Prelude case Dell Corporation
What if a manufacturing company didn’t need to have any inventory? Imagine the reduction to cost structure that could be achieved by simply getting rid of the need to carry huge amounts of finished goods on its books – and eliminating the nail-biting stress of waiting until those goods are sold. For Michael Dell, founder and CEO of Austin, Texas-based Dell Corporation, very little imagination is required. He has built a company with annual revenues in excess of $40bn entirely around a vision whereby manufacturing of an individual item does not begin until it has been ordered by a customer. Every single Dell product has an end user’s name on it before it even leaves the factory.
Visiting a Dell factory gives you an idea of just how effective Michael Dell has been in executing this supply chain management philosophy. At the company’s Irish factory near Limerick, for example, there are 40 doors at one end of the factory that deliver the parts needed to build a variety of products – including desktop computers and servers – and 40 doors at the other end of the factory where the finished goods are dispatched to be delivered to customers. The company never holds more than four hours’ worth of parts inventory at any time – and Dell is not even considered to have acquired the parts until the moment they are offloaded from a truck and brought into the factory. The same process is used in Dell operations throughout the world, including the company’s showcase factory at its US headquarters in Austin.
Every single Dell product has an end user’s name on it before it even leaves the factory.
After the parts are unloaded, the process of building individual, custom-made systems begins. All the parts that are needed for the assembly of a given system are placed in a plastic box that passes along a conveyor belt and is then routed to an assembler. Each part is scanned – along with a label denoting the name, address and details of the buyer (including the specifications of the system that has been ordered) – so that individual parts are associated with individual systems sold to individual buyers. This means that if a problem with a given part is discovered at any point, the company knows exactly which systems contain that part and can notify the owners about the need for a fix. In addition, it means that if a buyer reports problems, Dell’s technical support system can pull up the details of what was installed in the system at the factory, when it was assembled, and by whom.
Over the past year, Dell has started to build products other than desktop, server and notebook computer systems using this method of manufacturing – and recently changed its corporate name (from Dell Computer Corporation to Dell Corporation) to reflect this fact. It is all part of the ‘Dell model’ that Michael Dell says is just as applicable to manufacturing computer printers, handheld computers and MP3 players as it is to a personal computer. ‘If we look across the whole $800bn IT market, we see that there is a kind of standardisation and commoditisation occurring across many different product areas, so we have tried to understand what the best opportunities are for us to deliver value’, he said in a recent interview. Mr Dell also said that the direct manufacturing model gave his company an unparalleled insight into the kinds of product areas that his company should move into – as well as those from which it should retreat. ‘One of the magic abilities of any great product company is to understand technologies and customer requirements and come up with the perfect combination to solve a problem’, said Mr Dell, although he admits that customers sometimes do not realise that they have a problem that technology can solve. ‘The customer is not likely to come and say they need a new metallic compound used in the construction of their notebook computer, but they may tell us they need a computer that is really light and rugged. Where some companies fall down is that they get enamoured with the idea of inventing things – and sometimes what they invent is not what people need.’ He said that by using the Dell model, he knows very quickly when a product isn’t going to sell. ‘When we launch a new product, we know within 48 hours whether or not it’s going to work’, he says. ‘We had a Web PC that didn’t turn out so well. But if you have no experiments, then you have no success. Occasionally, you just miss.’
Mr Dell concluded that by having a sales, manufacturing and distribution model where the maximum possible number of variables are under its control, the company has been in a position to grow significantly during the recent economic downturn. ‘We have a fortunate situation in our business’, he said. ‘To the extent that there are tensions in the economy, we tend to be a more attractive choice. We have done well in tough economies – and we have a very efficient system that works well in many different economic environments.’
1. Taking the case of computer products, identify the supply chain for the distribution of these products and explain the channel service needs of customers. To what extent are store- and non-store-based distribution channels alike or different in terms of the channel functions they perform?
2. What are the advantages and disadvantages of the ‘Dell model’ of sales, manufacturing and distribution?
3. How might Dell sustain its competitive advantage in an increasingly competitive and mature market place? What channel strategies should it consider to enhance its value delivery network? Justify.