A REAL OPTIONS PERSPECTIVE ON SUPPLY CHAIN MANAGEMENT IN HIGH TECHNOLOGY1

ver three decades ago, Gordon Moore, one of the founders of Intel, observed that computer processing power doubles approximately every 18 months. “Moore’s There is both price and volume uncertainty on the supply side as well. In-house manufacturing capacity may be insufficient to meet demand, and it can take up to two years to bring additional capacity online for products such as semiconductors. In the case of manufacturing capacity and components that are outsourced, there is uncertainty about the assurance of supply and level of pricing. And a shortfall in the supply of critical components can be very costly. For example, in July 1999, Agilent’s stock price dropped by about 25% when the company’s inability to obtain key components resulted in a sharp drop in revenue. Price risk can also have a huge impact on firm value. In October 1999, Dell Computer suffered a $470 million earnings shortfall from the effect of DRAM prices on gross margins, which triggered a 13% drop in its stock price. Of course, the high-tech industry is not alone in being forced to cope with uncertainty about inputs and outputs. Indeed, for most industries undergoing major change in technology or market structure, the ability to manage—and even profit from—such uncertainty is increasingly recognized as a key source of comparative advantage and shareholder value. Moreover, the growing importance of coordinating supply and demand in high tech bears a striking resemblance to a challenge that financial services companies have been addressing for years—namely, managing the risk from potential mismatches between their assets and liabilities.