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Dell Inc. was formed in 1984 as "PCs Limited" by Michael Dell. He started business with the belief that by selling personal computer systems directly to customers, he could better understand customers' requirements and deliver the most effective solution to meet their needs. The corporation altered its name to "Dell Computer Corporation" in year 1988 and then to "Dell Inc." in 2003.
Dell had established a distinctive direct model of selling personal computers (PCs) side-stepping the conventional model of selling them through the reseller network. In the conventional model, resellers bought PCs from companies and circulated them to the customers. Using the direct model, Dell delivered customers with appropriate products, built only after acquiring the order from them. In this practice, it was able to reduce inventory costs and overheads as it didn't need any intercessors. By this model, Dell was able to deliver its customers the latest available technologies, performance, and supreme value at reasonable prices.
Dell's Supply Chain Strategy(The Direct Model)
Source: supply chain, www.businessintelligence.com
The first computer that the Dell presented in 1985 was named Turbo PC, and was promoted in computer magazines and sold straight to customers. Dell also began hiring computer literate sales employees, to guide customers in their choice of systems. Each system was assembled rendering to the preferences of the customers. This possibility helped customers to get computers at a price lesser than other brands. Dell achieved sales of United States Dollar (US$) 6 million in its first full year in business, approaching US$40 million the next year and now is a US$26.5 billion giant and its Direct model of Supply chain played a very important role in its success.
SUPPLY CHAIN MANAGEMENT (SCM)
A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request (Chopra et al (2003). Also we can say, a supply chain (SC) contains all organizations that work together in order to create and supply a finished product to the final consumer, as well as the consumer himself. For example a simple, direct Supply Chain would be a baker shop, which contains one supplier, a distributor of the materials, the bakery and a customer.
Supply Chain Diagram (source :www.axtin.com\solution\supply_chain)
Supply chain management has the objective to have the desired products in the desired quantities at the desired time at minimum cost, a state that would assure optimum service levels for the customer and optimum performance for the firms as a whole and distinctly.Looking at the different dimensions of supply chain, we can categorize three types of supply chain management decisions:
Strategic decisions contain the design and arrangement of the supply chain, capability planning and facility location.
Tactical decisions contain supplier variety and valuation, bidding and contracts.
Operational decisions contain inventory management, production plans and schedule and replacement policy.
Now we will take a look at supply chain management model of Dell Inc.
SUPPLY CHAIN MANAGEMENT AT DELL
From the beginning Dell adopted the direct sales method. At the starting computers were sold over the phone and they were built in accordance to the consumer's requirements. Dell took a short break of using the retail channel from 1990 to 1994, but in year 1994, Dell looked at its business model and recognized that the use of indirect supply channels had not been very fruitful. Regular PCs sold through retail channels could not deliver users the benefits of customization. Although sales through the retail channels were rising, but Dell was not making any profit on these sales.
In mid-1994, Dell decided to exit the retail market and concentrate on the direct sales model. Again after re-introducing the direct model, Dell experienced impressive progress and sales improved to US$ 3.5 billion in year 1994-95, with a 3% share in the United States market. By 1999, Dell commanded a 16% segment in the United States computer market. Dell resumed to its direct model and grew speedily in the mid-1990s, thus becoming in year 1999 the number one personal computer seller in the United States and number two global rank. Dell's success was extraordinary from a student's personal company selling no more than 100 computers in its first years of survival; it became a huge company of more than 35000 employees and over US$ 25 billion sales in 2000, challenging "giants" such as IBM and HP.
3.1) The Direct Model:
Dell's direct selling model gets its origins from Michael Dell's thought of selling computers straight to the customer excluding the need for intermediaries and distributors. Michael assumed that by selling PCs straight to the consumers, the firm would be able to better understand the needs of its customers.
The direct model states to the point that Dell does not use the retails channel, instead it sells its PCs directly to consumers. This way the in-between stages that may add time and cost are removed, and Dell is directly linked to its consumers.
Dell's Direct Model (source: e-learning.dmst.aueb.gr/mis/Cases/Dell/DEll_model.jpg)
In fact, Dell sells straight to all its clients, "from home-PC users to the world's largest corporations" (Dell.com). In this way it makes a direct relationship with every single customer, which turns out to be a great foundation of competitive improvement. As Michael Dell has specified, that this direct relationship "generates valued information" about the consumer, therefore Dell knows who their end users are, what they have purchased from Dell and what their likings are. This is the fact that allows Dell to propose add-on products and services, and stay, closer to the customer. Lawton et al (2001) propose, that this "provides Dell with a wealth of marketing and product development information".
Indirect Model of PC Industry
Dell's Direct Model
Dell serves a wide-ranging variety of clienteles. They vary from governmental organizations to individual buyers.Â To handle this multifaceted market, Dell benefits from segmenting its customers.
Dell roughly distinguishes three customer segments:
Large organizations (large businesses or government institutes)
Small and medium companies
The prime focus is on large organizations as 70% of Dell's sales relate to them. (Magretta,J(1998) Harvard Business Review). It should also be mentioned that splitting up is getting better and better in order to improve approach the customers. This point, in blend with the direct model, leads to the capability to better forecast demand (Magretta,J(1998) Harvard Business Review).
