CASE STUDY & ARTICLES: DELL COMPUTER
ARTICLES & INFORMATION
Supply Chains - A Manager's Guide - Chapter 1 (abstracts)
by David A. Taylor
Cost reduction is the number-one reason that companies initiate supply chain improvements. But there’s an even bigger opportunity here: Supply chain improvements are good for the bottom line, but they can be even better for the top line. Getting the supply chain right can give a company a tremendous competitive advantage, and sometimes that advantage is enough to overturn an entire industry structure. The shining example of this kind of victory is the way Dell Computer systematically dismantled the rest of the personal computer industry. Prior to Dell, personal computers were manufactured in volume, shipped to retail stores, and sold individually to customers—pretty much like washing machines, televisions, and other appliances. It worked, but it required massive amounts of inventory, and customers were limited to a relatively small set of configurations. Dell changed all that by adopting a direct sales strategy, building every PC to order, and shipping it directly to the customer (Figure 1.1). Initially a mailorder house, Dell was one of the first to recognize the potential of the Internet, selling its first computers on line in 1996. Four years later it was doing $50 million a day from its Web site alone. In 2001, Dell became the largest producer of personal computers in the world, a position it surrendered only briefly after the merger of the former market leaders, HP and Compaq. It’s common knowledge that Dell’s success was built on a combination of direct sales with build-to-order production, but Dell wasn’t the first PC company to try this strategy. What really makes the company so successful is the way it executes the strategy. Dell is absolutely relentless about pulling time and cost out of its supply chain. Suppliers are located right next to Dell’s assembly plants, and they deliver a constant stream of components on a just-in-time basis. Monitors are shipped directly from the companies that make them and merged in transit with Dell’s own shipments, arriving in matching Dell boxes in a single customer delivery (as shown in Figure 1.1). The company has forecasting and planning down to a science, and it enjoys the financial advantage of a negative cash-to-cash time—it actually gets paid for its products before it buys the components. The perfection of techniques such as these gives the company a full five percentage points of profit advantage over its competitors, a virtually unassailable advantage in what is now almost a commodity market.
Figure 1.1 Dell’s Supply Chain Strategy
Supply Meets Demand at Dell Inc. (ACCENTURE)
Build it and they will come. This prophetic expression, first whispered to Kevin Costner by an unknown force in a 1980s American film about baseball, quickly became conventional business wisdom for IT organizations scrambling for a piece of the dot.com pie. In other words: Come up with an innovative product and your market will follow. As it turns out, this mantra (at least for many businesses) was spectacularly wrong. Fortunately, Dell Inc. wasn’t listening. Rather, it followed another voice – that of its founder, Michael Dell – who believed that direct-to-consumer, build-to-order processes would ultimately be more appealing to customers than stockpiles of new-fangled gadgets. In effect, Michael Dell turned conventional wisdom on its head with an entirely new business model: They will come and we will build what they need. Today, Dell never assembles a computer system until it has a customer order in hand. That, in turn, means ultra-low inventory levels (one tenth that of many competitors), as well as a favorable cash-conversion cycle (minus 20 days in a recent quarter). But are customers really willing to wait for delivery? Absolutely....
References: ZDNet India (2002), 'Dell:Building a World-Class Supply Chain ', http://www.zdnetindia.com/biztech/ebusiness/stories/62268.html, (03 Apr 2003). Dell Manages Profitability, Not Inventory
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