What are the characteristics of market segments that Dell chooses to attack
Markets ripe for commoditization where there are established common standards
Whats special about Dells value chain How does this differ from HP Sony Toshiba Gateway etc.
Dell only sells direct
4 Disintermediation Source Benjamin Wigand (SMR) 5 Benefits of Disintermediation
Can build product only when its needed
Avoid bullwhip effect
PG and the beer game
With no middleman it can eliminate the margin others have to share with retailers
Boosting its own margins
6 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
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
Moores Law product rapidly depreciates.
Our official definition Processing power per dollar doubles every 18 months.
7 Processing power per dollar doubles every 18 months Source Intel Corp. 8 Processing power per dollar doubles every 18 months 9 Floating Point Operationsper Second (FLOPS)
Price Per GFLOPS
1997 about US 30000
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 10 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)
Cut 3 weeks in past 13 years 1.65B
2006 profits 3B. Over half profits come from efficient supply chain.
Its like fish you can literally see it rot its a financial imperative
11 Technology is the key enabler.
Dells 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 its tracked by a scanner possession changes hands.
12 Cost of Inventory
Typical PC maker pays for parts 30 days before sold.
That means typical manufacturer pays the marginal cost for the product in advance of the products sale.
Once that computer is built its sitting on a shelf somewhere for 30 days before its sold is it earning interest
Can you invest it
Can you use it to hire people
or expand your operations
Thats why inventory death
money is being wasted.
13 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
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
Whats Dells 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.
14 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.
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)
Whats Dells 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
Do other firms manufacture PCs in the US
Why doesnt it outsource like everyone else
For Dell manufacturing is a source of competitive advantage
16 A carefully orchestrated dance.
Dell produces 700 PCs in an hour
Eliminated screws so parts can be snapped together in how short a time
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 Dells plants
Can they do this from Singapore
No they have to be in Austin TX.
Why do companies do it
Scale they want Dells business. Big Dell can dictate terms
How many Sushi restaurants in Bentonville AK
17 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 Dells scale gives it bargaining power. How do suppliers get more of Dells business
Suppliers are ranked against competitors
Vendors compete on cost technology supply predictability service
Rank determines the percentage of Dells business they earn
18 Forecasting Demand Shaping
So thats the back end of the system. How does Dell help suppliers understand buying patterns
It does forecasting
Pays attention to customer buying upgrade patterns
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
It can leverage demand shaping more than rivals
because it has a direct-to-customer model
19 Hard to compete with Dell
Whats Dells profit margin advantage over rivals
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!
20 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.
21 Channel Conflict TraditionalRetailers (small) Distributors TraditionalRetailers (big box) 22 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
23 Not All is Rosy at Dell
Dells been struggling lately. Why
24 Resource-based View (RBV)
Company can develop sustainable competitive advantage if its resources/ products have 4 characteristics
Inimitable (not able to be copied easily)
Non-substitutable (there arent any alternative products available).
25 Is Dells supply chain valuable
Yes but not as valuable as it used to be.
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.
26 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.
27 Is Dells product non-substitutable
Increased computing power introduced substitutes to the desktop.
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
Is their advantage as strong as in desktops
May be a disadvantage for some (e.g. LCD)
28 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.
29 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
30 How is Dell responding
Selling in China
Selling in WalMart
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