Operating Model Of Dell

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The traditional distribution system of the PC industry is based on an indirect model. The makers sell the products to distributors and then sell them to different retailers, who sell products and services to the final customers. However, this approach inherent weakness like high inventory cost and inaccurately forecast demand. The company that held this opportunity was Dell which opened up a new business model based on selling products directly to customer and building product only when an order received. In Dell, this kind of direct model of contact is fully based on virtual integration in which the customer and supplier become part of the company. Dell's business model combines 2 components, direct sales and build to order production.

The direct sales approach is developed on two key aspects which are direct customer relationships and customer segmentation. Dell sells directly to customers and builds up a direct relationship with them. This direct relationship was important to Dell for cost saving and gather detailed knowledge about its customers. The aim of the direct approach is to make customers as partners and communicate closely with them. For example, Dell's senior technologists regularly meet with customers to exchange sights on products and needs. The intensive communicate let Dell to identify customer trends early therefore the company can keep the inventory down and react to the customer wants before its competitors can. With the focus of customers, Dell started segmenting by customer but not product. Dell realised that different types of customers exist, with different types of needs. To better target the needs of different customers, the sales department was spilt into for large companies, midsize companies, government and education institution and small customers. For example, Dell has customized the support site into different segments and people are going to see pages different from those people in other segments. Each segment has become a separate business unit, organising by customer type rather than product lets Dell refine the relationship, also allows Dell to monitor the profitability, better forecast future product purchases and make share in each segment.

Dell's build to order production relates to lean manufacturing and just in time production. Dell aims to reduce the inventory level and suppliers only require refilling parts when they are needed and retain ownership of parts until they are used. Moreover, Dell's strategy goes even further than lean manufacturing and achieves mass customisation of products. [2] Furthermore, under build to order production, Dell must make sure have enough parts to quickly fill order and unpredictable sizes. This requires very close coordination with suppliers and treats the suppliers as partner. To maintain this, Dell developed a good relationship with a limited number of suppliers and kept them as long as they are world class technical and quality leader. In real time, Dell tried to use information technology (IT) to facilitate communication and replenish the needs to suppliers.

The direct model of Dell is simple in idea but involves great difficulties in implementation. Therefore, IT department in Dell have to help refine and extend the business model. Dell uses IT to drive operating practices, all the way from customers, suppliers and outbound distribution. Advanced IT application are in evidence throughout Dell business processes like orders are entered by customer online into the Dell Order Management System (DOMS). Also, information sharing and notifies suppliers to ship monitors by Dell Logistics System. The use of IT significantly increases efficiency in production processes, it also vital in connecting Dell to its suppliers and customers, therefore allowing Dell to reach virtual integration all the way through the entire value chain.

It is believed that there are number of strengths inherent in Dell's operation model. The contribution of IT to operational efficiency can be seen in Dell's inventory level. Michael Dell said that Inventory is the worst thing to own in an industry, especially high tech industry. Under virtual integration, Dell's days of inventory in third quarter 2010 was only 8 days and this inventory level is the lowest in the industry which 20 days in IBM and 30 days in HP. Using IT to form a real time sharing of information on orders and production throughout Dell's entire supply chain allow information to substitute for inventory. Furthermore, under Dell's build to order production, the company can also enjoy a cash management advantage. The model lets Dell bill the customers immediately, however pay suppliers later which let the company float the account receivable cash and pay for its operation effectively. In third quarter of 2010, Dell has achieved a cash conversion cycle of negative 36 days. That means it operates with negative working capital, reducing the need to finance its operations and keep the company more agile. The model enables Dell to uphold an efficient cash conversion cycle, which compares favourably with others competitors in the industry.

On the other hand, the weakness of Dell's operating model is lack of strong ties with computer retailers when comparing to others competitors. Also, the direct model involves problem like customers cannot go directly to retailers as Dell does not use distribution channels. People cannot buy Dell's products as simply as other competitors. Also, online order may lead Dell hard to expand and growth in overseas market. For example, some of the less developed countries may lack of IT infrastructure development and also some of the Europeans countries not always use credit card for online purchase. These all will hinder the sales growth and market share of Dell in global market as highly rely on online order. Evidence has been proven that Dell's revenue growth rate in 2009 in global market was 0% and -13% in 2010. Moreover, even though Dell has a close relationship with supplier there may still involve supplier risk. Dell reliant on few number of large suppliers like Intel, AMD, high risk involve like potential disruption of parts or sudden increase in prices which may badly affect the margin. The dependency on few suppliers locks Dell in a period and makes the company hard to switch supply due to lack of large suppliers in the world and the switching cost will be relatively high.

In conclusion, Dell has grown rapidly to develop into one of the top three vendors in the PC industry. The operating model aim to achieve virtual integration and stitches all the strategic components together. The key to Dell success has been its direct sales and build to order business model. Direct sales approach emphasis on direct customer relationship and customer segmentation. Furthermore, build to order production operates under just in time assembly and maintain a close relationship with suppliers. Moreover, Dell's use of IT plays a critical role in the implementation of its business model and has been the key element in the refinement and extension of that model. In addition, Dell's operating model help Dell's to develop strengths like improving inventory turnover and efficient cash conversion cycle. Also, there may be weaknesses at the same time such as difficulties in expanding to overseas market and supplier risk. It is believed that in long run, the model behind Dell will still bring benefit to the company, however continue improvement will still become an important issue for Dell to uphold their competitive advantage.