Fairchild Semiconductor reduced its Q4 guidance today and made specific note of the electronics supply chain's distribution link in doing so.

“We entered the fourth quarter needing slightly more than 10% fill orders to meet our guidance,” said Mark Frey, Fairchild’s executive VP and CFO, in a statement. “Unfortunately, in the weeks since our Q3 earnings release we have booked virtually no net fill and demand visibility remains very limited. While we still expect more turns orders to be booked this quarter, the lower guidance we are issuing today requires no additional net order fill to meet the low end of the range.”

Fairchild lowered revenue expectations for Q4 to between $338 million and $360 million, a sequential decline of 16% to 21%, compared to previous expectations for revenue down 6% to 12%. Gross margin is expected to be down 100 to 200 basis points (27.9% to 28.9%) on the lower revenue, and the company expects to cut R&D and SG&A spend to $73 million to $76 million for the quarter. Previous guidance called for flat (29.9%) gross margin and R&D and SG&A spending of $80 million to $83 million.

“Currently our order rates are just keeping up with push outs and cancellations. Our customers and distributors are coping with reduced orders while at the same time trying to rapidly reduce their inventories," Mark Thompson, Fairchild’s president and CEO, said adding that the analog company will continue to focus on the factors it can control like internal inventory control.

The so-described rapid reduction is part of a new inventory situation brought on by faster turnaround via Web ordering and always increasing storage and shipping costs, and compounded by the overall economic environment. This new situation has inventory in constant flux and isn't being well defined or accepted by many of the financial analysts out there.

If you listened in on the September quarter company calls with analysts in recent weeks, Wall Street seems to think distributors are driving inventory down to zero or near zero, which isn't true in many cases.

Is inventory lower than it has been in previous years? Yes, as FBR Research points out in its report on Fairchild this morning, distributors -- like every other company types right now -- need cash and many distributors in Asia are converting inventories to cash due to deep credit freeze.

"In recent weeks, it has become increasingly clear that Asian distributors are depleting chip inventories below sustainable levels in order to hoard cash as many Asian banks are not actively lending right now. This inventory-to-cash conversion process makes December-quarter visibility poor and revenue guidance weak," the firm said.

Barclays Capital also made similar points in its report on Fairchild this afternoon. 

While Asia is a huge link in the electronics supply chain, it's not the only link and to be sure not every distributor is rapidly moving toward zero. Those who are won't be ready for what FBR expects to be a Q2 replenishment of inventories.

I think Harley Feldberg, president of Avnet EM, summed it up in a recent EDN interview when he said: "Don't assume that the distributor that gets to zero inventory first wins. Would you shop at a Wal-Mart that had nothing in it?"

What are your thoughts on inventory and the distributor's role? Share them below.