Dell direct model of supply chain management

Dell Inc., founded by Michael Dell, is a multinational information technology corporation based in Round Rock, Texas, USA that develops, sells and supports computers and related products and services. Dell is one of the largest technological corporations in the world and is listed at no. 38 on the Fortune 500 (2010). Dell`s product range include personal computers, servers, data storage devices, network switches, software, and computer peripherals, HDTVs, cameras, printers, MP3 players and other electronics built by other manufacturers.

Dell is well known for The Dell Direct Model – innovations in supply chain management and electronic commerce.

The Dell Direct Model is based on the idea of eliminating the intermediary. Direct relationship started with telephone calls to customers, then through face-to-face interactions and now through internet. With every new customer, more information about service and product requirement is gathered. It is a perfect-closed loop.

Dell does not build a single computer until it has been ordered and credit cleared – it takes no chances. It also reduces inventory space and soaking up of capital. Thus, Dell’s factory has no warehouses. Since the suppliers are also aligned to deliver components, as Dell uses them, raw material inventory goes down.

Stage 1: Order Processing

Orders are received online and downloaded to manufacturing set-up every 15 minutes. The orders are then put into a factory planner, which takes an inventory snapshot and generates material requests.

Dell’s suppliers respond to these requests within two hours. All the suppliers have local hubs, and are obliged to have two weeks of stock ready.

Stage 2: Validation

In case the components from a supplier is not validated, or there is an issue with it, customers are informed about the availability.

Quality Assurance: Dell forms close relationships with suppliers, teaching them about requirements, sharing testing and validating data, and driving them for continuous improvement.

Stage 3: Manufacturing

The factory has usually has multiple assembly lines for desktop PCs, notebooks and servers. However, all the lines can be changed according to demand. Some lines are flexible and can build portables or desktops according to demand.

The process begins in the kit area, moves to the build area, then may go to the custom factory line for anything not usual that needs to be done.

As there are no warehouses the completed products go right out the gates. The model is continuous flow manufacturing where parts come in, Dell builds the products and they go out the other side.

The factory keeps enough parts for four hours of operation. It prints a service tag to represent a customer, a barcode on a sticky label, and that tag lives throughout the life of the unit.

The tag number is useful both in the factory and externally – if customers ring in, Dell can give them information about the product, like if it’s possible to increase the storage capacity. The tag also helps in terms of fraud.

A complete customer order is picked, the barcode scanned, and the parts sent on a conveyer belt to build. Dell tracks the code of each part going into the system so it has full traceability. This means it can go back to the individual customer in the event of recall, and doesn’t have to go to the media.

Dell assembles the system and does a quick test, to make sure the order is correct early on. This aims to verify the product rather than validate it. The test takes five to six minutes, then the unit goes back on the conveyer belt.

Stage 4: Delivery

What employees call a pizza box – a flat box containing the keyboard, mouse and documentation and supplied by a sub-contractor -is put in a box with the system. The supplier has to have the pizza box there within two and a half hours, and it puts the same barcodes that Dell uses on each box.

The barcodes on the shipping box, pizza box and system box are scanned to check that all three of them match, then boxing and addressing happens automatically.

A sort-system reads the barcodes and determines which chute the boxes should go down, depending on the initial destination. Dell has several logistics hubs. It loads the trucks and ships them to these hubs. Depending on the region, Dell’s average fulfilment promise is five to seven days

VIRTUAL INTEGRATION

Dell establishes direct relationships that close the gap between customer, manufacturer and suppliers. It believes in creating partnerships for capital-intensive and labor intensive services and focus on what it can do best.

Dell chooses “best of breed partners” and sets quality measures and builds data linkages that enable monitoring in real time – when parts are dispatched or how long it takes to respond to a request for service

It makes deals where the supplier agrees to meet for example 25% of volume require displays, and because of the long-term commitment, Dell gets displays year in and year out, even when there is more demand than supply. The supplier effectively becomes Dell`s partner.

