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Supply Chain Management

Semester 1 2009

CASE STUDY; DELL INC.: IMPROVING THE FLEXIBILITY OF THE DESKTOP PC SUPPLY CHAIN

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Table of Contents
1.0 INTRODUCTION...............................................................................................3 2.0 FORECASTING ACCURACY..........................................................................3 3.0 SUPPLIER ISSUES (THIRD-PARTY INTEGRATORS)..................................6 4.0 QUALITY ISSUES............................................................................................8 5.0 RECOMMENDATIONS....................................................................................9 6.0 CONCLUSION................................................................................................10 7.0 REFERENCES (HARVARD STYLE).............................................................11

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1.0 INTRODUCTION
In the world of superior technology and computers today, Dell Inc. is one of the leading low cost computer manufacturers in this era and is still growing strong against their competitors. Dell is one manufacturing company that has a direct business model (supply chain) that has no intermediary involvement but starts and ends with their consumers. Dell also utilises on the unique integration of level 5 versus level 6 manufacturing process with more reliance on third party integrators. In this procedure, there are two different manufacturing processes of assembling components of a desktop PC and this may be an issue which needs to be looked into further. Though, Dells one key strategy and strength is basically having customer loyalty, the company manufactures to the preferred configuration of the customer demands which then is directly shipped to the customer, who generates a more reliable and satisfying customer experience. Dell could be the leading low cost computer manufacturers in the world but there are some problems that could evolve from inefficiency from their supply chain management. Through out this paper, it will be looking at the different issues of: Forecasting accuracy Supplier issues (third-party integrators) Quality issues

2.0 FORECASTING ACCURACY


It was evident from the case study that Dell Inc. has a problem with forecast accuracy. According to research studies, forecasting is the basis of business planning because every plan depends on it. The more accurate the forecasts, the better would be the business plans (Jain, 2004). Though the task of forecasting accuracy is difficult due to the inter-related nature of data series, the present of outliers, level and trend shifts. Also, there are the impacts of the market and general economic environment issues (Fildes et al, 2008).

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The problem which arises at Dell is when the actual demand surpasses the forecast which Dell than needs to source extra supply or risk the possibility of not meeting customer demand. This problem occurs because the lead time for manufacturing, assembling, testing and delivering the product is on average 13 weeks, such a long lead time makes it difficult for the suppliers to provide the additional supplies in order to meet Dells demand schedule (Simchi- Levi et al., 2008, p.185). As stated above, forecasting accuracy is difficult due to the inter-related nature of data series (Fildes et al., 2008). Thus, the high demand forecast error has a detrimental impact on supply chain performance, resulting in lost sales, obsolete inventory, and inefficient utilisation of resources (Simchi-Levi et al., 2008). The forecasting accuracy problem which potentially happens at Dell is the cause of lead-times that is generated between Dell and the suppliers. Lead-time is made up of time devoted to processing orders, to procuring and manufacturing items, and to transporting items between various stages of the supply chain (Simchi-Levi et al., 2008). The longer the lead-time, the excess inventory inherently presents a great deal of waste, not to mention quality issues (spoilage), storage requirements, investment of funds, limiting cash flow and among others (Ritzman & King, 1993). Stalks (1988) noted as lead-time lengthens, the accuracy of sales forecasts declines this than incurs forecasting errors, inventories expands and the need for safety stocks increases. Karmarkar (1987) noted other potential issues which may happen with longer lead-times in an organisation; Long lead-times lead directly to proportionally larger work-in-process (WIP) inventories. Long lead-times force final schedules to be frozen over long horizons, thus increasing the chance of schedule changes (forecasts).

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Finally the competitiveness of the firm can be eroded by the poor responsiveness and distant due dates engendered by long lead times.

