Chapter 6

Supply Chain
Integration

McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Dell Desktop PC Supply Chain:
Case Study
Optimizing the Flexibility of
the Desktop PC Supply Chain

2006 Massachusetts Institute of Technology.

All rights reserved.
Agenda
L6 vs. L5 Value Comparison

Root Causes Analysis

Project Methodology & Next Steps

Lessons Learned

3
Critical Components of a Desktop PC
& Major Component Manufacturers

Chipset
AMD Motherboard
Intel ASUS
Foxconn
Intel
MiTAC
Printed Circuit
Board Desktop PC
BTI Electronics Acer
Compeq Apple
GCE Dell
Plato Electronic Desktop Chassis Fujitsu Siemens
ASUS Gateway
Flextronics HP
LAN Chip Foxconn Lenovo/IBM4
Broadcom MiTAC Company list is not comprehensive.
Intel Images used on this page belong to the respective companies.
L6 vs. L5
L6

MB
5 Weeks
China Dell
Integration Supplier Customer
Logistics Manufacturing
Center
Chassis

L5 3rd Party Integrator

(managed by Equipment
Manufacturers)

: L5 additional cost
MB
1 Week
Dell
Supplier
Chassis Logistics
Manufacturing

Center Customer
5 Weeks
Problem Statement

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

have had to adapt an increasing % of L5 manufacturing:
1. Empty chassis are shipped by ocean (L5) to Dell US &
Europe first. Motherboards are then air-freighted to Dell
US & Europe.
2. Dell incurs motherboard expedite/air-freight cost and 3 rd-
party integration cost.
3. CMs incur cost for idle labor dedicated for MB-chassis
integration.

6
L6 vs. L5: Value Comparison
L6
Integrated offshore & outside a Dell facility
Integrated motherboard-inside chassis
shipped on water
+ Labor savings
+ MB air-freighting costs are eliminated
+ Reduced motherboard packaging costs
Reduced supply chain flexibility
More motherboards need to be re-worked in
the event of an MB ECN
L6 is more cost-effective than L5.
L5
Integrated inside a Dell facility
Chassis shipped on water
Motherboards shipped by air
+ Increased supply chain flexibility
Increased motherboard air-
freighting costs
3rd-party integration cost in US
Separate logistical costs for
chassis and motherboards
7
L5 Driving Increasing Operational
Cost
Costs of air-freighting MBs and 3PI integration have been increasing.

Worldwide
Procurement
Expedite Council
established

8
AMF includes 3PI integration cost. EMF and APJ dont as integration is done in Dell factory.
 L6 vs. L5 Shipments:
% Comparison
L5%
Dell Worldwide L5 vs. L6 Shipments Received
L6%
100% from a Typical Contract Manufacturer
7% 6% 5% 4% 6% 4%
11% 9% 10%
14% 15%
90%
27%
80%

70% L5 shipped %
has been
60% increasing since
50%
March 2005.
93% 94% 95% 96% 94% 96%
89% 91% 90%
86% 85%
40%
73%

30%

20%

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

9
Root Causes Analysis

Majority of expedites are caused by chipset supply

shortage.

AMF Expedite $ by Root Cause (January to June 05)

10
Project Scope

Is Is Not
Desktops Laptops, servers, storages,
peripherals
DAO (Dell America Outside DAO
Operation)
Constrained by chipset To improve chipset supply
supply shortage
Focused on factory To improve Dells demand-
operational improvement forecasting ability

Motherboard-chassis Fans, power supply, SPAMS

integration (Speakers, Printers,
Advanced Port Replicators,
Monitors, Scanners), or 11

other components
Project Methodology

BPI project team established to evaluate the

following 6 scenarios:
1. Keep as current: 3rd-Party Integrator (3PI) managed by
Equipment Manufacturers
2. DAO Cellular Integration: Enable the Dell factory work cells
to perform L5L10 mfg work
3. Offline Integration: Keep the current L6L10 mfg process
unchanged; add a separate facility to handle MB-chassis
integration work
a. At SLC (Supplier Logistics Center)
b. At a Dell-leased building
4. 3PI managed directly by Dell
5. L6 from Equipment Manufacturers Mexico plants 12
Factors to Considered

