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... th distributing through independent resellers. Building to order avoided (1) having to keep many differently equipped models on retailers shelves to fill buyer requests for one or another configuration of options and components and (2) having to clear out slow-selling models at a discount before introducing new generations of PCs. Selling direct eliminated retailer costs and markups. (Retail dealer margins were typically in the 4 to 10 percent range. ) Dell Computer was far and away the worlds largest direct seller to large companies and government institutions, while Gateway was the largest direct seller to individuals and small businesses. Micron Electronics was the only other PC maker that relied on the direct-sales, build-to-order approach for the big majority of its sales.
Dell Computers Strategy Dell management believed it had the industry's most efficient business model. The companys strategy was built around a number of core elements: build-to-order manufacturing, partnerships with suppliers, just-in-time components inventories, direct sales to customers, award-winning customer service and technical support, and pioneering use of the Internet and e-commerce technology. Management believed that a strong first-mover advantage accrued to the company from its lead over rivals in making e-commerce a centerpiece in its strategy. Build-to-Order Manufacturing Dell built its computers, workstations, and servers to order; none were produced for inventory. Dell customers could order custom-built servers and workstations based on the needs of their applications. Desktop and laptop customers ordered whatever configuration of microprocessor speed, random access memory (RAM), hard disk capacity, CD-ROM drive, fax / modem , monitor size, speakers, and other accessories they preferred.
The orders were directed to the nearest factory. In 2000, Dell had PC assembly plants in Austin, Texas; Nashville/Lebanon, Tennessee; Limerick, Ireland; Xiamen, China; Penang, Malaysia; and El Dorado do Sul, Brazil. All six plants manufactured the companys entire line of products. Until 1997, Dell operated its assembly lines in traditional fashion, with each worker performing a single operation.
An order form accompanied each metal chassis across the production floor; drives, chips, and ancillary items were installed to match customer specifications. As a partly assembled PC arrived at a new workstation, the operator, standing beside a tall steel rack with drawers full of components, was instructed what to do by little red and green lights flashing beside the drawers containing the components the operator needed to install. When the operator was finished, the drawers containing the used components were automatically replenished from the other side, and the PC chassis glided down the line to the next workstation. However, Dell had reorganized its plants in 1997, shifting to "cell manufacturing" techniques whereby a team of workers operating at a group workstation (or cell) assembled an entire PC according to customer specifications.
The shift to cell manufacturing reduced Dells assembly times by 75 percent and doubled productivity per square foot of assembly space. Assembled computers were tested, then loaded with the desired software, shipped, and typically delivered within five to six business days of the order placement. Dells build-to-order, sell-direct strategy meant, of course, that Dell had no in-house stock of finished goods inventories and that, unlike competitors using the traditional value chain model (Exhibit 7), it did not have to wait for resellers to clear out their own inventories before it could push new models into the marketplace resellers typically operated with 60 to 70 days inventory. Equally important was the fact that customers who bought from Dell got the satisfaction of having their computers customized to their particular liking and pocketbook. Quality Control Programs All assembly plants had the capability to run testing and quality control processes on components, parts, and subassemblies obtained from suppliers, as well as for the finished products Dell assembled.
Suppliers were urged to participate in a quality certification program that committed them to achieving defined quality specifications. Quality control activities were undertaken at various stages in the assembly process. In addition, Dells quality control program included testing of completed units after assembly, ongoing production reliability audits, failure tracking for early identification of problems associated with new models shipped to customers, and information obtained from customers through its service and technical support programs. All of the companys plants had been certified as meeting ISO 9002 quality standards.
Partnerships with Suppliers and Just-in-Time Inventory Practices Michael Dell believed it made much better sense for Dell Computer to partner with reputable suppliers of PC parts and components rather than integrate backward and get into parts and components manufacturing on its own. He explained why: If youve got a race with 20 players all vying to make the fastest graphics chip in the world, do you want to be the twenty-first horse, or do you want to evaluate the field of 20 and pick the best one? 9 A central element of Dell Computers strategy, therefore, was to evaluate the various makers of each component, pick the best one or two as suppliers, and partner with them for as long as they remained leaders in their specialty. Management believed long-term partnerships with reputable suppliers yielded several advantages. First, using name-brand processors, disk drives, modems, speakers, and multimedia components enhanced the quality and performance of Dells PCs. Because of varying performance of different brands of components, the brand of the components was as important or more important to some end users than the brand of the overall system. Dells strategy was to partner with as few outside vendors as possible and to stay with them as long as they maintained their leadership in technology, performance, and quality.
