INTRODUCCION A LA LOGISTICA UNIVERSIDAD DE ANTIOQUIA

DELL - CASE STUDY:

Distribution And Supply Chain Innovation

http://www.marsdd.com/articles/dell-distribution-and-supply-chain-innovation/
Areti Manataki - A Knowledge-Based Analysis and Modelling of Dells Supply Chain Strategies
Roman Kapuscinski, Rachel Q. Zhang, Paul Carbonneau, Robert Moore, Bill Reeves - Inventory Decisions in Dells Supply Chain

In 1983, 18-year-old Michael Dell left college to work
full-time for the company he founded as a freshman,
providing hard-drive upgrades to corporate
customers. In a years time, Dells venture had $6
million in annual sales. In 1985, Dell changed his
strategy to begin offering built-to-order computers.
That year, the company generated $70 million in
sales. Five years later, revenues had climbed to $500
million, and by the end of 2000, Dells revenues had
topped an astounding $25 billion. The meteoric rise of
Dell Computers was largely due to innovations in
supply chain and manufacturing, but also due to the
implementation of a novel distribution strategy. By
carefully analyzing and making strategic changes in
the personal computer value chain, and by seizing on
emerging market trends, Dell Inc. grew to dominate
the PC market in less time than it takes many
companies to launch their first product.
No more middleman
Dell started out as a direct seller, first using a mail-
order system, and then taking advantage of the
internet to develop an online sales platform. Well
before use of the internet went mainstream, Dell had
begun integrating online order status updates and
technical support into their customer-facing
operations. By 1997, Dells internet sales had reached
an average of $4 million per day. While most other
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PCs were sold preconfigured and pre-assembled in
retail stores, Dell offered superior customer choice in
system configuration at a deeply discounted price,
due to the cost-savings associated with cutting out
the retail middleman. This move away from the
traditional distribution model for PC sales played a
large role in Dells formidable early growth.
Additionally, an important side-benefit of the
internet-based direct sales model was that it
generated a wealth of market data the company used
to efficiently forecast demand trends and carry out
effective segmentation strategies. This data drove the
companys product-development efforts and allowed
Dell to profit from information on the value drivers in
each of its key customer segments.
Dells Supply Chain
Dells supply chain works as follows. After a customer
places an order, either by phone or through the
Internet on www.dell.com, Dell processes the order
through financial evaluation (credit checking) and
configuration evaluations (checking the feasibility of a
Indirect Distribution Channel of the PC Industry
Dells Direct Distribution Channel
specific technical configuration), which takes two to
three days, after which it sends the order to one of its
manufacturing plants in Austin, Texas. These plants
can build, test, and package the product in about
eight hours. The general rule for production is first in,
first out, and Dell typically plans to ship all orders no
later than five days after receipt. There are, however,
some exceptions. For example, Dell may manipulate
the schedule when there is a need to replace
defective units or when facing large customers with
specific service-level agreements (who have non-
standard quoted manufacturing lead times) for their
orders.
Dell pursued an aggressive manufacturing strategy of
virtual integration. Dell required a highly reliable
supply of top-quality PC components, but
management did not want to integrate backward to
become its own parts manufacturer. Instead, the
company sought to develop long-term relationships
with select, name-brand PC component
manufacturers.
In most cases, Dell has significantly less time to
respond to customers than it takes to transport
components from its suppliers to its assembly plants.
Many of the suppliers are located in Southeast Asia
and their transportation times to Austin range from
seven days for air shipments to upwards of 30 days by
water and ground. To compensate for long lead times
and buffer against demand variability, Dell requires its
suppliers to keep inventory on hand in the Austin
revolvers (for revolving inventory). Revolvers or
supplier logistics centers (SLCs) are small warehouses
located within a few miles of Dells assembly plants.
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Each of the revolvers is shared by several suppliers
who pay rents for using their revolver.
Dell does not own the inventory in its revolvers; this
inventory is owned by suppliers and charged to Dell
indirectly through component pricing. The cost of
maintaining inventory in the supply chain is, however,
eventually included in the final prices of the
computers. Therefore, any reduction in inventory
benefits Dells customers directly by reducing product
prices. Low inventories also lead to higher product
quality, because Dell detects any quality problems
more quickly than it would with high inventories.
This just-in-time, low-inventory strategy reduced
the time it took for Dell to bring new PC models to
market and resulted in significant cost advantages
over the traditional stored-inventory method. This
was particularly powerful in a market where old
inventory quickly fell into obsolescence. Dell openly
shared its production schedules, sales forecasts and
plans for new products with its suppliers. This
strategic closeness with supplier partners allowed Dell
