Dell Inc Chain Management - Term Paper Example

Analysis of DELL's Supply Chain Management November 25, 2008 Supply Chain Management (SCM) is a critical aspect of consideration in many industries as business units realize the importance of managing good relationships with their suppliers and customers. Managing the supply chain has become a way of improving competitiveness by reducing uncertainty and enhancing customer service. While supply chain management concepts are applied in both service and manufacturing industry, its complexity varies greatly from industry to industry (Ganeshan & Harrison 1995). This report describes the role of Supply Chain Management (SCM) in the success of a business and analyzes the SCM system followed by Dell, Inc. It also highlights the key issues or limitations of existing SCM process followed by Dell and recommends specific measures to prevent or overcome those limitations. Introduction Dell Inc ('Company') is a multinational technology company that offers a broad range of product categories, including computer desktop systems, servers and networking products, mobility products, software and peripherals and enhanced services. The Company has often been cited as one of the premier innovators in supply chain design and execution. Its demand-driven, outsourced operational model enabled it to achieve market domination, which then allowed it to dictate costs and standards to suppliers. This report is based on analysis of information available on the Company's website and publicly published reports. Supply Chain Management Supply chain management (SCM) is a comprehensive activity including management of the flow of materials, information, and funds across the entire supply chain, from suppliers to component producers to final assemblers to distributors, and ultimately to the consumer; including after-sales service and sales returns Johnson.(M. Eric & Pyke F. David 1999). In a global environment, firms have to deal with multiple suppliers and customers and are required to manage inventories in new and innovative ways. Various industrial researchers have stressed the importance of viewing SCM as an integrated system. With different methodologies of SCM implemented by various businesses in the same sector, it is more of a competition amongst the various methods of managing the supply chain for businesses, even those belonging to the same sector. SCM has generated much interest in recent years for a number of reasons. It has become crucial for businesses across sectors to realize that weak performance of one member of value chain could ultimately influence the profitability of the entire business. In this highly competitive business environment, cost of poor coordination between suppliers and customers can be extremely high. Especially in sectors characterized by fluctuating demand, a weak SCM can result in inefficient use of production, high transportation costs and high inventory costs. This cost increases as we move up the supply chain from consumer to distributor to producer, a phenomenon known as a 'Bullwhip Effect' (Johnson .M. Eric & Pyke F. David 1999). Similarly, an efficient SCM which is well integrated across the value chain of the business can provide a significant competitive advantage. On a broad level, supply chain management can be based on one of the two approaches; 'push approach' or 'pull approach'. The push system takes full benefit from economies of scale in production and input acquisition by producing optimal output size and then distributing to wholesalers and retailers (Papadakis 2002). On the other hand, pull approach is known for its adaptive efficiency and is applied by sectors where demand is highly volatile and technology is depreciated fast. According to the pull system, a value adding transformation takes place only after someone demands it, in a Just in Time (JIT) fashion, thereby inventory risk is minimized (Papadakis 2002). Dell has applied the pull system of supply chain management and selling products directly to customers via telephone or internet, known as the 'Direct Business Model'. Traditionally, activities in a supply chain (marketing, distribution, planning, manufacturing and purchasing) operated independently. Objectives of these activities are often conflicting and an efficient supply chain management system strives to integrate these objectives to attain a clear competitive advantage over other industry players (Ganeshan & Harrison 1995). Choice of an SCM system depends on a company's strategic and operational considerations. There are four major decision areas in a SCM described below. Location Decisions Location decisions involve choice of production facilities, stocking points, and sourcing points and require long term commitment of resources. These decisions are of great significance to a firm since they represent the basic strategy for accessing customer markets, and will have a considerable impact on revenue, cost, and level of service (Ganeshan & Harrison 1995). A company also needs to consider the information on production costs, taxes, duties and duty drawback, tariffs, local content, distribution costs and production limitations before making location decisions. Production Decisions Production decisions are strategic decisions and can have a significant impact on a company's revenue, cost and customer service levels. It involves deciding on what to produce, which plant to produce in, how to allocate suppliers to plants, plants to distribution centers, and distribution centers to customer markets. A critical issue to be considered is the capacity of manufacturing facilities which largely depends the degree of vertical integration within the company (Ganeshan & Harrison 1995). Production decisions also include