As annotated above with the potential issue occurring at Dell, it must be addressed immediately or suffer loss of competitive advantage against the competitors, time-wastage and profit loss if it becomes a bigger problem. To improve this problem at Dell, there is a few ways to minimise this from happening. According to Jain (2004), its not humanly possible to have forecasts free from errors but to only minimise the forecast errors. The recommendations for Dell to decrease the forecasting errors within the organisation is to aggregate the forecast. Aggregate forecasting is an estimate of sales, often time phased, for a grouping of products or product families produced by a facility or firm (Wacker, et al., 2006). Huntress (2004/2005) stated that aggregate forecasts tend to be more accurate than detailed forecasts. Also, aggregate forecasting drives effective decision-making, as well as operational plans. Whilst, reducing the long lead-times at Dell is by having the strategy to have shorter lead-times and better communication with suppliers. Research has shown that the lead-time reduction strategy is not merely to cut the amount of total lead time but to increase the speed of throughput (Tersine et al., 1995). Also, Tersine et al. (1995) stated that organisations producing products in a make-to-order environment begin with material procurement, have the opportunity to reduce lead-time by the reduction of procurement lead times. Some of these strategic responses to reduce the lead-time are implementing just-in-time (JIT) and purchasing programs. Overall, forecasting accuracy is difficult; it can be reduced to aggregate forecasting but cannot be eliminated.

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3.0 SUPPLIER ISSUES (THIRD-PARTY INTEGRATORS)


It was apparent from the case analysis that Dell Inc. has a problem with the third party integrators in order of supplying the specific materials to the organisation. In supply chain management of a manufacturing firm, third party logistics is useful in an effective manner to increase the quality of products and to minimise cost, especially, when outsourcing, so that they would recognise greater opportunities for increasing and establishing the business relationship for a common assistance (Conway & Betty, 1991). Third-party logistic services have moved to supplemental services such as product installation, repairs, final product assembly and modifications from its traditional manner such as carrier negotiations, contracting involvements and transportations. However, Maloni & Benton (1997) contends that selecting the inappropriate suppliers would create a major difficulty in the partnership. There are a few causes of failures in third-party involvement, which are excessive and unrealistic prospects from the customers who obtain certain services. According to the case, third-party integrators have the highest manufacturing cost which has been determined by the process complexity involvement. The whole dilemma in selection of suppliers for multiple sourcing is not only to choose the right supplier, but also to assign the best order quantity amongst the selected suppliers which is based on numerous key criteria such as costs, quality, and delivery reliability (Ting & Cho 2008). It has been identified that Dell does not have any dedicated manufacturing resources or capability to manufacture Country Kit Input (level 10) products to gain effectiveness and the complexity of bioregional procurement organisation of Dell Inc. is also been caused by inadequate coordination of suppliers. Therefore, dysfunctional operations would occur due to the lack of coordination among the suppliers which consist of a longer lead-time, increase in inventory cost, higher transportation cost and different level of damages and poor customer service (Togar et al., 2002).

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Moreover, unexpected problems such as lack of flexibility and new challenges would transpire when dealing with reliable satisfactory and timely approach in this kind of mutual partnership. Conversely, Ndubsi et al. (2005) have found that the manufacturing flexibility is affected by the upstream and downstream uncertainties. This is where upstream doubts are failures for suppliers on delivery and performance, machine breakdown, rejects, inconsistent task times, and downstream doubts are due to demand instability and changes in product mix, price and competition engagement. To overcome these related issues, the importance scheme is cutting down the suppliers would be a vital impact to the organisation. When considering the on time deliver issue and uninterrupted supply inconvenience, third-party logistics meet the diverse issues in order to source the goods and services to the manufacturer. High transportation costs and long transit times would involved when the contracts are being moved into China for lower product prices and labour costs (House and Stank, 2001). It would affect the critical bioregional operation for Dell to synchronise all areas of the supply chain system. In addition, issues recounting the essential economic efficiency where, size and mix of the transportation would fleet with different capacity of vehicles that would face comparative cost of fuel consumption, utilisation of maintenance and depreciation, capital cost and a range of wages defiantly (Feame & Fowler, 2006). Also, this issue has been highlighted at Dell, level 6 (L6) chassis manufactures in Mexico who are retaining a difficulty of transportation and unfavourable customer infrastructure in relation to providing equipments as well. On the other hand, Choy et al. (2007) noted that the most crucial decisions manipulate by cost of raw materials in the transportation optimisation process. Furthermore, Mexicos poor infrastructure and lack of efficient transportation also make company to avoid choosing the contract manufacture in Mexico (SimchiLevi et al., 2008). In contrast, many suppliers involvement is stepping towards the

