Case Studies Of Companies Supply Chain Management

Dell was incorporated in 1994 by Michael Dell while he was a student at University of Texas, Austin. From its very first initiatives, direct selling model was adopted. In the beginning PC’s were sold over the phone and they were customized according to customers’ specifications. Dell returned to its direct selling model after using the retail channel from 1990 to 1994. In mid 1990’s, the company grew rapidly, thus becoming number one PC seller in the US and number two worldwide in 1999.

Dell’s success continued over the following years, but it was not able to avoid the crisis in PC industry in the new millennium. Dell’s growth rate fell, resulting in the fall of its stock price. However, over the time, Dell managed to remain a highly successful company, and its growth rate continued to outperform the industry as a whole.

Dell’s strategic choices and ways of realizing those choices have played an effective role in story Dell’s success. The supply chain management of the company is the key element in its successful business model. The core element of the company’s business model is its direct sales model, referred as ‘direct mode’, with the build to order strategy.

In this work we have a look at an organisation with its sheer strategy and competitive view of the future created a giant in the industry. It has developed a business model which has a very little requirement of controlling variables, but with few efficient and critical models it has created an industry leader. It shows how Dell Inc has changed the dynamics of the industry and how it has helped in evolved with the industry.

It is an $80 billion company which is created in just in time frame of 23 years. The strategy was to bypass the dealers in the field of personal computers and sell directly to the consumers. What will urge customers to buy online? The answer to these is to make the product build to order and provide them customization. This business model gave Dell some great cost advantage over it peers. This strategy has given Dell- Information about the customer & dell has leveraged that to create with its partner an infrastructure which is a global giant. The power of customer information has given Dell competitive advantage in the value chain as a result of which much of the competition is now turning to becoming partners across the value chain. Virtual integration has harnessed the needs of two very different models.

The IBMs and Compaqs and HP of the world subscribed to the view that “we have to develop everything”. This was an engineering centric era, in this era dell was of the view why we should we make everything; we can just buy and collaborate as per our requirement. This view gave them flexibility and coupled with the excellent supply chain that they created- they became what they are. In this model there are fewer things which can go wrong because there are only fewer things which can go wrong. There is no drag effect of 50000 people working with you.

The only critical problem with this business model is to establish partnership model with suppliers so that at customers end everything should seem completely integrated. The key challenge is to make money by reducing the inventory cost to the bare minimum and Dell has done that by using excellent partnership models and also building up an excellent supply chain. They have leveraged the knowledge of value chain in the process.

9.1.2 Partnership with Sony

With Sony the partnership has created excellence for both of them. For Dell there is zero day inventories holding if we look at an excellent partnership model with Sony. Let’s examine what Dell said to Sony- oh we are looking to buy two or three million of those monitors, why we don’t just pick them up as per our need. If you cannot provide us this convenience we don’t keep any of your products.

They go to Sony and say-The distance between demand and supply has totally shrunk, hence we pick as per our need.

The Evolution of a faster Business Model

This differentiated model of dell help it creates a niche in the distribution channel and eliminates the entire mid channel members to arrive at cost leadership position in the industry. The basic principle of Resource based view is that the competitive advantage for any particular organization completely depends upon the resources which are available at any company’s disposal. It is a management tool to determine the important resources available for any organization. It is very important for success of the organization that these resources are valuable and are not imitable.

9.1.3 Value Chain Analysis

9.1.4 Strategy for profit oriented industry in 21st century

Both the views of strategy are equally strong and have their sets of critics. A competitive positioning in a competitive market is not sustainable if they don’t have adequate resources available to them to maintain the cost advantage. For e.g.: Telecom industry in Singapore is an industry of price wars. Competitive positioning is effective but is only sustainable for bigger players like Bharti Telecom & Vodafone International because they have valuable resources with them which allow them to sustain themselves in price wars.

A profit oriented industry in 21st century should create adequate resources and develop capabilities to use them properly. On the marketing front if the environment is competitive than the firm should develop competitive positioning or till then it should enjoy healthy margins.

Let’s take an example of Apple Incorporation. It had the resource of great Inventions & a great leader in there CEO-Steve Jobs. They utilised it with their capability to position themselves in the market. It’s a highly profitable firm now.

