CASE STUDY & ARTICLES: DELL COMPUTER ARTICLES & INFORMATION Supply Chains – A Manager’s Guide – Chapter 1 (abstracts) by David A. Taylor Cost reduction is the number-one reason that companies initiate supply chain improvements. But there’s an even bigger opportunity here: Supply chain improvements are good for the bottom line, but they can be even better for the top line. Getting the supply chain right can give a company a tremendous competitive advantage, and sometimes that advantage is enough to overturn an entire industry structure.
The shining example of this kind of victory is the way Dell Computer systematically dismantled the rest of the personal computer industry. Prior to Dell, personal computers were manufactured in volume, shipped to retail stores, and sold individually to customers—pretty much like washing machines, televisions, and other appliances. It worked, but it required massive amounts of inventory, and customers were limited to a relatively small set of configurations. Dell changed all that by adopting a direct sales strategy, building every PC to order, and shipping it directly to the customer (Figure 1. ). Initially a mailorder house, Dell was one of the first to recognize the potential of the Internet, selling its first computers on line in 1996. Four years later it was doing $50 million a day from its Web site alone. In 2001, Dell became the largest producer of personal computers in the world, a position it surrendered only briefly after the merger of the former market leaders, HP and Compaq. It’s common knowledge that Dell’s success was built on a combination of direct sales with build-to-order production, but Dell wasn’t the first PC company to try this strategy.
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What really makes the company so successful is the way it executes the strategy. Dell is absolutely relentless about pulling time and cost out of its supply chain. Suppliers are located right next to Dell’s assembly plants, and they deliver a constant stream of components on a just-in-time basis. Monitors are shipped directly from the companies that make them and merged in transit with Dell’s own shipments, arriving in matching Dell boxes in a single customer delivery (as shown in Figure 1. 1).
The company has forecasting and planning down to a science, and it enjoys the financial advantage of a negative cash-to-cash time—it actually gets paid for its products before it buys the components. The perfection of techniques such as these gives the company a full five percentage points of profit advantage over its competitors, a virtually unassailable advantage in what is now almost a commodity market. Figure 1. 1 Dell’s Supply Chain Strategy SOURCE: http://www. businessintelligence. com/ex/asp/id. 4/page. 1/xe/biextractdetail. tm Supply Meets Demand at Dell Inc. (ACCENTURE)| | Build it and they will come. This prophetic expression, first whispered to Kevin Costner by an unknown force in a 1980s American film about baseball, quickly became conventional business wisdom for IT organizations scrambling for a piece of the dot. com pie. In other words: Come up with an innovative product and your market will follow. As it turns out, this mantra (at least for many businesses) was spectacularly wrong. Fortunately, Dell Inc. wasn’t listening.
Rather, it followed another voice – that of its founder, Michael Dell – who believed that direct-to-consumer, build-to-order processes would ultimately be more appealing to customers than stockpiles of new-fangled gadgets. In effect, Michael Dell turned conventional wisdom on its head with an entirely new business model: They will come and we will build what they need. Today, Dell never assembles a computer system until it has a customer order in hand. That, in turn, means ultra-low inventory levels (one tenth that of many competitors), as well as a favorable cash-conversion cycle (minus 20 days in a recent quarter).
But are customers really willing to wait for delivery? Absolutely. Given the speed of Dell’s manufacturing processes, the wait is rarely more than a few days. And customers are assured that they’re getting a system that meets their exact specifications. Dell has realized, however, that maintaining its manufacturing efficiency (and corresponding customer satisfaction) will become more complicated as the company continues to grow its global business. The reason? Dell’s streamlined manufacturing processes and its enviably low inventory levels re increasingly dependent on the company’s ability to accurately forecast customer demand and schedule its manufacturing processes accordingly. In other words, as Dell grows, so does the complexity of its manufacturing process and the need to have the right components on-hand at any given moment to satisfy immediate customer requirements. Until now, the company’s supplier-management processes have relied primarily on manual mechanisms, including shared spreadsheets, voicemail and faxed messages.
