Supplier Management: Dell Computers - Research Paper Example

Case Study – Dell Computers Background Dell Computers has a unique strategy and business model that aims to keep costs low by the direct-sellingapproach. This also helps them to understand customer needs and expectations. They have an agile and efficient supply chain that further helped to bring down costs for the end customer. Because of their investments in research, Dell has been able to provide value to the customer. However, over the years, with change in management and structural changes, several issues need attention. 2. Identification of the problems Supplier management Dell was one of the early computer manufacturers and developed a different business model that fetched them a very good response initially. However, as the industry grew the early manufacturers could not keep pace with the technology that advanced in so many directions all at the same time. Vertical integration in the industry became difficult as there were too many technologies and manufacturing intricacies. As a result specialist companies emerged that mass-produced specialized components and supply it to several computer manufacturers. This form of outsourcing worked cheaper for computer manufacturers and many such as IBM, Sony, HP and Compaq abandoned the vertical integration model. They preferred to concentrate on efficient assembly and marketing their own brand computers instead of developing and R&D base and investing in it. Dell, however, preferred to continue with the shorter-value chain model by selling directly to customers, avoiding the intermediary commissions and costs associated with distribution through independent retailers. Gradually, companies such as HP even started outsourcing the assembly to contractors, while focusing on product design and marketing. All the vendors tried to minimize the amount of finished goods in dealer inventories and shorten the time it took to replenish dealer stocks. Dell stuck to its own business model of Built-to-Order (BOT). Dell’s supply chain efficiency had eroded between 2003 and 2006 when it peaked at five days on inventory supply. They found it difficult to get cooperation from other organizations and bureaucracy started prevailing within the organization. There was misalignment between its procurement and supply chain activities, and with its assembly line. Dell wanted to partner only with reputed suppliers rather than have 20 suppliers all supplying to all computers manufactures. They stuck to one or two suppliers and maintained long-term partnership with them. They however, brought down their inventory turn cycle from 32 days in 1995 to 7 days in 1998, and to four days’ supply between 2003 and 2007. Dell’s quality control was not perfect and they incurred $307 million in 2008. Distribution channels While all computer manufacturers tried to emulate the Dell strategy of direct sales, a very small percentage of their overall sales could be accounted as direct sales. HP, in addition to its direct sales, also sold a sizeable share through distributors, retailers, and other channels like independent vendors. Moreover, HP’s in-house personnel focused on design development and the assembly was handled by contract manufacturers located in various parts of the world. Dell only sold through its website until it had to change its strategy to sell through dealers. This gave its rivals an edge as they had multiple distribution channels. Service issues The global services were not up to the expectations. They had just 25 service centers at the global level and these too were primarily engaged in technical support, requests for repairs and other issues. In a yet another attempt to cut down costs, they moved a large portion of their support services to low-wage countries. Small customers were badly affected and customer complaints began to rise. People started posting horror stories on websites and media gave it adverse publicity. Value creation When technologies become standardized and volume market develops, the game starts to change. The company expanded on array of products and services on a geographic basis. Their focus was to reach the products and services more efficiently to the customers than anyone else. They focus on servers, storage and services. They continue to drive down costs and would make up for profit margins. Global recessionary forces have caused a slowdown in IT spending. Moreover, Dell is trying to sell its worldwide network of computer factories to bring down production costs. They now want to enter into agreements with contract manufacturers to produce its PCs. They had been industry leaders in lean manufacturing approaches, and the cost-efficient BOT methods, but their costs were high because of their own manufacturing setups. Moreover, consumers have started preferring laptop PCs instead of desktops PCs. Laptop PCs are labour intensive and more complex to handle. They were assembling the laptops in two different units which added to their costs. It is cheaper to have a single assembly contractor in Asia but Dell had not followed this business system. Now they are unable to find buyers for their plants. NPD Dell’s philosophy was that it was their job to sort out the new technology and designs coming into the market place. Their R&D personnel indicated that products incorporating standardized technology delivered twice the performance per dollar of cost as products based on proprietary technology. Dell used standardized upgradeable parts and components. They entered into the white-box segment and started supplying their own PCs to small vendors or businesses. Some believed that this was Dell’s strategy to take on the clients of the white-box dealers. They used leading computer publications for advertising like PC Magazine and PC World. They also used the television to promote its products to small businesses and individuals. The old customers were periodically sent brochures on new offerings. They wanted their advertising to be communicative and forceful. They continuously pursued cost reduction initiatives. How price war in the industry caused the company’s profit margins to slip. To cut down on the operating expenses they decided to reduce the global workforce count by 10 percent. By March 2008, while 3200 jobs had been eliminated, they actually hired 2100 people to staff the frontline operations. When HP became market leaders and profits declined, Dell added an array of new products and services without going into the market needs. It started selling printers and accessories, electronic cash registers, including MP3 players and Plasma TV. These had to be abandoned as these did not fetch the expected returns. Their new product development process was not a sequential process. 