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Dell Computers is one of the worlds top PC makers and the worlds #1 direct-sale computer vendor. It was founded by Michael Dell who is also the CEO of this company. "Dell designs, develops, manufactures, markets, sells, and supports a range of computer systems and services that are customized to individual customer requirements" ("Business Summary," 2009). Customers can purchase Dell desktop computers, laptops, servers, printers, and software from the Dell Web site or speak to a sales representative over the telephone. The various customers of Dell include various U.S. government agencies, healthcare, corporate, and education entities. No other company executes this direct model better than Dell. Even during times of recession Dell has done well. In examining the Dell model this project focuses on what all we can learn from it.
This project is divided into three parts:
How Dell Works?
Dell from a Managerial Accounting Perspective.
Dell's accounting system.
HOW DELL WORKS
Dell is one of the most successful examples of a company executing the direct model, which has turned their business around. They use inventory management as their core strength and a means to boost profit margins. Lets examine the Direct model adopted by Dell in detail.
Dell eliminated the reseller, thereby eliminating the markup and the cost of maintaining a store. Traditionally, a long chain of partners was involved in delivering a product to the customer. Suppose a company XYZ manufactured a computer coded 1234. This system was first sent to a warehouse, which forwarded it to the dealer, who eventually pushed it to the consumer by advertising. The whole process was time-consuming. Now, if the consumer wanted to buy model 1235 instead of 1234 he couldn't because the company XYZ was only building model 1234 and pushing inventory into the channel. The result was a glut of model 1234 that nobody wanted. Inevitably someone in the distribution channel ended up with too much inventory and big price corrections used to take place. The retailer couldn't sell it at the suggested price, so that manufacturers would lose money on price protection. Companies used to practice 'channel stuffing' to clear out older technologies or to meet their financial targets. Ultimately it was the customer who was at loss as he had to pay for outdated systems.
Dell learnt that by building computers directly to fill their customer's orders, they didn't have finished goods inventory devaluing on a daily basis. They implemented JIT (Just In Time) production system to minimize raw material inventory. Hence, reduction in component costs could be passed on to their customers quickly. It also allowed Dell to deliver the latest technology to their customers faster than their competitors.
The direct model turns conventional manufacturing inside out. In conventional manufacturing there is always a stockpile of raw materials to ensure that the outflow of products is not disturbed due to rise in demand. But if demand conditions are unstable then there is a high risk of ending up with huge amounts of excess and obsolete inventory. In the direct model no stockpiling happens but information is the key here. The quality of information is inversely proportional to the excess inventory. Dell understood that if it had great information i.e., it knew what people want and how much they want, it would need very less inventory. Fewer inventories corresponded to less inventory depreciation. Component prices in the computer industry are always decreasing as technology keeps improving. Let's say that Dell has six days of inventory turnover time. Compare that to an indirect competitor who as 25 day turnover period and an additional 30 days where goods are flowing through the distribution channel. That adds up to 55 days. Hence, there's a difference of 49 days, and in 49 days, the cost of materials will go down by about 6 percent.
The main problem with obsolete inventory is that when a product reaches the end of its lifecycle the manufacturer has to worry about whether it has too much of the same in the channel and whether a competitor will dump the product, thus destroying profits for everyone. The direct model eliminates this perpetual problem of the computer industry. It also makes it clear as to when the customers are ready to move on technologically, alerting Dell when to apply the brakes. Hence, it does not have to subsidize its losses by charging higher prices for other products. Ultimately it is the customer who wins. Optimal inventory management is possible by squeezing time out of every step in the manufacturing process. Dell mastered the technique of high speed product deliveries. To achieve this speed it designed its products such that the largest part of the market was covered with the fewest number of parts. For example, 9 different hard drives were not needed if 98% of the market could be served with only 4. Dell configured systems with greater variety of low-cost parts and a limited variety of expensive parts. This decreased the number of components to manage, increased the velocity, and decreased the risk of inventory depreciation, which in turn increased its overall health.
In 1993, Dell had $2.9 billion in sales and $220 million in inventory. In 1997, it had posted $12.3 billion in sales and had an inventory of 33 million. Presently the inventory is measured in hours instead of days, which is a big achievement in itself. Dell backs its strategy by providing excellent after sales service. It maintains an interactive but simple online interface to attract more customers.
DELL FROM A MANAGERIAL ACCOUNTING PERSPECTIVE
The previous section dealt with Dell's strategy which has been so successful. The balanced scorecard plays a key role in formulating strategy. This section will try and link Dell's strategy to the lead and lag measures of a balance scorecard.
Dells lead indicators are as follows:
Dell's strategy (which includes its direct sales model and excellent customer service)
Self improvement (initiatives such as employee training)
Efficient supply chain (quality of the products is maintained with equal focus on speed)
Dell's lag indicators include cash flows, earnings per share, profit and other financial measures.
Dell's strategy as per its website is "to be the most successful computer company in the world at delivering the best customer experience in markets we serve." This strategy drives through each perspective that comprises a balanced scorecard. Following are the different perspectives of the balanced score card with respect to Dell's strategy:
Financial perspective: It basically sets criteria for the company so that they can determine their financial goals. This criteria includes profit, cash flow, earnings per share, revenue growth and gross margin by customer segment. These factors enrich the company profile.
Customer perspective: Customers feedback is valuable to any company. This perspective provides the company with information which is very vital in its functioning. It includes: customers' perception of Dell's product quality, after sale services, online interaction and customer retention. This helps managers assess customers' level of satisfaction with the services provided.
Internal Operations perspective: This perspective deals with strengthening one's core competencies by rectifying all loose ends in the manufacturing process. It includes defect rate within manufacturing operations, errors made by Dell's suppliers, speed of delivery, time spent in contacting customers and number of customer focused innovations. This helps managers to focus on those areas in which he wants his company to excel.
Learning and Growth perspective: The theory of self improvement is valid for every company which aspires to maintain its hold in the market for a long time. This perspective includes employee training hours, number of customer initiated product innovations, number of patents that approve Dell's direct model, number of emerging technologies evaluated and so on. The ultimate goal is to create value for the company which is only possible in the long run when companies are continuously improving.
(Pg 445 Managerial accounting)
Hence, using a balanced scorecard Dell measures its smaller-scale operational activities and makes sure that they are aligned with its larger-scale objectives in terms of vision and strategy.
CONCLUSION: WHAT CAN WE LEARN FROM DELL
From the above two sections we learnt about Dell's strategy and how it is formulated using a balance scorecard. This section briefly explains what all we can learn from Dell.