Boğaziçi UniversityDepartment of Management Information Systems

MIS 517 Advanced Operations Management

DELL'S VALUE CHAIN

CANAN YILMAZPERİHAN YAVUZCAN

Instructor : Aslı Sencer Erdem

December, 2009

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DELL'S History

The history of the personal computer (PC) industry has been dynamic and fraught with much uncertainty. Technological advancements and innovation change the industry drastically from one day to the next. The volatile industry coupled with the “beating-the-odds” history of the company makes Dell Computer Corporation a firm to watch.

While attending the University of Texas as a pre-med student, Michael S. Dell beganrebuilding and selling PCs. In order to earn extra money, Dell sold disk-drive kits and random access memory (RAM) chips at computer conferences in Austin, Texas. In 1983, Dell made enough money to purchase IBM computers from dealers who were having problems meeting their quotas. Dell modified these computers and sold them to local companies. By April 1984, he was grossing $80,000per month and revenues were $6 million for the first year. Dell dropped out of school and sales reached $257 million by 1988. In the early years, Dell sold his computers as “PC’s Limited," butchanged the name to Dell in 1988. Dell expanded sales internationally to Canada, France, Italy,Germany, Finland, and the Netherlands between 1988 and 1991. In 1993, Dell entered the Japanese market. Moving into these international markets has allowed Dell to consistently reach record revenues every quarter. By 1993, sales had reached $2.8 billion and for the last fifteen quarters (through November 2, 1997), Dell has reported record revenues. Revenues for the quarter ended November 2, 1997 were $3.2 billion and increased 58% over the third quarter of 1996. As of 1997, European sales accounted for 23% of total revenue, while Asia Pacific and Japanese sales accountedfor 7% of revenue.

The financial statement for Dell Computer Corporation

Value Chain

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Value Chain is collection of activities that are performed by the firm to design, produce, market, deliver and support a product or service. The configuration of a firm's value chain - the decisions relative to the technology, process, and location and whether to "make or buy" each for each of these activities - is the basis of competitive advantage. The value chain is, in turn, part of a larger value system that incorporates all value-added activities from raw materials to component and final assembly through buyer distribution channels The Dell Model

Dell produces custom-made computers "just in time" for orders received directly from the customer via telephone or the Internet. As Dell receives an order, it shares production requirement information electronically with its suppliers world-wide for immediate delivery to a Dell production facility, where the computer is assembled and shipped directly to the customer within a week. The Dell model relies on demand side pull rather than supply side push - no computer is produced unless there is corresponding demand in the marketplace. Thus the massive queues of inventory usually sitting idle within retail stores, distributors, and factories are virtually eliminated. The productivity advantages of this production model are profound. Dell is able operate with half the number of employees and one-tenth of inventory of its traditional computer competitors. Return on invested capital reached 195 per cent in 1999, compared to 10–20 per cent for traditional manufacturing firms. Companies from around the world have been flocking to Austin, Texas to understand the Dell production model, much as firms had flocked to Tokyo and River Rouge earlier in the century. The opportunity for productivity improvement was enormous; in the USA alone, the cost of goods in inventory of all value systems was nearly $1 trillion in 1997.. As the 1990s closed, the 'Dell model' began to spread from high technology to traditional manufacturing sectors such as automobile production.

The notion of 'linkages' between supply chain participants is not new and was traditionally referred to as 'vertical integration'. Unlike the Dell model, though, vertical integration implies ownership of both upstream suppliers and downstream distributors. Firms such as Ford habitually controlled all elements of the value sequence, vertically integrating the information, decision, financial and operational dimensions of the strategic supply chain. In addition to the previously inventory and disintermediation costs saving, there are other advantages associated with the direct business model. In particular, as Michael Dell states, “you actually get to have a relationship with the customer”. A direct link to the individual customer provides a manufacturer such as Dell with a wealth of marketing and product development information. This information enables the company to build a position of strength relative to both its customers and its suppliers. When that information is combined with the technology of the Internet, it allows a company to develop a revolutionary new value chain infrastructure and business model. This is what Dell has done through its "virtual integration of the value chain" approach. "Virtual integration" means a blurring of the conventional value chain boundaries and roles between suppliers, manufacturers and end users. Michael Dell defines "virtual integration" as "the idea of interweaving distinct businesses so that our partners are treated as if they're inside our company" .This results in gains of efficiency and productivity, as well as significant gains in return to investors. Higher returns on investment are gained by concentrating resources on activities where value can be added for the customer and not in activities that simply need to be done. By this logic, Dell argues that a computer company, for instance, does not have to actually

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make computers. If fabricating semiconductor chips or even placing them on motherboards does not result in significant profit margins, then the computer company should consider outsourcing such activities. In Dell's case, this meant focusing instead on its distinct core competency - delivering solutions and systems to customers.

