Analysing the Dell Direct Distribution Channel
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Published: Tue, 13 Mar 2018
The direct model refers to the fact that Dell does not use the retails channel, but sells its PCs directly to customers through its website, this way the intermediary steps that may add time and cost are eliminated, and Dell is directly linked to its customers. The direct approach allows Dell to build a relationship, which makes it quick and easy for customers to do business with Dell.
Dell’s direct distribution channel
The build-to-order model enables Dell to keep inventory down very low compared to competitors like Compaq and IBM. Dell has a low inventory of five to ten days, while Compaq and IBM have inventory of four weeks or more. Dell works on the strategy of single supplier. In some cases, alternative sources of supply are not available. Even if the multiple suppliers are available, Dell prefer to work with the single supplier, if the company believes it is advantageous to do so when considering performance, quality, support, delivery, capacity and price (Annual Report, 1996).
If the supply of a critical single-sourced material or component were delayed or curtailed, Dell’s ability to ship the related product in desired quantities and in a timely manner could be adversely affected. Even where alternative sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of sales, which could affect operating results adversely (Annual Report, 1996).
On 21 September 1999, an earthquake of magnitude 7.6 struck Chichi, Taiwan. It had devastating consequences. Baum (1999) reports that after the disaster more than 2,200 people lost their lives, more than 50,000 buildings were destroyed and total industrial production losses were estimated as $1.2 billion. This area features high production concentration of many other computer components, e.g. motherboards (more than two-thirds of world consumption in 1999) and notebook displays. Local producers of computer memory, TSMC and UMC being the leading Taiwanese suppliers, lost significant quantities of work in progress at the time of the earthquake. Sherin and Bartoletti (1999) report that production lines could not restart at the first couple of days after the event as sensitive critical-path equipment had been damaged.
The world markets of memory chips reacted very fast to this news, as supply was constrained at the last part of 1999. The spot price of memory chips went up fivefold. computer memory increases were not passed on to consumers as higher product prices, but they were absorbed by the company and were passed on to investors in the form of less stock repurchases. Dell Computer Co. (2000a) announced that during the fourth quarter of 1999 it lost $300 million in revenue due to the Earthquake.
The global presence of DELL with sales offices in 43 countries, sales presence in 170 countries, 6 global manufacturing sites in Brazil, Tennessee, Texas, China, Ireland and Malaysia clearly defines its leading position in the computer systems market. The annual revenue for Dell Inc was $ 61.8 Billion (FY 2008- 2009). By cutting .the middle man and building PCs, enterprise products like servers, storages, solutions to order, Dell has revolutionized an industry once inundated with unsold inventory and products that quickly became obsolescent. Dell’s integrated supply chain has allowed it to gain market share while remaining profitable.
Dell’s business strategy includes direct route to market, Supplier relationship and E- Commerce.
Dell Direct Model
Supplier Relationship (Just In Time Strategy)
Direct Model: Dell’s business model is the envy of many competitors. Most other competitors are in the process of developing a direct market strategy but the transition from existing sales channel is not simple. Dell continues to gain market share by using its knowledge about its customers. First of all, this model helps them to eliminate the need of supporting a widespread network of wholesalers and retail dealers, benefiting them in several aspects. It allows them to avert dealer mark ups. They need not have to invest high on inventory costs associated with the retail or wholesale channel and to face the competition for retail shelf space. It also nullifies the risk of obsolescence associated with every product in a rapidly changing technological market.
Supplier Relationships: Dell’s integrated supply chain allows it to keep only four days of inventory. Component price in computer industry falls almost 6% a week. The company can provide the component price decline to its customers quickly. In addition, Dell shares demand information with suppliers, so ensuring that inventory is kept to minimum. Dell also enhances cash flow by effectively paying suppliers after customers have settled invoices. Relationship of Dell with its supplier proved out to be a key for their success. Eventually, they developed a way to trace most suppliers to keep components warehoused within a time limit of minutes from Dell’s factories at various places like Austin, Penang, Malaysia, and Ireland. This brought up a remarkable different picture of the suppliers, reducing their number from 204 in 1992 to 47 currently, all of whom are ready to support the warehousing plan. These suppliers apart from supplying to Dell, run their own inventory as well and supply to Dell on demand. One of the greatest advantage for Dell in this type of services is they don’t get billed until the component leave the supplier’s warehouse. This is an excellent step taken by Dell to overcome the problem of rapidly falling prices. They don’t order the component unless an order is placed by the customer, saving them a lot of money.
