Dell’s Value Chain Dell Computer, with close supplier relationships, encourages

Question

Dell’s Value Chain

Dell Computer, with close supplier relationships, encourages suppliers to focus on their individual technological capabilities to sustain leadership in their components. Research and development costs are too high and technological changes are too rapid for any one company to sustain leadership in every component. Suppliers are also pressed to drive down lead times, lot sizes, and inventories. Dell, in turn, keeps its research customer-focused and leverages that research to help itself and suppliers. Dell also constructs special Web pages for suppliers, allowing them to view orders for components they produce as well as current levels of inventory at Dell. This allows suppliers to plan based on actual end customer demand; as a result, it reduces the bullwhip effect. The intent is to work with suppliers to keep the supply chain moving rapidly, products current, and the customer order queue short. Then, with supplier collaboration, Dell can offer the latest options, can build-to-order, and can achieve rapid throughput. The payoff is a competitive advantage, growing market share, and low capital investment.

On the distribution side, Dell uses direct sales, primarily via the Internet, to increase revenues by offering a virtually unlimited variety of desktops, notebooks, and enterprise products. Options displayed over the Internet allow Dell to attract customers that value choice. Customers select recommended product configurations or customize them. Dell’s customers place orders at any time of the day from anywhere in the world. And Dell’s price is cheaper; retail stores have additional costs because of their brick-and-mortar model. Dell has also customized Web pages that enable large business customers to track past purchases and place orders consistent with their purchase history and current needs. Assembly begins immediately after receipt of a customer order. Competing firms have previously assembled products filling the distribution channels (including shelves at retailers) before a product reaches the customer. Dell, in contrast, introduces a new product to customers over the Internet as soon as the first of that model is ready. In an industry where products have life cycles measured in months, Dell enjoys a huge early-to-market advantage.

Dell’s model also has cash flow advantages. Direct sales allow Dell to eliminate distributor and retailer margins and increase its own margin. Dell collects payment in a matter of days after products are sold. But Dell pays its suppliers according to the more traditional billing schedules. Given its low levels of inventory, Dell is able to operate its business with negative working capital because it manages to receive payment before it pays its suppliers for components. These more traditional supply chains often require 60 or more days for the cash to flow from customer to supplier—a huge demand on working capital.

Dell has designed its order processing, products, and assembly lines so that customized products can be assembled in a matter of hours. This allows Dell to postpone assembly until after a customer order has been placed. In addition, any inventory is often in the form of components that are common across a wide variety of finished products. Postponement, component modularity, and tight scheduling allow low inventory and support mass customization. Dell maximizes the benefit of postponement by focusing on new products for which demand is difficult to forecast. Manufacturers who sell via distributors and retailers find postponement virtually impossible. Therefore, traditional manufacturers are often stuck with product configurations that are not selling while simultaneously being out of the configurations that are selling. Dell is better able to match supply and demand.

One of the few negatives for Dell’s model is that it results in higher outbound shipping costs than selling through distributors and retailers. Dell sends individual products directly to customers from its factories. But many of these shipments are small (often one or a few products), while manufacturers selling through distributors and retailers ship with some economy of scale, using large shipments via truck to warehouses and retailers, with the end user providing the final portion of delivery. As a result, Dell’s outbound transportation costs are higher, but the relative cost is low (typically 2% to 3%), and thus the impact on the overall cost is low.

What Dell has done is build a collaborative supply chain and an innovative ordering and production system. The result is what Dell likes to refer to as its value chain - a chain that brings value from supplier to the customer and provides Dell with a competitive advantage.

Questions:

How has Dell used its direct sales and build-to-order model to develop an exceptional supply chain?

How has Dell exploited the direct sales model to improve operations performance?

What are the main disadvantages of Dell’s direct sales model?

How does Dell compete with a retailer who already has a stock?

How does Dell’s supply chain deal with the bullwhip effect?

Explanation / Answer

1) Dell encourages all its suppliers to focus on their individual technological capabilities to sustain leadership in their respective components. Suppliers are also forced to drive down lead times, lot sizes, and inventories. Dell constructs special Web pages for suppliers to plan based on actualend customer demand. On the distribution side, Dell uses direct sales, primarily via the Internet,to increase revenues by offering a virtually unlimited variety of desktops, notebooks, and enterprise products. Dell’s customers place orders at any time of the day from anywhere in the world. Dell has track past purchases and place orders consistent with their purchase history and current needs.

