Know When to Hold ‘Em

Investment bank Bear Stearns is reporting that inventories among EMS players are on the upswing, reaching their highest point in four and a half years. But is there more to it than meets the eye?

Per Bear Stearns, days inventory and the inventory to sales ratio are at their highest marks since March 2002.

In an up market, rising inventories are less of a issue. It’s when business slows that they become a problem. Bear Stearns is among many industry watchers that, while not calling for a recession, do expect growth to slow in coming quarters.

However, I would argue (and have at various industry conferences) that what’s behind the inventory build is not poor management at the EMS companies but rather a rather blatant attempt by their so-called supply-chain partners to use their contractors as corporate warehouses.

If you look at the publicly traded EMS companies, the value of raw materials in stock and finished goods have been rising. Yet at the same time, WIP has been falling relative to the former two categories.

Note to EMS firms: Holding inventory on behalf of customers is worthwhile only if you are getting paid for it. And as long as we’re passing out the black marks, you OEMs need to remember that the EMS model is already broken (i.e., unprofitable) enough, and those guys — your suppliers — need to make a buck, too.

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About Mike

Mike Buetow is editor-in-chief of Circuits Assembly magazine, the leading publication for electronics manufacturing, and PCD&F, the leading publication for printed circuit design and fabrication. He is also vice president and editorial director of UP Media Group, for which he oversees all editorial and production aspects. He has more than 20 years' experience in the electronics industry, including six years at IPC, an electronics trade association, at which he was a technical projects manager and communications director. He has also held editorial positions at SMT Magazine, community newspapers and in book publishing. He is a graduate of the University of Illinois. Follow Mike on Twitter: @mikebuetow