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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 the personal computer value chain, and by seizing on
full-time for the company he founded as a freshman, emerging market trends, Dell Inc. grew to dominate
providing hard-drive upgrades to corporate the PC market in less time than it takes many
customers. In a years time, Dells venture had $6 companies to launch their first product.
million in annual sales. In 1985, Dell changed his
No more middleman
strategy to begin offering built-to-order computers.
That year, the company generated $70 million in Dell started out as a direct seller, first using a mail-
sales. Five years later, revenues had climbed to $500 order system, and then taking advantage of the
million, and by the end of 2000, Dells revenues had internet to develop an online sales platform. Well
topped an astounding $25 billion. The meteoric rise of before use of the internet went mainstream, Dell had
Dell Computers was largely due to innovations in begun integrating online order status updates and
supply chain and manufacturing, but also due to the technical support into their customer-facing
implementation of a novel distribution strategy. By operations. By 1997, Dells internet sales had reached
carefully analyzing and making strategic changes in an average of $4 million per day. While most other

PCs were sold preconfigured and pre-assembled in later than five days after receipt. There are, however,
retail stores, Dell offered superior customer choice in some exceptions. For example, Dell may manipulate
system configuration at a deeply discounted price, the schedule when there is a need to replace
due to the cost-savings associated with cutting out defective units or when facing large customers with
the retail middleman. This move away from the specific service-level agreements (who have non-
traditional distribution model for PC sales played a standard quoted manufacturing lead times) for their
large role in Dells formidable early growth. orders.
Additionally, an important side-benefit of the
Dell pursued an aggressive manufacturing strategy of
internet-based direct sales model was that it
virtual integration. Dell required a highly reliable
generated a wealth of market data the company used
supply of top-quality PC components, but
to efficiently forecast demand trends and carry out
management did not want to integrate backward to
effective segmentation strategies. This data drove the
become its own parts manufacturer. Instead, the
companys product-development efforts and allowed
company sought to develop long-term relationships
Dell to profit from information on the value drivers in
with select, name-brand PC component
each of its key customer segments.
Dells Supply Chain In most cases, Dell has significantly less time to
Dells supply chain works as follows. After a customer respond to customers than it takes to transport
places an order, either by phone or through the components from its suppliers to its assembly plants.
Internet on www.dell.com, Dell processes the order Many of the suppliers are located in Southeast Asia
through financial evaluation (credit checking) and and their transportation times to Austin range from
configuration evaluations (checking the feasibility of a seven days for air shipments to upwards of 30 days by

Indirect Distribution Channel of the PC Industry

Dells Direct Distribution Channel

specific technical configuration), which takes two to water and ground. To compensate for long lead times
three days, after which it sends the order to one of its and buffer against demand variability, Dell requires its
manufacturing plants in Austin, Texas. These plants suppliers to keep inventory on hand in the Austin
can build, test, and package the product in about revolvers (for revolving inventory). Revolvers or
eight hours. The general rule for production is first in, supplier logistics centers (SLCs) are small warehouses
first out, and Dell typically plans to ship all orders no located within a few miles of Dells assembly plants.

