It is once again time to pen another commentary regarding consumer electronics provider Sony and its ongoing supply chain challenges.  In our last Supply Chain Matters commentary in March of this year, we noted how Sony’s senior management had set a rather aggressive target relative to Sony’s television business, a planned 70% ramp-up in production in the upcoming fiscal year that ends in March of 2011.  This challenge was especially difficult for two primary reasons.  First, Sony had recently outsourced most of its previous owned manufacturing away from Japan, favoring instead an outsourced contract manufacturing deployment model.  Achieving such an aggressive ramp-up of production in a newly implemented outsourced environment would certainly test various aspects of external supply chain synchronization and control.  Second, the demand for high-definition or even 3D televisions has been tepid, especially in the previous core markets of North America and Europe, as consumers continue to cut-back on certain discretionary purchases.

The latest news from Sony reflects some of this reality, and adds an additional supply chain related twist.  The good news was that Sony returned to profitability in the latest quarter ending in September, reporting a $384 million profit compared with a previous loss.  Previous restructuring efforts, including supply chain outsourcing have paid-off in an environment of a stronger Japanese yen.  The company however acknowledged that a tepid market and cutthroat competition may cause its television business to again lose money in this fiscal year.  Sony also raised its net profit outlook by 17% for the fiscal year, but lowered its annual revenue forecast by 3%, a continued aggressive stance on the part of Sony’s senior management. Competitors such as LG Electronics, Panasonic, Samsung and Sharp however remain somewhat concerned about future results in light of an environment of tepid demand, intense competition and rising supply costs.

A Wall Street Journal article, Sony to Corral TV Inventory, (paid subscription may be required) further indicates that the company plans to maintain tight inventory controls heading into the holiday shopping season.  Sony’s CFO, Masaru Kato, is noted as indicating that the company has no intention of being “adventurous” in its supply chain management.  On the one hand, the company is banking on a big December quarter to meet its goal of selling 25 million LCD televisions, but the CFO is cautioning that pursuit of a volume number at the detriment to sound financial performance is not a sound strategy.  Mr. Kato is quoted: “Pushing products into the market without consumers is not the business that we are in.”  The WSJ article further notes that Sony has slashed inventory from 61 to 38 days, however in the September quarter Sony’s inventory stood at 59 days, in preparation for the upcoming holiday surge. Mr. Kato is also cited as indicating that he believes that this level of inventory is not too heavy at the moment, but this is not the time to be “adventurous” in adding further inventory.

In our view, Sony’s television-related supply chain team remains in a rather difficult and tough position.  The previous strategic plan was to drive significantly increased volume growth leveraging a newly outsourced contract manufacturing model.  The reality of today’s global market has added a significant other challenge of increased price competition, as multiple consumer electronics manufacturers compete for a limited pool of potential consumer sales, especially in the upcoming holiday driven quarter.

An environment of severe price competition either means that Sony maintains a pricing model based on consumer loyalty, or that consumers will forego brand loyalty in favor of more attractive pricing choices.  In either case, Sony’s supply chain team has made a bet on hopefully having the right inventory levels and mix to pull-off a robust quarter, and flexibility to respond to any sudden market changes may have been limited by edict.  We trust that teams have the right capabilities to quickly shift existing inventory and synchronize contract manufacturing with geographic and channel market demand.

It will be rather interesting to observe how this newest Sony supply chain capability chapter plays out over the remaining weeks of 2010 and 2011. Stay tuned.

Industry observers are welcomed to add their observations in Comments realted to this posting.

Bob Ferrari