E-Commerce: Dell has developed a process whereby they can assess the lowest possible price within an hour. Dell’s e-commerce infrastructure allows dynamic pricing strategy, whereby the same product and service can be sold at different prices, depending on the buyer. The result of their innovative transformation profited them with $30million internet sales, which accounts for about 30%of their overall revenue. This proves internet as the most genuine and efficient form for Dell’s direct model, making it more convenient and efficient for Dell and their customers.
Theoretical Model :-
Supply Chain Disruption, both potential and actual are the enemies of all firm. Supply Chain disruption can be defined as “ Unplanned and Unanticipated event that has disrupted the normal flow of goods and material within a supply chain. Risk Prevails in three categories i.e Internal risk , External Risk and Network related risk( Juttner et al. 2002). Risk can be catogorised in variables. Variables suggested by Ritchie and Marshall ( 1993) include environment, industry, organisation , problem specific, decision maker related variables.
Supply Chain Disruption:- Anything that affects the flow and supply of raw material, sub component, finished good from all the way from origin to the final demand point.
Mapping probability and consequences (from Sheffi and Rice 2005)
On the basis of the severity of impacts and their likelihood or probability of occurrence, the major established attributes of disruption can be classified as follows:
The most vital attribute of disruption is the inherent cause of disruption. For example, Murphy(2006) categorized disruptions into “natural events”, “external – man made events”, and “internal– man made events.” Blizzards, labour strikes, and product recalls would be examples of each category respectively (Murphy 2006).
Another vital attribute is on how many spheres or disciplines of the supply chain have been affected by a given disruption at one time.
The third vital attribute is whether or not the disruption is associated an environmental change. Disruptions that cause an environmental change usually impact some form of the infrastructure for either a long time period or permanently.
The fourth and the final attribute of disruption is the duration of the disruption itself.
The framework tests the supply chain risks based on the above mentioned attributes and classifies them as deviation disruption or disaster, based on the severity of the disruption over the supply chain and the probability of occurrence as a parameter for risk calculation, assessment, prevention or mitigation.
In order to see the different aspect of risk management in a supply chain, a frame work prepared by Manuj and Mentzer( 2008) has been reviewed.The schematic diagram of the framework is shown below.
Global SCRM and mitigation framework from Manuj and Mentzer (2008a)
The framework is created in view with firms having a global outreach who source from different countries. This framework provided is a comprehensive one with both risk management and mitigation factors incorporated in to it. This framework proved to be ideal for risk management and mitigation in Dell, a truly global firm.
The framework adopts 5 step approach for Risk management and Mitigation.
Risk Identification: – Risk identification is an important stage in the risk management process. Consequently, by identifying a risk, decision-makers become aware of events that may cause disturbances. To assess supply chain risk exposures, the company must identify not only direct risks to its operations, but also the potential causes or sources of those risks at every significant link along the supply chain (Christopher HYPERLINK “#idb3″et al.HYPERLINK “#idb3”, 2002). Hence, the main focus of supply chain risk analysis is to recognize future uncertainties to enable proactive management of risk-related issues.
Risk Assessment and Evaluation: – After the risk analysis, it is important to assess and prioritize risks to be able to choose management actions appropriate to the situation. One common method is to compare events by assessing their probabilities and consequences and put them in a risk map/matrix
Risk Management Strategy: – Different strategies are adopted for various risks according to their importance and nature. Various strategies are suggested in the framework, such as Avoidance, Postponement, Speculation, Hedging, Control, Risk Sharing/Transfer, Security etc.
