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Component shortages could hurt Dell

Dell Computer's "be direct" business model, under which inventories are kept to a minimum, may be efficient in good times, but it can be a liability when things go awry.

Dell Computer's "be direct" business model, under which inventories are kept to a minimum, may be efficient in good times, but it can be a liability when things go awry.

That is the conclusion of financial and industry analysts evaluating the effects of rising memory prices, the Taiwan earthquake, and the delay of Intel's 820 chipset on the company.

Dell operates a more efficient operation than most PC makers, working on lean inventories, analysts said. The model saves money for Dell and gives the PC maker more flexibility to deliver the latest technology.

But when component supply is constrained, so is Dell's ability to build and ship systems quickly. Dell, like Gateway and Micron, builds PCs to order rather than shipping them to dealers for resale.

"Since Dell is so proud of its lean inventory, it's the least likely to have buffer stock," said Roger Kay, analyst with International Data Corporation.. "This is the point where Dell's strength becomes its weakness in certain circumstances, and these are one of those circumstances."

Dell spokesperson T.R. Reid dismissed the idea that recent events have hamstrung the company's ability to crank out PCs. But a Dell sales representative today acknowledged the Taiwan earthquake had affected PC availability.

"Depending on which components you choose it could take more than two weeks to build your system," he said. Under normal circumstances, it would only take five days.

BancBoston Robertson Stephens downgraded Dell to a "long-term attractive" rating from "buy" because of component supply problems related to these events.

In a report issued today, BancBoston Robertson Stephens senior electronics analyst Daniel Niles wrote, "We believe supply disruptions in DRAMS, motherboards, graphics chips, TFT displays, and processor chips are causing industrywide PC production problems.

"Just a one week disruption can cause a significant problem in the ramp towards Christmas, especially given that Dell had only six days of inventory exiting Q2," wrote Niles, who revised his 1999 earnings-per-share estimate to 74 cents from 77 cents.

Most perilous for Dell is the earthquake in Taiwan, which is squeezing the supply of chip sets used in a variety of system components, such as graphics cards.

Dell, like some other PC makers, also has been grappling with problems getting notebook displays.

A sales representative for Gateway said systems are shipping on schedule, taking about a week to arrive from when they are ordered. "We we're not seeing any affect right now," he said, "but who knows what tomorrow will bring."

BancBoston Robertson Stephens also cited a recent surge in SDRAM prices and the delay of Intel's 820 chipset as other reasons to watch Dell.

Others, however, saw fewer potential problems. "The 820 situation only affects the top-of-the line machines," concluded Peter Glaskowsky, analyst with MicroDesign Resources. Dell would not have shipped enough of these systems to significantly impact immediate revenue, he said.

"Dell buys components on long-term contracts that keep prices constant quarter after quarter, except when there's an upgrade to that component. Dell gets the upgrade but gets to pay the flat price they have been paying," said Lindy Lesperance, analyst with Technology Business Research.

Nonetheless, Glaskowsky noted that "just in time" manufacturing techniques have thinned the ice somewhat for manufacturers in these situations.

"Historically, companies have kept an inventory of parts to build products from to even out supply problems," said Glaskowsky. "As we've gone to just-in-time stock supplying, the ability to address supply fluctuations has all but disappeared."

In the short term, PC makers like Compaq Computer and IBM, which carry more inventory and largely rely on dealers, are perhaps best suited to weather the short-term component crisis.

Because these firms have more stock available and systems were priced at lower component costs, they might be able to undercut their direct PC competitors, said Lesperance.