preparing a detailed production schedule, workload balancing, and quality control measures at a production facility. Inventory Decisions Inventories are a buffer against uncertainty and include raw-materials, semi-finished and finished goods. Since holding inventories requires blocking on capital with opportunity cost, holding of an optimum level of inventory is important decision to avoid over or under capitalization. Inventory decisions involve determining optimal level of order quantities and reorder points, and setting safety stock levels, at each stocking location. These levels are critical, since they are primary determinants of customer service levels (Ganeshan & Harrison 1995). Transportation and Logistics Decisions These decisions encompasses all issues related to the flow of goods through the supply chain, including transportation, warehousing, and material handling. It includes vehicle routing, dynamic fleet management with global positioning systems and merger-in-transit (Johnson .M. Eric & Pyke F. David 1999). These decisions are closely linked with inventory decisions. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense (Ganeshan & Harrison 1995). Shipment sizes, routing and scheduling of equipment are key in effective management of the firm's transport strategy (Ganeshan & Harrison 1995). Supply Chain Modeling Approaches On a broad level, there are 3 models of SCM (Ganeshan & Harrison 1995) which can be applied to incorporate the above decisions into an effective supply chain. These models are describes below: Network Design Methods This method determines the location of production, stocking, and sourcing facilities, and paths the products take through them. Such methods tend to be large scale, and used generally at the inception of the supply chain (Ganeshan & Harrison 1995). These network-design based methods add value to the firm as they lay down the manufacturing and distribution strategies far into the future. While this method covers all the four major decision areas described above, it focus more on the design aspect of the supply chain and the establishment of the network. Rough cut: Rough cut method is the most commonly applied method and it typically deals with operational issues. The focus of this model is the development of inventory control policies, considering several levels or echelons together (Ganeshan & Harrison 1995). These models have come to be known as 'multi-level' or 'multi-echelon' inventory control models (Ganeshan & Harrison 1995). While it helps to reduce inventory costs, it ignores the production function of the supply chain. Simulation methods: Simulation method is a method by which a comprehensive supply chain model can be analyzed, considering both strategic and operational elements. However, this method only helps in evaluating the pre-specified policy rather than developing new ones (Ganeshan & Harrison 1995). Supply Chain Management as practised by Dell Dell Inc had pioneered a unique model of selling its products directly to consumers and bypassing distributors and retailers. Its supply chain includes the suppliers, Dell and end users. Eliminating intermediaries out of the supply chain resulted in reduced total cost of products and also reduced the processing time of received orders for the Company. Efficient production, better supply chain and a direct sales model has helped the Company to provide customized, low cost, and quality computers that are delivered on time. Moreover, Dell's direct contact with customers allows it to properly identify market segments, analyze the requirements and profitability of each segment, and develop more accurate demand forecasts. Dell has been considered as a model logistics organization over the years. The Company considers SCM as a strategic capability and integrates activities such as procurement, marketing, sales, finance and information technology. While the Company carries out a number of functions effectively, it partners with third-party providers for most its logistics needs Strategic Benefits and Limitations By using the build-to-order model Dell reduces its inventory costs and overheads, which enables it to provide the end users with its latest products for superior value and at competitive price. In fact, the Company delivers low cost, customized products in time without carrying any inventory. This customized on-demand manufacturing strategy has provided a competitive advantage to the Company over the years. The first step in its logistical system is when the customer places the order (Russell Michael 2006). Dell receives and processes this customer requirement and sends an order to each individual supplier to transport each component to a location where the product can be assembled. Then it simply assembles the items and ships it out to the customer. The Company is not responsible for any inventory and even more incredibly does not have to pay for any unused parts. While this system works out to be profitable for Dell; from the suppliers' point of view it would not be beneficial to assume all the risk of unused inventory. Hence, it can be safely assumed that Dell chooses small suppliers and makes sure that the majority of their business is done for Dell (Russell Michael 2006). Given the high bargaining power of suppliers in this industry, it is very difficult for a company to convince a supplier to guarantee that a certain number of parts will be in stock and ready for use and to not offer a guarantee in return that they will be paid for the parts. From a supplier's point of view it would not be beneficial to assume all the risk of unused inventory. Hence, Dell has to keep its sales volume high enough so as to provide enough business to these suppliers to keep them afloat (Russell