Implementation of Supply Chain Risk Management Strategy:- Once the various strategies have been decided, plans have to be made for implementing the strategies based on their priority.
Mitigation of Supply Chain Risk: – Mitigation is the most commonly considered risk management strategy. Mitigation involves fixing the flaw or providing some type of compensatory control to reduce the likelihood or impact associated with the flaw. A common mitigation for a technical security flaw is to install a patch provided by the vendor. Sometimes the process of determining mitigation strategies is called control analysis.
Expansion of the Framework and explanation of Potential Source of Disruption Recovery:-
The global SCRM frame work designed by Manuj and Mentzer (2008) was applied on the Dell’s Value chain to analyze and identify the Risk. The framework was expanded and broken in to various stage and then applied to the Dell Value Chain.
Risk Identification: – In this phase various risk were identified by brain storming. The risks were classified in the following sub heads.
Supply Risk: – This includes of Wrong Supplier selection ,Natural Calamity like Earthquake, Hurricane, Low Inventory levels, Quality Issues , Supply disruption and Price escalation.
Operations Risk: – This includes Exchange Rate, Country Factors, and Virtual integration network breakdown.
Demand Risk: – This includes New Competitor, Technology Changes and Demand Fluctuation.
Security Risk:- This includes Information system breach and Freight breaches.
Risk Assessment and Evaluation: – In this phase we have calculated the RPN number. Probability and impact of disruption were quantifies on the scale of 1 to 10 based on the hypothesis on the most severe to be 10 and the least severe to be 1.Eventually the most probable to be 10 and the least probable to be 1. Multiplying the Probability and Probability, RPN was calculated.
Risk Management:- In this phase we have suggested the various ways by which an organization can minimize the impact by the risk which were identified in the Risk identification. Risk’s having high RPN number such as “ Supply Disruption , Low inventory Level “ should be attacked first, gradually coming down to the lesser RPN numbers and taking proper measure to minimize the risk.
Risk Mitigation: – Identifying the severity of disruption, risk mitigation strategy was defined.
The academic framework by Manuj and Mentzer(2008) was tested hypothetically over the case of severe supply chain disruption faced by Dell and other computer systems manufacturer, during the time when Taiwan, one of the largest manufacturing base for semiconductor and motherboard production and assembly, suffered an earthquake, which is critically analysed as an unplanned unorganised risk for any functional supply chain in the manufacturing scenario..
After the step wise approach of finalising the framework and implying and expanding it over a real time already occurred situation of crisis it was inferred that severe supply chain disruptions have a great impact on the firm. The existence of a clearly articulated risk management plan for disaster-induced supply disruptions has not appeared in Dell’s official announcements during the six month period after the event in Taiwan. The inherent supply chain agility of this CDM Company, however, offered it several means of recourse during the month that followed the disruption. Dell operates on a configure-to-order basis, thus the final decision on product configuration rests with Dell’s customer. The moment an input’s price increases, customers may modify their configuration preferences by requesting less of the expensive input. Veverka (1999) reports that Dell changed its marketing strategy after the Taiwan earthquake in an effort to shift consumer preferences towards low
A second ingredient of Dell’s supply chain strategy, long-term contracts with suppliers, did not deliver steady prices; despite expectations to the contrary in the PC industry press (Deckmyn, 1999). Baljko-Shah (2000) reports that Dell was forced to buy regular DRAM memories after the Taiwan earthquake, while their prices were high. Dell was planning to incorporate in its most innovative product line best-available technology memories (RDRAM). Contrary to earlier announcements, computer processor unit (CPU) suppliers did not make available on time CPUs compatible with the new technology memories. Dell ended up buying conventional memories during the earthquake-induced shortage in order to meet advertised commitments to increased memory capability in its innovative products. Dell Computer Co. (2000a) announced that during the fourth quarter of 1999 it lost $300 million in revenue.
