Chapter 6 Dell Desktop PC Supply Chain:

Case Study
Optimizing the Flexibility of
the Desktop PC Supply Chain
Supply Chain
Integration

2006 Massachusetts Institute of Technology.

All rights reserved.
McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Critical Components of a Desktop PC

Agenda & Major Component Manufacturers
L6 vs. L5 Value Comparison

Root Causes Analysis

Chipset
Project Methodology & Next Steps Motherboard
AMD
Intel ASUS
Lessons Learned Foxconn
Intel
MiTAC
Printed Circuit
Board Desktop PC
BTI Electronics Acer
Compeq Apple
GCE Dell
Desktop Chassis Fujitsu Siemens
Plato Electronic
ASUS Gateway
Flextronics HP
LAN Chip Foxconn Lenovo/IBM
3 Broadcom MiTAC 4
Company list is not comprehensive.
Intel Lite-On Images used on this page belong to the respective companies.

L6 vs. L5 Problem Statement

L6

Since July 2004, Dell and its contract manufacturers (CMs)

MB
have had to adapt an increasing % of L5 manufacturing:
5 Weeks
China
Integration Supplier
Dell
Customer 1. Empty chassis are shipped by ocean (L5) to Dell US &
Logistics
Center
Manufacturing
Europe first. Motherboards are then air-freighted to Dell
Chassis US & Europe.
L5 3rd Party Integrator 2. Dell incurs motherboard expedite/air-freight cost and 3rd-
(managed by Equipment
party integration cost.
Manufacturers)
3. CMs incur cost for idle labor dedicated for MB-chassis
: L5 additional cost
MB integration.
1 Week
Dell
Supplier Manufacturing
Chassis Logistics
Center Customer
5 Weeks
6

1
 L6 vs. L5: Value Comparison L5 Driving Increasing Operational
Cost
L6 L5 Costs of air-freighting MBs and 3PI integration have been increasing.

MB-Airfreighting & 3PI Integration Costs

Integrated offshore & outside a Dell facility Integrated inside a Dell facility
Worldwide
Integrated motherboard-inside chassis Chassis shipped on water Procurement
shipped on water Motherboards shipped by air Expedite Council
+ Labor savings established
+ Increased supply chain flexibility
+ MB air-freighting costs are eliminated Increased motherboard air-
+ Reduced motherboard packaging costs freighting costs
Reduced supply chain flexibility 3rd-party integration cost in US
More motherboards need to be re-worked Separate logistical costs for
in the event of an MB ECN chassis and motherboards

Q3FY05 Act Q4FY05 Act Q1FY06 Act Q2FY06 Act Q3FY06 Act Q4FY06 FCST
L6 is more cost-effective than L5. Americas EMF APJ MDS Total
7 8
AMF includes 3PI integration cost. EMF and APJ dont as integration is done in Dell factory.

L6 vs. L5 Shipments: Root Causes Analysis

% Comparison
Majority of expedites are caused by chipset supply
L5%
Dell Worldwide L5 vs. L6 Shipments Received
L6%
100%
7% 6%
from a Typical Contract Manufacturer
5% 4% 6% 4% shortage.
11% 14%
9% 10%
15%
3.8%
90% 8.3%
27%
80%

70% L5 shipped %
has been Chipset supplier decommit
60% increasing since or supply issues
50%
March 2005.
93% 94% 95% 96%
91% 94% 96%
90% 24.5% Quality/Eng Issues
89%
86% 85%
40%
73%
30%
Dell Forecast Accuracy
63.5%
20%
NPI
10%

0%
Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 AMF Expedite $ by Root Cause (January to June 05)

9 10

Project Scope
Project Methodology

Is Is Not BPI project team established to evaluate the

Desktops Laptops, servers, storages, following 6 scenarios:
peripherals 1. Keep as current: 3rd-Party Integrator (3PI) managed by
DAO (Dell America Outside DAO Equipment Manufacturers
Operation)
2. DAO Cellular Integration: Enable the Dell factory work cells
Constrained by chipset To improve chipset supply to perform L5L10 mfg work
supply shortage
3. Offline Integration: Keep the current L6L10 mfg process
Focused on factory To improve Dells demand-
unchanged; add a separate facility to handle MB-chassis
operational improvement forecasting ability
integration work
Motherboard-chassis Fans, power supply, SPAMS a. At SLC (Supplier Logistics Center)
integration (Speakers, Printers, b. At a Dell-leased building
Advanced Port Replicators, 4. 3PI managed directly by Dell
Monitors, Scanners), or 5. L6 from Equipment Manufacturers Mexico plants
11 12
other components