3. Evaluation Hult and Swan (2003) identify three interdependencies between new product development (NPD) and supply chain management (SCM). It first requires identification and reinvigoration of the existing solutions that customers need or want and this can be achieved through product development management process. The SCM process has to be equally efficient as it incorporates the acquisition of all physical and informational inputs. Third, through customer relationship management process it is important to identify customer, build relationships and shape perceptions. Dell’s NPD process did not take into account individual customer requirements. Dell used standardized technology and components because it delivered twice the performance per dollar of cost. However, each line of desktop and portable computers has a particular usage, a particular customer or market segment (Hult & Swan, 2003). Despite their customer-focused approach, they could not leverage technology and knowledge across segments and attain efficiencies. Even though they claim that they were always alert to oppurtunities, they did not take advantage of such market needs. Dell never participated in multiple supply chain networks. This would have helped them to nurture and integrate the development of products, knowledge and efficiencies that would otherwise be impossible (Hult & Swan, 2003). They stuck to one or two reputed suppliers. NPD process typically moves sequentially through different stages and a seven-stage process moves a product from idea to launch. Known as the stage-gate system, the process may vary across product and company. It is a highly structured development process that seeks to manage risks and increase efficiency. NPD models lay emphasis on upfront activities – building market knowledge, clear product and oppurtunity definition (Veryzer, 1998). Intensive technology development in the case of radical developments may span 10 to 20 years and the market oppurtunities for such products are unspecified and unclear. Reliance on lead users may be of little help in the development of these products because of two reasons. First, the customers have nothing to compare the product with. Secondly, the customers may not have the ability to envision the potential of the radically innovative product. Dell entered into NPD without really looking into the demands of the market. For instance, they started supplying Ethernet and layer2 switches just because it goes with the PCs. They similarly entered the external storage devices segment just because the executives saw it as growth oppurtunity. They entered into price war and undercut the rivals thereby bringing down the price for the end-customer by 50 percent. Price wars are considered as dysfunctional behavior especially in industries like the computer industry, where demand uncertainty, rapid growth and sudden behavior are common (Langley, Paich & Sterman, 1998). Dell had fixed its objective of achieving a certain percentage of the market share and then fixed the price accordingly. In such cases the mark-up is cut aggressively when there is excessive capacity. They gain market share during a period of boom but when the market saturates, it leads to bigger bust. This also increases the delivery times of the products and the customers can be driven away. To compete on a global scale, the NPD process is becoming more complex as customers are globally dispersed. Understanding globally dispersed customers is no longer a matter of identifying the needs of a single, relatively homogeneous group (McDonough, Kahn & Barczak, 2001). Companies need to have the ability to understand the needs of customers located at different places, speaking different languages, having different set of cultural beliefs and who express their preference in specific ways. This means an organization must have global teams that can employ globally distributed NPD expertise that is not available in a single geographic area. Value creation Dell’s strategy to offer standardized configurations gave them volume sales but it did not really cater to the custom requirements that others could offer through the white-box strategy. Even with their aggressive price strategy they could not meet this requirement. To create value for the customer requires capabilities beyond the core capabilities available within the firm. The major strategic thrust of the firm should be to put together a network of firms to build a set of capabilities (Kothandaraman & Wilson, 2001). Firms can do this by developing strong relationships with key partners who can add value to the market offering. The scope of the value chain and the firm’s position within the value network impacts its ability to develop competitive advantage. However, Dell did not believe in having 20 suppliers as its rivals and wanted long-term relationship with only one or two suppliers. What they have overlooked is that having multiple suppliers would bring in more capabilities that could help meet customer needs and expectations. 