Analysing and evalution supply chain management

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The purpose of this paper to map, analyze and evaluate the supply chain management of Dell and to provide recommendations for performance improvement of supply chain integration.

"Building good business and supply chain strategies requires thorough assessment of industry trends, environment and industry competition characteristics and the firm's external (financial, customer /market) and internal (operations/supply chain, organization/ people) capabilities and resources" (Barney 2002, Kalakota and Robinson 2001, Kim 2003 and Porter, 1980 citied by Kim 2006) .

The business model has to be developed when the above analysis is completed. This process involves

"mapping lifecycles of market, product, supply chain (responsive, efficient), and technology to a firm's vision based on a balanced scorecard comprising financial, customer/market, business/supply chain process, and organization/people dimensions" (Kim, 2006).

"Supply chain management encompasses materials/supply management from the supply of basic raw materials to final product. SCM focuses on how firms utilise their suppliers' processes, technology and capability to enhance competitive advantage. It is a management philosophy that extends traditional intra-enterprise activities by bringing trading partners together with the common goal of optimisation and efficiency" (Tan et al. 1998 citied by Croom et al. 2000)

Supply Chain Management is defined as "Network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer." (Christopher 1992 citied by Croom et al. 2000).

Dell has a business model which sets a "differentiation advantage-based service excellence model focusing on excellence in customer contact, service, and relationship management, a cost advantage-based operational excellence model emphasizing seamless process management and efficient asset utilization" (Kalakota and Robinson 2001 citied by Kim 2006).

Dell strategy was to directly sell the computers from manufacturer to consumer. The direct selling business model of Dell "eliminated retailers, who added unnecessary time and cost" and also configure computers at the best market price. Dell used the advanced technology faster than other computer companies with "slow-moving, indirect distribution channels, turning over inventory an average of every four days" (Govindarajan and Lang, 2002).

The conventional 'value chain' of the PC industry was considered as "build-to-stock". Companies like HP, IBM, Compaq and Acer launched their goods based on market predictions. The goods were put in the warehouse and distributed to the retailers who charged 20-30 percent of the mark up price before they were sold to consumers. The 'upstream of the value chain' was controlled by manufacturers and the 'downstream of the value chain' was controlled by the distributors and retailers. (Govindarajan and Lang, 2002).

Indirect Channels:

The conventional value chain of the PC industry was reengineered by Dell by eliminating the middlemen. Dell outsourced all the peripherals of the computer but executed assembling them on its own. Dell did not rely on the distributor channels and despatched them from its company to the end consumers. The internet was used to take personalized orders from the customers. The consumers were happy with the products delivered and Dell in the long run eliminated the extreme use of its resources. In this way, Dell transformed itself into a 'service industry' from 'product industry'.

The Dell Direct Model:

The Dell Direct model concentrates on increasing the execution speed and minimising the inventory days. "The Dell direct model was characterized by high-velocity, low-cost distribution, direct customer relationships, build-to-order, Just-In-Time manufacturing, and products and services aimed at specific market segments" (Mendelson, 2001).

Supply chain case analysis:

As Porter (1980) highlights through his research that "the primary value chain activities of a firm are inbound and outbound logistics, marketing and sales, service, and operations; if a firm succeeds to implement these activities in an effective and efficient way, it can gain a considerable competitive advantage". Time Based Process Mapping (TBPM) has been used to analyze the supply chain of Dell. "TBPM is a tool for visually representing and analyzing the key interconnecting processes which collectively constitute the supply chain and product introduction processes in relation to time" (Mena, 2010)

Walk the process:

Dell follows the build to order model in which first the customer places the order. After this, lean manufacturing and Just-in-Time production takes place (Manataki, 2007). Once the customer order has been recorded, composition details are given to the manufacturing department and then the assembling of the components takes place. After the computer has been configured, the desired software will be installed and the final product is despatched to the customer.

Identify every process step:

The time based process map was drawn by identifying the value adding and non value adding activities.

Time Based Process Map:

Analysis of a time based process map:

The step "Create computers to order" corresponds that Dell has to design and define the requirements of the product and process (1st step). To buy the necessary mechanisms from its suppliers (2nd step), the order has been configured for the product (3rd step), Dell uses its sales channel to deliver the goods to the customer (4th step). The whole process is based on the Dell managing as a creator which indulges "business strategy, maintaining supplier relationships" (5th step).

In Step 1: "Design product and process" can be modified. To design a product and service, Dell has to look at the configurations of the product, then depending on these factors the product and process design is integrated.

In Step 2: "Buy standard item to stock", the steps receive, select and pay are done in succession, but Dell receives the payment before the order is been given to the supplier and then pays to the supplier.

In Step 4: "Sell using customized sales channel", after indentifying potential consumers in different channels, the customer relationships have to be managed at the same level as the identifying the corporate and individual customers.

