The logistics concepts applied by Dell.

1-Direct Model

The logistics concepts practiced by Dell are the so-called Dell direct model and build-to-order model.

Suppliers

Final Customer

This concept is most successfully applied and used by Dell, though other companies have tried to copy it but have failed due to its complexity. In the direct model, the strategic focus is eliminating any intermediate processes that cost money and time i.e. there are no retail stores. This model also allows Dell to get to know their customers. By selling directly to the home users and large corporation Dell knows who their customers are, where they are located, what their preferences are etc. This brings Dell closer to their customer thus making it easier for them to offer better products and services. One can also say that in this information technology age, thats exactly what a company needs to succeed. In the direct model, as described and illustrated above, the distributer and retailer are eliminated from the supply chain management. Instead, customers order directly from Dell using either a phone or Dells website www.dell.com. Customers can order pre-configured computers or they can order a custom configured computer which of course requires some knowledge of hardware and software. In case you lack that knowledge, you can contact a customer representative and they can help you out. There are three different customer segments served by Dell: large organizations (e.g. multinational entities or government organization), SMEs, and personal users. Information Technology also plays a big role in the success of Dells logistical concepts. According to Michael Dell Dell is not going to be just their PC vendor anymore, but their IT department for PCs. Dell will not only take the role of a manufacturer of computers and other hardware devices; Dell also provides the IT support and services their customers require.

2-Negative Cash Conversion Cycle It possible to have a negative cash conversion cycle, but it hard its usually applying to retailers (E.g.; receive payments before you have to pay the suppliers). What Dell does is that they sell products to the customers and get the payments and this gives them some time to hold the cash before they can pay their suppliers. Only a few companies can manage to be in this situation, especially in the IT industry, but Dell managed to do it for years. Therefore Dells has one the most favorable conversion cash cycle in the industry.

3-Build to Order

The build-to-order model supply chain strategy is where a customer or a large entity can place an order based on their own preferences and wishes i.e. customers design the computers instead of buying pre-configured PCs. As described above, this all happens directly at Dell. Customers place an order either by using Dells website or by contacting Dell directly by phone. Customers are able to put together custom configured computers and are able to choose what kind of software their PC has to come with e.g. operating system. Also, customers are able to order other hardware such as monitors, printers, home or business servers etc. Once the order has been placed, it is automatically transferred onto a production scheduling system. Usually this is at a location close to the customer. Here, all the parts that have to be assembled into a final product are put together in a casing and are marked with bar codes to track the product throughout the production process. These parts travel through the production facility and are assembled, software is installed, and are tested to make sure it all works. Once the final product is ready, it is boxed and shipped to the customers address.

Customer places order

Kitting

Build

Software installation and testing

Boxing

Order Accumulation

4-IT = the pillar of the supply chains

Even though, the fast, flexible, and lean supply chains are the heart of the Dell business there is another necessity in order to make the supply chains work. This is Information Technology. Dells supply chain capabilities are a key competitive differentiator that enables them to operate their direct sales model quickly and cost effectively. Basically, the supply chain leans heavily on its information systems for support. If these systems are not operational, Dell is not able to build or deliver its products. No errors are allowed within these IT systems and information flows in order to keep the supply chain working. Curt Johnson, director of Worldwide Procurement IT at Dell says that with millions of bills of materials a year, and nearly 1.8 million purchase order lines per year combined with high levels of reliability and speed: The availability of Dells supply chain systems is paramount to keeping the factories running. And because we are building more than 100,000 systems each day, any downtime costs us thousands of dollars per minute.

What choices has Dell made in trading off inventory versus timely delivery (CODP)? At a certain point in time, Dell was not focused anymore on having the best supply chain, but on product segmentation and differentiation. The supply chain was not updated accordingly and trading off inventory was at this point more important than a timely delivery. You could say that the CODP focus was lying less and less on the customer and was shifting more and more towards cutting cost. In the days that Dell was forefront of the computer industry. They didnt have to make a lot of choices, they could predict up to 75% of the customer orders and delivery was always on time due to good contracts. In the new setting, in the newly shaped supply chain focus will lie more on a timely delivery and the CODP will focus more on the customer again. There will be more possibilities for customized design and the product will be easier accessible, for example through retail channels. Describe how Dell has gained sustainable competitive advantage over the years. In 1984, Michael Dell founded the company Dell, which he then named PCs Limited. He aimed to sell IBM PC-compatible computers, built from stock components. Michael Dell believed that by selling personal computers directly to the users he could better understand their needs, which allowed him to provide the most effective computing solutions. The company produced the first computer of its own design in 1985. They advertised the systems in computer magazines for sale directly to customers. By a selection of options from which the customer could choose, all systems were custom-assembled. This meant for the customers that they didnt have to assemble their computers themselves anymore and the price was even lower than computers bought at retail prices. In 1988, the company changed its name to Dell Computer Corporation. Just one year after that they set up their first on-site-service programs. From the belief of selling personal computers directly to the users, to understand their needs, the Dell Direct concept was born. From this concept three key integrations were formed: 1. A symbiotic relationship between Dell and its suppliers 2. Customers are directly linked to the manufacturer 3. End users are linked to proper customer service assistance.

