The Expansion of Dell into European Markets - Essay Example

4.4 Supply Chain Practices before and After EU Single Market Prior to the unification of the Single European Market, each country had different import and export regulations, transportation laws, communications standards, inventory valuation and accounting methods, and product storage standards. As a result of this confusion, the cross-border transport of goods was cumbersome. Truck and rail freight shipments often faced days of delay at boarder crossings as paperwork was filed and checked and rechecked. (Wood, Barone, Murphy and Wardlow, 2002) Differences in communications standards inhibited the high speed transmission of data; the differences in accounting standards for inventory valuation caused massive seasonal shifting of inventory across borders. Shipping goods across multiple borders within the community was a huge headache for logistics managers. It was therefore clear that a more efficient flow of goods and information was a driving force behind the potential economic unification. However, the expansion of Dell into European markets occurred only in the 1990’s, parallel to the creation of the Single European Market. Therefore, unlike its main competitors who had expanded their business into Europe much earlier, Dell did not have to go through long, time- and money-consuming programmes of restructuring and reorganising logistics and supply-chain management operations according to the new European rules. Moreover, Dell’s innovative Web-based and technology-oriented approach meant that unlike IBM and HP, Dell was ready to enter new markets in a faster and cheaper way with its E-commerce strategy. Procedures, laws, and technology are now largely standardised across Europe, and logistics operations have become more uniform as integration continues to advance in many European countries. The simple act of dropping tariffs and simplifying import/export regulations was sufficient to improve the efficiency of transportation throughout the community. Border delays are now nearly nonexistent as shipments are no longer inspected and paperwork processed at national frontiers. (Wood, Barone, Murphy and Wardlow, 2002) Dell is consequently benefiting from this standardised and innovative region where the changes made it possible to place manufacturing facilities, distribution networks, and transportation systems according to market needs rather than according to national boundaries. Moreover, as Dell has centralised its European operations in Limerick, it has largely benefited from the fact that Ireland is part of the European Community; products made in Ireland can be shipped to Europe without paying value-added tax. Also, since Ireland is now adopting the Euro, Ireland will use the same currency as the rest of Europe, and Dell will avoid exchange rate risk and currency-conversion expenses when operating within the European market. In order to cope with the demanding and sophisticated European market, Dell must have excellent manufacturing and logistics capabilities, supported by information systems that enable it to substitute information for inventory. The demands of Dell’s model have led it to adopt a new organisational structure, referred to as a “virtual company” or “Value Web” (See Figure 4). Figure 4 – Dell’s European Value Web Model Source: Kramer and Dedrick, 2002) Dell’s organisation of logistics in Europe provides a good illustration of the general logic [ NOT SURE WHAT THIS MEANS!] for logistics. All of Dell’s inbound logistics for material needed in assembling PC’s are handled by suppliers who must have hubs or production facilities located within 30 minutes’ travel time of Dell’s Limerick facilities. Third parties operate some of these hubs for a number of Dell’s suppliers. On the outbound side, Dell has four European distribution hubs to take advantage of locations close to major markets, transportation networks, and logistics expertise. These distribution hubs include: Limerick for Ireland and for Eastern Europe; Liverpool for the U.K.; Tillberg, Netherlands, for Central Europe; Gottenberg, Sweden for the Nordic countries. Porter argues that the ability to perform particular activities and to manage the linkages between these activities within a company is a source of competitive advantage. (See Appendix 7 for detailed explanation of Porter’s Value Chain model) Figure 5 – Porter’s Value Chain Dell goes beyond the integral focus of Porter’s Value Chain and manages the entire end-to-end industry value chain. The key elements in Dell’s formula are “efficiency” and “the finest possible customer service”. This, in brief, is the secret to Dell’s business success: an end-to-end process that meets or surpasses customers’ expectations. Dell’s present value chain basically involves what the company has acquired over its life: huge fixed assets, ownership of their processes, building parts, products, and services. Inputs and outputs are directly controlled by the company, with [HUH? -->>] same customers profile and also same competitors. . (See Appendix 8 for Dell’s