Supply chain practices of dell

4. The Supply Chain of Dell Inc.

Dell, Inc. is a multinational technology corporation that develops, manufactures, sells and supports personal computers and other computer-related products. Based in Round Rock, Texas, Dell employs more than 82,700 people worldwide. Dell grew during the 1980s and 1990s to become (for a time) the largest seller of PCs and servers. As of 2010 it held the second spot in computer-sales within the industry behind HP. The company currently sells personal computers, servers, data storage devices, network switches, software and computer peripherals. Dell also sells HDTVs that are manufactured by other brands. In 2010, Fortune magazine ranked Dell as the 25th-largest company in the Fortune 500 list, 8th on its annual "Top 20" list of the most-admired companies in the United States. In 2009, Dell ranked 34th and 8th respectively on the equivalent lists for the year.

1. Manufacturing

In the 1980s Dell became a pioneer in the “configure to order” approach to manufacturing and delivering individual PCs configured to customer specifications. In contrast, most PC manufacturers in those times delivered large orders to intermediaries on a quarterly basis. To minimize the delay between purchase and delivery, Dell adopted a general policy of manufacturing its products close to its customers. This also allows for implementing a just-in-time (JIT) manufacturing approach, which minimizes inventory costs. Low inventory is another signature of the Dell business model – a critical consideration in an industry where components depreciate very rapidly. Dell’s manufacturing process covers assembly, software installation, functional testing (including "burn-in"), and quality control.

2. The Direct Model of Dell’s Supply chain strategy

Dell’s direct selling model traces its origins Michael’s idea of selling computers directly to the consumers eliminating the need for distributors and middlemen. He believed that by selling PCs directly to the consumers, the company would be able to better understand the needs of its customers, Dell decided to produce PCs as per the orders it received and not to hold excess inventory or finished products. At the time of starting this process, their primary focus was to reduce the inventory by 50 %, improve the lead time by 50 %, reduce obsolete inventory by 75 % and reduce the assembly cost by 30 %.

Later on, Dell decided to replace inventory with information, on the premise that with more information on the needs and requirements of the target customers, the level of inventory could be further reduced. The company decided to pass on the information to the suppliers who were provided access to company’s internal data about the demand for specific components. Initially, the component inventory dropped from 70 days to 30-40 days and consequently to 20 days. With reduction in components inventory having a positive effect on each cash flow, the company decided to bring other tasks related to production in line with the reduced inventory.

In the process of reducing inventory Dell’s executives observed that as the inventory was reduced, the component lead time improved while the finished product inventory also reduced. This happened because Dell was aligning inventory and sales, rather than carrying inventory against projected sales. Another benefit was in terms of returns. The returns grew as Dell was able to eliminate carrying costs and also obsolete stock, and reap savings due to cheaper components. The overall savings Dell derived from managing the inventory encouraged it to try matching supply and demand on monthly, weekly and daily basis. This reduced the variation in supply and demand and gradually it was no longer necessary for Dell to maintain any component inventory. Dell established its website in 1994, when the company’s total revenues were US $3.5bn. Online pricing was introduced in 1995, and online sales began in 1996. Within six months Dell’s revenues on the Web stood at US $ 1 million a day. The internet proved to be a shot in the arm for Dell’s direct model as it was able to facilitate transactions, reduce costs, and improve relationships with customers.

3. Role of Dell’s Suppliers

In order to manage its operations with low inventory levels, Dell collaborated closely with its suppliers. The company’s procurement decisions were based on four criteria-quality cost, delivery and technology. Suppliers were selected on the basis of cost (given a weight age of 30 %) and quality, service and flexibility (with a weight age of 70%).Dell separated activities related to contracting like cost negotiation, contract terms source selection from commerce-related activities like purchase order release delivery management and payment. Cost was centrally-managed while delivery was managed regionally.

Printed circuit board assemblies and sub-assemblies were handled by contract manufacturers or OEMs. Components and peripherals like CD ROM drivers, monitors, keyboards and pointing devices were supplies by the offsite suppliers. Software was supplied by standard suppliers like Microsoft or as per the requirements of the corporate customers. Most of Dell’s suppliers were located in Asian countries. As bringing the components from the suppliers’ factories to Dell took anything between 7 and 30 days depending on the mode of transportation, Dell required all its suppliers to maintain a warehouse close to its factories. They could either manufacture the product at the warehouse or produce at another place and ship the finished product to the warehouse. Most of Dell’s Asian suppliers produced some components near Dell’s manufacturing facilities, while other components were produced in Asia and shipped in to their own warehouses near Dell’s factories.