Michael 2006). While Dell's SCM system gave the Company a competitive edge, it also added to the complexity and cost (Gilmore Dan 2008). This was primarily because Dell built base models which can be customized as per customer requirements. The Company earned good income through such customized products. However, if the customer orders for only base model, the Company lost margin because the base unit had extra costs to support the potential of high-end customization. Dell's Four Core Capabilities Relate to Processes and People SCM Capabilities Processes People Demand Management Build-to-Order Bias about Action Internal Collaboration Information Technology Culture of Information Sharing Leverage Partners Linked Partner Planning & Execution Value of Personnel Business Fundamentals Balance Sheet and Income Statements Rewarded for decreased costs Source: www.scmr.com Dynamic Value Chain Management Dell's online supply management allows its suppliers and customers to work together (Jaffe, Muirhead, Tiong & Raveendra 2007). The Company links supply chain management with customer relationship management and supplier relationship management, thus providing tremendous value to its trading suppliers and customers as well. This link is known as Dynamic Value Chain Management (DVCM). DVCM helps in collaborative demand planning with customers and suppliers, auto-replenishment of inventories, design information sharing with strategic partners, content management and distribution management. With the help of information technology, Dell shares a constant stream of data on demand and supply side. It gathers information about the inventory levels of its suppliers at various positions in the supply chain. In return it provides information on customer demand, current and projected market shifts and sourcing strategies to its suppliers. At the same time, the company's extranet (an internet link with outside partners) enhances collaboration on, and commitment to, forecasts. This visibility across the supply chain allows the Company to manage demand in real time. Technological Integration Technological integration and availability of a good Information Technology (IT) platform, especially for the IT sectors has played a key role in the implementation of some of the most efficient SCM setups. Dell's SCM system must handle an enormous number of transactions and pieces of information and include multiple core components necessary to keep operations running smoothly (Jaffe, Muirhead, Tiong & Raveendra 2007). Dell uses most up-to-date technology and IT tools to closely integrate all the members of its supply chain so that the suppliers and the Company can exchange information and interact with each other. This virtually integrated structure eliminates the need to manufacture everything, and instead uses the power of the Internet to share and exchange information with suppliers and vendors to build a truly superior supply chain that keeps inventory turnover low and costs to a minimum. To achieve this supply chain superiority, Dell uses solutions from i2 Supply Chain Management, which streamlines the supply chain by providing its suppliers and planners with up-to-date information on product demand across the globe and material requirements (Jaffe, Muirhead, Tiong & Raveendra 2007). It also assists in real-time factory scheduling and inventory management, so that employees can generate key reports based on accurate and timely data, estimate the inventory on the factory floor, and receive supplier deliveries on a true just-in-time basis. This allows Dell to have a flexible manufacturing schedule which can be altered quickly to keep up with the customer orders. Since the Company's suppliers have access to this accurate and timely information, they can work with facts instead of forecasts, thus reducing waste and improving efficiency. Dell uses Windows NT operating system and Intel-based servers for all of the i2 applications (Jaffe, Muirhead, Tiong & Ravendra 2007). Both the factory operations and other integrated systems including the internal ones depend on the SCM systems which enables the company to get real-time information in order to be efficient and cost effective, especially in handling increased workloads. This is managed with the help of Oracle RAC 10g database and the Company's standard 'Dell PowerEdge' servers, which helps reducing the network complexity and maximize the use of IT resources (Jaffe, Muirhead, Tiong & Raveendra 2007). Using Dell's standard server helps the Company to avoid significant additional expenditures for owning UNIX based servers used earlier (Jaffe, Muirhead, Tiong & Raveendra 2007). Current Position of Dell While Dell competes in several international and domestic markets, it had succeeded to maintain a higher than average margins for its products due to the strength of its direct sales business model, manufacturing prowess, brand strength and customer service. However, with Dell's competitors also improving their supply chains and matching it with Dell's direct model, the Company has been losing its competitive edge. Over the last couple of years, Dell has lost its market leadership to Hewlett-Packard Co. (HP). HP was able to surge ahead of Dell by procuring components at a cheaper price and improving its supply chain management practices. Growing complexities in product lines and its pricing systems is posing a major challenge for Dell. In 2006, the Company faced several problems with many users complaining about long delays in supplies. This was due to shortage of LED back-lit liquid-crystal-displays in its electronic supply chain (Deffree Suzanne, 2007). At the same time, demand from the corporate buyers, who accounted for a major share of Dell's sales is facing a downward