For each of the 6 scenarios, BPI project team assessed the

following attributes:
1. Process smoothness & sustainability
2. Cost per box
3. Product quality
4. Capital investment
5. Material handling/cost-accounting
6. Logistics
Project Goal:
Identify the optimal scenario
based on these input attributes.
13
 Complexity Analysis

Legend:
The Cost per Box data has been modified to respect Dells data confidentiality.
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
14
Option 4: Dell-managed 3PI Option 5: Integrated chassis from Mexico
Option 2 vs. 4: Value Comparison
Option 2: Integration at DAO Work Cells
+ Lower capital expenditure investment
+ Less impact to business if chipset supply
reverts to 100% L6
+ Fit the Dell Direct model better
Builder headcount is more difficult to
scale
Increased inbound & scheduling
complexity
More part numbers to manage
Factory thru-put rate is downgraded
Option 4 enables Dell to focus on the more value-
added portion of the MB-chassis integration.
Option 4: Dell-managed 3PI
+ Dell has direct control over the 3PI
+ More clear definition of quality issues
ownership
+ Less manufacturing infrastructure
change required, less impact on
existing supply chain network
+ Little additional capital expenditure
investment, little lead time change
Only an incremental change from the
original manufacturing design
15
Lessons Learned

1. Supply chain coordination requires involvement from all

partners in the chain (customer, supplier, sub-tier
suppliers).
2. A well-planned strategy complements strong operational
execution ability from supply chain partners.
3. Change management requires 3 key ingredients:
Top-down leadership
Bottom-up engagement
Cross-functional coordination
4. Qualitative judgment is just as important as or more
critical than quantitative analysis.
5. Working in a bi-lingual/bi-regional setting has its perks
and challenges. 16
Discussion and Q&A

Questions and Thoughts

17
Back-up

18
Manufacturing Costs: L5 > L6.

Costs Common to L5 and L6

L6 Only Costs
Costs of doing L6, rather than L5: Type
China assembler's cost (Foxconn performing L6) Labor
L5 Only Costs

19
 Pros & Cons of the 6 Options

Description Pros Cons

1 Current Least impact for Ops & PE Most expensive option
Process, EM- Dell does not own inventory during MB- WWP and Regional Procure. have more intense EM and
managed 3PI chassis integration at 3PI 3PI mgmt/coordination
Most difficult option for SQE
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
one process simultaneously
L5 and L6 parts are ordered and tracked
independently clear-cut Cost Accounting Work cells config need to change Greatest impact
for Ops and PE
Easiest option for Logistics
DAO Quality concern from an L5-L6 hybrid mfg model
3 L6 at Dell SLC Less complex for WWP Most complex for Cost Accounting
A SQE mgmt is reduced Extra PC and IC headcounts required
3 L6 at Dell- Less complex for WWP Most complex for Cost Accounting and IC
B leased SQE mgmt is reduced Extra PC and IC headcounts required
external
location Requires additional lease commitment
4 Dell-managed Easiest option for Ops & PE Most complex for Cost Accounting and IC difficult to
3PI manage Parts Cost at a Dell-managed 3PI
DAO Quality expected to improve as Dell
directly manages 3PI
5 L6 from EM Lowest possible cost compared to China L6 Requires Regional Procure. to manage L6 out of EM
(China, facilities from China, Mexico, and possibly other regions.
Overall easiest option for Dell
Mexico, Increased SQE mgmt
and/or Most manageable for Master Sch./COC, PC,
elsewhere) IC, Ops, and DAO Quality Multi-regional logistics coordination is a concern.20