4. Recommendations Price war and undercutting are no means to capture market share. Price war can be used as a market penetration strategy for some time but once the clientele is established, the prices should be raised (Elzinga & Mills, 1999). The consumers may initially gain price wars but ultimately the product quality suffers. This also led Dell’s image to be affected and they had to withdraw certain products from their offering. Thus, Dell should not use undercutting as a strategy to capture market share. NPD process has to be a sequential process which implies evaluation of the market and the product specifications. The R&D centers should be such that it has members from different regions to provide input from different customer bases and segments. A breakup of activities and the outcome is essential in Porter’s view to attain competitive advantage. The activities of the a firm must be broken up - receiving, manufacturing, storing, transporting, hiring, training, purchasing, and marketing (Sheehan & Foss, 2009). The root of competitive advantage lies in being different – different efficiencies in different ways. This analysis would help Dell to identify the high cost areas and where it performs differently from competitors. The value chain would then be able to optimize at the business system level instead of individual function level. Dell has so far focused on the internal environment and what they believe to be right. However, Porter suggests that focus should be on the external environment and this would constantly keep a firm alert about rivals and their strategy. Dell has not been pursuing the strategy of discontinuous innovation. Whatever is suggested by their partners, they develop that product. Discontinuous innovation becomes essential in this industry because it would help Dell to bring to market very different products and services that would undermine established products and services (Baker, 2002). While discontinuous innovation can take place through external contractors, Dell must ensure regular monitoring. At the same time, they must have the ability to adapt to potential innovations that could affect how they currently operate. They definitely need service innovation because their customer service has been much below the expectations of the customers. They need process innovation to support their service process. Dell has been sticking to its old business model but this too requires innovation. To achieve organizational success it is now necessary to continuously revolutionize the basic organizational strategy. This means Dell must redefine its industrial boundaries, redefine the market space and radically re-conceive new products and services instead of just developing new products and services. Cost reduction is a major driver of innovation and since Dell’s basic strategy has been to keep costs low, radical innovation should be a part of Dell’s basic strategy. Dell has so far been relying on customer inputs to change the design or the products. However, customers may not have the ability to decide how their needs can be satisfied. Dell should also encourage design and process innovative ideas from the staff specially those that deal directly with customers. In nutshell, they must have a sound innovation management in place. Dell must enter into agreements with several suppliers instead of relying on just one or two. Alliances and partnerships enable sharing of risks and rewards while also offering oppurtunities for learning (Saimee, 2007). Dell has been forecasting demand but the market has become demand driven and under the circumstances accuracy in forecasting cannot be achieved (Oracle, 2006). The company’s responsibility has moved beyond buying. It now extends to ensuring flow of information and materials through a smooth supply chain. Lead times have to reduce which had increased at Dell and inventory investment has to be low. 5. Conclusion Thus, Dell has to change its business model on a continuous basis. They need to encourage the staff to input innovative ideas and focus on radical discontinuous innovation. Forecasting demand has to be replaced with a more efficient supply chain. Core capabilities have to be enhanced by adding fresh suppliers in their network. They need to create and add value to their market offerings. Dell must move from standardized configurations to offering custom-tailored products and services. They need to enhance their service centers at the global level. References Baker, K.A. (2002). Innovation. Ch.14. Retrieved online 14 June 2010, from http://www.au.af.mil/au/awc/awcgate/doe/benchmark/ch14.pdf Elzinga, K.G., & Mills, D.E. (1999). Price wars triggered by entry. International Journal of Industrial Organization. 17, 179-98. Hult, G.T.M., & Swan, K.S. (2003). A Research Agenda for the Nexus of Product Development and Supply Chain Management Processes. J PROD INNOV MANAG, 20, 333–336 Kothandaraman, P., & Wilson, D.T. (2001). The Future of Competition: Value-Creating Networks. Industrial Marketing Management. 30, 379-389 Langley, P.A., Paich, M., & Sterman, J.D. (1998). Explaining Capacity Overshoot and Price War: Misperceptions of Feedback in Competitive Growth Markets. Retrieved online 14 June 2010, from http://www.systemdynamics.org/conferences/1998/PROCEED/00026.PDF McDonough, E.F., Kahn, K.B., & Barczak, G. (2001). An investigation of the use of global, virtual, colocated new product development teams. J PROD INNOV MANAG. 18, 110-120 Oracle. (2006). Lean Procurement: The Future of Supply Chain Management in a Demand-Driven World. Retrieved online 14 June 2010, from http://www.oracle.com/media/peoplesoft/en/pdf/whitepapers/jde-e1-lean-procurement-white-paper.pdf Saimee, S. (2007). Global marketing effectiveness via alliances and electronic commerce in business-to-business markets. Industrial Marketing Management. 37, 3–8 Sheehan, N.T., & Foss, N.J. (2009). Exploring the roots of Porter’s activity-based view. Journal of Strategy and Management. 2 (3), 240-260 Veryzer, R.W. (1998). Discontinuos innovation and the New Product Development Process. J PROD INNOV MANAG. 15, 304-321 Read More