trend. Increasing discontent of customers also led to a slowdown in sales. Besides, the Company's recall of Sony battery cells in its laptops brought undesirable media hype to the company. Industry experts believe that it is time Dell moves into PC retailing by establishing exclusive stores and selling PCs through retailers. However, foray into retail distribution will add additional costs, thereby further minimizing its current cost advantage. Profit margin of the Company is also expected to drop even further as it will have to offer incentives to compete with HP in retail stores. Furthermore, industry experts' point that Dell is not focusing enough on R&D, innovation and customer experience, which the consumers have started to value more. Though the Company has spruced up its product design and range, Apple is still clearly far ahead of it. However, many experts feel that such new initiatives will only distract Dell from its supply chain operations. Recent shift in SCM Strategy To regain its lost market position, Dell is significantly revamping its entire supply chain strategy and, in large measure, abandoning its make-to-order model. For the first time, the Company plans to make greater use of contract manufacturers (Gilmore Dan, 2008). Contract manufacturers can generally produce computers more cheaply because their entire operations are narrowly focused on finding efficiencies in manufacturing (Hagel John 2008). Dell also aims to integrate its supply chain and eliminate overlapping activities for achieving higher efficiency and quality. It has established Global Operations Organization (GOO), a center for consolidating its global manufacturing, procurement and supply chain activities (ICMR, 2007). Earlier, the Company had a regional approach wherein manufacturing, supply chain and procurement activities were separate divisions (ICMR, 2007). In 2008, the Company's management launched a global retail initiative by offering selected products in retail stores in America, Europe, Middle East, Africa and Asia Pacific-Japan. It also launched 'PartnerDirect', a global program to bring the Company's existing value-added reseller programs under one roof including training, certification, deal registration, focused sales and customer care, and a dedicated web portal. This new manufacturing and distribution model will enable Dell to effectively focus on customer requirements. Furthermore, in a move to sharply overhaul its production model, the Company's management is trying to sell a significant portion of its computer factories and logistics operations. It is a bold step on the part of the Company to move away from its core business model (Hagel John 2008). In March, 2008, the Company's management announced that it will close its desktop manufacturing facility in Austin, Texas, and the sell off its small package fulfillment center in the second quarter of Fiscal 2009. Recommendations Innovative use of direct selling channels and a lean manufacturing approach was a source of competitive advantage to Dell. However, with a shift of the market preference from desktop computers to much more standardized notebook PCs, the Company has lost its competitive advantage as consumers preferred purchasing through conventional retail channel rather than the direct selling channels (Hagel John 2008). The focus of industry players shifted from highly customized desktop computers to cost-effective manufacturing of large numbers of relatively standardized notebook PCs for retailers. While a build-to-order model served the Company well for almost 20 years, the business environment has changed. The Company should firstly try to regain its lost supply chain advantage. Analysts recommend that in order to realize higher returns, Dell should concentrate on providing a better customer experience and introducing path breaking products by investing more in R&D. The Company should also continue to evaluate and optimize its global manufacturing and distribution network, including relationships with its original design manufacturers. It should aim to meet customer needs efficiently and reduce product cycle times. Conclusion While it is true that an efficient SCM provides significant strategic and competitive advantage to a company, it is also equally important for any company to have a 360 degree view all the time, wherein the effectiveness of the system can be retained by continues enhancements internally considering the fact that there are far too many competitors waiting to grasp the best practices of a profitable SCM system. Even though, Dell had undoubtedly build one of the best in class SCM system, its lack of focus towards the changes in the external environment resulted in loosing a significant proportion of its market share to HP. The Company should hence abide by the same rules of the game by making necessary amendments to its existing SCM process and leverage its efficient IT systems to not just sustain but also flourish in the dynamic market of today and tomorrow. References Dell's Supply Chain Management Practices 2007, ICMR, India, viewed 24 November 2008, Deffree, Suzanne 2007, 'Bad Supply Chain Management and Bad Luck at Dell', Electronics Design, Strategy, News, viewed 24 November 2008, Gilmore, Dan 2008, 'The New Supply Chain Lessons from Dell', SupplyChainDigest, viewed 25 November 2008, Russell Michael 2006, Logistics at Dell, viewed 24 November 2008, Hagel John 2008, 'Unbundling Dell's Business', EdgePerspective, viewed 24 November 2008, Papadakis Yanni 2002, Operations Risk & Supply Chain Design: An Event Study, LeBow College of Business, Drexel University, viewed 4 December 2008, < http://opim.wharton.upenn.edu/risk/downloads/02-27-YP.pdf> Ganeshan Ram & P. 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