Operators Fight Rising Inventories

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Swelling inventories of hardware and related digital
trinkets are forcing cable operators to adopt innovative inventory-management systems.

On the new business side, there are cable modems, digital
set-tops, telephony-network-interface units and racks of headend hardware. Toss in the
hardware staples -- reels of coaxial and fiber, amplifiers, filters, pole/line hardware,
drop hardware -- and an operator's warehouse fills quickly.

Storage of those items is a crucial issue for operators
because of how much it costs for hardware to essentially collect dust on the shelf and due
to its companion issue, obsolescence. As such, MSOs are introducing new programs to
"turn" inventory, cut costs and tighten inventory-management systems in their
bulging warehouses.

Bobby Zachariah, vice president of supply management for
MediaOne, said the industry "must pay attention to inventory accuracy and implement
more operational, internal controls, like requisitioning, to drive costs down."

For example, MediaOne identified 60 key items in its
inventory as "A" items, which represent 80 percent of the company's inventory.
The company pays particular attention to these items, which include set-top boxes.

"As we go to digital boxes, we have to be more aware
of the 'A' items. They represent the maximum exposure to inventory on our books,"
Zachariah said.

Buying the right amount of equipment in the first place is
a great asset to any inventory-management system. Yet identifying the exact number of
digital set-tops to purchase and how many miles of fiber to buy, then adding the right
amount of amplifiers, filters and so on, is a veritable Rubik's Cube of purchasing and
inventory management for cable operators and their vendors.

"The whole inventorying process has to change,"
said Shelbie Berry, vice president of materials and purchasing for Jones Intercable Inc.
"Terms like on-time delivery and timing have been nonexistent in this industry. There
was no control."

And controlling inventory, Berry added, translates to more
revenue.

"If [an item] is sitting in inventory, that's lost
revenue. If you turn that into capital, it's significant money, and the savings are
dollar-for-dollar."

Berry said Jones cut its inventory by nearly 35 percent by
using inventory-management software, called "Lawson," that also helps the MSO to
turn its inventory an average of nine times per year. The industry average is less than
six, she added.

Exposure to "shrinkage," or theft, is a major
industry issue, too, Berry said. "Converter boxes and traps are big black-market
products, and many times, they aren't even on the books," she added, describing the
stolen set-top racket as "big-time."

With Jones now under the control of its soon-to-be-parent,
Comcast Corp., Berry is selling Jones' inventory-management system to Comcast's
organization.

"We gave them an overview, and they were amazed at how
we think of materials as inventory, and not as assets," Berry said, adding,
"We're pretty far ahead of them in inventory management, so we'd have to retool their
purchasing procedures. I hope that they pick this up."

The cable industry's entry into ancillary businesses, such
as high-speed data and digital services, is bringing with it dramatic increases in
hardware -- far more than operators are used to housing in their systems' inventories.
Accurately tracking, identifying and reusing this hardware and technology is now on the
short list of key issues facing operators like Jones.

In the meantime, obsolescence is the new menace of cable's
purchasing and inventory executives.

"Obsolescence has instilled a fear in operators as to
what and when to buy. And for us, we don't want to go to an operator and say, 'You'll have
to take that old piece of equipment out.' It could be outdated by the time they deploy
it," said Michael Coden, president and CEO of ADC Codenoll, an affiliate company of
ADC Telecommunications Inc.

Operators and vendors alike shudder at the thought of
instant obsolescence. As a consequence, MSOs are beginning to elevate quality
inventory-management systems to rarefied heights within their organizations.

"There has been a significant change in MSOs'
purchasing methodologies because of consolidation and new businesses. They're now looking
for quick-turn, training and problem-solving inventory systems," said Tim Cohane,
president of Times-Fiber Communications Inc., a producer of fiber optic products.

Steve Necessary, vice president of marketing for
Scientific-Atlanta Inc., described the environment as one in which "operators are
saying to us, 'Don't let us make a mistake. Get us into the future.'"

In addressing the inventory-management issue, Cox
Communications Inc. went so far as to implement a Materials Evaluation Committee, which
meets regularly to leverage its buying power with vendors and to upgrade its
inventory-management process via efficient forecasting.

"Neither our vendors nor ourselves can afford to have
equipment sitting on shelves, so forecasting is critical for both of us so that equipment
doesn't become obsolete," said Dick Wallace, director of materials management for
Cox.

Inventorying a product for less than three months is the
magic time frame for operators and vendors, said Mike Durant, director of operations for
the broadband-technology division of cable-modem manufacturer Bay Networks Inc.

"As a manufacturer, we have to have product from
design to market in three months, and even reduce that," Durant said.

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