HP 2005 Annual Report Download - page 25

•Our inventory management is complex as we continue to sell a significant mix of products
through distributors.
We must manage inventory effectively, particularly with respect to sales to distributors, which
involves forecasting demand and pricing issues. Distributors may increase orders during
periods of product shortages, cancel orders if their inventory is too high or delay orders in
anticipation of new products. Distributors also may adjust their orders in response to the
supply of our products and the products of our competitors and seasonal fluctuations in
end-user demand. Our reliance upon indirect distribution methods may reduce visibility to
demand and pricing issues, and therefore make forecasting more difficult. If we have excess or
obsolete inventory, we may have to reduce our prices and write down inventory. Moreover,
our use of indirect distribution channels may limit our willingness or ability to adjust prices
quickly and otherwise to respond to pricing changes by competitors. We also may have limited
ability to estimate future product rebate redemptions in order to price our products
effectively.
We depend on third party suppliers, and our revenue and gross margin could suffer if we fail to manage
supplier issues properly.
Our operations depend on our ability to anticipate our needs for components, products and
services and our suppliers’ ability to deliver sufficient quantities of quality components, products and
services at reasonable prices in time for us to meet critical schedules. Given the wide variety of systems,
products and services that we offer, the large number of our suppliers and contract manufacturers that
are dispersed across the globe, and the long lead times that are required to manufacture, assemble and
deliver certain components and products, problems could arise in planning production and managing
inventory levels that could seriously harm us. Other supplier problems that we could face include
component shortages, excess supply, risks related to the terms of our contracts with suppliers, and risks
associated with contingent workers, as described below.
•Shortages. Occasionally we may experience a shortage of, or a delay in receiving, certain supplies
as a result of strong demand, capacity constraints, supplier financial weaknesses, disputes with
suppliers (some of which are also customers), other problems experienced by suppliers or
problems faced during the transition to new suppliers. If shortages or delays persist, the price of
these supplies may increase, we may be exposed to quality issues or the supplies may not be
available at all. We may not be able to secure enough supplies at reasonable prices or of
acceptable quality to build products or provide services in a timely manner in the quantities or
according to the specifications needed. Accordingly, our revenue and gross margin could suffer
as we could lose time-sensitive sales, incur additional freight costs or be unable to pass on price
increases to our customers. If we cannot adequately address supply issues, we might have to
reengineer some products or service offerings, resulting in further costs and delays.
•Oversupply. In order to secure supplies for the provision of products or services, at times we may
make advance payments to suppliers or enter into non-cancelable commitments with vendors. If
we fail to anticipate customer demand properly, a temporary oversupply could result in excess or
obsolete components, which could adversely affect our gross margin.
•Contractual terms. As a result of binding price or purchase commitments with vendors, we may
be obligated to purchase supplies or services at prices that are higher than those available in the
current market and be limited in our ability to respond to changing market conditions. In the
event that we become committed to purchase supplies or services for prices in excess of the
current market price, we may be at a disadvantage to competitors who have access to
components or services at lower prices, and our gross margin could suffer. In addition, many of
our competitors obtain products or components from the same CMs, ODMs and suppliers that
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