Dell’s Value Chain Dell Computer, with close supplier relationships, encourages suppliers to focus on their individual t
Posted: Sat Mar 19, 2022 6:04 pm
Dell’s Value Chain
Dell Computer, with close supplier relationships, encourages
suppliers to focus on their individual technological capabilities
to sustain leadership in their components. Research and development
costs are too high and technological changes are too rapid for any
one company to sustain leadership in every component. Suppliers are
also pressed to drive down lead times, lot sizes, and inventories.
Dell, in turn, keeps its research customer-focused and leverages
that research to help itself and suppliers. Dell also constructs
special Web pages for suppliers, allowing them to view orders for
components they produce as well as current levels of inventory at
Dell. This allows suppliers to plan based on actual end customer
demand; as a result, it reduces the bullwhip effect. The intent is
to work with suppliers to keep the supply chain moving rapidly,
products current, and the customer order queue short. Then, with
supplier collaboration, Dell can offer the latest options, can
build-to-order, and can achieve rapid throughput. The payoff is a
competitive advantage, growing market share, and low capital
investment.
On the distribution side, Dell uses direct sales, primarily via the
Internet, to increase revenues by offering a virtually unlimited
variety of desktops, notebooks, and enterprise products. Options
displayed over the Internet allow Dell to attract customers that
value choice. Customers select recommended product configurations
or customize them. Dell’s customers place orders at any time of the
day from anywhere in the world. And Dell’s price is cheaper; retail
stores have additional costs because of their brick-and-mortar
model. Dell has also customized Web pages that enable large
business customers to track past purchases and place orders
consistent with their purchase history and current needs. Assembly
begins immediately after receipt of a customer order. Competing
firms have previously assembled products filling the distribution
channels (including shelves at retailers) before a product reaches
the customer. Dell, in contrast, introduces a new product to
customers over the Internet as soon as the first of that model is
ready. In an industry where products have life cycles measured in
months, Dell enjoys a huge early-to-market advantage.
Dell’s model also has cash flow advantages. Direct sales allow Dell
to eliminate distributor and retailer margins and increase its own
margin. Dell collects payment in a matter of days after products
are sold. But Dell pays its suppliers according to the more
traditional billing schedules. Given its low levels of inventory,
Dell is able to operate its business with negative working capital
because it manages to receive payment before it pays its suppliers
for components. These more traditional supply chains often require
60 or more days for the cash to flow from customer to supplier—a
huge demand on working capital.
Dell has designed its order processing, products, and assembly
lines so that customized products can be assembled in a matter of
hours. This allows Dell to postpone assembly until after a customer
order has been placed. In addition, any inventory is often in the
form of components that are common across a wide variety of
finished products. Postponement, component modularity, and tight
scheduling allow low inventory and support mass customization. Dell
maximizes the benefit of postponement by focusing on new products
for which demand is difficult to forecast. Manufacturers who sell
via distributors and retailers find postponement virtually
impossible. Therefore, traditional manufacturers are often stuck
with product configurations that are not selling while
simultaneously being out of the configurations that are selling.
Dell is better able to match supply and demand.
One of the few negatives for Dell’s model is that it results in
higher outbound shipping costs than selling through distributors
and retailers. Dell sends individual products directly to customers
from its factories. But many of these shipments are small (often
one or a few products), while manufacturers selling through
distributors and retailers ship with some economy of scale, using
large shipments via truck to warehouses and retailers, with the end
user providing the final portion of delivery. As a result, Dell’s
outbound transportation costs are higher, but the relative cost is
low (typically 2% to 3%), and thus the impact on the overall cost
is low.
What Dell has done is build a collaborative supply chain and an
innovative ordering and production system. The result is what Dell
likes to refer to as its value chain - a chain that brings value
from supplier to the customer and provides Dell with a competitive
advantage.
Questions:
Dell Computer, with close supplier relationships, encourages
suppliers to focus on their individual technological capabilities
to sustain leadership in their components. Research and development
costs are too high and technological changes are too rapid for any
one company to sustain leadership in every component. Suppliers are
also pressed to drive down lead times, lot sizes, and inventories.
Dell, in turn, keeps its research customer-focused and leverages
that research to help itself and suppliers. Dell also constructs
special Web pages for suppliers, allowing them to view orders for
components they produce as well as current levels of inventory at
Dell. This allows suppliers to plan based on actual end customer
demand; as a result, it reduces the bullwhip effect. The intent is
to work with suppliers to keep the supply chain moving rapidly,
products current, and the customer order queue short. Then, with
supplier collaboration, Dell can offer the latest options, can
build-to-order, and can achieve rapid throughput. The payoff is a
competitive advantage, growing market share, and low capital
investment.
On the distribution side, Dell uses direct sales, primarily via the
Internet, to increase revenues by offering a virtually unlimited
variety of desktops, notebooks, and enterprise products. Options
displayed over the Internet allow Dell to attract customers that
value choice. Customers select recommended product configurations
or customize them. Dell’s customers place orders at any time of the
day from anywhere in the world. And Dell’s price is cheaper; retail
stores have additional costs because of their brick-and-mortar
model. Dell has also customized Web pages that enable large
business customers to track past purchases and place orders
consistent with their purchase history and current needs. Assembly
begins immediately after receipt of a customer order. Competing
firms have previously assembled products filling the distribution
channels (including shelves at retailers) before a product reaches
the customer. Dell, in contrast, introduces a new product to
customers over the Internet as soon as the first of that model is
ready. In an industry where products have life cycles measured in
months, Dell enjoys a huge early-to-market advantage.
Dell’s model also has cash flow advantages. Direct sales allow Dell
to eliminate distributor and retailer margins and increase its own
margin. Dell collects payment in a matter of days after products
are sold. But Dell pays its suppliers according to the more
traditional billing schedules. Given its low levels of inventory,
Dell is able to operate its business with negative working capital
because it manages to receive payment before it pays its suppliers
for components. These more traditional supply chains often require
60 or more days for the cash to flow from customer to supplier—a
huge demand on working capital.
Dell has designed its order processing, products, and assembly
lines so that customized products can be assembled in a matter of
hours. This allows Dell to postpone assembly until after a customer
order has been placed. In addition, any inventory is often in the
form of components that are common across a wide variety of
finished products. Postponement, component modularity, and tight
scheduling allow low inventory and support mass customization. Dell
maximizes the benefit of postponement by focusing on new products
for which demand is difficult to forecast. Manufacturers who sell
via distributors and retailers find postponement virtually
impossible. Therefore, traditional manufacturers are often stuck
with product configurations that are not selling while
simultaneously being out of the configurations that are selling.
Dell is better able to match supply and demand.
One of the few negatives for Dell’s model is that it results in
higher outbound shipping costs than selling through distributors
and retailers. Dell sends individual products directly to customers
from its factories. But many of these shipments are small (often
one or a few products), while manufacturers selling through
distributors and retailers ship with some economy of scale, using
large shipments via truck to warehouses and retailers, with the end
user providing the final portion of delivery. As a result, Dell’s
outbound transportation costs are higher, but the relative cost is
low (typically 2% to 3%), and thus the impact on the overall cost
is low.
What Dell has done is build a collaborative supply chain and an
innovative ordering and production system. The result is what Dell
likes to refer to as its value chain - a chain that brings value
from supplier to the customer and provides Dell with a competitive
advantage.
Questions: