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Dell and Supply Chains aka The Rise and Fall of Dell


Using Dell as an example of the double-edged sword of IT-enabled supply chains. ... What was special about Dell's value chain? ... Technology is the key enabler. ... – PowerPoint PPT presentation

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Title: Dell and Supply Chains aka The Rise and Fall of Dell

Dell and Supply Chains (aka The Rise and Fall of
  • MI021/CS021 Computers in Management

  • Using Dell as an example of the double-edged
    sword of IT-enabled supply chains.
  • Part 1 What made Dell successful in the first
  • 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?

(No Transcript)
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,
  • Dell only sold direct

Source Benjamin Wigand (SMR)
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

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
  • 72 hrs. average
  • 2 hrs at weak link
  • Why is eliminating inventory so important for
  • Moore's Law product rapidly depreciates.
  • Our official definition Processing power per
    dollar doubles every 18 months.

Processing power per dollar doubles every 18
Source Intel Corp.
Processing power per dollar doubles every 18
Floating Point Operations per 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
Depreciation in Practice
  • Depreciates a half to a full point each week…1/2
    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
  • 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"

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
  • 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

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
  • 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.

Negative Working Capital
  • By collecting money from customers before it pays
    its suppliers, its suppliers finance its
  • 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
  • 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

  • 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

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?

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
  • 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

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
  • 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

Hard to compete with Dell
  • What's Dell's profit margin advantage over
  • 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!

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

Channel Conflict
Traditional Retailers (small)
Traditional Retailers (big box)
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

Not All is Rosy at Dell…
  • Dells been struggling lately. Why?

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

Is Dells supply chain valuable?
  • Yes, but not as valuable as it used to be.
  • Why?
  • Moores Law. Computer technology has gotten
  • Dells profit margin is 8.
  • I paid 3500 (for my first computer out of
  • 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 valued…service and product
  • Trying to be like Wal-Mart cost before quality
    only cut PC support so far.

Is Dells product rare?
  • Used to create rare product in that it could be
  • 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).
  • Storage…just get an external hard drive.
  • Processor…most 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

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)

Is Dells supply chain inimitable?
  • Supply chaining is hard…but not impossible.
  • Others have begun to close The Gap here (pun
  • Article suggests that Dell is a one trick pony.
  • Have not been able to innovate to counter
    competitors that have begun to copy.

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?

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
  • Soliciting customer feedback through Web 2.0.
  • Ideastorm forum for customers to suggest and
    rate improvements to products. Co-creating
  • Differentiating product
  • Laptops with designs by contemporary artists.
  • Entering smartphone market