In Step 5: "Manage as a creator" can be seen where Dell has to implement the strategy and manage the internal and external resources and maintain relationships with all the stakeholders.

The step 2 can be modified to "Buy standard item to order" and the following can be added to it. Identify own needs, Identify potential suppliers, Select supplier, Negotiate contracts with the suppliers, Share demand forecast and general info with the supplier, Share inventory from the supplier, Share info about end customer orders, Manage supplier, Pay supplier, Evaluate supplier, Provide feedback and support, Manage supplier relationships.

With speed reaction to the changes in the customer demand and low level of inventories, Dell can buy from its suppliers without having exceeded the inventory levels. As the customer pays before hand, Dell has the advantage of positive cash cycles. Sharing the information about the inventory, Dell maintains the relationships with its suppliers. ValueChain.Dell.com is a website through which Dell interacts with its suppliers to get "information about the inventories, supply and demand data, component quality metrics and new part transitions. In this way the suppliers decide on their production levels, hence avoiding the bullwhip effect" (Manataki, 2007). Dell maintains 6 days of inventory on average when compared to 42 days by its competitors.

The most important point in supply chain management is the requirement for flexibility with the high demand from the customers downstream specifically on product and quality. This gives rise to agile manufacturing. Agile manufacturing can be defined as a "reliance on mass customization or quick, responsive accommodation of varied demand in terms of volume, variety, and mix achieved through flexible operations" (Christopher and Towill 2002 citied by Frankel 2006). Agile manufacturing is usually required when "product variety is large, demand is highly unpredictable, and product cycles are short" (Frankel, 2006). Dell is the best example for agile manufacturing as it collects data from the consumers and then passes the information to the suppliers. Dell maintains the low levels of inventory with the help of suppliers by building partnerships and achieves highest levels of internal coordination. Dell has gained a lot by sharing the information with the suppliers and this resulted in "faster cycle times, reduced inventory, and improved forecasts and customers have also benefited by getting a higher-quality product at a lower price" (Stein and Sweat, 1998 citied by Li et al. 2005 ).

Supply Chain Integration:

"Effective integration of suppliers into product value/supply chains will be a key factor for some manufacturers in achieving the improvements necessary to remain competitive" (Ragatz et al. 1997 citied by Frohlich and Westbrook 2001).

Source: Frohlich and Westbrook

Dell is the largest direct seller of PCs in the world. Dell's success is attributed to the extensive use of internet for managing its supply chain. Its supply chain consists of three components namely Suppliers, Dell and Customers.

Integration can be divided into two types: Forward integration and Backward integration. Forward integration indulges the coordination and integration of the direct stream of information about deliveries involving suppliers, customers and manufacturing units. (Saunders, 1997; Trent and Monczka 1998 citied by Frohlich and Westbrook 2001). "The backward integration engages the backward synchronization of information technologies services and the flow of information from customers to suppliers" (Martin, 1992; Trent and Monczka, 1998 citied by Frohlich and Westbrook 2001).

The direct distribution channel looks small but it is complex as it gets order for computers from different parts of the world. "Dell has five manufacturing facilities in Texas, Brazil, China, Ireland and Malaysia, and hundreds of supplier companies. Dell's customers, and thus its supply chain, demand a very high degree of responsiveness as Dell builds most of its computers to order, rather than to stock, and the technology, and thus components, are constantly changing" (Brunn and Mefford, 2004). Dell gets most of its order through its website and the customers have the luxury of customizing the PCs based on their needs. Dell website sets the component rates on a regular basis to match supply and demand. Dell's ability to forecast demand and plan for schedules of productions gives the company an edge over its rivals when it comes to identifying and adjusting to changing consumer demand. This is done with the help of high level technology. When Dell gets the order for PCs, the order is passed on to its manufacturing service and to its suppliers concurrently as they can view the order catalogue and inventories with the help of dell's website. This allows suppliers to map with the production timeline with the customers demand. This is based on PULL principle of the supply chain management. This results in reducing the "bullwhip effect in the supply chain management of the Dell".

The model which Dell implemented for inventory reduction of hardware components is build-to-order model. As Dell does not sell the computer and other hardware devices through the retail outlets, the lead time is low as there is no inventory and the build up of components is not outdated. Even if there is low demand of components by the consumers, Dell does not get affected by its inventory levels. As mentioned earlier, Dell maintains 6 days of inventory on average when compared to 42 days by its competitors. The time between order placed by the customer and the despatch enables Dell to extend the number of components into its manufacturing areas in line with the demand by the customers. The time lag enables Dell to pursue greater reliable assembling timetable by altering the despatch schedules to the consumers. The despatch to consumers is done by third party companies like FedEx and UPS to guarantee quick transport and reduce the inventory at the retail outlets. Dell has build relationship with suppliers like Sony to deliver monitors, all Dell has to do is to inform Sony about the order details and Sony does all the transport work for Dell. "The Internet allows Dell to manage their worldwide logistics to minimize transportation costs and assure responsive delivery to customers and from suppliers" (Brunn and Mefford, 2004).

Dell shares sensitive information with its suppliers which enables Dell to enhance the quality of the services and timely availability of the production schedules and mass customization capabilities. Dell has proved its excellence in "direct marketing model, minimization of inventory costs, speed in production and delivery time, and cost-effective manufacturing processes" (Erevelles and Stevenson 2005).

Dell's method of assembling PCs when the order is placed is based on build-to-order model. Dell transmits the order to its assembly plants within a day and assembling the computer takes another day and despatching the computer to a customer is done within a week after the order has been received. Dell has been designed to support the build-to-order model which other industries struggle to adopt such forecast based method (Holweg et al., 2004).

Dell can function with "negative working capital uses the make-to-order model" as the payment for the goods is done through credit cards which make the direct payment for Dell. This enables Dell to have cash in hand for more time and makes the payment to all the suppliers on the later dates. Dell gains considerable financial benefit in contrast to the competitors who have great number of inventory level. Dell outsources its maintenance and support activities to the third party companies. Whenever this is service request raised to Dell, then Dell transfers the service request to the service providers ensuring that the service is done on a timely basis.

Dell has excelled in the supply chain management of computer industry. Dell creates and builds order schedule and forecasts the customer demand by updating its suppliers every 2 hours. The programme reveals the current consumer orders, orders which are in the queue, status of the inventory and supplier obligations. Dell's maintains all its manufacturing plants close to assemble and deliver at the agreed time. Because of this supply chain integration Dell maintains the "highest inventory turnover ratio" in the PC industry and delivers ninety percent of its goods (most of them are based on configuration as desired by the consumers) in less than five days when the order is placed (Dehning et al., 2006).

"Enhanced integration with suppliers can impact many dimensions of firm performance, including cost, quality, technology, delivery, flexibility, and profits" (Gupta and Zhender 1994 citied by  Dehning et al., 2006).

.

As Dell (1999) says "The link between day-to-day demand trend and the incoming material from the suppliers is absolutely critical to Dell's success-so that the shorter you can make the link the better off you are. Today, we have access to technology that greatly facilitates that information. We call this process trading inventory for information." The interface between the buyers and suppliers by sharing information is called "virtual integration". This interface was possible only through means of internet.

The inventory part of a company amounts for 30% of the capital of the company. As researched by Presutti Jr. (2002) "the average S&P industrial company holds about $500 million inventory or a 60-day supply which equates to $8 million a day to support the company's operations".

With the help of "e-procurement strategy", Dell maintains the inventory for less than 8 days by sharing inventory information with its suppliers.

"Supply chain planning, Just-in-Time production and delivery practice" are considered to be closely related to deliver high performance (Schroeder and Flynn, 2001 citied by Zhou and Benton Jr., 2007). Sharing information to suppliers, customer demand forecast and internal logistics are considered to be main motives behind supply chain planning. Making the best customer demand forecast and organize different roles in a organization with consumers and employees. "Inter-functional coordination within a firm is important because the alignment among the functions is necessary to achieve a firm's goal" (Hodge et al. 1996 citied by Zhou and Benton Jr., 2007)

Just-in-time production consists of five different strategies "pull system, cycle time reduction, cellular manufacturing, agile manufacturing strategy, and bottleneck removal" (Flynn et al., 1995 citied by Zhou and Benton Jr., 2007). The manufacturing is based on the demand by the customer when the order is placed in the pull system. The purpose of the pull system is to get close to what is required by the customer's demand in accurate and judicious method. "Cycle time reduction" comes into picture when assembling of computers is done in lesser groups; this increases the value and correctness of opinion. "Cellular manufacturing" recognises same components or same process in which the job is done which leads to deduction in "throughout time". "Agile manufacturing strategy allows production systems to cope with rapid demand changes, which enhances effective supply chain management." (Zhou and Benton Jr., 2007). "Bottleneck removal" stabilizes time, money & resources and increases the levels of manufacturing output. In a nutshell, Just-in-time production increased the receptiveness and effectiveness of the supply chain management.

The literature shows that effective "delivery practices" plays an important role in delivering high performances in supply chain management. Delivering the goods is another competitive advantage of Dell.

By collating all the above three areas of supply chain improvement, we can say that Dell has high inventory rate for low cost components. The interface between Dell and buyers enables the pull production system more efficient and facilitates the planning for supply chain management. By sharing information of the order catalogue and backlog with its suppliers, Dell reduces its inventory levels and reduces supplier's lead time (Zhou and Benton Jr., 2007). Delivery is done utmost speed without any delay. Above all, Dell's supply chain planning helps improve with the use of the above three techniques.

