Distribution Channel of Dell - Assignment Example

Running Head: DISTRIBUTION CHANNEL OF DELL Distribution Channel of Dell [The Writer’s Name] [The Name of the Writer] Distribution Channel of Dell Executive Summary The initial success of Dell was due to its early use of the internet. Dell's direct sales strategy had attracted the customers and paid off in a short term. In addition, the use of internet created a significant competitive advantage for Dell while its competitors didn't believe that the online operations are very difficult to conduct in B2B market. Dell uses the direct model to easily allow the customization of computers for consumers, and how the direct model allows Dell to operate with very little inventory through the use of a just-in-time inventory system. The second section of the case study focuses on how emerging economies differ in terms of direct and indirect distribution channels with respect to USA. In terms of extending its products to emerging economies, Dell believes that its direct model is adequate to work in any country. However, some cultural issues need to be assessed prior to implementing its channel model. In terms of indirect distributors, the Indian personal computer (PC) market has revamped its channel relationships to focus on national and regional wholesalers and reducing its use of local wholesalers. The Indian PC wholesalers erred in assuming that distribution to rural parts of the country would succeed. They did not consider the other parts of the marketing mix in their distribution strategy; for example, having a product available in a market will only translate to sales if the customer knows it is there. Lastly, the case study analyzes the differences in PC prices across countries and explains the variances in these prices. Distribution Channel of Dell Introduction Channels of distribution represent the "place" component of the marketing mix. Place is a critical element because it is the ultimate goal of a business transaction, the consumer receives the product and the manufacturer receives revenue. This report focuses on how the manufacturer delivers its product to the consumer. Part one of the report will give an explanation of the major concepts related to distribution channels. For the second part of the report we will conduct a case study which relates the concepts learned in the first part of the report to Dell Inc. The case study will look at indirect and direct distribution channels in Dell Computers. (Pelton, et. al. 2002, 189-94) Dell’s Online Success inevitably resulted in a complete alteration of their business strategy, which focused on making every decision customer-driven, while increasing efficiency across the company. With the formation of the Dell Direct Model, which focused on made-to-order products, a low cost distribution system, rapid lead times, and the maintenance of customer relationships, this new concept needed strong sales and marketing opportunities, as a customer could get a made-to-order computer shipped to their home in about 36 hours, which was a model time within the computer industry at the time. With the Internet craze of the 1990’s, the Internet presented the ease of a new information channel, which was the perfect mode of extension for the new Dell Direct Model into customer’s homes. (Lapide, Larry, 2005, 16-19) On behalf of Dell’s original position within the PC market, as Dell did not have a distribution channel, but always directly dealt with the customers themselves, Dell’s marketing force believed that Dell’s venture of expanding retail sales, support help, an order tracking system, and other services directly into the homes and businesses of its customer base, would be extremely profitable through Dell Online. They were right, as sales revenues from the website generated about $3 million a day a year and a half preceding it’s launch (mostly coming from business customers), which were accompanied by high levels of customer satisfaction concerning their purchases online. With these high levels of customer satisfaction came goals to further reduce costs, which were saved by reducing the telephone calls between customers and sales reps and also by making possible higher sales quotas for sales reps as a result of the leads that were achieved as a direct result of online usage. Further success came as a result of the satisfaction accompanying customer-tailored services, such as Dell Premier Pages, which directly allowed large institutional customers to do such things as buy, price and construct systems, as well as track order status. Dell’s online success can be seen as an overall company makeover tailored more towards understanding their customers as well as setting them up for other market opportunities such as going global, without the need for large capital investment in a sales force. Limitations and Methodology As with most secondary research we had difficulty finding the specifics regarding what we were looking for. In our opinion, the best way to do a study like this would be to conduct primary research. However, without faculty clearance, research funding, and with a time constraint, conducting primary research was not an option. Although many websites did offer to sell us information regarding distribution channels we simply could not afford to purchase their offerings. The lack of distribution information was due to organizations protecting their distributional competitive advantage. Finding general information regarding distribution channels for specific organizations was readily accessible but the specifics were hard to locate. Another reason for the lack of distribution information was due to the dynamic nature of distribution channels. (Turban, et. al. 2002, 93-98) They are continuously changing due to organizational cost reduction