Value Chain Model) How does Dell’s European Logistics and Supply Chain work? Although it manufactures computers, Dell earns profits as a logistics firm. It is an organization of knowledge and routines, extracting surplus not from production, but by managing the movement of product and information along a globally dispersed network of companies engaged in the various aspects of producing and marketing finished PCs. As Dell’s vice president for manufacturing emphasizes, “We are not experts in the technology we buy. We are experts in the technology of supply-chain integration. We have created this expertise with the Internet at its core.” (vice president, interview, July 18, 2001). In this role as a logistics company, Dell's most notable accomplishment is the degree to which it balances the supply and demand of product flows among the firms in its global commodity chain. “Supply and demand balancing,” this same Dell vice president affirms, “is one of the most important capabilities at Dell.” (vice president, interview, May 24, 2001). The key to this core capability in material balancing lies in Dell's capacity to process Internet information flows in order to manage the external capabilities of other firms. This mastery over material balance flows and Internet information flows has enabled Dell to create an organization differentiated from its competitors by the degree to which it has succeeded in accomplishing a singular aim: increasing speed and compressing time in the movement of materials as they pass through the consecutive steps of customer order, procurement, production, and final product delivery (Gaither, 2001). Dell has very effectively streamlined its operations; all production processes have been calculated according to the principles of “just-in-time” manufacturing to improve efficiency.  Dell’s production now has extremely low relative transfer time due to strict inventory control, and high productivity.  Dell has also extended their efficient management techniques to the other parts of their value chain, and has in-sourced these processes.  The resulting efficient structuring has reduced Dell’s costs-to-market and enabled it to obtain a higher profit margin. Figure 4 – Comparison between Dell and Competitors’ Supply Chain Model In Dell’s Model chart it can be seen their distribution chain process, and what they can achieve becoming the owner of their core business by processing all their production, plants and other processes without the risk of sharing confidential knowledge, remember that Research and development is one of the key tools for their absolute advantage. [THIS PARAGRAPH IS UNCLEAR. WHAT ARE YOU GETTING AT?] Due to its efficient supply chain management, Dell can ship a PC within 24 hours of receiving an order. The introduction of the Internet and E-commerce has helped Dell improve this efficiency and resulting profitability. At Dell, the supply chain has two fundamental differences from the standard at its competitors: “disintermediation” and “real-time production”. Dell sells directly to its customers, cutting out the middle-men: the distributor and retailer. As Dell manufactures its products and then sells them directly to the customer, the company creates disintermediation – the outside retailer is cut out of the process. This reduces time and costs, and also ensures that Dell is better positioned to understand its customers’ needs directly. Source: The Irish Times, Business 2000 Currently, Dell’s supply-chain costs are reduced on the storage side as well, as a result of its efficient coodination between orders and production. Each individual PC ordered is manufactured only after the order is received – using only the “freshest” raw materials, which are delivered to the factory several times a day. This is known as “just-in-time” (JIT) production or real-time production. There is no warehouse for either raw components or finished goods. Each computer manufactured has been paid for, and has been built for a specific customer immediately before it is shipped. Real-time production ensures that no costs are incurred from maintaining inventory stocks. Output is always driven by actual customer demand. Each individual product is created with the latest technology, and each product is custom-made to exactly the specifications the customer wants. Source: The Irish Times, Business 2000 4.2.3. Future Developments The challenge to every business is to become a responsive organisation in every sense of the word. The organisation must respond to changes in the market with products and services which provide innovative solutions to customers’ problems; it must respond to volatile demand and it must be able to provide high levels of flexibility in delivery. (Christopher, 1998) The author [DO YOU MEAN CHRISTOPHER?] also argues that a clear vision of the role of logistics in the organisation is not enough; significant organisational change is necessarily as well. New ways of working with upstream and downstream partners must be designed and implemented, and a foundation of advanced information systems must be built. The