3.1.1) VIRTUAL INTEGRATION
Particularly in the case of large clienteles, the direct relationship is elevated to virtual integration. With the aid of information technology and old-style face-to-face human interaction, customers work with Dell as companions. Virtual integration depends on information technology to develop the value chain of manufactures, suppliers, and clienteles.Â The benefits it creates are coordination and focus.Â These qualities make virtual integration an extremely efficient organizational model.
There are two main services that bring Dell and its customers nearer; they are Premier Pages and Platinum Councils. Premier Pages, now known as Premier.Dell.com, are tailored Information Technology procurements and support sites for big customers, which facilitates them in deciding and managing their purchases from Dell, therefore leaving to salespeople a more advice-giving role. Premier.Dell.com signifies a tailored sales channel and as Dell has realised how beneficial that is, it has enlarged the number of Premier Pages from 1000 in 1998 to 50,000 in 2000. Platinum Councils are regional conferences of Dell's largest clienteles, where executives, salespeople and experts to discuss their experience with Dell and their requirements and expectations from technology. Virtual integration allows Dell to meet clients' needs quicker and more capably than any other model.
But this model can have a disadvantage in providing support as there are no intermediaries in direct model so support is all dependent on Dell only and if in near future cost of PCs goes very low then it seems support will become costly for dell Inc.
3.2) Inventory Management
In the course of the second quarter 1993-94, Dell had sales inventory for 55 days, and its cash deficit was around US$ 154 million. Dell figured that the cash shortage was mainly due to its poor inventory management and so it was decided to make over it. Dell understood that while it was providing its consumers the product within five days of getting the order, the average lead time for buying the components was 45 days. The company also recognized that in order to be on par with the top PC manufacturers like Compaq and IBM, upholding a high level of quality was necessary. Though, this required more cash.
The top executives of the company come across and decided to raise their funds in hand by reducing inventory. Nevertheless, managing the difference between the lead times for components and lead times assured to the clienteles was difficult. The new supply chain had to accomplish with low component levels but without increasing the customer lead-time. Dell decided to produce computers as per the orders it received and not to hold surplus inventory or finished products. The Heads of the Manufacturing and Marketing sections decided to reduce component inventories. At the time of starting this procedure, their main focus was to reduce the inventory by 50%, improve the lead time by 50%, reduce out-dated inventory by 75% and reduce the assembly cost by 30%.
Sometimes later, Dell decided to substitute inventory with information, on the ground that with more information on the wants and necessities of the target clienteles, the size of inventory could be additionally reduced. Dell decided to move on the information to the suppliers, as they were given admission to the company's internal data about the demand for particular components.
In the beginning, the component inventory fell from 70 days to around 35-40 days, and then to 20 days. By reduction in components inventory which had a positive effect on the cash flow, Dell decided to bring other jobs related to production in line with the reduced inventory.
In the procedure of decreasing inventory, Dell's executives detected that as the inventory was reduced, the component lead time enhanced while the completed product inventory also reduced. This occurred because Dell was arranging in a line inventory and sales, instead of carrying inventory against predictable sales. Additional benefit was in terms of yields. The returns rose as Dell was able to abolish carrying costs and also out-dated stock, and gain savings due to inexpensive components. The total savings Dell derived from handling the inventory stimulated in trying to match supply and demand on a monthly, weekly and daily basis. This reduced the difference in supply and demand and slowly it was no longer essential for Dell to uphold any component inventory.
Dell's Inventory Turnover
3.3) JUST IN TIME (JIT) Practice
Just-in-time is a measure and idea that has grown wide-ranging approval in the business world over the last decade because companies are becoming more and more competitive nowadays. The idea behind JIT, is to have the supplies in a firm at the exact moment that they are needed.
Just in time has a complete strategic focus to deliver businesses with an excellent amount of savings. There is a huge range of firms and industries that have earned these cost savings.
Dell is the only company within its computer technology industry that efficiently utilizes just in time. Dell has "revolutionized the selling of personal computers, using a direct-business model whose fundamental tenets include taking custom orders directly from customers, thereby reducing inventory and streamlining distribution" (Technology Review, July 2001). After Dell receives a customer order, they then begin assembly of the product that the customer requires. This demonstrates a pull system in the supply chain. A pull system is responsive whereby production is implemented in response to a customer order. This unique supply chain delivers Dell with a competitive gain within its industry allowing it to become the market leader over Compaq in 2001 (news.cnet.com).
Dell's place within its industry is a outcome of their strategic focus to decrease inventory and reorganise distribution. This strategy has allowed them to keep only five days of inventory on hand. This is the least amount of inventory of any firm within this industry, as stated by Mike Gray, Supply Chain Evangelist for Dell. He specified that most companies within the computer industry currently hold between 20 and 30 days' worth of inventory (http://www.managementparadise.com/forums).
