Just like the rest of the PC makers, Dell ran into issues with hard disk drive supply after severe flooding hit Thailand. The company formed a special crisis team and reacted pretty quickly by acquiring strategic quantities of hard drives and pulled in systems from its hubs. As the situation is very dynamic and is changing every day, Dell expects shortages to persist throughout the first half of calendar 2012.
"We made strategic purchases of inventory and pulled in supply from our hubs. This drove an increase in our end-of-quarter [days sales of inventory]. We also have teams working with the impacted suppliers to manage our hard drive supply chain and qualify new sources of supply. Our goal is to mitigate any impact to our customers in Dell, and our teams will be working throughout the quarter to do just that," said Jeffrey Clarke, vice chairman of operations and technology.
Unfortunately for Dell and the rest of the industry, the actual impact of the flood onto production capacities is completely unclear. It is unknown whether manufacturers of hard drives and components will need to build new factories and/or reinstall the production equipment or will be able to resume production once the water recedes. What is clear is that the situation will persist throughout Dell's first quarter of fiscal 2013, which ends in April, 2012.
"It is difficult for the industry to pinpoint the magnitude or duration of shortages, so that puts the industry and allocation environment at least through Q1 [of Dell's FY2013]. [...] The situation is quite dynamic. It changes every day. Our risk management team is in looking at the tier two and tier three supply base from base-plates, motors, actuators, bearings, top covers, etc. We are also working with each of our partners to understand what our recovery plans look like or their recovery plans look like from building to equipment overhaul to reinstall to requalification. It is a very dynamic world out there with this hard drive situation," said Michael Dell, the founder and chief executive officer of Dell.
Even though manufacturers of hard drives prioritize shipments to large PC makers, such as Dell, and fulfills their demands first, pricing of hard disk drives will still go up in the coming quarter. The good news, however, is that with slowing demand towards PCs in general and consequent decreases of prices, increased HDD costs will be partly offset. Still, some personal computers may get more expensive due to various reasons and in general the situation remains tough for the PC maker.
"I think when we look at component prices, clearly we would expect the price per drive on the hard disk side to go up. We are seeing that, and I think the reality is that when you look at the overall aggregate component cost for the quarter, there is enough other inflation in other components that is going to more than offset that, is our current view," said Brian Gladden, chief financial officer of Dell.