task of creating and implementing integrated supply chains to deliver greater customer value is daunting. Therefore, for Dell to achieve leadership through logistics, it has had to undergo a number of fundamental transformations. Environmental changes, the rapid development of the E-commerce and Internet applications, the competitive environment within the computer industry, and demanding customers are all factors that must be taken into consideration for Dell to create and manage its logistics and supply-chain systems to meet present and future needs. Changing for new economies of scale Due to the strategy that Dell is applying to enter the new market of the consumer electronics, the company’s current value chain has to be changed. The value chain that the company used previously was based specifically on assembling and selling computers. In Figure 7 below, we can see that Dell is moving away from mass-market products such as standard PC’s, storage devices, servers, etc., to a new niche, in order to take advantage of their online Web-based integrated business model. Most of the new devices such as Media Players, MP3 players, TV screens, downloads, and so on, will be part of Dell’s strategy in the near future, contributing to the large diversification of products and services provided by the company. Figure 7 – Dell’s Product Range Market Transforming the Value Chain Dell assembles computers, but the company does not have experience or knowledge to assemble printers, MP3 players, digital cameras, and the other new electronic consumer products that they are introducing as part of their new strategy. As a result, the company has to consider the impact of important new elements on their value chain and on their logistics. In Figure 8 we can see how Dell’s value chain must be changed. Figure 8 – Dell’s Future Supply Chain As we can see, Dell will have to include new suppliers in their value chain according to the number of new products that the company wants to offer. They will need a supplier or a joint-venture partner for cameras, another for MP3 players, yet another for printers, and so on. Dell must develop and integrate companies to create these products for them, and ultimately Dell will put its own brand on the products. In addition to new suppliers, Dell will need to change its internal operations as well its customer service system. Regarding its inbound logistics, Dell will have to change the way it manages its suppliers, investing in some form of automatic inventory management. The new products that Dell is introducing will significantly expand both the volume and the scope of its business; so if Dell wants to maintain its level of service on product delivery, its distribution logistics will have to be re-evaluated and redefined. All the other aspects considerer by Porter to be part of a company’s value chain – such as operations, sales and marketing, and services, are discussed in detail in Appendix 7. Emerging Markets Dell Computer’s access rate in Central and Eastern European remained quite low as of 2006. The consumers in this region have relatively low standards of income and lifestyle, not to mention relatively low spending power. However, it is forecast that Dell will be expanding its operations in these emerging countries, as they enjoy a strategic geographical location for potential distribution centres, cheap labour, and high-quality education systems. For instance, Hungary is already one of Dell’s locations for computer manufacture and delivery, suggestive of the fact that the indispensable, refined supply chain and logistics systems are operating powerfully. [I DON’T UNDERSTAND THE SECOND HALF OF THAT SENTENCE!] Dell has announced plans to build a manufacturing facility in Poland as part of an effort to meet growing demand in Central and Eastern Europe. (http://news.com.com) Paul Bell, Dell’s president for Europe Middle East and Africa said that the “the logic was to get closer to the customer.” The decision to operate in Poland could be a strategic advantage in serving parts of Germany and Scandinavia. This 253 million Euro (U.S. $321 million) manufacturing project is expected to become operational in FY 2008. As Poland is still a developing country, Dell had to build direct relationships with its local suppliers while being flexible regarding local practices. (See Appendix 8 for more details of Dell’s strategy regarding the mature/industrialised and the emerging/developing nations.) 4.6. Dell trends The author decided to build a brief summary of Dell’s operations, comparing its operations in the three time scale periods – Past, Present and Future. As is obvious from the table above, the organisation of Dell’s production network is changing. Dell continues to expand and re-invent its operations through new plants, new niches, new call centres, and new technology programmes. Dell maintains control over its value network by a new model of organisation – the “virtual organisation” – wherein Dell’s ownership of the customer relationship gives it the power and leverage to coordinate the entire network. Read More