9.1.5 Supply Chain Management

The Supply Chain Market (SCM) in Asia is poised for a robust growth. (Balsmeier, 1996)The Supply Chain Management is the set of frameworks and processes helping organizations in development and delivery of products. The supply chain represents the complex relationships of an organization with its trading partners through whom it sources materials, manufactures products and delivers products or services to the customers. The supply chain links all the activities in the procurement, transformation and storage of raw materials and intermediate products, and sale of finished goods.

Figure 1: Generic Configuration of Supply Chain in Manufacturing

The entire Supply Chain (Figure 1) is looked across my Supply chain management, rather than a single entity or level. The SCM aims to increase alignment and transparency of supply chain’s configuration and coordination, regardless of corporate or functional boundaries.

The growing competition among the manufacturers to retain and attract customers has compelled manufacturers to serve customers effectively by maintaining long-term relationships with the customers.

In the late 1980’s, organizations were looking for ways and means to improve their process efficiency, and for this purpose they revamped their internal processes. After they succeeded in making their internal processes efficient, businesses needed to make their external processes efficient so that they could reduce the time and money needed to market and distribute. For this, they had to redefine their relationship with their suppliers, retailers, distributers, and customers. An effective relationship with these entities increased the need for information sharing and made them mutually dependent. This caused a paradigm shift in competition from manufacturer VS manufacturer to supply chain VS supply chain.

Advanced Planning and Scheduling (APS) systems, developed in early 1990’s works on the principal of relating information to different entities in a supply chain- manufacturers, suppliers, business partners and retailers- and making it available to all entities. These applications are aimed to reduce the inventory levels of a company through accurate forecasting, reduced cycle times and near perfect scheduling. Customer levels are increased as the goods are delivered on time due to efficiency in the distribution process.

9.1.6 Direct Sales

The direct sales model refers to the fact that the company does not use any retail channels for selling its products, but sells its products directly to its customers through its corporate website, Dell.com.

The above figure shows hot the direct model of Dell was different from the indirect distribution channel of the rest of industry. In its direct sale model, the intermediary steps that add cost and time are eliminated, and the company is directly able to link with its customers.

Dell directly sells to all its customers, regardless of a home-PC to world’s largest corporations. The direct relationship with individual customer creates a great source of competitive advantage for Dell. This creates a valuable information about the end customers, and thus Dell knows who are the end users of their product, what they have purchased from the company, what are their future preferences, a fact that allows the company to stay closer to their customers by offering add-on products and services.

Company distinguishes three customer segments, namely large organizations, medium and small businesses and personal consumers; and the revenue of the company is not concentrated as no customer of Dell represents more than 2% of total revenues. This provides a wide mix of customers served. The focus of the company is majorly on large customers, accounting of 70% of the Dell’s revenues. Dell has been improving its segment from past years and with the combination of direct sales model, gives them the ability to better forecast demand.

In the case of large customers the direct relationship by the company is upgraded to virtual integration. With the help of IT, customers work with Dell as partners. Dell employs two main facilities that bring them and their customers closer. Premier Councils and Premier Pages. Premier Councils are the regional meetings of the company largest customers, where salespersons, technicians and the executives discuss their experiences with Dell, and their future expectations from the company. Premier pages, now known by Premier.Dell.com, are customizes support and procurement sites for their big clients, which allows them to manage and decide their purchases from the company, thus making the role of a sales person a more consultative role. This represents Dell’s customized sales channel and the company has increased its premier pages manifold in these years.

9.1.7 Build in Order and Integration with Suppliers

Build-to-order Supply Chain as a strategy is defines (Gunasekaran et al.)”as a value chain that manufactures quality products or services based on requirements of an individual customer of a group of customers at competitive prices, within a short span of time, by leveraging the core competencies of partnering firms or suppliers and information technologies, such as the internet and WWW, to integrate such a value chain”. Thus, a computer is build after the customer places and order, then just-in-time production and lean manufacturing takes place. This means when an order is placed, its configuration details reaches the manufacturing department and the assembly begins, and once the PC is configured it is shipped by a 3PL to the corresponding customer.

