Weak Links in Supply Chain Cause Disruptions for IT Industry
Amanda is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Intel’s (NASDAQ: INTC) announcement that it was lowering its 2011 Q4 guidance had less to do with demand and much more to do with supply—and put the issue of supply chain disruptions front and center.
Flooding in Thailand, where nearly 40% of the global market’s hard drives are produced, created a shortage of those critical devices that is expected to last at least through Q2 of this year. Naturally, Intel is not the only IT company affected by this crisis. Hewlett Packard (NYSE: HPQ) and EMC Corp. (NYSE: EMC) notified their customers of shortages and price hikes on key components, while Western Digital (NASDAQ: WDC) and Seagate (NASDAQ: STX), producers of data storage units, are also feeling the pinch. One notable exception is Apple (NASDAQ: AAPL), whose dependence on hard drives has been lessened by its segue into flash memory.
It is interesting to note that, as companies have “gone global,” they still seem to retain the problem of localized disturbances—be they labor issues, political unrest or natural disasters—causing serious disruptions in their business pipeline. Why, with the whole wide world at their disposal, are these global entities still finding themselves battling the same problems? Perhaps the mentality that drives them to seek the absolute lowest costs in an effort to bump up profits is to blame, causing them to attach themselves to only one supplier. If protecting profits and making investors happy is truly their game plan, however, losses incurred due to recent natural disasters such as the flooding in Thailand and the earthquake in Japan should be a massive wake-up call.
The IT industry is quite aware of its supply chain problems, though no one has publicly come up with a plan to mitigate such issues in the future. Surely, finding alternate vendors (even if this costs a little bit more) in different geographical locations would be an excellent first step and probably one that the industry is seriously considering. Taking a page out of Apple’s book, some companies are looking into moving to solid state components and concentrating more on the ultrabook category of laptops. But PCs are still in demand and hard drives are less pricey than the alternative. Also, the fact remains that even with a move to flash, the supply chain model would still need to be changed.
Though not optimal, the current situation is only temporary and would rectify itself in time, even without addressing the supply line issue. Investors should note how well these businesses learn from this recent upheaval, however, since it is only a matter of time until the next big disruption causes a repeat of this type of crisis. They should also keep an eye on companies like Micron Technology (NASDAQ: MU), who recently saw a huge uptick in orders for its solid state components, and SanDisk Corp. (NASDAQ: SNDK) -- two companies for whom 2012 may be a breakout year.
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