practices, evolving computer technology and the dynamics of the general business environment. Distribution Channel Concepts Distribution is one of the elements of the marketing mix. The purpose of a distribution system is to create place utility for customers, which is the value of having the product where the customer wants it to be. While many manufacturers choose to sell their products directly to end-users, a direct channel, most choose to use channel intermediaries. Intermediaries are firms or individuals such as wholesalers, agents, brokers, or retailers that help move the product from the manufacturer to the consumer and also add value to the product. Manufacturers use intermediaries to help distribute their goods for three reasons: contractual efficiency, specialization and division of labour, and economies of scale. Functions performed by intermediaries include bulk breaking, creating assortments and facilitating functions. Bulk breaking refers to dividing larger quantities of goods into smaller lots to meet the needs of consumers. Manufacturers typically ship full truckloads or shipping containers of their product to wholesalers who unpack and sell the product by the pallet or case to regional wholesalers or to retailers. (Rohner, 1998, 151-53) Creating assortments refers to providing a variety of products in one location to meet the needs of buyers. For example; someone building a house would prefer one-stop shopping to save time. Facilitating functions refers to the functions of channel intermediaries that make the purchase process easier for customers and manufacturers. For customers these functions include technical advice on selection, having customer service available, and been offering credit. For manufacturers, wholesalers make it possible to bundle third party product with the manufacturer's product, to customize packaging, and provide product monitoring throughout the channel. After a manufacturer has decided on a channel of distribution the focus shifts to logistics. Logistics refers to the physical activities involved in moving products from the manufacturing plant to the location where the consumer takes possession of them. The activities used to move finished goods include order processing, warehousing, materials handling, transportation, and inventory control. (Rangan, 1998, 33-37) Materials handling involves the moving of products into, within, and out of warehouses. Warehousing refers to storing goods in anticipation of sale or transfer to another member of the channel of distribution. It is important to have an efficient logistics system in place to improve inventory control and to ensure that goods are always available to meet customers' demands. Compaq is Dell’s main competitor because of Compaq’s high volume sales that it has achieved over the years. In 1996 for example, Compaq beat out Dell computer sales in the US by a little over 1,500(thousand) units, and by a little less than 4,500(thousand) units worldwide. (Farhoomand, et. al. 2002, 12-14) Compaq has strong retail presence, which Dell does not, but also has to deal with the problems that come with a supply chain, which Dell does not. Compaq believes that the distribution channel is a key to reaching the majority of PC customers, as many vendors were sure that Dell’s direct online mode could only reach 30% of PC customers. (Brad Alan Kleindl, 2002, 75-80) In 1997, Compaq began to mimic the Dell Direct model, by introducing build-to-order manufacturing, direct sales teams and telephone centres for shipping products, but this system showed strain. Dell should mainly feel threatened by Compaq’s high sales volume, but feel confident that the ease and reliability of their online ordering system will catch on and achieve higher sales volumes. Dell has to concentrate more on the home PC market just as much as their business segment if this market expansion takes place. Dell should offer many family oriented options such as payment plans and bulk-hardware order discounts, since many consumers may be more price sensitive than many large businesses. Dell could also sell various types of entertainment software, educational software and other family oriented amenities in their retail store. Dell should design their website with various reliable support services as well, because many unfamiliar home consumers may not be familiar with how to properly set up their new computer, or not even buy one if it looks too complicated. (Ramstad, 2005, 66-70) Dell's business model, being a demand pull company, helped to control its inventory and costs, whereas its competitors are strictly supply-push companies and operate in a more traditional manner. IBM and other competitors of Dell have to be good at forecasting, while Dell makes the computers to order. (Hoffman, et. al.1996, 50-68)Dell is more efficient and therefore more profitable because it can buy its component parts based on the customer's demand and not have to worry about building up its supply of inventory that may or may not be used. The result was that the company wound up with essentially no carrying costs for inventory while maintaining excellent turnaround on orders, because it sold what it had on hand, collected from customers in an average of a few days, and didn't have to pay suppliers for several weeks. Dell's success not only depends on its personnel but also depends on its strategies, organizational techniques, and the teaming up with outside suppliers that produce mutually beneficial results. Dell is able to sustain a competitive advantage over competitors in the computer industry because of an extremely efficient supply chain/distribution system and its JIT inventory system. (David D. Vanhoose, 2003, 121-24) Since inventory and labour are the highest liabilities of a firm and Dell operates with a few