The choice of JIT and build to order has several advantages for the company. Firstly, the level of inventories remains very low, leading to faster responses to demand changes and low inventory costs. For instance, if a new microprocessor comes into the market, the company can immediately place an order with its suppliers, as the company need not get rid of the excess inventory. Also, in case of Dell, customers pay in advance. That means the customer pay for the order prior to when the company pays its suppliers for the products, thus giving Dell the opportunity of operating on Negative cash flow cycle.

The special thing about the company is its relationship with its suppliers, which is the major reason for facilitating build-to-order model. In Dell, Suppliers are viewed as the integral part of operating business and a key variable for success. This helps Dell to adopt an approach of the extended enterprise. According to Dell their supplier effectively becomes their partner.

The company selects suppliers that show experience, expertise and ability to deliver value. The performance of suppliers is regularly evaluated against the pre-set parameters. A quarterly meeting is held between the company and its suppliers to discuss the quarterly performance and future expectations. The performance of each supplier is evaluated by comparing a scorecard consisting of quality, cost, and reliability with that of their competitor. The company’s suppliers are also provided with the support and training to improve their processes.

The company demands from its suppliers that it should provide them with inventory at a high speed. This helps Dells effort of minimizing its inventories. So instead of orders like deliver 4000 to warehouse every week, the form of orders is like “tomorrow evening we need 7.25 to be delivered at door D3 of the warehouse by 6 pm. This notion of Dell, has introduces inventory velocity, and it focuses on maximizing the speed and minimizing the inventory. Dell holds an average inventory of less than 6 days, while the corresponding industry average is of 6 weeks. In dealing with these rhythms, main supplier does have to maintain inventory near or in the company’s plants.

All the practices above require close collaboration between the suppliers and the company; sophisticated data exchange and mutual trust are the key variables to achieve it. The information sharing facility of the company is the website ValueChain.Dell.com. Through this website, the company’s suppliers get informed of the level of inventory in the company’s supply chain, demand and supply data, new part transitions with customers and component quality metrics. This way the company share production, demand and supply forecasts with its suppliers. These help suppliers in deciding on production levels, avoiding bullwhip effect.

9.1.8 Use of E-Commerce

Introduction to E-Commerce

Though E-commerce was there since long, since 70’s in the form of electronics transfers of documents and transactions between banks the boom of E-Commerce was evident in 90’s after the introduction of WWW Platform and this was further fuelled by increasing Broadband connectivity along with increasing trust of consumers on this platform thanks to certifying agency like VeriSign ad Payment Gateways like PayPal. Amazon and EBay have been there since its inception and have survived all ups and down of industry and also have been pioneers of new concepts in industry.

The technology that supporting this platform constitutes the backbone for industry. Trust of consumers of this platform is very important and it is estimated that around 40% of consumers still do not trust the platform despite using it for their purchases. In coming times this technology will be further dive deep and move from E-Com to M-Com i.e. more and more purchases will be made through mobile phones as connectivity issues become lesser and lesser and more trust gets build up among users. Since 2000’s the new concept what we call as Web2.0 or Social Networking is in evolution and has completely changed dimensions of industry with more and more users demanding better and innovative technology and application to make them buy and more and more reviews and wisdom of crowd ruling the purchases made, all E-Commerce retailers have been paying much attention to leverage it and is becoming an hygiene factor for future profitability and growth.

In this era of Web2.0 enabled E-Commerce application and more and more social content being the driving force behind it, it’s worthwhile to have a look at what products/services was being offered by the initial E driven commerce and the present E-commerce, better call it as E-commerce2.0. Let have few points comparing E-Com1.0 and E-Com2.0 and talking about what changes have taken place and why have they taken place and to what have these changes led to.

Those making purchases online includes a set of users who are confident of the technology and trust the platform through which it is being offered. Such users are generally people using WWW Platform for more than two year and are generally educated at least or above college graduate. The important thing being that around 80% of E-commerce consumers trust the site through which they make their purchases.

In the last decade, many start-up e-commerce companies have rapidly stolen market share from traditional retailers and service providers, pressuring these established traditional players to deploy their own commerce websites or to alter company strategy in retaliation. This effect is most pronounced in travel services and consumer electronics. According to comScore, online leisure travel bookings reached about $51B in 2005, or 44% of all online sales, which were around $122B in the same year.

