Chapter 15: Cell phone industry seen facing more trouble

http://www.canada.com/business/fp/Cellphone+industry+seen+facing+more+trouble/1616132/story.html

Summary:
Researcher Gartner claims that demands on cellphone will not recover until late 2010. The Reuters data show that the industry will suffer the worst quarter ever during April-June. During the first quarter of 2009, the industry fell 8.6 per cent. Gartner said, "We do not expect demand to get better before second half of 2010." According to research firm CCS Insight, in the first quarter, handset companies sold 14.3 per cent fewer phones than a year ago. Gartner which tracks the changes in inventory and the actual sales to consumers said that retailers sold about 25 million phones from inventories during the first quarter. It is expected that inventory reduction will continue during the second quarter but at a slow rate of about 10 million phones. Despite the decreasing inventory, there aren’t clear signs of improvement on consumer demand. The trend in Europe is that consumers are opting for cheaper monthly plans or even prepaid phones rather than yearly contracts.

Connection:
Inventory is piling up in the cell phone industry as this article clearly lets us know. This can be related to inventory turnover. Inventory turnover is the number of times a business has been able to sell and replace its inventory in a year. We learned in Chapter 15 that having a high inventory turnover is a good thing. It is a result of the company being able to sell much of the products that they have in stock. The formula for inventory turnover is cost of goods sold divided by the average merchandise inventory. Although in this article we aren’t given numbers, we can assume that the cost of goods sold is the same as the previous years. As for the average merchandise inventory, it is safe to estimate that the numbers are a lot higher compared to previous years, since the article says that companies sold 14.3 % less this year. Take a look at the equation for inventory turnover, the numerator (cost of goods sold) is the same and the denominator (average merchandise inventory) has increased. In this scenario, this would result in a small number for inventory turnover. But we learned that it is bad for the company to have a small inventory turnover.

Reflection:
I understand why the mobile industry is suffering and inventory levels are increasing as time goes by. We can blame it mostly on the economic recession. Citizens tend to hold onto the money they make and are less likely to go shopping. This results in inventory. When inventory piles each fiscal period or even each quarter, it has a negative effect on the company. Having last year’s model in stock and in large quantities just keeps on costing the company. It takes money from the company both by occupying space, which takes away room for newer models, as well as increasing the company’s expenses by not selling. When dealing with inventory turnover, it is ideal for the company to have a high turnover because that would mean that the company is producing just enough and not too much products to keep in stock. Although the cell phone companies wish to achieve this, they are currently not in this situation.