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risk side than the controlled manner. This mean it would significantly affect the firms profits inadequately and inexistence to attain desired products in the long run development. Generally, number of suppliers needed to ease because many firms and most of purchased material requirements are being assigned to a single source due to fewer suppliers in contact for orders given on short notice (Chen & Paulraj, 2004).The optimistic relationship between the primary suppliers and manufacturer leads to numerous benefits in the process. Ultimately, the issues would be assessed from these stated implications to minimise and overcome the obstructions of the supplier issues and also create a valuable and effective supply chain in the long run process for Dell.

4.0 QUALITY ISSUES


In this case study, Dell Inc. has also encountered a motherboard quality problem which is also one potential problem in the increasing of level 5 (L5) manufacturing. Motherboard is one of the key components of a desktop PC. It contains important components such as chipset and local area network chip. Though, if the motherboard has functional problems which need to be repaired and replaced or its not delivered on time to manufacturers. Dell Inc. motherboards have been produced by contract manufacturers in China. Therefore, they would require to focus on other manufacturer who can deliver the motherboards to level 6 (L6) manufacturer on time. Though, to remain on top of the list of contract manufacturers, it has to create, exploit and sustain competitive advantage (Noonan & Wallace, 2004). Dell may need to consider other motherboard manufacturers to overcome this particular quality assurance problem. But on the other hand, Dell can also solve the motherboard quality problem by improving relationship with present motherboard manufacturer in stead of changing it. The high quality of products at each level of the supply network has been recognised as an essential part of successful supply chain management (Choi & Rungtusanatham, 1999). Developing the relationship by

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sharing information with contract manufacturer can help to solve quality problems by introducing quality professionals from the traditional engineering and science fields need to continue contributing to the advancement of quality engineering (Hassan et al., 2000). It would be a successful approach which will result in producing standard quality motherboards in the long run without any failures.

5.0 RECOMMENDATIONS
FORECASTING ACCURACY To decrease the forecasting errors within the organization, aggregate forecasting is a resolution. Huntress (2004/2005) stated that aggregate forecasts tend to be more accurate than detailed forecasts. Also, aggregate forecasting drives effective decision-making, as well as operational plans. Research has shown that the lead-time reduction strategy is not merely to cut the amount of total lead time but to increase the speed of throughput (Tersine et al., 1995). Some of these strategic responses to reduce the lead-time are implementing just-in-time (JIT) and purchasing programs. SUPPLIER ISSUES Cooperation is a key element in the third party involvement, which links with strong and effective communication system to keep the least service providers and to build a good relationship. Cooperation and teamwork is essential not only between a company and a provider but also across providers and suppliers (Smith, 2008). Furthermore, Sridharan & Canies (2005) state that the planning procedures should precisely consider the cooperation element which can be expected from the suppliers to increase effectiveness of the supply chain management of the organisations. Moreover, Chen & Paularaj (2004) stated that for a decision in the long run, few elements needed to considered, such as reduced management costs, minimized

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logistical costs, enhanced trust by reason of communication and improved performance. QUALITY ISSUES If contract manufacturer capabilities and supply chain requirements become mismatched, gaps will appear between quality and requirements (Noonan & Wallace 2004). Inclusively, Dell needs to develop an effective plan regarding functionality, quality or delivery with considering the capacity of manufacturer.

6.0 CONCLUSION
Dell Inc. could be the leading low cost computer manufacturers in the world but there are always some problems that could evolve from inefficiency from their supply chain management. Based on the literature shown throughout the report, research shows the potential problems at Dell can be resolved in a number of different approaches. If these problems arent embarked early, Dell may be at risk of a fall of competitive advantage, a loss of profit, and a diminish in customer satisfaction with the products.

