Dell's Value Chain Case study

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 tum, 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 isready. 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, componentmodularity, and tightscheduling
allowlowinventoryand supportmass customization.Del.Imaximizes
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 configurationsthat are selling.Del.I is better able tomatch supply and demand.
One of the few negatives for Del.l'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 Del.I has done is build a collaborative supply chain and an
innovative ordering and production system. The result is what Dell
likes to refer toas its value chain-a chain that brings value from supplier to the customer and providesDell with a competitive advantage.
DiscussionQuestions

1. How has Dell used its direct sales and build-to-order model to
   developanexceptionalsupply chain?
2. How has Dell exploited the direct sales model to improve operationsperformance?
3. What are the main disadvantages of Dell's direct sales model?
4. How does Dell compete with a retailer who already has a stock?
5. How does Dell'ssupply chain deal with the bullwhip effect?
   Sources: Adapted from S. Chopra and P.Meindl, Supply Chain
   Management, 3rd ed. (Upper Saddle Rjver, NJ:Prentice Hall, 2007);
   R. Kapuscinski, et al., "Inventory Decisionsin Dell's Supply Chain,"
   Interfaces 34, no. 3 (May-June 2004): 191-205; and A. A. Thompson,
   A. J. Strickland, and J. E. Gamble, "Dell, Inc. in 2006: Can Rjvals Beat
   Its Strategy?" Crafting and Executing Strategy, 15th ed. (New York:
   McGraw-Hill, 2007).

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