2
Factors to Considered Complexity Analysis

Option 2 Option 2
For each of the 6 scenarios, BPI project team assessed the Option 1 (original) (revised) Option 3A Option 3B Option 4 Option 5
Worldwide Procurement 10 1 1 1 1 5 10
following attributes: Regional Procurement 8 5 5 5 5 5 10
Master Scheduler 5 5 5 5 5 5 5
1. Process smoothness & sustainability Production Control 5 10 10 7 7 7 5
Operations 1 10 10 5 5 1 1
2. Cost per box DAO Quality 5 10 10 5 5 1 1
Processing Engineering 1 10 10 5 5 1 1
3. Product quality Supplier Quality Eng
(Regional) 10 1 1 1 1 5 7
4. Capital investment Supplier Quality Eng
(Global) 1 1 1 1 1 1 10
5. Material handling/cost-accounting Cost Accounting 5 1 1 10 10 10 1
Inventory Control 1 5 5 5 7 10 1
6. Logistics Logistics 5 1 1 5 5 5 10
Total: 57 60 60 55 57 56 62
Project Goal: Cost per Box $10.07 $7.00 $7.90 $7.54 $7.70 $7.61 $7.00
Legend:
Identify the optimal scenario The Cost per Box data has been modified to respect Dells data confidentiality.

based on these input attributes. Option 1: EM-managed 3PI Option 2: Integration at DAO work cells
Option 3A: Integration at SLC/hub Option 3B: Integration at Dell-leased bldg
13 14
Option 4: Dell-managed 3PI Option 5: Integrated chassis from Mexico

Option 2 vs. 4: Value Comparison Lessons Learned

Option 2: Integration at DAO Work Cells Option 4: Dell-managed 3PI 1. Supply chain coordination requires involvement from all
+ Lower capital expenditure investment + Dell has direct control over the 3PI partners in the chain (customer, supplier, sub-tier
+ Less impact to business if chipset supply + More clear definition of quality issues suppliers).
reverts to 100% L6 ownership 2. A well-planned strategy complements strong operational
+ Fit the Dell Direct model better + Less manufacturing infrastructure execution ability from supply chain partners.
change required, less impact on
Builder headcount is more difficult to 3. Change management requires 3 key ingredients:
existing supply chain network
scale Top-down leadership
+ Little additional capital expenditure
Increased inbound & scheduling Bottom-up engagement
investment, little lead time change
complexity Cross-functional coordination
Only an incremental change from the
More part numbers to manage
original manufacturing design 4. Qualitative judgment is just as important as or more
Factory thru-put rate is downgraded critical than quantitative analysis.
Option 4 enables Dell to focus on the more value- 5. Working in a bi-lingual/bi-regional setting has its perks
added portion of the MB-chassis integration. 15 and challenges. 16

Discussion and Q&A

Questions and Thoughts Back-up

17 18

3
 Pros & Cons of the 6 Options
Manufacturing Costs: L5 > L6.
Description Pros Cons
Costs Common to L5 and L6 1 Current Least impact for Ops & PE Most expensive option
Costs of doing either L5 or L6: Type Process, EM- Dell does not own inventory during MB- WWP and Regional Procure. have more intense EM and
Raw material costs Materials managed 3PI chassis integration at 3PI 3PI mgmt/coordination
China materials transportation costs Logistics
Most difficult option for SQE
China assembler's cost (Foxconn performing L1-->L5) Labor
Chassis ocean-shipping cost Logistics 2 L6 at Dell Less complex for WWP Long ramp time of new builders
work cells SQE mgmt is reduced Difficult for PC to run deviations of both L5 and L6 in
Chassis US transportation cost (trucks, rail) Logistics
Chassis inventory holding cost at SLC Inventory Holding L5 and L6 parts are ordered and tracked one process simultaneously
US assembler's cost at Dell (from L7-->L10) Labor independently clear-cut Cost Accounting Work cells config need to change Greatest impact
Easiest option for Logistics for Ops and PE
DAO Quality concern from an L5-L6 hybrid mfg model