Second, because Dells partnership with a supplier was long term and because it committed to purchase a specified percentage of its requirements from that supplier, Dell was assured of getting the volume of components it needed on a timely basis even when overall market demand for a particular component temporarily exceeded the overall market supply. Third, Dells formal partnerships with key suppliers made it feasible to have some of their engineers assigned to Dells product design teams and for them to be treated as part of Dell. When new products were launched, suppliers engineers were stationed in Dells plant, and if early buyers called with a problem related to design, further assembly and shipments were halted while the suppliers engineers and Dell personnel corrected the flaw on the spot. 10 Fourth, Dells long-run commitment to its suppliers laid the basis for just-in-time delivery of suppliers products to Dells assembly plants. Many of Dells vendors had plants or distribution centers within a few miles of Dell assembly plants and could deliver daily or even hourly if needed.
To help suppliers meet its just-in-time delivery expectations, Dell openly shared its daily production schedules, sales forecasts, and new- model introduction plans with vendors. Using online communications technology, Dell communicated inventory levels and replenishment needs to vendors on a daily or even hourly basis. Michael Dell explained what delivery capabilities the company expected of its suppliers: We tell our suppliers exactly what our daily production requirements are. So its not, "Well, every two weeks deliver 5, 000 to this warehouse, and well put them on the shelf, and then well take them off the shelf. " Its, "Tomorrow morning we need 8, 562, and deliver them to door number seven by 7 am. " 11 Dell also did a three-year plan with each of its key suppliers and worked with suppliers to minimize the number of different stock-keeping units of parts and components in designing its products. Current initiatives included using the Internet to further improve supply chain management and achieve still greater manufacturing and assembly efficiencies. Why Dell Was Committed to Just-in-Time Inventory Practices Dells just-in-time inventory emphasis yielded major cost advantages and shortened the time it took for Dell to get new generations of its computer models into the marketplace.
New advances were coming so fast in certain computer parts and components (particularly microprocessors, disk drives, and modems) that any given item in inventory was obsolete in a matter of months, sometimes quicker. Having a couple of months of component inventories meant getting caught in the transition from one generation of components to the next. Moreover, it was not unusual for there to be rapid-fire reductions in the prices of components in 1997 and early 1998, prices for some components fell as much as 50 percent (an average of 1 percent a week). Intel, for example, regularly cut the prices on its older chips when it introduced newer chips, and it introduced new chip generations about every three months. The prices of hard disk drives with greater and greater memory capacity had dropped sharply in recent years as disk drive makers incorporated new technology that allowed them to add more gigabytes of hard disk memory very inexpensively.
The economics of minimal component inventories were dramatic. Michael Dell explained: If Ive got 11 days of inventory and my competitor has 80 and Intel comes out with a new 450 -megahertz chip, that means Im going to get to market 69 days sooner. In the computer industry, inventory can be a pretty massive risk because if the cost of materials is going down 50 percent a year and you have two or three months of inventory versus 11 days, youve got a big cost disadvantage. And youre vulnerable to product transitions, when you can get stuck with obsolete inventory. 12 Collaboration with suppliers was close enough to allow Dell to operate with only a few days of inventory for some components and a few hours of inventory for others. Dell supplied data on inventories and replenishment needs to its suppliers at least once a day hourly in the case of components being delivered several times daily from nearby sources.
In a couple of instances, Dells close partnership with vendors allowed it to operate with no inventories. Dells supplier of monitors was Sony. Because the monitors Sony supplied with the Dell name already imprinted were of dependably high quality (a defect rate of fewer than 1, 000 per million), Dell didnt even open up the monitor boxes to test them. 13 Nor did it bother to have them shipped to Dells assembly plants to be warehoused for shipment to customers. Instead, using sophisticated data exchange systems, Dell arranged for its shippers (Airborne Express and UPS) to pick up computers at its Austin plant, then pick up the accompanying monitors at the Sony plant in Mexico, match up the customers computer order with the customers monitor order, and deliver both to the customer simultaneously. The savings in time, energy, and cost were significant. The company had, over the years, refined and improved its inventory tracking capabilities, its working relationships with suppliers, and its procedures for operating with smaller inventories.