The limited quantity of inventory held by Dell has generated value for their customers. The value produced for their customers is a role of incorporating the entire value chain invention, growth, design, manufacturing, logistics, service, delivery and sales. Integrating the complete value chain generates visibility and delivers stronger relationships among Dell and their clienteles and suppliers. This visibility lets them to only "invest in what their customers want, rather than trying to guess what they might want" (Technology Review, July 2001). Also Dell has a viewpoint to "only manufacture what their customers ask them to make, when they ask them" (Technology Review, July 2001).
This strategy offers Dell with a time-to-market benefit. They can avail their customers the newest and ultimate Pentium 4 and all related operating systems 85 days faster than HP. This is factual in regards to research that shows Hewlett Packard has 63 days of inventory and a distribution channel with 25 to 30 days of inventory as well. Collectively, HP has about 90 days of inventory compared to Dell's five (Technology Review, July 2001). The least amount of inventory held by Dell delivers them with an economic advantage, because the value of constituents and manufacturing materials drops about one per cent per week. But the five day inventory also reduces a customer's ability to change their wants before they take delivery of their computer. Like if a customer tells a company what they need today and will be given a delivery time of 60 days, probabilities are that by this time the customer may want something else and can ask again for a replacement but it is not possible in rapid manufacturing and delivery system.
Dell's use of just in time outcomes in cost savings, narrow waste, and the capability to offer their suppliers with more information. In the finale these benefits result in a cost saving for Dell and greater revenue. Since Dell holds minimum inventory, they do not have to stock raw materials or finished goods inventory.
But just in time can be risky as well in some cases. "In just-in-time, everything is very interdependent. Everyone relies on everybody else" (Greenberg, 2002). So because of this robust interdependence with JIT, a flaw in the supply chain produced by a JIT weakness can be very expensive to all linked in the chain. JIT measures can be uncertain to certain businesses and at risk for the supply chain in circumstances such as labour strikes, disturbed supply lines, market demand variations, stock outs, and deficiency of communication upstream and downstream in the supply chain and unforeseen production interruptions.
Labour strikes, stock outs, and port lockouts etc. can speedily disturb an entire supply chain where JIT methods are in place. "Adhering to the just-in-time concept can be expensive in times of emergency such as at ports" (Greenburg, 2002). For example if a ship arriving from somewhere full of supplies for a particular company cannot make it to shore, the company using JIT will have a very little inventory to pay compensation for the emergency. This deficiency of inventory is correctly what makes JIT so great to firms in dropping costs, however making it risky also as in some cases not having enough safeguard inventories to respond and keep the supply chain moving.
Communication is main thing in a JIT type supply chain. There may be a risk with JIT if there is a communication breakdown and the firm cannot get the right amount of supplies needed to keep the just-in-time system running smoothly.
Weaknesses in JIT systems should be recognized. "From Cisco routers to Dell computers, companies have found that their just-in-time manufacturing systems have let them down" (Johnson, 2001). So the effects and risk to the supply chain must be heavily considered. Although JIT has its flaws, but in most cases, like Dell Inc. the benefits overshadow the threats to the JIT enabled company.
3.4) BUILT TO ORDER Practice
According to Michael Dell, "the fresh business model that Dell has initiated within the computer industry has broken the "we-have-to-develop-everything" existing view of the world and has managed to highlight component assembly as a respectful core activity of a computer company" (Magretta, J. (1998) HBR). This build-to-order approach takes this accomplishment one step further. Build to order as a tactic is defined by Gunasekaran et al as "a value chain that manufactures quality products or services based on requirements of an individual customer or a group of customers at competitive prices, within a short span of time, by leveraging the core competencies of partnering firms or suppliers and information technologies, such as the Internet and WWW, to integrate such a value chain". Therefore, in Dell, a computer is built only after a client has placed an order, after then lean manufacturing and just-in-time assembly take place. This shows that once an order is placed, configuration particulars are sent to the manufacturing level and the assembly starts. Once the computer is assembled and the demanded software is downloaded, it is shipped to the customer.
3.5) SUPPLIERS Integration
In order to accomplish its operations with low inventory levels, Dell collaborated carefully with its suppliers. The company's tracking down decisions were based on four criterias:
Suppliers were selected on the basis of cost (given a weightage of 30%) and quality, service and flexibility (with a weightage of 70%). Mentioning on the supplier
selection process, Kevin Kettler, Chief Technology Officer, Dell said, "Features, functions and performance level is one piece, but we also ask can they hit the quality requirements? Can they provide continuity of supply for the volumes we're looking at? Do they have the capability to diagnose a customer-related issue and interact? Do they have capabilities to quickly diagnose it with Dell as we trace it back to a component-level issue? What's a favourable arrangement for both Dell and the company so that we're both successful?"(source:
Dell divided activities related to contracting like cost negotiation, contract terms, source selection from commerce connected activities like purchase order release, delivery management and payment. Cost is centrally managed while delivery is managed regionally.
So we can see that Dell is doing fairly well at its operations this can be seen in the analysis and in their balance sheets too. Just there is a need of some prudence in the direct model regarding support costs as they can be a trouble in case if prices for computers go very low in future then as Dell has no intermediaries then all support cost will have to be paid by dell only which can affect its profit margins in a significant way.
Also some care should be taken for just-in-time process cause if supplies are hindered then it can be a huge trouble for the production line.