Either an organisation can score on cost leadership or differentiation. In this business cost leadership is not an option; hence only feasible option is to differentiate and survive. With ecommerce capabilities the organisation can differentiate. about two competitive positioning strategies -differentiation or cost leadership. A differentiator invests in creating high offering value while a cost leader has the lowest costs of the product in the market. If a firm can provide a differentiated product in the market it will create a niche for itself, while if it provides same product – then it should do that at a lower cost. If the case is involving a niche then this strategy is termed as focus. Hence this strategy creates a trade off for the firm -either invest in offering higher value or invest in lower cost.

The e-commerce business is characterized by large volumes of transactions, small value of individual orders, odd place of delivery, speed in internal movement, wider product portfolio, and a large number of customer spread over a wide geographical area. Manual operations have no scope in e-commerce logistics operations. The component of logistics, such as order processing, transportation, inventory management, packaging, and delivery require close coordination using IT solutions. Electronic commerce logistics solutions need to be based on the following design considerations:

Online facility for organizing and tracking shipment

Online order status and documentation

Online dispatch documentation and invoice

Auto reminder for payments

Seamless interface with existing SCM or ERP systems

Online alert for critical information through WAP/Mobile

MIS reports on the past data analysis, delivery history etc.

E-commerce logistics systems, based on the above considerations, ensure the following benefits to sellers, buyers, and 3PL service providers:

Improved Communication

Transparency in supply chain

Improved customer satisfaction

Cost reduction

Improvement in efficiency

On time delivery

Dell computers represent one of the successful e-commerce, logistics and supply chain stories. To compete with the giants like IBM, Apple, and Compaq, Dell has adopted a different strategy to market their PCs. They chose the e-commerce route. For ordering a PC with desired configurations and specifications, the customer has to log on to the Dell website, place an order and complete the outline commercial formalities. Very often the customer gets his PC very next day, if he happens to be in USA. The electronic commerce system installed on the Dell website registers an order after online completion of commercial formalities. The system estimates the demand of the various components going into commercial formalities. The system estimates the demand of the various components going into the computer and place orders for parts with the various suppliers. The supplier delivers the parts to predetermined supply centres wherein the computer is assembled. The system, while registering the order, communicates to its logistics partner, the details of the customer and the delivery location as well as the assigned supply chain for picking up the consignment. The logistics partner’s office nearest to the Dell supply centre is activated for material pickup and delivery. The result of this efficient process is nearly zero inventory and total customer satisfaction.

9.1.9 Security

Trusted Computing base or TCB is the sum total of the protection mechanisms within a network system which includes firmware, hardware and the software. It consists of one or more component which together enforces a unified security policy for the whole system. The company that I have chosen contains lot of sensitive data which is very important for national security. As expected the company will have a highly secured system for database management and security. A TCB system is expected to meet users requirements for security, reliability and effectiveness. Because no single user is responsible when it comes to data which is nationally important, operating system which manages this data uses a policy of mandatory access control. In MAC no individual takes a decision, the whole decision is based on the reference framework and the decisions are taken by the system itself. This is the case with XYZ limited which storehouse such sensitive data.

9.1.10 Other Interesting Approaches

Apart from build order and direct model supply chain strategies, analysts believe that there are also some other issues that contribute to the company’s success. Dell’s secret concerning its SCM is the appropriate matching of people and process elements. This was obvious from Michael Dell’s statement that “our R&D focuses on process and quality improvements in manufacturing” and “one of our biggest challenges in finding managers who can share and respond to rapid shifts”. (Global retail Business)

There are three central points in the company’s value web model: Dell’s potent role in control and coordination of a value network, Its close integration with its business partners and suppliers and the importance of IT, internet and electronic communications. Analysts view the company as a zero-time organization identifying four key features apart from direct sales model and build in order, which are described in the following table:

Competitive positioning is all about creating a brand for your product. Wal-Mart, the brand indicates adequate quality and low price, attracting price sensitive buyers. This is something which in long run help a firm leverages its brand equity. Firms with strong reputations are better positioned in markets involving inter firm cooperation’s than firms with history of failed partnership. If a firm can create a brand then it need not differentiate on any particular matter. It only needs to sustain the brand image and leverage the brand premia that it can enjoy. Let us have a look at how Nokia have created a competitive advantage.

