Examining Dells Operational Management, Logistics And Supply Chain
In 1983, a college student by name Michael Dell founded Dell Inc. through upgrading IBM computers and selling them to local businesses directly. Through the delivery of good customer experience to its customers, the company grew astronomical of the years. Though, in the 1990s, Dell was ranked the 25th computer company in the world and barley operated in handful of international locations, but as of 1999, Dell was ranked highest in the US and second largest computer company globally (Dell, 2000). Today, Dell still maintained its second position globally within the computer industry coming second after HP selling more than 17 million units of PC in 2008 (Euromonitor, 2009). Dell also comes after HP in the UK PC market in unit sales, although there was a slight drop in 2009, but it still retained its second position (Key Note, 2010). It has been argued by its founder, Michael Dell; that their success lays in its supply chain strategy (Dell, 2000). Dell is an international organisation operating in 180 countries, connects with more than 5.4 million customers and ships more 110,000 computers every day which amounts to more than one every second (Dell.com, 2010b).
How did Dell transform and grew so rapidly through its unique supply chain management and what was special about Dell’s supply chain strategy that led to its unanticipated success story? To understand the underpinning factors that led to this success and critically evaluate Dell’s supply chain methodologies; this report is intended to answer the above questions hoping to use the guide in the brief of this module to offer analysis of how the operations management and supply chain are conceived in Dell. The report will attempt to analyse the development, delivery and the support of operations in Dell’s supply chain. In analysing these, Dell’s production, delivery, direct model, inventory and capacity management will be considered as element that led to the tremendous success witnessed in Dell.
This report will conclude with an analysis of Dell’s performance improvement within its supply chain management with great emphasis on the relationship with its suppliers.
The nature of Dell’s operational management & its logistics and supply chain management
Operations management is the set of managerial activities used by an organization to transform resources inputs into products and services (Griffin, 2007). This implies the processes used in Dell in procuring electronic components, assembling and its shipment to customers. Griffin goes further to note that “efficient and effective management of operations goes a long way towards ensuring that competitiveness and overall organisational performance, as well as quality and productivity (Griffin, 2007)”. Evidently, it will be argued that Dell’s operational management encompasses the logistics and supply chain management, which will be analysed in the incoming chapters.
2.1 Dell logistic and supply chain management
According to Lyson & Gillingham 2003, logistic “is that part of supply chain that plans, implements, and controls the efficient, effective flow and storage of goods, services and related information from point of origin to the point of consumption”. In other words, it involves material handling and physical distribution management. The bottom line of logistic involves getting, in the right way, the right product, in the right quantity, in the right place at the right time, for the right customer at the right cost (Mangan et al. 2010). Dell since its inception applied a revolutionary concept to its logistic management by delivering product directly in a timely manner to its customers. This was achieved through the use of third party logistic providers (3PLs), delivering direct from the factory to the customers.
Dell logistics is summed up on their webpage which states that their job is to get the right stuff, to the right place, at the right time, using the right logistics team to do this at the right cost, and to optimize transportation costs while improving quality and striving to exceed the service expectations of customers (Dell.com, 2010a). The maximisation of the potentials offered by the logistics strategy employed by Dell led to minimal inventory holding, which will be discussed later, but, it is worthy of note that the use of 3PL providers was instrumental in the revolution created by Dell. The same logistics in Dell could be outsourced, but, bearing in mind the risks associated with outsourcing that “50% of outsourcing relationships worldwide fail within five years (Mangan et al. 2010)”, Dell was better off conducting its logistics through 3PLs and managing the channel without outsourcing. Having discussed and evaluated Dell’s logistics management, the supply chain management will be discussed next.
2.2 Supply chain management in Dell
Dell’s logistics and supply chain management is not disconnected from the organisational strategy of the company which is to deliver goods and services directly to their customers, thereby doing away with the middle man and minimizing inventory cost by not having to manage much inventory. The supply chain strategy undertaken by Dell actually drives the overall strategy of the company. In the words of Robert and Nichols (2002) “supply chain management is the integration and management of supply chain organizations and activities through cooperative organizational relationships, effective business process, and high levels of information sharing to create high performing value systems that provide member organization a sustainable competitive advantage”. The underlining principle in this is the satisfaction of the customer. It is will also be noted that in supply chain the beforehand mentioned “‘information flow’ moves upstream, whereas the flow of material moves down stream (Govil and Proth, 2002)”. As earlier mentioned the success story recorded in Dell is as a result of the supply chain management engaged therein. Companies and businesses have tried to replicate Dell’s supply chain management model without success; the success is tied to the nucleus factor of it business model known as Direct model, its core application of build- to -order- strategy, dealing directly with suppliers and communicating directly with its customers.