L6 Only Costs 3 L6 at Dell SLC Less complex for WWP Most complex for Cost Accounting
Costs of doing L6, rather than L5: Type A SQE mgmt is reduced Extra PC and IC headcounts required
China assembler's cost (Foxconn performing L6) Labor
L5 Only Costs 3 L6 at Dell-
B leased
Less complex for WWP Most complex for Cost Accounting and IC

Costs of doing L5, rather than L6: Type SQE mgmt is reduced Extra PC and IC headcounts required
external
Motherboard packaging cost Materials location Requires additional lease commitment
Motherboard air-freight/expedite cost Logistics 4 Dell-managed Easiest option for Ops & PE Most complex for Cost Accounting and IC difficult to
Motherboard US transportation cost Logistics 3PI DAO Quality expected to improve as Dell manage Parts Cost at a Dell-managed 3PI
Motherboard inventory holding cost at SLC Inventory Holding directly manages 3PI
Chassis & motherboard US transportation cost 5 L6 from EM Lowest possible cost compared to China L6 Requires Regional Procure. to manage L6 out of EM
(from SLC to local/regional integrator and back) Logistics (China, Overall easiest option for Dell facilities from China, Mexico, and possibly other regions.
Mexico, Increased SQE mgmt
Local/regional integration cost (Accurate, Saberex) Labor 19 and/or Most manageable for Master Sch./COC, PC, 20
Motherboard rework cost at Dell Labor/Quality elsewhere) IC, Ops, and DAO Quality Multi-regional logistics coordination is a concern.
Dell L5 mgmt cost (e.g. Expedite Council) Labor

6.1 Introduction 6.2 Push, Pull, Push-Pull

z Effective SCM implies:
z Efficient integration of suppliers, manufacturers, warehouses, Systems
and stores.
z Coordinate activities across the supply chain z Push and Pull traditional categories of
z Improve performance: reduce cost, increase service manufacturing operations
level, reduce the bullwhip effect, better utilize
resources, and effectively respond to changes in the z More recent hybrid strategy of combining
market place.
the two, Push-Pull systems
z Challenges can be met by integrating:
z the front-end, customer demand,
z to the back-end, production and manufacturing portion of the
supply chain.
z Various supply chain integration strategies:
z Push, pull, pushpull strategy.
z Matching products and industries with supply chain strategies.
z Demand-driven supply chain strategies.
z The impact of the Internet on supply chain integration.
6-21 6-22

Push-Based Supply Chains Bullwhip Effect in Push-Based

z Production and distribution decisions based on Supply Chains
long-term forecasts.
z Manufacturer demand forecasts based on z Leads to inefficient resource utilization
orders received from the retailers warehouses. z Planning and managing are much more difficult.
z Longer reaction time to changing marketplace: z Not clear how a manufacturer should determine
z Inability to meet changing demand patterns. production capacity? Transportation capacity?
z Obsolescence of supply chain inventory as demand z Peak demand?
for certain products disappears.
z Average demand?
z Variability of orders received much larger than the
variability in customer demand due to the bullwhip z Results:
effect. z Higher transportation costs
z Excessive inventories due to the need for large safety
stocks z Higher inventory levels and/or higher manufacturing
z Larger and more variable production batches costs
z Unacceptable service levels z more emergency production changeovers
z Product obsolescence
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4
 Pull-Based Supply Chains Implementation of Pull-Based
z Production and distribution demand driven Systems
z Coordinated with true customer demand rather than z Often difficult to implement
forecast demand
z when lead times are long
z firm does not hold any inventory and only responds to
z impractical to react to demand information.
specific orders.
z more difficult to take advantage of economies of scale
z Intuitively attractive:
z Reduced lead times through the ability to better z Advantages and disadvantages of push and pull
anticipate incoming orders from the retailers. supply chains:
z Reduced inventory since inventory levels increase z new supply chain strategy that takes the best of both.
with lead times
z Pushpull supply chain strategy
z Less variability in the system
z Decreased inventory at the manufacturer due to the
reduction in variability.

