Just in Time for Another Y2K Threat

Dell, Sun and others are guarding against just-in-time suppliers who neglect the looming Y2K problem.
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At this year's World Economic Forum in Davos, Switzerland, Wall Street economist Edward Yardeni wanted to send a message. Invited to join a panel of experts to discuss the year 2000 computer problem, Yardeni and his fellow panelists agreed to write a memo urging more leadership on the millennium bug.

But Yardeni's call to arms was upstaged moments later by a zinger from

Sun Microsystems

(SUNW) - Get Report

CEO and forum attendee Scott McNealy. Responding to Yardeni's comments, McNealy warned that Asian suppliers of computer components were behind schedule in preparing for the Y2K problem. His nostrum: Stockpile computers for the millennium.

"I nearly fell off my chair," wrote Yardeni in the Feb. 8 issue of his electronic dispatch, the

Y2K Reporter

. "This was the first time that the CEO of a major corporation warned that Y2K could be so disruptive. "

More than McNealy's off-the-cuff remarks, Yardeni was startled because the Sun king's exhortation confirmed his own top Y2K concern: that the bug will discombobulate the pervasive and technology-intensive just-in-time manufacturing system, thus triggering a worldwide recession.

Just-in-time manufacturing uses computers to better manage inventories by trying to align supply-and-demand patterns. Nearly three-fourths of U.S. manufacturers rely on just-in-time manufacturing to minimize their inventory cycles, according to a study by the

National Association of Manufacturers

, whose 14,000 members produce 85% of U.S. manufactured goods.

Most companies are confident that they can keep their own house in order. But what keeps executives downing Maalox is the worry that they can't whip their suppliers into shape. The NAM survey of 4,000 companies to be released Tuesday shows reason to be concerned.

First, the good news: 64% of small- and medium-sized companies and 75% of large companies say their suppliers will have fixed and tested their Y2K systems by the third quarter of 1999. The buzz kill is that 26% of small- and medium-sized firms and 8% of large firms say they don't know if their suppliers will be ready in time. Plus, 2% of small and midsize firms and 3% of bigger companies say they will not meet the deadline.

"Over a quarter of small companies don't know," says David Huether, NAM's director of economic analysis. "That's a legitimate issue of concern. I don't think you can put a positive spin on that."

Jan Amundson, NAM's general counsel, says the Y2K bug won't hurt Internet companies as much as it will the factory floor. On the other hand, some of most prominent manufacturers in the U.S. --

Compaq

(CPQ)

,

Dell

(DELL) - Get Report

and Sun -- are among the leaders driving the bull market in the '90s. If their stocks tumbled on the Y2K disruptions, the effect could drag the rest of the market down, too.

"I can tell you that my PC guys are fairly dependent on those systems working," says Mark Specker, a PC analyst with

SoundView Technology Group

. "I personally think the supply chain systems will work well. However, it would certainly be the case if systems don't work that the markets, which are fully valued now, would definitely be lower."

View From the Inside: Sun and Dell

"When Scott made those comments he wanted to wake up those suppliers in Korea and Taiwan," explains Tony Hampel, Y2K group manager for Sun. In fact, when it comes to Y2K, most of the developing world is stuck in neutral. A December 1998

World Bank

survey shows that only 54 of 130 developing countries have begun planning for Y2K. Of those, 21 are taking steps to fix their computers, but 33 have yet to take action.

Like many companies, Sun is trying to limit supply chain risk by making 800 of its most critical suppliers sign warranty statements to guarantee timely delivery of essential products and services. The company has also put in place a risk-monitoring system that rates the preparedness of its suppliers. The system has three categories: minor, serious and critical. As part of its contingency plan, Sun also rates the importance of its suppliers to help the company allocate its limited Y2K resources in case one supplier fails to comply.

"We put alternatives in place if it's a large risk because we don't want to depend on one supplier," says Hampel. "It's like an insurance policy for our most serious vendors."

Alternatives largely mean either finding another supplier or stockpiling supplies from a current vendor. A

Cap Gemini

survey reported that 38% of U.S. companies intend to stockpile items as part of their Y2K contingency plans.

For its part, Dell, which has slashed its inventory to six days through a build-to-order manufacturing system, is gauging how ready its component and service suppliers are for the Y2K threat.

Dell, which has manufacturing facilities in Malaysia and China, has already sought confirmation from its partners that their internal systems have been made compliant by Dec. 31, 1998. For those companies that fail to confirm their readiness, Dell is preparing a risk analysis showing which suppliers will need special attention to help them become Y2K compliant.

"We don't expect to have problems," says Libba Letton, a spokeswoman for Dell. "We feel confident that our major suppliers will be compliant."

However, in a November filing with the

Securities and Exchange Commission

, Dell said it's in the "early phase of developing contingency plans to address potential unanticipated interruptions or down time." Should one or more of Dell's critical vendors fail due to Y2K, the boilerplate-heavy filing says, the company's "business and its results of operations could be adversely affected."

Future filings from Dell and other manufacturers are expected to include not only fresher data, but a higher grade of information. "Once we start to see the

year-end filings of businesses on the supply chain, that's going to be a good bellwether of preparedness," says NAM's Amundson.