Dell Computer Corp.

1
Dell Computer Corp.

• Disdain inventory
• Never sell indirect
• Always listen to the customer

2
Inventory Concerns

• Bad Spell in 1994 left Dell with
• 2nd quarter operating loss of 76 million
• 55 days of inventory
• 154 million deficit in cash from business
  operations
• Dell execs swore at that time that changes would
  be made and they would never put the company in
  that position again.

3
Inventory p-2

• Supply Chain had to be revamped
• Dell had made promise to ship customer their
  order within 5 days of order being received
• BUT
• There was a 45 day average lead time necessary
  for purchasing parts.
• SO

4
Inventory p-3

• Dell developed valuechain.Dell.Com
• A novel idea
• Use the Internet in a B2B format to control
  inventory levels at suppliers businesses
• Basically, it was a you do this or else
• This proved to be very effective
• WHY?

5
Inventory p-4

• Suppliers were truly world-wide (26B/yr)
• By becoming a mandatory member of
  valuechain.dell.com, they exhibited something to
  other computer manufacturers, that being that
  they were serious about being a leader in their
  respective area of expertise.

6
Inventory p-5

• Initially run by Dell but in time is was turned
  over to the suppliers to run
• This targeted the supply issue of the partnering
  companies
• Within 1 year the Inventory was 4 days of sales
  in amount, of course which is less than the
  guarantee that the order will be shipped within 5
  days of receiving

7
Inventory p-6

• This was 1999
• Daily sales averaged approximately 15,000,000.00
  (70 in direct materials)
• Gross profit margin of 21 3,000,000
• Making the daily cost of sales 12,000,000
• The difference in days of inventory 55 4 51
• Lets say that money is worth 6
• This equates to a savings of 720,000 per day
• Or 36,720,000 for the 51 day change in inventory

8
Inventory p-7

• Daily sales in 1999 around 15,000,000
• Daily sales in 2001 in excess of 50,000,000 (more
  than 3 times the amount from 2 years prior)
• By 2001, the inventory carry was under 1 day
• Think about those savings based on reworking the
  value chain

9
Direct Sales

• In order to handle
• 1,000,000 per day in sales in 1996
• 15,000,000 per day in sales in 1999
• 50,000,000 per day in sales in 2001
• 31 billion annual sales in 2002 (82M/day)
• It takes speed. Something that cannot be
  attained without direct control over the
  marketing and sales function

10
Sales p-2

• Michael Dell designed the company business model
  to be a build-to-order business
• It would survive if it was built on speed, speed
  to change based on industry demands.
• Demands had to be constantly gathered and measured

11
Sales p-3

• With sales of over 7 billion per quarter in 2001,
  there was a lot of data to synthesize
• Dell works on the slimmest margin in the industry
  (21 in 1999) and becoming smaller all the time
• They are the price leader
• This could not be accomplished if they were
  selling at wholesale prices to retailers

12
Sales p-4

• Top PC Makers 1999
• Compaq 16.10
• Dell14.80
• Gateway 9.30
• Hewlett-Packard 8.60
• IBM 8.00
• Others 43.20

13
Sales p-5

• Sales by Price
• 1998 Actual 2003
  Projected
• 0 to 599 3.00 27.00
• 600 to 999 31.00 38.00
• 1,000 to 1,999 51.00 34.00
• 2,000 and over 15.00 1.00

14
Sales p-6

• Sales of this magnitude are made possible with
  the supply chain that runs the Inventory control
  area,
• AND
• Running their business in Real Time
• They understand on Monday afternoon if PC sales
  are slowing down, and they can adjust prices
  accordingly

15
The Customer

• Direct Sale Made to order
• 40 buy non name brand computers
• Dell owns 3 billion dollars of these sales as of
  now
• Taking away market from Foreign companies that
  have long had the white box market niche

16
Customers p-2

• Dell has the lowest transaction costs in the
  market
• What does this mean???
• As a stockholder?
• As an employee??
• As a Customer??

17
Customer p-3

• Proof of transaction costs
• Figure 4Profit Margins for Dell and major
  competitors
• Company Gross Margin Operating Margin
  Profit Margin
• Dell 20.62
  8.97 7.46
• IBM 36.38 12.39
  8.64
• Hewlett-Packard 28.53 7.97
  7.30
• Compaq 23.18 5.50
  3.86
• Gateway 22.81 7.97
  5.67

18
Concluding comments

• Dell has two main philosophies
• Supply and Demand are never in balance, company
  strategy is to manage when they deviate
• Always have enough, and have nothing left over.

19
Concluding comments

• Executing those philosophies takes
• Huge dollars invested in training employees
• Huge dollars invested in technology to enable the
  processes to work

20
Concluding comments

• Michael Dell agrees that the Internet gives
  customers unprecedented power to seek out the
  lowest prices, but he argues that it can also be
  used to deepen relationships and ultimately build
  far greater customer loyalty than before.

21
Resources

• Shah, J. (October 2001), Dell Makes Good on
  Inventory Vow Creation of three SCM
  Organizations has helped boost efficiency. EBN.
  1286,PG52
• Shah, J. (December, 2001), Dell writes the book
  on efficiency Processes focus on understanding
  where supply, demand diverge. EBN. 1293, PG32
• Anonymous, (June 1999), Survey Business and the
  Internet Youll never walk alone. The Economist.
  351, B11-B21
• Shah, J Serant, C. (August 2002), IS supply
  chain prowess enough? Dell confident time is
  right to enter white-box market. EBN. 1327, 3
• Souza, C. (November 2001), Real-Time business may
  be the real ticket Technology enablers seen as a
  good investment. EBN. 1289, PG4
• Sabatini, J. (August 2000) Direct to Dell I hunt
  for Michaels supply chain secrets. Automotive
  Manufacturing and Production. 112, 74-76
• Lewis, N. (February 2001), Dell Portal Adds
  Value Valuechain.dell.com provides pipeline to
  info exchange. EBN. 1251, PG62
• Teresko, J. (October, 2001), The value of
  velocity. Industry Week. 250, 43-44