It was clear to Dell’s leadership that, under continued global expansion, such mechanisms would eventually reach their breaking point. To avoid this eventuality, they needed to partner with an innovative leader with deep, global experience in business process and system design – a partner that could help create and implement the necessary technical architecture and integration and also provide deep project management skills. That partner was Accenture.
Accenture’s RoleIn today’s fast-paced world of business, the winners are those who can best predict their customers’ buying behaviors and immediately adjust to the fluctuating demand. In order to plan their purchasing and manufacturing activities, companies typically look at two things: A customer’s order history (for insights to help predict future orders) and a general business forecast (to better understand market trends that might impact demand).
Accenture worked closely with Dell to build on these valuable sources of information and refine those processes that would minimize the purchasing/manufacturing gap and drive real-time order fulfillment. While Dell’s new planning and scheduling model continues to rely on historical data and industry trends, it also looks at other important factors that can impact the company’s ability to meet demand, including: potential supply and shipping constraints, factory capacity and the requirements of each customer order.
To build capabilities in these areas, Accenture and Dell chose i2 Technologies’ supply chain planning and management applications. Accenture, i2 and Dell customized, implemented and integrated three i2 applications: Factory Planner (manufacturing scheduling), Supply Chain Planner (inventory planning) and Collaboration Planner (communication with suppliers and logistics operations). This marked the first time that a build-to-order environment implemented these three modules at the same time. The entire planning and scheduling solution runs on Dell PowerEdge servers and PowerVault storage products. By building the ew system in a “Wintel” environment (rather than Unix-based), Dell anticipates that its ongoing ownership costs can be cut by more than 60 percent. The Accenture-Dell-i2 team completed phase one of the project, which involved rollout to the Americas, in just 110 days – roughly half the time required by previous i2 software implementations of similar scope. Accenture completed the project’s global deployment just six months later, which also marked a record for an i2 engagement. Results and BenefitsWith Accenture’s and i2’s help, Dell’s already strong demand planning and scheduling capabilities have become that much stronger.
Today, Dell orders most of its required system components online. As the company receives customer orders and schedules production, its manufacturing facilities send an immediate signal to its suppliers’ remote inventory locations, which triggers the shipment of only those materials required to build systems that fulfill current orders. Similarly, suppliers can tap into a dedicated Internet portal to review Dell’s specific order requirements and also confirm their ability to meet Dell’s delivery goals.
In these ways, Dell can automatically and seamlessly process thousands of customer orders, translate these into millions of component requirements and collaborate with suppliers to build and deliver the systems that fulfill any customer’s requirements, quickly and reliably. What does all this mean to Dell’s bottom line? It means that at any given time, Dell’s operations hold less than four days of inventory. This compares to more than 30 days of inventory carried by many competitors. In addition, the system provides Dell a global view of the balance between supply and demand for components.
By combining this global view with innovative automated processes, Dell is able to improve customer response time and immediately adjust potential supply/demand imbalances. According to Dick Hunter, Dell’s vice president of supply-chain management, “We now schedule every line in every factory around the world every two hours, and we only bring into the factory two hours’ worth of materials. We typically run a factory with about five or six hours’ worth of inventory on hand, including work in progress.
This has decreased the cycle time at our factories and reduced warehouse space – space that has been replaced by more manufacturing lines. ” And that indeed is high performance delivered. | | SOURCE: http://www. accenture. com/Global/Services/By_Industry/Communications/Access_Newsletter/Article_Index/SupplyComputer. htm Uniqueness and Strength in Dell Computer Corporation Supply Uploaded by R. Nelly on Jul 3, 2005| | THE SUPPLY CHAIN OF DELL COMPUTER INTRODUCTION Appealing to exactly what the customer wants would ultimately be an ideal organisational objective for a business entity if it is aiming for profits.
And being able to do it without an additional cost to the customer, would be too good to be true! This however, is actually the edge for Dell Computer when it took the computer industry by storm with its direct model distribution and build-to-order manufacturing. And amazingly, Dell’s prices are very competitive, in fact, cheaper than most of its competitiors’ off-the shelf models! Not surprisingly in 2001, Dell emerged as the number 1 computer systems company in the world and earned the number 7 spot on the Fortune magazine list of the world’s most admired companies (ZDNet India,2002).