Dell mainly concentrates on operational brilliance in the dynamic PC industry where customer demands are volatile with varied, complicated and quickly changing customer needs. "Dell fully exploits its core capabilities and resources (seamless operations and supply chain process integration, precise execution ability of employees) through its famous direct model, where customers directly order what they want (configure-to-order, mass customization) through the Internet" (Kim, 2006).

 Performance characteristics of manufacturer storage with direct shipping network

Source: Sunil Chopra

The direct model allows the reduction in order inconsistency and response time to consumer priorities; it also allows increasing the operational level effectively and decreasing the expenses by delaying the assembling of the components till the order has been placed by the buyers. On top of it, the supply chain integration with the effective use of advanced information technology related to the suppliers and courier services despatching the PCs allows in lessening the inventory levels with efficient distribution. Dell demonstrates that the direct model is an amazing fit in the dynamic computer industry with its core resources and capabilities. To excel in the supply chain integration, "Dell has to clearly state strategic, operational, technological, cultural, and financial (cost-benefit) justification" (Kim, 2006).

Kim (2006) though his research has suggested that a "Process Chain Council" needs to be formed. This council comprises of senior management and the key executives in the supply chain organization. The council certifies quality control in all the facets of the organization. It acts as a principle council resolving the extent of process, structure, technological integration including of scheduling, implementation and evaluation. The council should have meet on regular basis working symbiotically with various departments. Trust i.e. faith plays a major role in binding the council together in making the decisions. A contract on paper will not be successful in binding the partners together. Toyota will serve as a best example of "lean/just-in-time philosophy" in managing the relationships among the suppliers.

"After the collaborative culture is developed, the process chain council need to jointly develop detailed supply chain strategies (efficiency- or responsiveness-based) that are consistent with the business model, competitive strategies (cost- or differentiation-based, with broad or narrow market coverage), and a vision for the total supply chain/network" (Chopra and Meindl, 2004 and Porter, 1980 citied by Kim 2006). To build process chain synchronization, a framework of developing competitive strategies and priorities, aligning assets and capacity to demand and integrating processes, infrastructure and information technology has to be developed.

Process chain synchronization.

Supply chain management comprises of "Enterprise resource planning (ERP: backbone of e-business, linking various business functions), Product lifecycle management (PLM: managing a product lifecycle of design, source/make, sell and service/support), Customer relationship management (CRM: managing customer service, relationships, and sales), Supply chain management (SCM: consisting of supply chain planning (SCP: including demand content management, sales and operations planning, materials and capacity planning, transportation planning, inventory planning) and Supply chain execution (SCE: including order, warehouse, and transportation management)), and Supplier relationship management (SRM: managing supplier interactions, relationships, and procurement)" (Chopra and Meindl 2004  citied by Kim 2006).

To attain excellence in supply chain integration, the supply chain managers have to apply the wheel by planning tactically and implementing the process by understanding.

Source: Kim (2006)

By understanding the situation, market rivalry and consumer demand, setting up the vision for the managers, construct a business model supported by mutual understanding between the suppliers, implementing a strategy which strengthens the competitive advantage, following the processes designed to maintain low inventory levels, making use of the information technologies, driving people to work towards the common goal and executing the framework in a precise and timely manner.

Recommendation:

Dell's direct model gives it a leading edge among its competitors. With the help of advanced information technology, a powerful tool which offer customers and suppliers a unique experience and on the same lines it gives Dell an opportunity to progress on its supply chain management.

The secret of Dell's success is its integrated supply chain management. In the future, it will rely on the collaboration with Oracle to provide "seamless information integration, effective synchronized planning and efficient workflow conditions" (socialtext website).

Information Integration plays a significant role in the supply chain management in a firm. Dell moved away from UNIX technologies to Oracle Enterprise Resource System (OERS) to raise the performance, scalability, security and reliability of its current systems. This will help Dell in increasing the "transaction processing, business intelligence, and content management applications" with low costs on the information technology (socialtext website).

 

Source: socialtext

Synchronized Planning will help Dell to prepare, predict and restock the required inventory. The data collated, arranged and circulated in the process will help to form relationship among the consumers, suppliers and Dell in maintaining the predicting the orders and reaching the desired inventory levels.

 

Source: socialtext

After Dell has migrated from UNIX system to Oracle Enterprise Resource System (OERS), it has increased its preciseness in getting information about "operating expenses, getting customer segmentation, sales margin and other transactional data" (socialtext).

This gives Dell a unique competitive advantage over other companies in the computer industry. The effective supply chain integration with its customers and suppliers will help Dell sustain the cost leadership in the PC industry by cutting costs and increasing efficiency. In this way, the supply chain in Dell will help in improving sales and increase the profit margin.

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