With the implementation of these integrations, Dell was able to reduce the number of suppliers from 204 to 47 and the delivery time for a PC went from 32 days to just 7. The finished product was more reliable, and the delivery time was reduced significantly.

Due to Dells Direct Model the middlemen between the customer and the manufacturer are eliminated and the upstream suppliers are key in keeping production and distribution smoothly, as can be seen in the figure below. This also results in a significant cost reduction for the customers.

Regular Supply Chain Model

Dells Direct Model

The regular Supply Chain vs. the Dell Direct Model

Supply Chain Excellence

Dells Supply Chain Framework.

Operating Model y Direct sales to customers (by phone or world wide web) y Build-to-order manufacturing y Box-level service

Customer Response

Supply Chain Performance Objectives 1. Lowest fulfilment costs 2. Lowest inventories 3. Lowest Procurement costs

Corporate Strategy y Highest Value-to-price provider of commodity computers and accessories to price conscious customers

Efficiency
Tailored Practices y Consigned inventory supplier hubs y Demand Shaping y Inbound Transportation Collaboration

Asset Utilization

Dells Tailored Practices

Practices

Inbound Transportation

Consigned inventory supplier hubs

Demand Shaping

Operating Principles

Economies of Scale

Sphere of Influence

Demand-Supply Matching

Supply Contracts

The Practices and Principles support a competitive Supply Chain strategy, focused on low costs, low inventories and minimum cash-to-cash cycles. As we can see from the figures, Dells Supply Chain related competitive strategy supports, enhances, and is an integrated part of Dells competitive business strategy. This is exactly what Excellence in a supply chain means; the alignment of the supply chain to the corporate competitive strategy.

Best practices

A best practice is a method, activity, process or technique that is widely believed to be more effective than any other when applied to a particular circumstance. Best practices are also defined as; y y Most efficient way to accomplish a task Most effective way to accomplish a task

This is based on repeatable procedures that have been proven to be sufficient over time for a large number of businesses. In 2007 Dell launched Dell Idea Storm, after a year in which a lot of customers were complaining about several aspects of the Dell company. The project is based on co-creation. Co-creation is the practice of developing products and services by intensive collaboration between developers and users. Dell Idea Storm is a community in which people can post their ideas about Dell-products and services. It focuses on all customers, existing and potential, and not specifically on lead users. The community was set up by the marketing department, which means that besides getting new and valuable ideas the second goal of the project is to improve Dells image. Dell wants to show they listen to their customers. The program led to positive results. By now, there are over nine thousand members and more than 12.000 ideas. About 300 new ideas are posted every month. From all ideas, about three percent is usable and implemented. For example; the idea for the possibility to choose the Linux system was one idea mentioned by customers through Dell Idea Storm. Benchmarking Benchmarking is the process of comparing a businesss performances and processes to another business that is considered by many as an industry standard in best practices. Benchmarking gives an idea of performances at this moment and where the business stands in relation to widely accepted standards. The result usual is a plan for changes and/or improvement. Dell Idea Storm was also a result of benchmarking. Michael Dell reentered the management team when he realized the company was not doing well. He had seen the efforts of Starbucks and Unilever to involve their customers in the processes of the companies had paid off.

For a long period Dell has been a role model for other companies regarding its Supply Chain Management system. However, over the last couple of years there have been some pitfalls for Dell. It has proven to be difficult to build success on success. Analyse this and formulate motivated recommendations for further future Supply Chain successes of Dell and its thrive for Synchronising the flow of goods, funds and information.