With respect to the framework by Manuj and Mentzer ( 2008) , the disruption at dell, in the case of earthquake in Taiwan at the supplier base, disrupting the dell’s supply chain can be covered by deploying the Risk resilience. The key points to mitigate the damages caused by the Supply Chain disruption are recommended as below.
Postponement of Risk :- Postponement entails delaying the actual commitment of resources to maintain flexibility and delay incurring costs (Bucklin, 1965). It appeared that an increasing trend toward off-shoring provided a motivation for form postponement. Yang et al. (2004) also argue that with increasing attention to mass customization, agile operations, and e-business strategies, there should be more interest in postponement; however, there has been an absence of empirical research supporting this implication. Since global supply chains face high risks, postponement becomes increasingly valuable as the proportion of off-shore components in the final product increases. Therefore, as a preliminary observation, we believe that as the proportion of off-shore components in the final product increases, the likelihood of a supply chain considering investment in form postponement will increase.
Speculation of Risk: – Speculation (also called selective risk taking) is a demand-side risk management strategy that is the opposite of postponement (Bucklin, 1965). It includes such actions as forward placement of inventory in country markets, forward buying of finished goods or raw material inventory, and early commitment to the form of a product, all in anticipation of future demand. In the interviews, speculation emerged as the most commonly used strategy to address uncertainty in the business Environment:
Hedging of Risk: – In a global supply-chain context, hedging is undertaken by having a globally dispersed portfolio of suppliers and facilities such that a single event (like currency fluctuations or a natural disaster) will not affect all the entities at the same time and/or in the same magnitude. For example, dual sourcing can be used as a hedge against risks of quality, quantity, disruption, price, variability in performance, and opportunism (Berger et al., 2004), but dual sourcing requires more investment than single sourcing.
Transfer of Risk:- The transfer of risk primarily encompasses a risk sharing strategy in a case of severe supply disruption by sharing it with 3rd party suppliers and allies.
CONCLUSION, RECOMMENDATION, IMPLICATION FOR FUTURE RESEARCH:-
Conclusion and Recommendation:-
Supply chain risk management is a decision process often requiring a multidisciplinary approach. Typically, risk mitigation and contingency planning entails skills in operations strategy and supply chains. After a close analysis of the Dell Direct Supply Chain system considering the impact of the Taiwan earthquake on the dell by the frame work developed by Munoj and Mentzer ( 2008). The overall objective of the framework is to reduce the impact of disruption and understanding the various factors that play a role in the post- disruption recovery and decision making process.
Dell Computer’s doctrinal commitment to minimal inventories, however, is well known. Companies with similar strategic commitments are unlikely to be interested in risk mitigation policies involving emergency inventories along the supply chain. In this case, risk transfer is left as the main option to consider, including contracts with emergency suppliers and insurance contracts. In light of Kunreuther and Bantwal’s (2000) discussion on rigidities in the successful introduction of Cat-Bonds, one alternative risk transfer instrument, the latter task may be challenging strategy to apply, but appears to be worth the effort.
Scope for Future Research :-
The Supply chain Disruption Management framework and disruption management process model have areas of interest that have not been able to be explored in this research leaving multiple area for future research. First area of research is understanding of the decision making process and its operational and behavioural factors. Second area of future research is the impact on the risk that disruption and firm strategies have.
Putting to practice supply chain theories in order to bridge supply chain
Strategy with company financial performance is a daunting task. Supply chain theory attempts to clarify the complex interconnections among many actors in supply networks. Yet, it is unclear whether simple formulas for supply chain performance, encompassing a few variables, will have general application to business practice. In addition, it is difficult to design empirical studies that would isolate the effect of supply chain strategy on business performance from other company decisions and environmental variables. The study of supply chain disruptions may provide an interesting exception to the latter restriction, in that disruption impact may test whether supply chain management affects Company risk structure. There is a fast growing literature on alternative methods of risk transfer. It would be interesting to explore whether the latter methods may shield customised product direct marketing companies from investor’s uneasiness after disruptions in component markets.
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