6-25 6-26

Push-Pull Strategy Supply Chain Timeline

z Some stages of the supply chain operated
in a push-based manner
z typically the initial stages
z Remaining stages employ a pull-based
strategy.
z Interface between the push-based stages
and the pull-based stages is the push
FIGURE 6-8: Push-pull supply chains
pull boundary.

6-27 6-28

General Strategy Identifying the Appropriate Supply

Chain Strategy
z Make a part of the product to stock
generic product
z The point where differentiation has to be
introduced is the push-pull boundary
z Based on extent of customization, the
position of the boundary on the timeline is
decided
FIGURE 6-9: Push-pull supply chains

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5
 Impact of Demand Uncertainty and Implementing a PushPull Strategy
Economies of Scale
z Achieving the appropriate design depends
z Demand Uncertainty:
z Higher demand uncertainty leads to a preference for on many factors:
pull strategy. z product complexity
z Lower demand uncertainty leads to an interest in
managing the supply chain based on a long-term
z manufacturing lead times
forecast: push strategy. z suppliermanufacturer relationships.
z Economies of scale: z Many ways to implement a pushpull
z The higher the importance of economies of scale in
reducing cost strategy
z The greater the value of aggregating demand z location of the pushpull boundary.
z The greater the importance of managing the supply chain based
on long-term forecast, a push-based strategy. z Delllocates the boundary at the assembly point
z Economies of scale are not important z Furnituremanufacturers locate the boundary at the
z Aggregation does not reduce cost production point
z A pull-based strategy makes more sense. 6-31 6-32

Impact of the Push-Pull Strategy Impact of the Push-Pull Strategy

z Push portion
z Pull portion
z Low uncertainty
z Service level not an issue
z High uncertainty
z Focus on cost minimization. z Simple supply chain structure

z Long lead times z Short cycle time

z Complex supply chain structures z Focus on service level.

z Cost minimization achieved by: z Achieved by deploying a flexible and
z better utilizing resources such as production and responsive supply chain
distribution capacities
z Order-fulfillment processes are applied
z minimizing inventory, transportation, and
production costs.
z Supply Chain Planning processes are applied.
6-33 6-34

Characteristics of the Push and

Interactions of the Two Portions
Pull Portions of the Supply Chain
Portion Push Pull
z Only at the push-pull boundary
Objective Minimize cost Maximize service level z Typically through buffer inventory
z Different role for the inventory in each portion
z In the push portion, buffer inventory is part of the
Complexity High Low
output generated by the tactical planning process
z In the pull system, it represents the input to the
fulfillment process.
Focus Resource allocation Responsiveness
z Interface is forecast demand
Lead time Long Short z Forecast based on historical data obtained from the
pull portion
Processes Supply chain planning Order fulfillment
z Used to drive the supply chain planning process and
determine the buffer inventory.

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6
 6.3 The Impact of Lead Time Impact of Lead Time

z Longer the lead time, more important it is

to implement a push based strategy.
z Typically difficult to implement a pull
strategy when lead times are so long that
it is hard to react to demand information.

FIGURE 6-10: Matching supply chain strategies with products:

the impact of lead time and demand uncertainty

6-37 6-38

Impact of Lead Time 6.4 Demand-Driven Strategies

z Box A z Requires integrating demand information
z Items with short lead time and high demand uncertainty
z Pull strategy should be applied as much as possible. into the supply chain planning process
z Box B z Demand forecast:
z Items with long supply lead time and low demand uncertainty.
z Use historical demand data to develop long-term
z Appropriate supply chain strategy is push.
estimates of expected demand
z Box C
z items with short supply lead time and highly predictable demand. z Demand shaping:
z Continuous replenishment strategy z Firm determines the impact of various marketing
z Suppliers receive POS data
z They use these data to prepare shipments at previously agreed-
plans such as promotion, pricing discounts,
upon intervals rebates, new product introduction, and product
z A pull strategy at the production and distribution stages and push at withdrawal on demand forecasts.
the retail outlets.
z Box D
z Items with long lead times are long and unpredictable demand
z Inventory is critical in this type of environment
z Requires positioning inventory strategically in the supply chain
6-39 6-40