In fiscal year 1995, Dell averaged an inventory turn ratio of 32 days. By the end of fiscal 1997 (January 1997), the average was down to 13 days. The following year, it was 7 days, which compared very favorably with Gateways 14 -day average, Compaq's 23 -day average, and the estimated industry-wide average of over 50 days. In fiscal year 1999, Dell operated with an average of 6 days supply in inventory.
The companys long-term goal was to get its inventories down to a 3 -day average supply. Direct Sales Selling direct to customers gave Dell firsthand intelligence about customer preferences and needs, as well as immediate feedback on design problems and quality glitches. With thousands of phone and fax orders daily, $ 35 million in daily Internet sales, and daily contacts between the field sales force and customers of all types, the company kept its finger on the market pulse, quickly detecting shifts in sales trends and getting prompt feedback on any problems with its products. If the company got more than a few of the same complaints, the information was relayed immediately to design engineers, who checked out the problem. When design flaws or components defects were found, the factory was notified and the problem corrected within a matter of days.
Management believed Dells ability to respond quickly gave it a significant advantage over rivals, particularly PC makers in Asia, that operated on the basis of large production runs of standardized products and sold them through retail channels. Dell saw its direct-sales approach as a totally customer-driven system, with the flexibility to change quickly to new generations of components and PC models. Despite Dells emphasis on direct sales, industry analysts noted that the company sold perhaps 10 percent of its PCs through a small, select group of resellers. 14 Most of these resellers were systems integrators. It was standard for Dell not to allow returns on orders from resellers or to provide price protection in the event of subsequent declines in market prices. From time to time, Dell offered its resellers incentive promotions at up to a 20 percent discount from its advertised prices on end-of-life models. Dell was said to have no plans to expand its reseller network, which consisted of 50 to 60 dealers.
Dells Use of Market Segmentation To make sure that each type of computer user was well served, Dell had made a special effort to segment the buyers of its computers into relevant groups and to place managers in charge of developing sales and service programs appropriate to the needs and expectations of each market segment. Until the early 1990 s, Dell had operated with sales and service programs aimed at just two market segments: (1) corporate and governmental buyers who purchased in large volumes and (2) small buyers (individuals and small businesses). But as sales took off in 199597, these segments were subdivided into finer, more homogeneous categories (see Exhibit 8). In 1999, 65 percent of Dells sales were to large corporations, government agencies, and educational institutions. Many of these large customers typically ordered thousands of units at a time and bought at least $ 1 million in PCs annually. Dell had hundreds of sales representatives calling on large corporate and institutional accounts.
Its customer list included Shell Oil, Sony, Exxon-Mobil, MCI, Ford Motor, Toyota, Eastman Chemical, Boeing, Goldman Sachs, Oracle, Microsoft, Woolwich (a British bank with $ 64 billion in assets), Michelin, Unilever, Deutsche Bank, Wal-Mart, and First Union (one of the 10 largest U. S. banks). However, no one customer represented more than 2 percent of total sales. Dells sales to individuals and small businesses were made by telephone, fax, and the Internet. It had a call center in the United States with toll-free phone lines; customers could talk with a sales representative about specific models, get information faxed or mailed to them, place an order, and pay by credit card.
Internationally, Dell had set up toll-free call centers in Europe and Asia. 15 The call centers were equipped with technology that routed calls from a particular country to a particular call center. Thus, for example, a customer calling from Lisbon, Portugal, was automatically directed to the call center in Montpelier, France, and connected to a Portuguese-speaking sales rep. Dell began Internet sales at its Web site (web) in 1995, almost overnight achieving sales of $ 1 million per day. In 1997 sales reached an average of $ 3 million daily, hitting $ 6 million on some days during the Christmas shopping period.
Dells Internet sales averaged nearly $ 4 million daily in the first quarter of 1997, reached $ 14 million daily by year-end 1998, a...
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Research essay sample on Dell Computer Corporation Strategy And Challenges