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7.0 REFERENCES (Harvard Style)


Chen. I . J., & Paulraj, A. (2004), Understanding Supply Chain Management: Critical Research and a Theoretical Framework, International Journal of Production Research, vol. 42 no. 1, pp. 131-163. Choi, T. Y., & Rungtusanatham, M. (1999), Comparisons of Quality Management Practices: Across the Supply Chain and Industries, The Journal of Supply Chain Management, vol. 35 no. 1, pp. 20-27. Choy, K. L., Chow, H. K. H., Lee, W. B., & Chan, F. T. S. (2007), Development of Performance Measurement System in Managing Supplier Relationship for Maintenance Logistics Providers, Benchmarking: An International Journal, vol. 14 no. 3, pp. 352-368. Conway, & Betty, A. (1991), Partners in Quality: Managing Your Suppliers, Hospital Material Management Quarterly, vol. 12 no. 4, pp. 53-58. Feame, A., & Fowler, N. (2006), Efficiency versus effectiveness in construction supply chains: the dangers of lean thinking in isolation, Supply Chain Management: An International Journal, vol. 11 no. 4, pp. 283-287. Fildes, R., Goodwin, P., Lawrence, M., & Nikolopoulos, K. (2009), Effective Forecasting and Judgmental Adjustments; An Empirical Evaluation and Strategies for Improvement in Supply-Chain Planning, International Journal of Forecasting, (n.d), pp. 3-23. Hassan, A., Nabi Baksh, M. S., & Shaharoun, A. M. (2000), Issues in Quality Engineering Research, International Journal of Quality & Reliability Management, vol. 17 no. 8, pp. 858-875.

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House, R. G., & Stank, T. P. (2001), Insights from a Logistics Partnership, Supply Chain Management: An International Journal, vol. 6 no. 1, pp. 16-20. Huntress, K. (2004/2005), Evolution in the Demand and Supply Planning at Dow Corning, Journal of Business Forecasting Methods and Systems, vol. 23 no. 4, pp. 10-16. Jain, C. L. (2004), Benchmarking Forecasting Error, The Journal of Business Forecasting, (n.d), pp. 8-11. Karmarkar, U. S. (1987), Lot Sizes, Lead Times and In-Process Inventories, Journal of Management Science, vol. 33 no. 3, pp. 409-418. Maloni, M. J., & Benton, W. C. (1997), Supply Chain Partnerships: Opportunities for Operations Research, European Journal of Operational Research, vol. 101 no.1, pp. 419-429. Ndubisi, N. O., Jantan, L. O. H., & Ayub, M. S. (2005), Supplier Selection and Management Strategies and Manufacturing Flexibility, Journal of Enterprise Information Management, vol. 18 no. 3, pp. 330. Noonan, J., & Wallace, M. (2004), Building Responsive Contract Manufacturers Through Value-Focused Strategies, Supply Chain Management: An International Journal, vol. 9 no. 4, pp. 295-302. Ritzman, L. P., & King, B. E. (1993), The Relative Significance of Forecast Errors in Multistage Manufacturing, Journal of Operations Management, vol. 11 no. 1, pp. 51-65. Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E. (2008), Designing and Managing the Supply Chain (3rd edn), McGraw-Hill, New York.

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Stalk, G. (1988), Time The Next Source of Competitive Advantage, Harvard Business Review Article, (n.d), pp. 42-52. Tersine, R. J., & Hummingbird, E. A. (1995), Lead-Time Reduction: The Search for Competitive Advantage, International Journal of Operations & Production Management, vol. 15 no. 2, pp. 8-18. Ting, S., & Cho, D. I. (2008), An Integrated Approach for Supplier Selection and Purchasing Decisions, Supply Chain Management: An International Journal, vol. 13 no. 2, pp.116-127. Togar, M., Simatupang, T. M., Wright, A. C., & Sridharan, R. (2002), The Knowledge of Coordination for Supply Chain Integration, Business Process Management Journal, vol. 8 no. 3, pp. 289-308. Wacker, J. G., & Sheu, C. (2006), Effectiveness of Manufacturing Planning and Control-Systems on Manufacturing Competitiveness: Evidence from Global Manufacturing Data, International Journal of Production Research, vol. 44, no. 5, pp. 1015-1036.

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