So, what can the secret be for this infant computer company to be able to offer such ‘ideals’ to customers? To a large extent, Dell’s supply chain configuration and operations has a major role to contribute to this capability. Dell’s supply chain is chosen to discuss the issue in this assignment because of its compelling role in contributing to Dell’s outstanding performance in a highly competitive industry. This essay will examine the unconventional structure and design of Dell’s supply chain as influenced by the nature of products and services offered by Dell.
In addition, the measurability of the performances of these supply chain design will also be addressed. DELL’S PRODUCTS AND THE BUSINESS ORIENTATION Having positioned itself as one of the leading world-class computer corporation over a relatively short period, Dell’s main product categories are typically: • servers, storage and networking • notebooks and desktops • printers • handheld products • software and peripherals, and • related services. This product range serves virtually any computing need of the industry and home customers globally.
Dell builds customised systems as ordered by customers and delivers them in a few days – to their doors, across the globe, and in the way they wanted it. To do this, there is a critical link all the way from its materials and component suppliers extended to the customer. Dell has manufacturing facilities in each of its four worldwide operational regions: the Americas region, the Europe, Middle East and Africa region, the Asia -Pacific and Japan region, and the China region. The advent and proliferation of the internet made Dell’s business model a perfect fit. Customers make their queries, selection and orders online.
And this kind of supply chain management, maintaining high level of speed and service demanded from consumers has to be the cornerstone of Dell’s corporate success in the competitive world of high-tech. DELL’S SUPPLY CHAIN The Challenge. Dell has to achieve global, end-to-end supply chain visibility and management, to enhance its supply chain process for efficient materials management, improved inventory planning, forecasting and execution. In addition, inventory levels in its factories has to be reduced from days to hours. On top of these, transactions have to be online and real time.
Imagine the criticality of a component in a computer system used by air traffic controllers. Should the system go on a blink, the results can be devastating. And systems like this will not wait for days to be restored to perfect working conditions. The Solution. Physically, materials needed are in close proximity to Dell factories, meaning, suppliers have their Supply Logistic Centres or hubs near the manufacturing plants. Procurement of inventories from these suppliers are done over the web in real time and materials are ‘pulled’ into the factories every two hours based on orders.
The overall process is comprised of two steps: •Planning – involves getting the needed materials positioned at supplier hubs near the appropriate factories •Execution – which involves having the right materials on hand at the factories to build each customer’s order Dell employs the i2 Supply Chain software as the system tool for its supply chain processes. This is illustrated below (Dell Corp,2001): Report Users Supply Chain Planning Users Factory Planner Users Real-time Access And Transactions The Planning module of the i2 system is deployed region-by-region while the Execution module is on all factories.
This provides a global view of the long and short-term materials needs in each Dell factory. Since every link in the chain is connected, every participant is working with accurate and timely information. This means that the supply chain operations are based on facts rather than forecasts, thereby reducing waste, improving efficiency and responding immediately to customer needs (ZDNet India,2002). A typical structure of the processes in the planning and execution module of i2 is as illustrated: Execution with i2 Planning with i2
The i2 software solution has enabled Dell to gain global visibility of its entire supply chain and by sharing these data with its suppliers, a collaborative value chain is created. The i2 system, suppliers’ collaboration and the global visibility had promoted Dell to achieve 90 percent of its direct material supplies online. Dell used to work with more than 1000 suppliers. And with the i2 and valuechain. dell. com, that number is now reduced to about 100. User End Customer Service. Dell initiated the ‘direct to courier hub’model with an express company for shipments that fit the courier profile.
To support large business customers who require time definite delivery schedules or customer specific software integration, Dell employs the ‘Delivery Plus’system. This is Dell’s answer to the value-added services traditionally handled by resellers (CTL, 1999). The direct ship to courier allows the realisation of compressing cycle time for delivery. And by removing ‘touches’ that do not add value to the distribution process, cost is further reduced. Field Service parts aspect of the supply chain is handled by another courier organisation. Service parts are managed and warehoused at strategic locations.
