Dell and Supply Chains aka The Rise and Fall of Dell

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Dell and Supply Chains(aka The Rise and Fall of
Dell)

• MI021/CS021Computers in Management

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Introduction

• Using Dell as an example of the double-edged
  sword of IT-enabled supply chains.
• Part 1 What made Dell successful in the first
  place.
• Valuable because supply chain lessons also apply
  to other industries (e.g. WalMart).
• Pretend you dont know the end of the story.
• Part 2 Why Dell has struggled lately
• Part 3 What is Dell doing about it?

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(No Transcript)
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Dells Business

• What are the characteristics of market segments
  that Dell chooses to attack?
• Markets ripe for commoditization where there are
  established, common standards
• What was special about Dell's value chain? How
  does this differ from HP, Sony, Toshiba, Gateway,
  etc.?
• Dell only sold direct

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Disintermediation
Source Benjamin Wigand (SMR)
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Benefits of Disintermediation

• Can build product only when it's needed
• Avoid bullwhip effect
• PG and the beer game
• With no middleman it can eliminate the margin
  others have to share with retailers
• Lowering prices
• Selling more
• Boosting its own margins

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A lot can happen in 15 years

• About 15 years ago, dell had 20-25 days of
  inventory spread across a network of warehouses.
• How many warehouses does it have today?
• None
• How many hours of inventory does it hold in its
  factories?
• 72 hrs. average
• 2 hrs at weak link
• Why is eliminating inventory so important for
  Dell?
• Moore's Law product rapidly depreciates.
• Our official definition Processing power per
  dollar doubles every 18 months.

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Processing power per dollar doubles every 18
months
Source Intel Corp.
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Processing power per dollar doubles every 18
months
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Floating Point Operationsper Second (FLOPS)

• Price Per GFLOPS
• 1997 about US 30,000
• May 2000 640
• August 2003 82
• May 2005 5
• February 2006 about 1
• March 2007 0.42

Reference PS3 20 GFLOPS, Fastest
Supercomputer 1 Petaflop
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Depreciation in Practice

• Depreciates a half to a full point each week1/2
  to 1 percent.
• Turn that into money
• Dell had 55B in revenues in 2006. How much do
  you save if shave a week off of inventory
  (roughly)?
• 550M
• Cut 3 weeks in past 13 years 1.65B
• 2006 profits 3B. Over half profits come from
  efficient supply chain.
• It's like fish", "you can literally see it rot",
  "it's a financial imperative"

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Technology is the key enabler.

• Dell's suppliers move their products into up to
  110 Dell factory bays.
• When does Dell take possession of product?
• When customer order has been made product is
  pulled
• And how is 'possession' recorded? Does someone
  run out to the floor type this in?
• Pallet moves across a white line in the factory,
  it's tracked by a scanner, possession changes
  hands.

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Cash Conversion Cycle

• Cash conversion cycle the period of time
  between an outlay of cash for parts and the
  collection of payments for goods made from them
• Typical PC maker, pays for parts 30 days before
  sold.
• When does Dell have to pay suppliers for the
  parts it used to build the product?
• Not until 36 days (average) after it has received
  payment from customers.
• If inventory depreciates at 1/ week, how much is
  that worth?
• 2.75B
• What's Dell's cash conversion cycle?
• Negative 36 days (assumes credit cards clear
  right away)
• Why do you suppose Dell gets such good terms?
• When youre Dell, suppliers do what you want to
  get your business.

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Negative Working Capital

• By collecting money from customers before it pays
  its suppliers, its suppliers finance its
  operations
• Dell has a negative cash conversion cycle. It
  sells product faster than it pays.
• Inventory Turns
• Number of times go through whole inventory in a
  year
• Value of product sold in a year and divide it by
  the value of product in inventory (on average)
• What's Dell's inventory turns number?
• 107 times a year
• What are HPs IBMs inventory turns?
• 8.5 and 17.5 times a year
• If inventory death, low inventory

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Outsourcing?

• Do other firms manufacture PCs in the US?
• No
• Does Dell?
• Yes
• Why doesn't it outsource like everyone else?
• For Dell, manufacturing is a source of
  competitive advantage

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A carefully orchestrated dance.

• Dell produces 700 PCs in an hour
• Eliminated screws so parts can be snapped
  together in how short a time?
• 3 minutes
• How long from start to finish to build a PC?
• 4-8 hrs. depending on configuration
• Software burning testing takes the most time,
  several hours.
• How long do suppliers have to truck inventory to
  Dell's plants?
• 90 minutes
• Can they do this from Singapore?
• No, they have to be in Austin, TX.
• Why do companies do it?
• Scale they want Dell's business. Big Dell can
  dictate terms
• How many Sushi restaurants in Bentonville, AK?