days of inventory, they are able to cut costs on warehousing, hiring people to track and maintain inventory, and avoid holding on to obsolete technology. (Gary P. Schneider, 2002, 211-17) Dell uses a JIT inventory system because Dell's customers can only order computers directly through Dell itself. Dell uses their website www.Dell.com to take customer's orders. Dell focuses on direct sales, cutting out other distribution channels entirely. This allows for a deeper relationship with the customers whereby Dell can offer their customer's better service, savings, convenience, and efficiency. Part 2: Case Study A. Tracing Distribution Channels in USA I: Direct Distribution This section will examine direct and indirect distribution channels in USA. We shall begin the analysis by turning to Dell's direct distribution channel. Dell's operating practices focus strictly on direct distributions; meaning, they have close relationships with its customers and suppliers; thus, there is no interaction with intermediaries along Dell's distribution channel. "No unnecessary costs: This is an all-but-sacred mandate of the famous 'Dell direct' business model. No inventory, no middlemen to eat into profits, no agenda other than giving the customer what he or she wants. “Dell believes it can best understand the needs of consumers and thus provide the most effective and efficient computing solutions for its customers through this model. Dell also utilizes its practices of mass customization and direct distribution channelling to enjoy a competitive advantage over its competitors while providing the best in customer service. To place an order with Dell a customer can simply order through telephone or use the internet to meet his/her needs. Ordering a PC through Dell is simple but in order to maintain an edge on the competition, Dell sets up kiosks across the country to keep people informed and to allow them to try out the latest Dell products. Dell uses a just-in-time inventory system, where a large inventory is not necessary; instead, it produces computers only after orders have been received. "The supplier hub feeds components directly into the assemble-to-order manufacturing operations, allowing Dell to hold almost no inventory which provides it with the benefits of a negative cash-to-cash cycle.” This is referred to as a "pull' approach to production, where a customer's order triggers a reaction that can be traced back to the supplier of the component parts. As PC components enter the factory, workers scan the bar codes of the major components. This makes it easier to track each part of a PC as it is being built. "The unique bar code links each PC to a detailed list that is used to confirm the PC system using instructions for configuration, software loads, and testing to be done on the system.” (Bendapudi, et. al. 2002, 83-101) All the parts in a PC are traceable to the specific invoice and manufacturing process, so Dell will be able to track each part in a finished system, especially for finding linkages in defective products. Dell turns over its inventory more than once a week, thereby allowing the company to escape from holding excess inventory of short-lived electronic components. "This way inventory costs are kept to a minimum; therefore, brand new computer parts can be delivered to customers within a week, and obsolete and dated stock holdings are minimized.” This reduction in inventory is achieved by requiring suppliers to hold batch inventory in their manufacturing plants, which are closely located to Dell's production plant. This way inventory costs are kept to a minimum; therefore, brand new computer parts can be delivered to customers within a week, and obsolete and dated stock holdings are minimized. Moreover, while Dell does some of the work, a significant amount of the manufacturing process is tied to third-party suppliers. The responsibility of shipping is placed on external courier companies. "Shipping is contracted out to several courier companies, with multiple shippers delivering the finished systems to locations in North and South America. " These contracted companies manage the delivery of product throughout the Americas. Moreover, it takes an average of three working days to receive an order and complete the production. Once the finished systems leave the factory, it can take 7-10 days to ship the product to urban customers; whereas, it can take 8-11 working days to ship to rural customers; and it may take 9-14 working days to deliver products to customers in more remote areas. B. Tracing Distribution Channels in Emerging Economies I: Direct Distribution Dell applies its direct-channel-distribution model to all of its global operations; allowing for some minor adaptation to the local consumer's needs and demographic behaviours. In China, Dell addresses the fact that most Chinese consumers do not have a credit card; thus, Dell has adapted its payment system by striking deals with customers and their banks to facilitate payments. The reason being, the price of a PC can cost three months wages for an average Chinese worker. So, to buy a PC the customer my have to give Dell some sort of collateral which is facilitated by the customer's bank. In terms of selling tactics, Dell realizes it is important to set up an abundant network of kiosks to inform its customers about Dell products. Notably, Chinese consumers prefer seeing the product before they purchases it; not to mention, many Chinese consumers currently do not have access to the internet; therefore, kiosks make it easier for Dell to overcome these obstacles. Furthermore, Dell only implements its direct model based on the readiness of a region or country. If a region or country is ready, then it has the right kind of infrastructure to make Dell's direct model work