Dell Computers

A Case Study in Low Inventory

 Why We are talking about Dell

• When discussion comes on low inventory

levels, Dell is invariably discussed.
• Why Dell only?
• Has their low inventory REALLY helped out
that much?
• In short, yes. We are going to discuss how
much it helped.
• We will not discuss how they achieved
such high inventory turns using a state of
the art just in time inventory system.
 Reasoning behind need for lower
inventory

• The first thing that needs to be discussed

is why low inventory has such a great
effect on Dell's overall performance.

• The reason is quite simple: computers

depreciate at a very high rate.

• Sitting in inventory, a computer loses a

ton of value.
 Inventory Concerns

• Bad Spell in 1994 left Dell with

– 2nd quarter operating loss of $76 million
– 55 days of inventory
– $154 million deficit in cash from business
operations

Dell execs swore at that time that changes would

be made and they would never put the
company in that position again.
Dell’s market share in U.S. and Worldwide (in Q1
2009) compared to other top PC makers
 Dell Inventory Model

• Supply Chain had to be revamped

• Dell had made promise to ship customer
their order within 5 days of order being
received
• BUT
• There was a 45 day average lead time
necessary for purchasing parts.
• SO
 Dell Inventory Model
• Dell developed value chain.Dell.Com

• A novel idea

• Use of Internet in a B2B format to control

inventory levels at suppliers businesses

• Basically, it was a you do this or else

• This proved to be very effective

• WHY?
 Dell Inventory Model

• Suppliers were truly world-wide

(26B/yr)

• By becoming a mandatory member of

valuechain.dell.com, they exhibited
something to other computer
manufacturers, that being that they were
serious about being a leader in their
respective area of expertise
 Dell Inventory Model

• Initially run by Dell but in time is was

turned over to the suppliers to run

• This targeted the supply issue of the

partnering companies

• Within 1 year the Inventory was 4 days

of sales in amount, of course which is
less than the guarantee that the order
will be shipped within 5 days of receiving
 Dell Inventory Model
• This was 1999
Daily sales averaged approximately
$15,000,000.00 (70% in direct materials)

• Gross profit margin of 21% = $3,000,000

• Making the daily cost of sales $12,000,000

• The difference in days of inventory 55 – 4= 51

• Lets say that money is worth 6%

• This equates to a savings of $720,000 per day
• Or $36,720,000 for the 51 day change in
inventory
 Dell Inventory Model
• Daily sales in 1999 around 15,000,000

• Daily sales in 2001 in excess of 50,000,000

(more than 3 times the amount from 2 years
prior)

• By 2001, the inventory carry was under 1

day

• Think about those savings based on

reworking the value chain
 Dell’s Business Model
• Michael Dell designed the company business
model to be a build-to-order business
• It would survive if it was built on speed, speed
to change based on industry demands.
• Demands had to be constantly gathered and
measured
• Manages 250 suppliers who handle 4000
components.
• Calculates schedules.
• Estimates surplus parts in the factory and in
the supplier inventory.
• Places orders, which are delivered within 90
minutes!
 Dell Business Model

• Sales of this magnitude are made possible

with the supply chain that runs the
Inventory control area,
• AND
• Running their business in Real Time
• E.g. They understand on Monday afternoon
if PC sales are slowing down, and they can
adjust prices accordingly
 Supplier vs. Buyer

Supplier Buyer
Pros: Pros:
• Real-time Data Updates •Works well for commodities with
• Data Accuracy limited configurations
•Catalog Preview Management
• No Double Entry
• Consistent look and feel among
• Integrated Electronic different suppliers
Transaction
• Allows supplier to manage Cons:
complexity of valid Data Accuracy
configurations Catalog Management
Cons: Manual Data Update and Order
• Requires XML Communication Receipt (sent in email)
Capability .
• Customer gets a different look
and feel from every 'Punchout'
supplier
 Dell’s philosophies

– Supply and Demand are never in

balance, company strategy is to
manage when they deviate

– “Always have enough, and have

nothing left over.”
Dell’s Inventory Turnover Data

Year Inventory Turnover Week's Inventory

1992 4.79 10.856

1993 5.16 10.078
1994 9.4 5.532
1995 9.8 5.306
1996 24.2 2.149
1997 41.7 1.247
1998 52.4 0.992
1999 52.4 0.992
2000 51.4 1.012
2001 63.5 0.819
 Conclusion
• Key point to notice here is that Dell was
carrying over 10 weeks worth of inventory in
1993. By 2001, Dell was carrying less than 1
week's worth of inventory.
• This essentially means that inventory used to
sit around for 11 weeks and now it sits around
for less than 1 week.
• Also computers lose 1 percent of their value /
week. Dell put it like this “computers “rot”. The
longer a computer sits around, the less it is
worth.’’
 Conclusion
• In 1993 Dell was losing 10% / PC due to less
turn around time. In 2001, Dell was losing less
than a %. Based on holding costs alone, Now
Dell managed to reduced costs by nearly 9%.
• Since 2001, Dell has continued to lower
inventory. Asper their latest annual reports,
day's inventory has dropped by approximately
a day.
• So what does this mean for Dell? Less turn
around time more is the profit.
 Acknolwdgements /Sources

• Dell.com
• Wikipedia
• Google.com
• Businessweek.com
• http://www.intel.com/ebusiness/pdf/affiliates/i2-
dell.pdf
THANK YOU