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Return of the Value Chain

• Dell has squeezed inventory down to less than 4
  days. Is it gone from value chain?
• Not entirely, have to pay for it through
  suppliers costs.
• How much inventory do suppliers hold?
• Required to hold 8-10 days of stock in
  multi-vendor warehouses within 90 minutes of the
  factories.
• So Dell's scale gives it bargaining power. How
  do suppliers get more of Dell's business?
• Suppliers are ranked against competitors
• Vendors compete on cost, technology, supply
  predictability service
• Rank determines the percentage of Dell's business
  they earn

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Forecasting Demand Shaping

• So that's the back end of the system. How does
  Dell help suppliers understand buying patterns?
• It does forecasting
• Pays attention to customer buying upgrade
  patterns
• How accurate?
• 75
• What does Dell do during the times when Dell
  guesses wrong is caught with low stocks in key
  inventory (say 15" monitors)?
• Runs a special on 17" monitors
• What do supply chain experts call this?
• Demand shaping
• It can leverage demand shaping more than rivals
• because it has a direct-to-customer model

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Hard to compete with Dell

• What's Dell's profit margin advantage over
  rivals?
• 8 points
• How much does HP make on a PC? What are its
  profit margins?
• Less than 1 margins
• So Dell cuts two points from its margins and it
  buries HPs profits!

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Why dont competitors copy this?

• Why doesnt Gap copy Zara?
• It cant, because it would have to redo
  everything.
• Supply chaining is hard.
• More complex in Dells case
• Who doesnt like disintermediation?
• Retailers dont want to be cut out of the
  process.
• Channel Conflict.

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Channel Conflict
TraditionalRetailers (small)
Distributors
TraditionalRetailers (big box)
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Not just for technology.

• Companies cannot afford to do without retailers
  in the short term, retailers wont let them move
  gradually to disintermediate over long-term.
• We recognize that a vendor has the right to sell
  through whatever distribution channels it
  desires. However, we too have the right to be
  selective in regard to the vendors we select and
  we trust that you can understand that a company
  may be hesitant to do business with its
  competitors. Home Depot memo to suppliers

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Not All is Rosy at Dell

• Dells been struggling lately. Why?

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Resource-based View (RBV)

• Company can develop sustainable competitive
  advantage if its resources/ products have 4
  characteristics
• Valuable
• Rare
• Inimitable (not able to be copied easily)
• Non-substitutable (there arent any alternative
  products available).

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Is Dells supply chain valuable?

• Yes, but not as valuable as it used to be.
• Why?
• Moores Law. Computer technology has gotten
  cheaper.
• Dells profit margin is 8.
• I paid 3500 (for my first computer out of
  college)
• 8 margins 280
• Lots of money, buy direct
• I paid 500 (for wifes computer moving to
  Boston. Note also 80x more powerful than my
  college computer)
• 8 of 500 40
• Not so much, maybe want to see feel.
• As continued to cut, may have cut some things
  that customers valuedservice and product
  quality.
• Trying to be like Wal-Mart cost before quality
  only cut PC support so far.

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Is Dells product rare?

• Used to create rare product in that it could be
  customized.
• Configure computer for your particular needs
• As computing power has gotten greater, now the
  standard computer is sufficient for most needs of
  average user (save CAD).
• Storagejust get an external hard drive.
• Processormost people never use all the
  processing power they have.
• New technologies (grid or utility computing)
  beginning to take advantage and harness all the
  extra computing power out there.
• SETI, AIDS research, PS3 Network for molecular
  folding.

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Is Dells product non-substitutable?

• Increased computing power introduced substitutes
  to the desktop.
• Name some
• Laptops not a huge price difference anymore.
• PDA/Smart Phone The PDAs today are as powerful
  as computers 5-10 years ago.
• Game Stations Carving off entertainment market.
• Does Dell make many of these products?
• Yes.
• Is their advantage as strong as in desktops
• No.
• May be a disadvantage for some (e.g. LCD)

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Is Dells supply chain inimitable?

• Supply chaining is hardbut not impossible.
• Others have begun to close The Gap here (pun
  intended).
• Article suggests that Dell is a one trick pony.
• Have not been able to innovate to counter
  competitors that have begun to copy.

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Sustainable competitive advantage

• Goal of business strategy, give a long-term
  edge that a company has over its competitors.
• Dell has been able to sustain its competitive
  advantage for 15 years (2006 25 on Fortune 500,
  started 1984 in UTx dorm room).
• No question that Dell has been one of the most
  successful companies of past decade.
• No question Dell still lean mean is doing
  stuff as well as they always have.
• Question is whether what Dell has built can
  sustain to next 10 years?
• Are Dells resources still VRIN?

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How is Dell responding?

• Moving away from production (selling factories
  and outsourcing production).
• Breaking from the direct model.
• Selling in China
• Selling in WalMart
• Attempting to be more responsive to customers
  needs.
• Soliciting customer feedback through Web 2.0.
• Ideastorm forum for customers to suggest and
  rate improvements to products. Co-creating
  product.
• Differentiating product
• Laptops with designs by contemporary artists.
• Entering smartphone market