effectively. (Avlonitis, et. al. 2000, 441-59) II: Indirect Distribution We now shift from direct distribution in China to indirect distribution in India. In 2001, the Indian economy entered a major downturn, which had a large impact on the existing channels of distribution in the PC market. The impact was large enough to force a restructuring of channel relationships amongst distributors. Restructuring resulted in the elimination of small wholesalers; leaving only the national and regional wholesalers in the market. The situation was dire enough that some experts predicted that regional wholesalers were also in danger of getting eliminated along with the small wholesalers; leaving only the larger national wholesalers. Some extreme forecasts predicted that direct distribution would be the only efficient way to do business. These predictions were flawed for several reasons. For one, regional wholesalers have a comprehensive knowledge of local markets; thus, they add value to the chain, making their efforts invaluable. Secondly, direct channels would not work due to poor infrastructure in most parts of the country; this fact is something Dell is fully aware of. Lastly, making dramatic changing due to the natural ups and downs of the business cycle can create hostilities within the supply chain. During the economic downturn, the PC market in India began to focus on smaller rural locations. Rural markets were focused upon because the larger markets were viewed as being saturated. Again, this strategy was flawed because if people living in metropolitan regions are reducing their expenditure due to economic conditions, it would be safe to assume that rural customers are doing the same thing. Also, the PC market also failed in incorporating its distribution channel with other elements of the marketing mix. For example, PC's were being shipped to rural regions of the country but people had no idea they were there and in some cases did not know how to use them! Conclusion Part one of the report gave a thorough explanation of the concepts related to distribution channels. For the second part of the report we conducted a case study which related the concepts learned in the first part of the report to the computer industry. The computer industry case study looked at indirect and direct distribution channels in USA using Dell. Secondly, the distribution channels for computers in emerging economies such as China and India were examined to give the reader insight as to how foreign distribution channels differ from those used in USA. The advantages that Dell derived from its Online success includes wider expansion to the limits of their distribution channel, as Dell has always dealt directly with customers, without relying on any other extensive distribution channels. As the number of households with the internet increased, so did the possibility of obtaining new customers, who never would have went through the trouble of finding Dell Sales reps and ordering a computer from them. This advantage is significant, as Dell did not have to interrupt or anger fellow supply chain players, but simply expanded their range of possible customers that could now more easily deal with Dell. Dell also became more cost efficient within the production and sales departments, which could only be beneficial for the company as a whole because of higher margins that could be realized on their products. With Dell having several intense competitors, cost savings could be a huge differentiator that could give Dell a significant advantage in the future. Dell had always been uniquely positioned as one of the few vendors who could capitalize on the Internet opportunity, as Dell could go direct to the customer as usual, but other had to use a different medium to go direct. This was a substantial advantage as other competitors had existing supply chains that they would have to configure and depend on to deliver their products correctly in a decreased amount of time. Other competitors were strong because of their retail presence, but this may not have been a great threat to the ease that Dell online brought to customers. This is a substantial advantage, as consumers tend to buy products from companies that will support them before/after point of purchase, as well as from companies that are known for being easy to deal with, such as Dell. Expanding services to the internet like Dell did may be an easy task for competing companies to take on over a few years, though, as its competitors fully understands the trick that’s driven Dell’s success. This could be achieved with a strong marketing and sales force. The increased cost efficiency of Dell may be a little more substantial, but also a little harder to sustain, as the alteration of a competitor’s production system and sales force is not impossible, but harder to achieve. This would take time to implement such things as J.I.T.D of parts, a pull system throughout the distribution chain (Dell does not process an order until a customer makes one), and also re-working of sales incentives, as an online system tended to upset the sales force because of the loss of account control that they experienced. All of these could take a long time to develop, and therefore, catching up to Dell would take a while, therefore making Dell’s pre-capitalization on reducing costs a huge credible commitment towards becoming the leader in the PC market. References: Avlonitis, George J. and Despaina A. Karayanni. 2000. "The Impact of Internet Use on Business-to-Business Marketing." Industrial Marketing Management 29: 441-459. Bendapudi, Neeli and Robert P. Leone. 2002. "Managing Business-to-Business Customer Relationships Following Key Contact Employee Turnover in a Vendor Firm." Journal of Marketing 66(April): 83-101. 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