 recovery.  Analysts at iSuppli note that overall inventory levels are at very healthy levels, and proper inventory management will be a key to a 2010 growth recovery.  By iSuppli’s calculations, inventory levels at semiconductor makers declined to 66.4 days, or 15% from 74.6 days for the same period in 2008. Inventory at distributors was reported as 36.9 days at the end of Q3, down 15% from the 43.4 days in Q3-2008.  The article conclusion is that tight control of  overall inventories throughout the electronics supply chain bodes well for the industry.  Here is the most important quote for our community to focus on: “This means that any increase in demand for such end products is likely to translate directly into rising semiconductor sales, …”

As I try to connect these two developments, I see the potential for other conclusions.  TSMC’s aggressive expansion is noted as being motivated by needs for smaller and faster multiple function chips needed in computing, video and music playing devices.  New breakthrough technology translates to the need for newer innovation in products. Now couple the two developments: industry demand has precipitated the need to build additional chip capacity for both TSMC and competitor GlobalFoundries, and that overall inventory levels up the chain are at their lowest levels.  The conclusion that I come to is a different.  My sense is that increases in end-item product demand, especially new product demand, will equate to a need to ramp-up capacity and adequate inventory.  This will likely translate into more headaches for planners and product management teams as they try to take advantage of opportunities to expand top-line revenue growth opportunities.

I would sure like to hear the comments and observations from those of you in the electronics supply chain community who are on the ground, closest to the action..  But from my lens, keep those seat belts fastened and prepare for moderate turbulence.

 Bob Ferrari