Making The Number

Andrew Schmitt, in the comments to a previous post, mentioned the predilection of semiconductor firms to smooth out their earnings numbers, often through illicit means. You often hear about companies "smoothing" out or "engineering" their numbers, though there's not a lot of discussion about what this actually means, or what the consequence of this.

The book Rebirth of American Industry, which basically argues that our system of accounting creates perverse to actual industry had a great section walking through the process a widget maker (ACME widgets, not Facebook ones) goes through to make the number. It's an ugly process that involves all kind of waste, overproduction, moving goods into a different basket, etc. Unfortunately, I've lent out my copy at the moment, so I can't copy an excerpt. The point is, it's counterproductive and it has long-term negative consequences, because it leads to a build up of inventory and plant mismanagement. I recall after reading it feeling a little bit of a chill thinking about the analogy would be in the financial world -- the furious end-of-the-quarter machinations to hit the number and what they looked like.

Comments

[Andrew Schmitt]

Thanks for the book reference. It looks a little hefty but probably good reading for someone in manufacturing.

The trend towards 'lean inventory' is certainly real but in many cases much of this inventory has been moved to a middleman, so that it doesn't exist on the books of the buyer/seller.

Sellers can ship to distributors, and instantly factor their receivables by getting a short term bank loan on the future receivable.

The beauty of this? When the vendor ships to a distributor (or 'disty') the cost of the distributor is reflected by taking the end users cost and reducing it by the distributors cut.

Hypothetical Example: Broadcom sells chips to Cisco for $50 each. Cisco, for whatever reason, doesn't need chips for 2 more weeks but Broadcom's quarter is ending. Broadcom decides to ship the chips to a distributor, or in some cases the contract manufacturer for Cisco (in Taiwan, China). The distributor knows the game, and demands $4 to hold the chips for 2-3 weeks. Cisco ships the chips to the disti for $46.

Of course, this can become a vicious cycle where you start looking for places to 'stuff' at the end of each quarter.

This shows up as decreasing margins - as the 'cost' of distrubution doesn't appear on the P&L.

If you're really interested, I took the process apart in a study of a company called Nu Horizons, which was partnered with Vitesse Semiconductor.

http://www.nyquistcapital.com/symbol/nuhc/

[Taobao]

Um...like the style of your writing.*_*

[Coach Outlet Online]

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[ティンバーランド]

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