Dell has used its direct sales and build-to-order model to create this exceptional supply chain by integrating everything from the beginning to the end process. Dell starts by researching customer to find out what they want. As soon as an initial product is designed, Dell starts to market that product on the web-site. Dell does not start to produce any of the products until the customer tells Dell exactly what they want and pays for the product. Only then does the procurement process start.

Dell has improved the supply chain to make it exceptional by integrating the suppliers. The suppliers have a Web page which informs them of pending orders. This allows the suppliers to plan based on actual demand. This sales model created an exceptional supply chain because this integration of activities from the procurement of materials to the final product.

Dell’s direct shipment to the customer can be done in a matter of hours compared to months. In addition, this allows for exceptional cash flow compared to traditional methods since the payment is received before Dell pays for the components itself.

2) Dell has been able to exploit the direct sales model because of the online sales. Dell has been able to attract customers that value choice from all over the world. Dells prices are cheaper because they don’t have the brick and mortar to pay for and there is no option for the customers to customize their products.

Dell can introduce a new product to customers over the internet as soon as the first model or prototype is ready. In an industry where products have life cycles measured in months, Dell enjoys a huge early-to-market advantage. Dell has compressed its supply chain by directly linking the orders directly to the suppliers.

Suppliers can view existing orders so they know if or how many components to produce and ship. This supply chain compression gives Dell a substantial unit-cost advantage over someone else. With an inventory turnover rate of about 60 times per year, Dell has minimized the rapid depreciation and inventory write-off costs that typically hurt the desktop computers/personal computers industry.

Also, with the direct sales model, Dell operates on a negative cash conversion cycle. Which means, Dell receives its money prior to having to pay its suppliers for the components. Dell's direct sales model has improved operations because the customer can order exactly what they want without Dell having to worry about stocking product every time. Dell receives the orders and payment for the item and the customer receives the exact product and accessories they want within a day.

3) Dell’s direct sales model mostly has many advantages but there are a few disadvantages of the direct sales model. The biggest disadvantage is the shipping and others include the customer service component before, during, and after the product is completed. Dell handles all aspects of the computer building process directly and sending it to the customer. But, customer has to pay for the cost of shipping.

Generally, most of the companies mass produce their computera and send them in bulk. Dell is at a disadvantage here because, they are sending individual or very small orders directly to many consumers.

The other issue of the direct sales model is that Dell has to shoulder all the related support costs, from handling information requests before the sale to taking and tracking orders to handling service inquiries after the sale. It does not have the ability to pass any of those costs onto retailers because it is handling every aspect of the transaction. In summary, the direct sales model provides a cost advantage on the production side, but brings a cost disadvantage on the support side.

4) Dell competes by allowing itself low inventory and high customization by postponing assembly and manufacturing its products according to demand. This is relatively easy for them as their inventory is in the form of components which is easily assembled. Since many consumers like to see and feel a product before purchasing Dell had to create a different way to compete. The most obvious is the price issue. Since Dell doesn’t have to pay for the brick and mortar buildings, they can sell at a lower price because of their lower fixed costs.

The other bigway that Dell competes with a retailer that already has computers in stock is by allowing the consumer to customize their computer to exactly what they want. The stores have limited supplies with limited selection. Due to the supply chain model they have set up, Dell allows customers virtually unlimited option for them to customize their computer.

In addition, Dell can produce the computer in a matter of hours and have it shipped to the customer in a matter of days. In summary, Dell competes with a retailer by offering a lower price and allowing theconsumer to customize the product to the options that they prefer.

5) Theoretically the Bullwhip effect does not occur if all orders exactly meet the demand in each period. This is consistent with findings of supply chain experts who have recognized that the Bull-whip Effect is a problem in forecast-driven supply chains, and careful management of the effect is an important goal for in supply chain management. Therefore it is necessary to try to figure out demand as far in advance as possible.

Dell has achieved this by constructing online web-pages for the suppliers which allows the suppliers to view order for components they produce as well as how much stock is currently ininventory at Dell. This allows the supplies to build for demand in real time.

In summary, if companies can build in real time based on actual demand you will not have to worry about inventory build-up of unnecessary components and products. Dell’s customized web-page for suppliers allows them to reduce the bullwhip effect.

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