This is complemented by Dell’s ‘Critical Care’ response available in large business centres, which is designed for businesses that cannot sustain a systems shutdown for lengthy periods (CTL, 1999). Typically, when the customer calls, Dell diagnosed the problem over the phone and despatch its service provider to pull the required parts from the inventory and go directly to the customer site for the service. Dell also created a recommended stocking list for each customer installation to ensure that each part failure is met within the small service window.
THE E-COMMERCE EDGE E-Commerce has realised most of the supply chain processes’ efficiency and accuracy. Real-time web-based reporting, inventory management based on facts, and custom-built operations planner had maximised both, operational efficiency and customer satisfaction and at the same time responding immediately to changes in the marketplace. Dell’s supply chain tools have gained the cost-effective, flexible solution it needs to sustain a global competitive business edge in its operations. MEASURING THE PERFORMANCES
Contrary to the perceived complications of computer networking, Dell’s supply chain management had proved eminently decisive and accurate to support management and business decisions. Due to the massive computer applications, most of the business processes are indeed measurable and readily made ‘visible’. This is vindicated by the achievement of global visibility, reduced operations and action time, accurate and timely forecasting, and reduced inventory at the factories. These capabilities have in turn reduced waste, improved efficiency, eliminate multiple handling and offer the ability for immediate response.
Backed by a huge and reliable database, Dell’s i2 supply chain system, valuechain. dell. com and the various subsidiary systems had leveraged Dell’s overall performance to be in the lead over a short period of time. CONCLUSION Dell’s supply chain management had shortened the cycle between the component, the manufacturer and the end customer (ITAC, 2001). Not only that, the system had even led to changes in the workplace like administrative and purchasing staff now filling up roles as supplier relationship managers. They can step in if a human touch is needed to resolve delays, invoice discrepancies or quality concerns.
Eventually, enhanced relationships with suppliers and appealing to customers are but the fundamental ideals for business sustenance. Investing in a sophisticated, worldwide supply chain system is perhaps the competitive edge for Dell. Its supply chain infrastructure has proven to be a cost-effective solution for a high-volume, high-growth global company (Dell Corp, 2001). Looking at the developments now, this must be the way of supply chain for the future. References: Dell Corporation, (Dec 2001) ‘Dell’s Supply Chain: Improving on a World-Class Process’, http://www. ap. dell. om/downloads/ap/products/pedge/i2%20CS%20lo. pdf, (05 Apr 2003). Information Technology Association of Canada (ITAC 2001-2003), ‘Dell Computer Corporation – Best Practice Case Study’, http://www. itac. ca/client/ITAC/ITAC_UW_MainEngine. nsf/cd0bbbe7b8237, (05 Apr 2003). Canadian Transportation and Logistics (CTL), (Nov/Dec 1999), ‘Built for Web-based Sales, Build-to-Order PCs, and Direct Distribution Make Dell’s Supply Chain the Cornerstone of its Business’, http://www. ctl. ca/research/supply_chain_management/web-based-sales… , (03 Apr 2003). Dell Corporation, (2001), ‘Dell’s Supply Chain’, http://www. dell. om/us/en/gen/casestudies/casestudy_dell_i2. htm, (3 Apr 2003). ZDNet India (2002), ‘Dell:Building a World-Class Supply Chain’, http://www. zdnetindia. com/biztech/ebusiness/stories/62268. html, (03 Apr 2003). Dell Manages Profitability, Not Inventory HBSWK Pub. Date: Jun 2, 2003 Dell Computer was a second-tier PC provider–until it learned the secrets of just-in-time inventory. Here’s an inside look at how Dell manages profitability. by Jonathan Byrnes In 1994, Dell was a struggling second-tier PC maker. Like other PC makers, Dell ordered its components in advance and carried a large amount of component inventory.
If its forecasts were wrong, Dell had major write-downs. Then Dell began to implement a new business model. Its operations had always featured a build-to-order process with direct sales to customers, but Dell took a series of ingenious steps to eliminate its inventories. The results were spectacular. Over a four-year period, Dell’s revenues grew from $2 billion to $16 billion, a 50 percent annual growth rate. Earnings per share increased by 62 percent per year. Dell’s stock price increased by over 17,000 percent in a little over eight years.