The warehouses known as Suppliers Logistics Centers (SLC) were located a few miles away from Dell’s assembly plants. Each SLC could be shared by more than one supplier. Typically, Dell required suppliers to maintain inventory for 8 to 10 days in SLCs. Dell took the inventory from SLCs as required usually replenishing its stocks every two hours. It was up to the suppliers to decide on maintaining inventory at SLCs. Most suppliers replenished the stocks at SLCs thrice a week. Dell had a vendor managed inventory arrangement with its suppliers. As per the arrangement, Dell set the target inventory levels-typically 10 days. The vendor had to decide when to order the inventory and the quantity to order to maintain the levels set by Dell. The suppliers also had to decide on sending the components to SLCs so that Dell could take the components as and when required.

With some suppliers, who had been with Dell over a long time, Dell agreed to purchase a particular percentage of the components it required. This was to ensure that an adequate supply of products was available even when the demand in the market was higher than the supply. Some of the engineers from the major suppliers worked in tandem with the new product development teams in Dell. This enabled the suppliers to understand Dell’s requirements, and in case there was a problem with the components, the engineers from the suppliers were available to rectify it immediately.  Due to this close collaboration with suppliers Dell was able to manage with an inventory of just a few hours for some components. Some of the partnerships that Dell entered into with its suppliers enabled it to operate with almost zero inventory levels. A case in point was Sony, which supplied monitors for Dell. These high quality monitors, with very few defects, were not tested by Dell. These monitors were not shipped to Dell’s assembly lines but were shipped directly to Dell’s customers.

Dell shared with its suppliers the data pertaining to sales forecasts once a month. The data was generated by the marketing department of the company and took into account various factors like the demand for new products, and seasonality trends like the demand from the government departments at the end of the year, demand from school children at the start of the academic year etc. Dell believes in maintaining a close relationship with its suppliers. All the inventory data, including the long-term planning data, volume expectations, and replenishment data was shared with them. Dell was of the view that if it had more information to share with its suppliers, it could expedite the process of building the products and receiving material from suppliers, and minimize its inventory. Dell constantly passed on data on demand and supply trends to its suppliers.

 The company gathered information about inventory levels of the suppliers and the suppliers were required to share information on their capacity to deliver products on time, new technology drivers, etc. Dell provided the details of customer demand to its suppliers, and details of changes in demand patterns.

Dell demanded that its suppliers should be extremely flexible to accommodate short term demand fluctuations. The company provided suppliers with data on real-time customer demand, and every week, suppliers were given an order commitment from Dell for the following week. The suppliers needed to send their consent to meet the company’s demands immediately.

Every supplier was given a supplier report card and their performance was constantly monitored against the metrics set by Dell.  Dell’s suppliers also maintained low levels of inventory. The company had about 30 suppliers who provided 75 % of the components required by the company and they maintained inventory for an average of 8 to 10 days. If the inventory exceeded 10 days, Dell worked together with the suppliers to ensure that optimum inventory levels could be maintained by them.

4. Managing the Demand and supply chain

Dell maintained a database to track the purchasing patterns of corporate customers and their budget cycles, in order to forecast demand. It also maintained a similar database for individual customers in order to cater to their future requirements for PCs. Through its forecasting techniques, Dell was able to forecast demand with 75% accuracy. Thrice a day, the changing demand patterns were communicated to the major suppliers.

In all the countries in which Dell operated it had a direct sales force, which was directed by the marketing department located at the headquarters. The sales force was primarily responsible for marketing the Pc's to the corporate and public sector customers. Dell maintained a sales force in all the regional offices. As Dell sold directly to the corporate customers, it kept track of their purchases and gained knowledge about the PC requirements of the major customers.

They interpreted the demand trends, tried to resolve supply issues and focused on lead times for delivering products to the customers. If it was found that the lead time for a product was increasing, the procurement of the product was expedited or additional suppliers were brought and the customers were encouraged to buy a substitute. If any component was found to be accumulating, customers were provided incentive to buy those products. The pricing also changed from week to week reflecting the demand management in the company. The product lead times were updated everyday. In case the demand exceeded supply at any given point in time, Dell had more than one supplier for each of components to expedite supply. If the component was generic, Dell checked with alternative suppliers.

5. Production Process

Dell received orders via the telephone, internet, e-mail, etc. Orders were received by business units, which downloaded the orders every 15minutes. The orders were processed after checking the credit of the customers and configuration evaluation, where the feasibility of the configuration selected by the customer was checked. As of 2003 Dell received about 50,000 orders per day and around 25,000 orders were received via the internet. All orders were sent to Dell’s Legacy order Management System, which received the inventory status and generated requests for the materials. The request was then sent to suppliers. After the order from the customers was received, in order to process order, a barcode was printed and attached to the components, and this remained on them through the assembly line.

