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Compaq distributes its PC making

The company signs up distributors for a distributed-PC-making program that cuts costs, lowers inventory, and allows for easy customization.

Compaq (CPQ) has signed up distributors for its channel configuration program, a sort of distributed-PC-making scheme that cuts costs, lowers inventory, and allows for quick and easy customization.

Under the "Compaq Channel Configuration Program," Compaq will ship semibuilt Deskpro computers to distributors and large resellers such as Inacom (INAC). These partners will then install the memory, hard drives, and other components to make the computer complete, as well as install the system software upon customer order. Nearly all of the major distributors and national resellers will participate in the program.

This form of distributed computer manufacturing, which was pioneered by IBM (IBM), is designed to cut down manufacturing costs by reducing inventory. Machines don't get built until an order comes in, so vendors and resellers cut down the risk of getting saddled with an unpopular line. Also, the technique lets resellers customize computers.

Hewlett-Packard (HWP) will roll out a similar configuration program later this summer, said sources in the computer reseller community, that will be based on a channel configuration program HP already runs in Europe.

Although clearly popular, analysts and resellers see positives and negatives with channel configuration. While the manufacturer imposes strict requirements on its partners, channel configuration potentially raises the possibility of error because manufacturing is no longer controlled by one central organization. Second, even though channel configuration cuts down on inventories, it also creates the possibility of inventory time bombs. With manufacturing spread out over nine or more partners, the logistics of keeping track of customer buying trends, even with electronic communication systems, becomes more difficult.

IBM implemented a configuration plan two years ago, but the overall volumes remain under target, said channel sources and investors.

Generally, channel assembly--where the manufacturer assembles the computer entirely in the same way a mail-order company might--is favored over channel configuration. "Configuration makes sense in the short term, but ultimately we will end up with a build-to-order industry and the channel will be a part of that," said Scott Miller, senior industry analyst at Dataquest.

Compaq adopted a build-to-order program earlier this month. Lawrence Ricciardi, senior vice president of IBM, said that his company would likely implement a build-to-order plan in the future. HP's is expected.

Still, the configuration plan gives the manufacturer intangible advantages. With it, the vendor can conceivably strengthen reseller loyalty, which can translate into market share. "It locks up channel capacity. A Vanstar (VST) (a large corporate reseller) can only build so many companies' machines," said Miller. "Increasing exclusivity is going to be a big issue for the middle tier manufacturers."

Channel configuration conceivably also puts the manufacturer in a cash-rich position, said one reseller executive whose company is working on IBM's channel configuration program. Under a configuration scheme, the reseller or distributor assumes the inventory and manufacturing risk, stepping into the role of the debtor to the component manufacturers. The manufacturer essentially becomes a marketing and design center, with far less financial risk than it had before.

Although only a few channel members will participate directly in the program, computers from the configuration program will be available through all Compaq dealers.

Later in the year, Compaq will also unveil a configure-to-order program, under which Compaq and resellers will work together to let large customers obtain highly customized orders.