In 1998, Dell’s return on invested capital was 217 percent, and the company had $1. 8 billion in cash. Dell’s transformation Profitability management, coordinating a company’s day-to-day activities through careful forethought and great management, was at the core of Dell’s transformation in this critical period. Dell created a tightly aligned business model that enabled it to manage away the need for its component inventories. Not only was capital not needed, but the change generated enormous amounts of cash that Dell used to fuel its growth. How did Dell do it?
At the heart of Dell’s profitability management was a seemingly impossible dilemma: the company had adopted a build-to-order system, yet it had to commit to purchase key components sixty days in advance. How did Dell manage this? Dell created a tightly aligned business model that enabled it to manage away the need for its component inventories. | — Jonathan Byrnes | The answer lay in Dell’s tightly aligned business model, which had several key elements. (I am very grateful to Stuart Smith, who was Dell’s vice president of materials and logistics during this transformation period, for sharing his experiences and observations. Account selection. Dell purposely selected customers with relatively predictable purchasing patterns and low service costs. The company developed a core competence in targeting customers, and kept a massive database for this purpose. A large portion of Dell’s business stemmed from long-term corporate relationship accounts—customers having predictable needs closely tied to their budget cycles. For these, Dell developed powerful customer-specific intranet Web sites with predetermined custom specifications and budgets. The remainder of Dell’s business involved individual consumers.
To obtain stable demand in this segment, Dell used higher price-points and the latest technology products to target second-time buyers who had regular upgrade purchase patterns, required little technical support, and paid by credit card. Demand management. “Sell what you have” was the phrase that Dell developed for the crucial function of matching incoming demand to predetermined supply. This occurred at several levels. At a monthly MSP/MPP (master sales plan/master production plan) meeting led by CEO Michael Dell, top-level managers agreed on a five-quarter rolling forecast with a strong focus on “the current quarter plus one. In this meeting, Dell’s functional department leaders balanced and agreed on internal product strategies, competitive factors, and constraints. At the meeting, the sales commission plan was set to equal the production plan. Through this process, Dell synchronized the company every thirty days. At a weekly Lead-Time Meeting, senior executives in sales, marketing, and supply chain collectively interpreted demand trends and supply issues to determine where component overages or underages were likely to develop. The meeting focused on a common variable: lead time for product delivery to customer.
At this meeting, the group focused on managing product lead times to ensure that customers would not cancel sales, and that Dell would not be stuck with unsold components. If a product lead time was climbing, purchasing could expedite component deliveries or shift to alternative sources of supply, or sales could try to induce customers to buy substitute products. If component overages were accumulating, sales could provide incentives for order-takers to steer customers toward the makeable set of products, or could bundle products with an attractive umbrella price.
The order-takers could tell from their screens which configurations were available, and the dynamic incentives induced them to steer point-of-sale demand toward these. When in doubt, Dell managers over-forecast on high-end products. | — Jonathan Byrnes | Dell’s pricing also reflected real-time demand management, and varied significantly from week to week. While its competitor’s prices were stable with periodic adjustments, Dell’s prices varied significantly from week to week as the company modified its prices to push products where component inventory was building beyond prescribed levels.
The weekly Lead-Time Meetings had a very strong impact on Dell’s culture. Once the sales executives agreed on a set of products to be made, they “owned” the task of ensuring that these products would be sold. The product lead times were posted daily for all to see, and this drove the daily profitability management process. Dell’s core philosophy of actively managing demand in real time, or “selling what you have,” rather than making what you want to sell, was a critical driver of Dell’s successful profitability management.
Without this critical element, Dell’s business model simply would not have been effective. Product lifecycle management. Because Dell’s customers were largely high-end repeat buyers who rapidly adopted new technology, Dell’s marketing could focus on managing product lifecycle transitions. The company’s direct marketing provided real-time customer feedback, which led to the rapid rounds of learning essential to product development and crisp lifecycle timing. Dell became expert at curtailing the end-of-life tail of its six-to-nine-month product cycle. Supplier management.