The very efficient supply chain was the foundation of the success of Dell. Dell found a way to manage their supply chain in such a way that they could keep costs low. This was done by directing their deliveries directly at customers, related technologies and services at the best value. The five key strategies in Dells successful Direct Model are: rapid time to volume build to order products elimination of reseller mark-ups superior customer service and support low inventory and capital investment

Each system was assembled according to the preferences of the customers. This option helped customers to get computers at a price lower than other brands.

By eliminating the inventory holding- and reseller stage in the supply chain, Dell could reduce costs and delay time. Dell maintained very little inventory and concentrated on pacing its products through its supply chain. This also meant that there were no old products sold at a discount. In this way, their supply chain did not lose value, because a supply chain with old products has little value. In order to manage its operations with low inventory levels, Dell collaborated closely with its suppliers. Dell based its decisions to work with a supplier on four criteria (quality, cost, delivery and technology).

Dells supply chain works as follows: 1. Customer places an order either by phone or through the internet via its website. 2. Dell processes the order within 2-3 days by evaluating financial feasibility (credit checking) and technical feasibility (technical configuration). 3. Dell processes the order to one of its manufacturing locations. 4. These plants can put together, test and package the product in about 8 hours. 5. Dell typically plans to ship all orders no later than 5 days after receipt. Orders were received by business units, which downloaded the orders every 15 minutes. Customers could choose from a variety of products ranging from desktops, notebooks, servers, printers, etc. The website facilitated for different segment of customer like individuals, home offices, SMEs, large businesses and public sector customers like government departments, educational institutions and healthcare institutions. Dell tracked the purchasing patterns of corporate customers and their budget cycles with a database, in order to forecast demand. For individual customers, Dell maintained a similar database, which could help them facilitate for future requirements for PCs. With these databases, Dell was able to forecast demand with 75%. For a long time, this supply chain with direct sales was the main competitive advantage for Dell. This approach however, turned out to lead to higher product costs in many cases. The basic models for a computer had to be built in such a way that all the different configuration options (or add-ons) could be manufactured on the basic model to make it a high-end model. When customers configured a high-end model, Dell earned good money. When the customer just stayed with the basic model, Dell lost margin because the basic model was much more expensive compared to the competition. This was due to the requirement that the basic model had to be compatible for all the configuration options. It furthermore caused overall supply chain complexity. Also, customers were complaining about long waiting times, and the recall of Sony battery cells in their laptops caused an undesirable media hype. The increasing discontent of the customers led to a slowdown in sales, which consequently caused Dell to lose its market leadership to Hewlett Packard. Hewlett Packard was able to beat Dell by offering components at a cheaper price and improving its supply chain management. Dell faced problems in growing complexities in their product line and pricing system. At the same time, demand from corporate customers (which accounted for a large share of Dells sales) fell.

It is the case that competitors have improved their supply chains and implemented a kind of similar strategy as Dell. Dell therefore cannot rely on its old successful supply chain system and direct sales only. There is a need to develop something new. It has to keep up with its competitors and regain its lost competitive advantage. Dells Direct Model was based on cost controlling, by offering high-end components cheaper than the competition. Now, this is not possible anymore, because many competitors can offer those components cheaper. This is also due to the fact that many competitors moved their production lines to developing countries. In order to set itself apart from competition, Dell should shift to an innovation-based model, which provides personalized solutions for customers. Dell should therefore improve their Research & Development departments; in order to spend more time to this personalized innovation approach. If they wish to stick to their cost controlling system, they should make improvements in their production cycle. Up till now, Dell had a basic model which could be expanded and build into a high-end unit, with different components a customer could choose from. This basic model had to be compatible for all those different components which the customer could choose from. This was very costly. Dell could therefore create two basic models: One for very basic, home use, with limited capability of compatibility with components, and one for the high-end users. If Dell would choose to separate into these two groups, it could reduce costs for the basic model for home users, because it does not need to be compatible for components which a home-user would never need. However, complexity in the supply chain still remains, and needs to be managed, which can also cost more. The best solution for Dell to synchronize the flow of goods, funds and information is to integrate an innovation-based model into their supply chain, which targets at customers personalized solutions. Since personalization has become more and more important to customers, Dell can create competitive advantage. Personalized solutions could be a PC, but could also be a whole system for business users. Improvements in customer care need to be made as well, since personal attention for your customer is a key element in maintaining customers. Furthermore, personal approach towards customers can be achieved through setting up retail channels. Exclusive Dell stores can attract customers with the need for personal attention, rather than impersonal ordering online. Innovation should come from new technologies, be it in terms of services offered for Dell products, or be it in new applications or computer upgrades.