Forecast Errors Are Always Present! 6.5 The Impact of the Internet on
z High demand forecast error has a detrimental impact on Supply Chain Strategies
supply chain performance
z Approaches to improve accuracy z Expectation that increasing use of the
z Aggregate forecasts are more accurate,
z Select the pushpull boundary so that demand is aggregated over internet would solve a lot of the business
one or more of the following dimensions:
z Across products/geography/time problems
z Use market analysis and demographic and economic trends
to improve forecast accuracy (see Chapter 2 for details). z Reality was very different
z Determine the optimal assortment of products by store
z Reduce the number of SKUs competing in the same market. z Many of the problems in the internet-
z Incorporate collaborative planning and forecasting based businesses were related to
processes with your customers
z Demand forecast by SKU by location has to be supported logistics strategies
by the supply chain
z Interaction of demand planning and tactical supply planning
z Iterative process
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7
 Successes and Failures E-Business
z Notable Failures z E-business: a collection of business
z Furniture.com models and processes motivated by
z Peapod.com Internet technology and focusing on
z Notable Successes improvement of extended enterprise
z Amazon.com
performance.
z E-commerce: ability to perform major
z Hybrid of successes and failures
commerce transactions electronically.
z Cisco
z $2.2B inventory write-off in 2001
z Has been successful in leveraging the internet
subsequently

6-43 6-44

Key Observations Grocery Industry

z e-commerce is only part of e-business. z Typical supermarket employs a push-based strategy
z Internet technology is the force behind the z Peapod was built on pure pull strategy with no inventory
business change. and no facilities.
z Focus on the extended enterprise z Significant service problems with high stockout rates
z Business-to-consumer (B2C) z Changed to a pushpull strategy by setting up a number of
z direct to customer, warehouses
z Retail activities over the Internet, and includes products, z Warehouse covers a large geographical area
insurance, banking, and so forth. z Aggregated demand
z Business-to-business (B2B) z Other challenges:
z Conducted over the Internet predominantly between z Reducing transportation costs
businesses. z Short response time
z Includes: z Low customer density
z electronic sourcing (the so-called eSourcing)
z Products have low demand uncertainty
z reverse auctions
z collaboration with suppliers and vendors to achieve z high economies of scale in transportation cost
common goals. z push-based strategy is more appropriate.

6-45 6-46

Book Industry General Retail Industry

z Initial model of Amazon.com a pure pull system with no
warehouses and no stock. z Late to respond to competition from virtual
z Ingram Book Group supplied most of Amazons customer stores and to recognize the opportunities
demand. provided by the Internet.
z As volume and demand increased: z Brick-and-mortar companies are adding an
z Amazon.coms service level was affected by Ingram Books Internet shopping component to their offering.
distribution capacity
z Using Ingram Book in the first few years allowed Amazon.com to z Already have the distribution and warehousing
avoid inventory costs but significantly reduced profit margins. infrastructure
z As demand increased distributor no longer required.
z Click-and-mortar firms
z Current Amazon.com:
z High-volume, fast-moving products stocked in stores
z Several warehouses around the country where most of the titles
are stocked. z Push strategy
z Inventory at the warehouses is managed using a push strategy z Low-volume, slow-moving products are stocked
z Demand satisfied based on individual requests, a pull strategy. centrally
z Slow moving low volume books and CDs are not stocked z Push-Pull strategy
at Amazon distribution centers
z Amazon orders those when demand arrives.
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8
 Traditional Fulfillment Versus e- Summary
Fulfillment z Implementation of push-pull strategies and
Traditional fulfillment E-fulfillment demand-driven strategies have helped many
companies to improve performance, reduce
costs, increase service levels.
Supply chain strategy Push Pushpull
z Collapse of many Internet companies shows that
Shipment Bulk Parcel e-business has great challenges.
Reverse logistics Small part of the business Important and highly complex
z Companies need to:
z Identify the appropriate supply chain strategy for
Delivery destination Small number of stores Large number of geographically individual products.
dispersed customers
z Case for no physical infrastructure or inventory is
Lead times Relatively long Relatively short tenuous
z Pushpull strategy
z advocates holding inventory
z although it pushes the inventory upstream in the supply chain.

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