Dell has as few partners as possible and they will last as long as they maintain their leadership in technology and quality. Where the technology is fairly stable-in monitors, for example-partnerships last a long time. But regardless of how long these relationships last, virtual integration means to basically stitch together a business with partners that are treated as if they’re inside the company-sharing information in a real-time fashion.

Dell shares design databases and methodologies with supplier-partners to speed up time to market, which creates a lot of value that can be shared between Dell and supplier. Therefore, technology enhances the economic incentives to collaborate.

Concept of Inventory Velocity

Optimal inventory management starts with design process – Design the product so that entire product supply chain is as well as the manufacturing process is oriented not just for speed but also for ‘velocity’. Speed means being fast at first place; Velocity is squeezing time out of every stage.

Dell designed products in such a way that the largest part of the market with fewest number of parts. Systems were reconfigured to allow greater variety of low cost parts and limited variety of high cost parts.

Inventory velocity is one of a handful of key performance measures watched very closely. It focuses us on working with suppliers to keep reducing inventory and increasing speed. With a supplier like Sony, which makes very good, reliable monitors, there’s no need for have any inventory at all. Dell does not even take these monitors out of the box to test them because defect-level is under 1,000 defects per million.

Most of the suppliers have established parts warehouses near Dell`s plants. Dell has different sourcing arrangements and delivery schedules for custom and commodities parts. Custom parts are sourced on regional basis, while commodities parts, which do not require much customisation, are sourced through global sources, thereby allowing for better pricing and service.

The most critical factor to speed up inventory turnover at Dell is communication – information to suppliers is provided by Valuechain.dell.com on all aspects of relationship – from issues of quality to cost to inventory levels to order demand. Dell gets quality data every minute of the day -from its plants and via direct model, its customers, which it shares with suppliers. This enhances chances of encouraging suppliers to improve.

Dell allows suppliers to participate in “revolver program “where they can sell parts stored at warehouse to other customers, thus helping them to keep low inventory .

Dell pulls components in a very consistent, predictable way from its suppliers because the distance between the demand and the source of supply is totally shrunk. The longer that distance, the intermediary channels, the less likely to have good information about demand — causing more variability, more inventories, higher costs, and more risk.

Another factor that keeps demand for computers level is the mix of customers Dell does not have any customer that represents more than 1% to 2% of revenues.

Segmentation allows Dell to understand customer needs and gives access to information that’s absolutely critical to forecast strategies – what customers are going to need and when. Dell turn inventory over 30 times per year. The complexity and the diversity of product line, requires credible information about what the customer is actually buying. It is a key part of why rivals have had great difficulty competing with Dell.

It is not just that Dell sells direct, it is also its ability to forecast demand — it’s both the design of the product and the way the information from the customer flows all the way through manufacturing to suppliers. It is this kind of coordination of information that facilitates Dell to manage such lower level of inventory.

LEAN, AGILE AND LEAGILE SUPPLY CHAIN:

Lean manufacturing focuses on reduction and elimination of waste or muda. Basic forms of muda are: defects in production, overproduction, inventories, unnecessary processing, unnecessary movement of people, unnecessary transport of goods and waiting by employees.

Agile manufacturing is the ability to respond rapidly to changes in demand in terms of both volume and variety.

Variety / Variability

Agile

Lean

Volume

High

Low

The combination of Lean and Agile is known as Leagile. The decoupling point is defined as the point in the material flow streams to which the customer`s order penetrates.

Dell efficiently manages postponement of decoupling point to increase efficiency of supply chain. This is done by moving product differentiation closer to the end consumer. Postponing the decoupling point thus reduces the risk of being out of stock and holding too much stock of products that are not required. It also facilitates mass customisation.

Dell collapses the value chain and eliminates the following cost components:

the retailer’s mark-up

the costs and risks associated with carrying large inventories of finished goods

Reduction in component costs can be easily passed on to customers

Incorporate latest technology in products at faster rate than competitors do

The model relies on demand side pull rather than supply side push i.e. not even a single computer is produced unless there is corresponding demand in the marketplace. This avoids the massive queues of inventory usually sitting idle within retail stores, distributors, and factories.