Every two hours, the production lines in every factory located across the globe are rescheduled. At the beginning of the cycle, the component providers have 90 minutes to deliver the products for the next schedule of production. Dell on its part required 30 minutes to take the material and deliver the components to the assembly line. The process took two hours, and after this another production cycle began. Without maintaining inventory and warehouses for storing finished goods. Dell still managed to process orders on time by ordering the components from its suppliers, only after the final order was received.

The schedule for making a product was drawn up and sent to the factory accompanied by an order number. At the same time, a message was sent to SLCs. After receiving the information, the suppliers delivered the required materials at the specified dock door to send them to the assembly line. Personnel from the suppliers were present at Dell’s facilities to run the process smoothly. Dell assumed the ownership of the components only after they had reached its production line. Once all the required components were ready, the customer order was picked up and the barcode was scanned. Then the parts required were sent on a conveyer belt. As the parts went into the assembly each was scanned to ensure future traceability. The system was assembled and a quick test was carried out to verify if the order was executed as per the customer specifications. After the verification, the unit was placed back on the conveyer belt. The assembling was carried out by a single worker, and it was the responsibility of the worker to maintain the quality of the product.

 The next step was loading the software and ensuring that the application ran correctly. This process took up to four hours. The technician present there detected any failures that occurred and rectified them immediately.

6. The Benefits to Dell by its Supply Chain Model

Dell maintained nearly zero inventories for some of its components. With the value of inventory declining rapidly at an average of 0.5% a week, holding a significant amount of inventory did not prove to be an advantage. As Dell did not hold large inventory of finished products, it did not have to sell technologically obsolete products at a discount. Dell was able to bring in new products according to the needs of the customers into the market faster than its contemporaries. In 2009, the inventory turnover rate in Dell was at 107 times a year, compared to 8.5 times at HP and 17.5 times in IBM.

Dell’s production system functioned on negative working capital. Usually, computer manufacturers paid the suppliers 30 days before the PC was skipped to the market. In Dell’s case, it received payment from the customers on order, after which the specified order was carried out. The suppliers were paid 36 days after Dell received payments from its customers. Through the Direct Model, Dell was able to incorporate new technologies quickly into its products and take them to customers almost two months ahead of its competitors. Bothe suppliers and customers benefitted from this, as the suppliers could not use the latest technologies. The consumers derived benefits also in terms of cost as Dell passed along the material cost savings to them through forward pricing. Dell decided on the optimum price of the PC for achieving a high sales volume. It then considered a target price and the expected volume and communicated to the vendors who adjusted their price accordingly. In the process, Dell was able to meet the expected price and the vendors also benefitted as they were to sell higher volumes of the components.

7. Brief Summary of the Dell Supply Chain model.

Importance of SCM to the PC business of Dell Inc.

1. Material costs account for 74% i.e. 21 billion dollars for Dell.
2. Improving SCM by 0.1% has bigger impact than improving manufacturing process by 10%.
3. Changing technology obsoletes materials value by almost 1% per week.
4. Dell relies on market forecasting to drive production.
5. Constant technological breakthroughs cause very short product life cycles.

Dell’s Competitive Advantages with its Supply Chain Model

1. Dell boasts of one of the best SCM’s in the world.
2. 92% supplies are ordered online using integrated websites of suppliers and Dell.
3. 95% of supplies located very close to assembly plants hence coordination is easier.
4. D ell’s factories have only 7 hours worth of inventory for most items whereas if we take industry wise it is around 10 days.
5. 15 suppliers provide almost 85%of all supplies.
6. Dell gets paid by its customers first and then it pays its suppliers.
7. Dell uses the I2 SCM software package which caters to almost 70% of the SCM market.
8. Every 20 seconds the software aggregates orders, analyses material requirements, compares Dell’s on hand inventory with its supplier’s inventory and then generates a supplier bill of material to meet its order needs.
9. Instead of forecasting the daily supply need, Dell receives the exact material every two hours to fulfill actual consumer orders.

Competitors disadvantage Vis a Vis Dell’s supply chain model

1. The need to hold inventory at each step.
2. Have to pay suppliers first before getting paid from the customers.
3. Caught with short supplies of hot products leading to lost sales.
4. Stuck up with excess inventories of slow selling products.
5. With about 2000 product transitions a year the ability to reduce product time to the market is critical which only Dell has been able to achieve more effectively than the rest.

V. Bibliography

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5. www.managementparadise.com