to reap the benefits of vertical integration, without
requiring the company to invest billions setting up its
own manufacturing operations in-house.
Dell wishes to stay ahead of competitors who adopt a
direct-sales approach, and it must be able to reduce
supplier inventory to gain significant leverage.
Although arguably supply-chain costs include all costs
incurred from raw parts to final assembly, Dell
concentrates on Dell-specific inventory (that is, parts
designed to Dells specifications or stored in Dell-
specific locations, such as its revolvers and assembly
plants). Because assembly plants hold inventories for
only a few hours, Dells primary target was the
inventory in revolvers. Dell has a special vendor-
managed-inventory (VMI) arrangement with its
suppliers: suppliers decide how much inventory to
order and when to order while Dell sets target
inventory levels and records suppliers deviations
from the targets. Dell heuristically chose an inventory
target of 10 days supply, and it uses a quarterly
supplier scorecard to evaluate how well each supplier
does in maintaining this target inventory in the
revolver. Dell withdraws inventory from the revolvers
as needed, on average every two hours. If the
commodity is multisourced (that is, parts from
different suppliers are completely interchangeable),
Dell can withdraw (pull) those components from any
subset of the suppliers. Dell often withdraws
components from one supplier for few days before
switching to another. Suppliers decide when to send
their goods to their revolvers. In practice, most
suppliers deliver to their revolvers on aver-age three
times a week. To help suppliers make good ordering
decisions, Dell shares its forecasts with them once per
month. These forecasts are generated by Dells line of
business (LOB) marketing department. In addition to
product-specific trends, they obviously reflect the
seasonality in sales. For home systems, Christmas is
the top time of the year. Other high-demand periods
include the back-to-school season, the end of the year
when the government makes big purchases, and
country-specific high seasons for foreign purchases
(foreign language keyboards are especially
influenced). Dell sales also increase at the ends of
quarters (referred to as the hockey stick).
Innovation on the assembly floor
In 1997, Dell reorganized its assembly processes.
Rather than having long assembly lines with each
worker repeatedly performing a single task, Dell
instituted manufacturing cells. These cells
grouped workers together around a workstation
where they assembled entire PCs according to
customer specifications. Cell manufacturing doubled
the companys manufacturing productivity per square
foot of assembly space, and reduced assembly times
by 75%.
Dell combined operational and process innovation
with a revolutionary distribution model to generate
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tremendous cost-savings and unprecedented
customer value in the PC market. The following are
some key lessons from the story of Dells incredible
rise:
1. Disintermediation (cutting out the middleman):
Deleting a player in the distribution chain is a risky
move, but can result in a substantial reduction in
operating costs and dramatically improved margins.
Some companies that have surged ahead after they
eliminated an element in the traditional industry
distribution chain include:
Expedia (the online travel site that can beat the
rates of almost any travel agency, while giving
customers more choice and more detailed
information on their vacation destination)
ModCloth (a trendy virtual boutique with no
bricks-and-mortar retail outlets to drive up costs)
PropertyGuys.com (offers a DIY kit for
homeowners who want to sell their houses
themselves)
iTunes (an online music purchasing platform that
wont have you sifting through a jumble of jewel
cases at your local HMV)
Amazon.com (an online sales platform that allows
small-scale buyers and sellers to access a broad
audience without the need for an expensive
storefront or a custom website)
Netflix (the no-late-fees online video rental
company that will ship your chosen video rentals
right to your door)
2. Enhancing customer value:
Foregoing the retail route allowed Dell to
simultaneously improve margins while offering
consumers a better price on their PCs. This move also
gave customers a chance to configure PCs according
to their specific computing needs. The dramatic
improvement in customer value that resulted from
Dells unique distribution strategy propelled the
company to a leading market position
3. Process and operations innovation:
Michael Dell recognized that the way things had
always been done wasnt the best or most efficient
way to run things at his company. There are countless
examples where someone took a new look at a
company process and realized that there was a much
better way to get things done. It is always worth re-
examining process-based work to see if a change
could improve efficiency. This is equally true whether
youre a company of five or 500.
4. Let data do the driving:
Harnessing the easily accessible sales and customer
feedback data that resulted from online sales allowed
Dell to stay ahead of the demand curve in the rapidly
evolving PC market. Similarly, sales and feedback data
was helpful in discovering new ways to enhance
customer value in each of Dells key customer
segments. Whether your company is large or small, it
is essential to keep tabs on metrics that could reveal
emerging trends, changing attitudes, and other
important opportunities for your company.