Each of the revolvers is shared by several suppliers target of 10 days supply, and it uses a quarterly
who pay rents for using their revolver. supplier scorecard to evaluate how well each supplier
does in maintaining this target inventory in the
Dell does not own the inventory in its revolvers; this revolver. Dell withdraws inventory from the revolvers
inventory is owned by suppliers and charged to Dell as needed, on average every two hours. If the
indirectly through component pricing. The cost of commodity is multisourced (that is, parts from
maintaining inventory in the supply chain is, however, different suppliers are completely interchangeable),
eventually included in the final prices of the Dell can withdraw (pull) those components from any
computers. Therefore, any reduction in inventory subset of the suppliers. Dell often withdraws
benefits Dells customers directly by reducing product components from one supplier for few days before
prices. Low inventories also lead to higher product switching to another. Suppliers decide when to send
quality, because Dell detects any quality problems
their goods to their revolvers. In practice, most
more quickly than it would with high inventories. suppliers deliver to their revolvers on aver-age three
This just-in-time, low-inventory strategy reduced times a week. To help suppliers make good ordering
the time it took for Dell to bring new PC models to decisions, Dell shares its forecasts with them once per
market and resulted in significant cost advantages month. These forecasts are generated by Dells line of
over the traditional stored-inventory method. This business (LOB) marketing department. In addition to
was particularly powerful in a market where old product-specific trends, they obviously reflect the
inventory quickly fell into obsolescence. Dell openly seasonality in sales. For home systems, Christmas is
shared its production schedules, sales forecasts and the top time of the year. Other high-demand periods
plans for new products with its suppliers. This include the back-to-school season, the end of the year
strategic closeness with supplier partners allowed Dell when the government makes big purchases, and
to reap the benefits of vertical integration, without country-specific high seasons for foreign purchases
requiring the company to invest billions setting up its (foreign language keyboards are especially
own manufacturing operations in-house. influenced). Dell sales also increase at the ends of
quarters (referred to as the hockey stick).
Dell wishes to stay ahead of competitors who adopt a
direct-sales approach, and it must be able to reduce Innovation on the assembly floor
supplier inventory to gain significant leverage.
Although arguably supply-chain costs include all costs In 1997, Dell reorganized its assembly processes.
incurred from raw parts to final assembly, Dell Rather than having long assembly lines with each
concentrates on Dell-specific inventory (that is, parts worker repeatedly performing a single task, Dell
designed to Dells specifications or stored in Dell- instituted manufacturing cells. These cells
specific locations, such as its revolvers and assembly grouped workers together around a workstation
plants). Because assembly plants hold inventories for where they assembled entire PCs according to
only a few hours, Dells primary target was the customer specifications. Cell manufacturing doubled
inventory in revolvers. Dell has a special vendor- the companys manufacturing productivity per square
managed-inventory (VMI) arrangement with its foot of assembly space, and reduced assembly times
suppliers: suppliers decide how much inventory to by 75%.
order and when to order while Dell sets target
inventory levels and records suppliers deviations Dell combined operational and process innovation
from the targets. Dell heuristically chose an inventory with a revolutionary distribution model to generate

tremendous cost-savings and unprecedented 2. Enhancing customer value:

customer value in the PC market. The following are
some key lessons from the story of Dells incredible Foregoing the retail route allowed Dell to
simultaneously improve margins while offering
consumers a better price on their PCs. This move also
1. Disintermediation (cutting out the middleman): gave customers a chance to configure PCs according
to their specific computing needs. The dramatic
Deleting a player in the distribution chain is a risky
improvement in customer value that resulted from
move, but can result in a substantial reduction in
Dells unique distribution strategy propelled the
operating costs and dramatically improved margins.
company to a leading market position
Some companies that have surged ahead after they
eliminated an element in the traditional industry 3. Process and operations innovation:
distribution chain include:
Michael Dell recognized that the way things had
Expedia (the online travel site that can beat the always been done wasnt the best or most efficient
rates of almost any travel agency, while giving way to run things at his company. There are countless
customers more choice and more detailed examples where someone took a new look at a
information on their vacation destination) company process and realized that there was a much
ModCloth (a trendy virtual boutique with no better way to get things done. It is always worth re-
bricks-and-mortar retail outlets to drive up costs) examining process-based work to see if a change
PropertyGuys.com (offers a DIY kit for could improve efficiency. This is equally true whether
homeowners who want to sell their houses youre a company of five or 500.
4. Let data do the driving:
iTunes (an online music purchasing platform that
wont have you sifting through a jumble of jewel Harnessing the easily accessible sales and customer
cases at your local HMV) feedback data that resulted from online sales allowed
Amazon.com (an online sales platform that allows Dell to stay ahead of the demand curve in the rapidly
small-scale buyers and sellers to access a broad evolving PC market. Similarly, sales and feedback data
audience without the need for an expensive was helpful in discovering new ways to enhance
storefront or a custom website) customer value in each of Dells key customer
Netflix (the no-late-fees online video rental segments. Whether your company is large or small, it
company that will ship your chosen video rentals is essential to keep tabs on metrics that could reveal
right to your door) emerging trends, changing attitudes, and other
important opportunities for your company.