The above charts set the theme for both the views in motion. They are so well interrelated that there is a common goal that can create a competitive advantage. There are five critical blocks (Green cells are RBV while violet ones are for Competitive positioning) for RBV which when practiced can lead to two quality positions- Superior market position or Defendable market position, which in turn is key component to position a product or service competitively.. These two strategies work in junction and neither of them can be sustainable in isolation.

The differentiation among these two perspectives lays in the fact that one talk about capabilities and the other does not. Competitive positioning talks how the capability of an organisation allows the firm to be competitive in the market, while RBV only stresses on the resource. Competitive positioning shows the angle of marketing deciding the strategy of the firm while RBV is more from the side of manufacturing. (Strategy Formulations)

The two houses of strategy namely Resource based view & competitive positioning had their fare share of critics. After studying them in detail it can be seen that there are certain inherent weakness in both of them and both of them are not sustainable in long run if isolated. In a long competitive environment a firm needs to invest in either product differentiation or cost leadership and then utilise the competitive positioning which will be sustainable because of our ability to defend it on the base of cost advantage. If a company develops a sustainable cost advantage in the industry it can kill its competitors and rules the market. Sustainable differentiation helps an organisation charge brand premia to the customer. Either of the strategy in modern day’s scenario will not work in isolation. A developing organisation needs to realise that in such a globalised scenario no differentiation or cost leadership can last for long. Baring an example of some technological innovation no strategy in isolation has created a lasting organisation.

Dell’s Supply Chain Management

The company supply chain management system handles pieces and information and enormous transactions, and includes many core components necessary in keeping the operation run smoothly:

Configuration management: This component of the company manages up to 1 million of Dell’s part numbers every year across 200 product families approximately. It also handles over 2 million BOM (Bills of materials) every year. BOMs part numbers are created for facilities manufacturing in building assemblies and its sub assemblies for the company’s products.

Procurement: The procurement component of Dell manages almost 1.8 million purchase orders line per year from more than 6000 suppliers worldwide. To further streamline the procurement process, the company uses an automated application including the workflow and vendors approvals and communications and enabled services like defective parts replacement.

Cost: The batch mode is used to calculate the costs to the company for BOMs. All the cost components run mostly in the batch mode. The batch jobs runs daily, weekly, monthly and quarterly, and each job aggregating total material costs.

Inventory: Inventory component of the company manages over 3 million movements daily from the factory floors in all Dell sites to the stock rooms, along with over 3 million messages transmitted to multiple systems for analyzing, reporting and factory scheduling.

Accounts Payable: The accounts payable component of the company handles about 15,000 items per day, which includes payments to the company’s invoices, receipts and all suppliers. Vendor information includes vendor id, contact info and negotiated terms.

Along with these order related transactions of the company, the Supply Chain Management system also runs several other process jobs to aggregate data in intervals of week, month and quarters. (Cohen Shoanen, 2004)

The SCM database consists of 3,000 database objects including packages, functions, procedures, triggers, views in the North American region. The SCM of Dell is supported by Power Edge 2650 server applications (6), internally developed web based applications (5), almost 20 system-to system integrations, and around 125 batch jobs with almost 500 user interfaces.

Previous System: UNIX-based servers

The earlier Dell system used Sun E6000-Class UNIX servers operating the Sun Solaris 8 OS with Sun Cluster 2.2. The Servers, within 16 processors at 336 MHZ with 11GB of memory, managed the production database on Oracle database 8.0.6. The company’s disaster recovery server had 12 processors running at 336 MHz with 6 GB of memory.

To make the systems readily available, the company’s information technology used Sun Cluster to cluster primary and secondary servers with an active/passive configuration connecting to a shared disk storage, enabling its database to fall over to the passive node if in case the active one is failed.

Conclusion

Dell via its partnership model has completely changed the industry methods. It has integrated the value chain by its access to information. Industry is facing stiff competition and in such a competitive scenario Dell has differentiated at cost and also at offering. The inventory management policy and supply chain excellence has become a part of discussion for all the Ivy League Business Schools. The offering that Dell provided its suppliers has left less room with the suppliers to negotiate. This has led to excellent partnership model which has benefited everyone across the value chain. Dell has created excellence in personal computer industry and it is a pioneer in process management for this industry. The healthy competition and brilliant innovation in this industry has helped in its evolution. Customer is the ultimate one to benefit.

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