Dell and Direct sale model
The direct model is a concept developed by Michael Dell which meant that the company did not sale through distribution channel or retail outlets, which according to Dell.com states that by selling computer systems directly to customers, they could deliver the most effective computing solutions to meet their needs (Dell.com, 2010b). The direct model did not only allow Dell to sell directly to its customers, but, it also helped them to deal directly with their customers, thereby building a strong communication link that assisted them in segmentation their customers (Dell, 2000). Dell argues that the direct sale strategy did not only eliminate the reseller, but also eliminated the mark-up and the cost of maintaining a store (Dell, 2000).Table 1. Source: Dell.com (Dell direct sale diagram)
Dell argues further that the direct model has nothing to do with stockpiling but everything to do with information (Dell, 2000). In that way, the information gathered from the customer ultimately creates a direct relationship, which offers Dell competitive advantage over other companies that deals through retail outlets and channels. This in turn means that Dell can always offer their customers add-on products and services, knowing which product the customer bought from them, thereby creating a close link that arguably offers more customers satisfaction. Some business leaders has shown concern regarding the sustainability of the direct model and argued that Dell advantage will one day soon become its disadvantage (Zellen, 2004), which in order words means that the direct model will be out of place in the near future. This argument is yet to be proven right, though with the advent internet and its applicability companies could offer the same type of service that Dell does. Z
Dell groups its customers into three segments (1) large and medium sized companies, e.g. educational institutions and government organizations, (2) small businesses (3) consumers. Dell argue that the idea of this segmentation goes beyond simplistic demography, rather, it meant the company can evaluate the return on investment on each segment and compare it with other segments against performance target (Dell, 2000). The information generated through the direct sales to customer and the benefit of segmentation meant that Dell could target its customer more effectively thereby helping to achieve more sales results than forecasted. To explore on the success of the direct model, other elements that helped that to succeed like the Dell’s production pattern and inventory management will be discussed.
Dell production pattern (mass customisation)
According to Mangan et al. 2010, “mass customisation is enabled by production philosophy known as postponement which involves the reconfiguration of product and process design so as to allow postponement of final product customisation as far down stream as possible”. The underlining principle in this system is that packaging or coupling does not start unless customers order is received. This concept was initiated into the computer industry by Dell, which meant that Dell was not engaging into mass production to be shipped to the end user as the direct model assisted that they needed to understand what the customer wanted before the computer is customised to customers need thereby offering maximum satisfaction. It’s been argued that Dell adopted this model not because it “recognized the larger potential of this business strategy, but due to tangible constraints (Gardner, 2010). Gardner stated that Dell could only afford to build products on demand, as he didn’t have the resources (capital, work space, infrastructure, etc.) to build finished goods inventory and put it on a shelf in the hope that someone would come along and buy what he had built (Gardner, 2010).
The ground breaking mass customisation by Dell received a tremendous boast for the fact that customers could configure, price, order product online and use the internet to track their order status as it moved down the manufacturing line (Dell, 2000). According to Dell.com, the company connects with more 5.4 million customers everyday on phone, in person, and on the internet (Dell, 2010b).
Dell builds computer after the customer has placed an order which kick-starts the process of agile production which applies in situation where replenishment lead times are still short but where demand is unpredictable (Mangan et al. 2010). This applies to Dell as its suppliers must react in delivering the customized components for final coupling as the actual number of component is not know until order is received and wired to the supplier for just-in-time delivery which is usually direct to the production line and delivered to the customer through a 3PL. The mass customisation and agile production system adopted by Dell offers variety of advantages to Dell, like low inventory keeping and rapid responds to demand changes. This will be explained in details in the next sub-heading on inventory management.
2.5 Dell inventory management
The just-in-time system agreed by Dell with its suppliers is designed to make sure that inventory is kept at the minimal by producing only what is needed and when needed. If not for this model, inventory can tire up capital and affects cash flow. Dell argues that, less inventory, of course, corresponds to less inventory depreciation (Dell, 2000). According to Atkinson (2005), Dell’s website is connected to their electronic data interchange (EDI) system which allows suppliers to see what parts Dell requires as soon as the customer orders the computer. The suppliers, who make multiple shipments to Dell daily, supply Dell with the parts they need when, and only when, they require them.
The success of Dell’s inventory management is as a result of its direct dealing with customer and the avoidance of distributing through channel that has the potential of elongating the inventory holding period up “to forty-nine day (Dell, 2000)”,. Atkinson further states that “Dell has achieved a system that at times leaves them with average inventories for long enough to last only three days. Michael Dell stated that in 1993, Dell had $2.9billion in sales and $220 million in inventory. Four years later, Dell posted $12.3 billion in sales and inventory of $233 million. This goes to show how effective the inventory management applied by Dell has been. Looking at the figure, the amount spent on inventory based on the just-in-time (inventory velocity) strategy dropped by almost 90 percent. To Dell “inventory has the shelf life of Lettuce (Dell, 2000).
Dell maintains a good relationship with its supplier which facilitates the build-to-order model and aids inventory velocity. Dell obviously views its suppliers an integral part of the business which according to Dell makes “suppliers effectively becomes our partner”. How Dell does evaluate and measure supplier’s performance for effective result? The answer to the question is the last section of this report that will deal on performance improvement.
Performance measurement and improvement
Organisations tend not to engage in performance management and evaluations, rather they focus on operational issues. Dell takes it annual performance measurement in its supply chain very seriously. Annually, Dell conducts award programme to recognize companies with outstanding performance in global citizenship, service, and continuity of supply, cost and technology rating that measures the scale of improvement in the supplier’s technology. According to McBeath (2010), Dell has quarterly business reviews with its thirty largest suppliers at a senior executive level; together, they set continual improvement targets for the next quarter in cost, quality, and other areas. Feedbacks, recommendations, and expectations from the supplier are discussed during this meeting, and well placed suppliers are rewarded not only with award but also with training and support. Dell also requires it suppliers to maintain their inventory close to Dell’s plant for easy coordination for inventory velocity. Dell also sometimes shows a supplier how they perform against other suppliers in order to get the best out of those suppliers. As part of Dell’s performance improvement, they share information through supplier portal, a platform created for supply for easy access to information. It could argued that Dell ability to manage and reward its suppliers treating them as partners has lead to the success recorded in its supply chain management.