Although Dell’s manufacturing system featured a combination of build-product-to-order and buy-component-to-plan processes, the company worked closely with its suppliers to introduce more flexibility into its system. Dell concentrated its supplier base into 50 to 100 suppliers accounting for 80 percent of its purchases. Supplier selection was based only 30 percent on cost, with the other 70 percent on quality, service, and flexibility. Forecasting. Dell’s forecast accuracy was about 70 to 75 percent, due to its careful account selection. Demand management, in turn, closed the forecast gap.
When in doubt, Dell managers over-forecast on high-end products because it was easier to sell up, and high-end products had a longer shelf life. Liquidity management. Direct sales were explicitly targeted at high-end customers who paid with a credit card. These sales had a four-day cash conversion cycle, while Dell took forty-five days to pay its vendors. This generated a huge amount of liquidity that helped finance Dell’s rapid growth and limited its external financing needs. This cash engine was a key underlying factor that enabled Dell to earn such extraordinarily high returns.
Genesis of Dell’s process How did Dell create its tight profitability management process? The answer is very telling. The seeds of Dell’s success were sown in its failures of an earlier time. In 1994, Dell created two important products that were deficient due to quality problems. Sales plummeted and Dell faced a serious cash shortfall. At the same time, the company realized that it had to accelerate its growth in order to move from the list of declining Tier 2 manufacturers (Commodore, Zeos, etc. ) to the group of prospering Tier 1 producers (IBM, Compaq, etc. , and this required even more cash. Dell used the freed-up cash to fuel its growth, chiefly in major corporate accounts. | — Jonathan Byrnes | The executives met to decide how to generate the funds to keep the company alive. The decision was made to dramatically reduce inventories. The heads of manufacturing and marketing were charged with devising a way to run the business without component inventories. At first they resisted. Then they developed a way to meet this goal. The new Dell business model developed over a period of time.
The first set of objectives focused on lowering inventory by 50 percent, improving lead time by 50 percent, reducing assembly costs by 30 percent, and reducing obsolete inventory by 75 percent. The new system was phased in, with component inventory dropping from seventy days to thirty to forty days, then to twenty days, then to nearly zero. At the same time, the sales force was trained to “sell what you have. ” As the new profitability management system emerged and proved viable, Dell moved aggressively to refine it and to bring the other functional activities into tight alignment.
Dell used the freed-up cash to fuel its growth, chiefly in major corporate accounts. These accounts were originally hard for Dell to penetrate because they were generally buying from resellers. In order to win this business from the resellers, Dell had to convince the accounts that its products were of comparable quality, and that it could meet the necessary service and delivery requirements. It was widely thought that Dell’s build-to-order model could not meet the delivery requirements of major accounts.
Once Dell demonstrated that it could build to specific customer orders and meet delivery and quality requirements, growth followed. This dynamic enabled Dell to catapult to first-tier status. Two surprises greeted the Dell executives who were creating this new process. First, as inventory dropped, lead-time performance improved. The reason was that Dell was not simply carrying component inventory against forecasted sales, but rather was aligning inventory and sales, managing profitability on a daily, weekly, and monthly basis.
Second, as inventory disappeared, the company’s returns grew disproportionately. Not only did Dell avoid carrying costs and obsolete stock, but importantly, it was saving enormous amounts of money on purchasing components because the component prices were dropping 3 percent per month. Profitability, not inventory The inventory in a channel is determined by the variance in supply and the variance in demand. Unless these variances are reduced, channel inventory can only be moved around, not eliminated.
I think of this as the “waterbed effect. ” When you sit on a waterbed, it sinks in one spot and bulges in another. The water is redistributed but the amount stays the same. Through its use of profitability management, Dell matched supply and demand on a daily, weekly, and monthly basis. It sharply reduced the variance, and the need for inventories simply disappeared. In many companies, inventory substitutes for profitability management, tying up valuable capital and preventing the company from focusing on day-to-day business alignment.
In most companies, managers face a choice between managing inventory and managing away the need for it. By the way, are you managing profitability or inventory? If the answer is profitability, you can have your cake and eat it too! Jonathan Byrnes is a senior lecturer at MIT and president of Jonathan Byrnes & Co. , a focused consulting company. He earned a doctorate from Harvard Business School in 1980 and can be reached at [email protected] edu| | | OTHER RECOMMENDED READINGS: http://www. tmi. umich. edu/dell. pdf