Discussion Questions

1) How has Dell used its direct sales and build-to-order model to develop an exceptional supply chain?

Dell relies on a unique supply chain strategy that gathers large volumes of customer information through its direct-sales model and shares it with internal procurement and sales departments, as well as external suppliers. Dell immediately relays its assesment of customer information to its suppliers allowing them to adjust their inventory accordingly and rapidly. Through developing a direct relationship with all of their individiual clients, Dell was able to build a highly efficient just-in-time process, eliminating most of its inventory

Dell has developed customized intranet sites called Premier Pages for well over 200 of its largest global customers. These exist securely within the customers' firewalls, and they give them direct access to purchasing and technical information about the specific configurations they buy from Dell. One of its customers, for example, allows its 50,000 employees to view and select products on-line. They use the Premier Page as an interactive catalog of all the configurations the company authorizes; employees can then price and order the PC they want.

2) How has Dell exploited the direct sales model to improve operations performance?

Dell is physically virtual, transacting all of its business via telephone and the Internet. Dell is also a virtual owner and manufacturer, sourcing its parts and services from other companies. This results in eliminating the reseller, reducing inventory, operational and human resources costs and being responsive to adapt unpredictable market shifts. Allowing customers to purchase custom built products and custom-tailored service is the most effective way to meet customer needs.

The whole idea is to meet customers' needs faster and more efficiently than any other model. The direct sales model lets you be efficient and responsive to change at the same time.

3) What are the main disadvantages of Dell’s direct selling model?

Product in transit is a form of inventory and has a carrying cost. Because Dell has to deliver each product separetely causes high shipping costs.

Larger lead times is another disadvantage. Because the customer is not buying the product from a retailer, there is a longer time for the product to be assembled and shipped to the customer.

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Also because the contact with the PC’s are only after purchasement and delivery, people might still prefer to purchase a product after trying it at a retailer store.

4) How does Dell compete with a retailer who already has a stock?

Differentiation is an important advantage. Kits of components are made up for each customer. Parts are then delivered as needed and the final product is assembled by highly trained generalists who put together the entire computer.

Dell Personel Computer business is custom ordered, the throughput time for each machine is less than 8 hours. Since Dell follows Just-in-time and Build-to-Order policies, the inventory remains in the suppliers’ books untill Dell puts the order. Dell outsource all its component manufacturing, including sub-assemblies like motherboards and nearly the entire production chain for notebok PCs. However it does not outsource the final configuration and keeps control over the production and supply chain.

Because holding costs and procurement costs are lower, total cost is lowered although higher ordering costs.

This organizational structure ensures high accountability for the satisfaction of each customer. PC makers dealing through retail chain do not have this advantage and are not able to respond as quickly.

5) How does Dell’s supply chain deal with the Bullwhip effect?

The bullwhip effect stems from a number of sources. First, traditional inventory management techniques practiced at each level of the supply chain lead to the bullwhip effect. This is due to the need of each level in the supply chain to forecast demand.An important characteristic of all forecasts is that the more data a company receives the more it modifies the forecast and therefore the inventory policy, leading to an increase in variability.

Second, volume discounts, transportation discounts and promotional activities tend to destroy the structure of customer demand, forcing retailers to order less frequently than customer demand, and therefore increase variability in the supply chain. Finally, the longer the lead-time in the supply chain the larger the increase in variability. As variability in the supply chain increases, inventory levels must increase, or alternatively, service levels decrease.

In addition, the increase in variability makes it very difficult for warehouses and manufacturing plants to manage resources effectively. That is, it is not clear whether resources should be managed based on peak demand or average demand. Either way, cost is going to increase.

Dell can eliminate the bullwhip effect, thus reducing costs and increasing profits but also increasing service levels and flexibility. If customer demand information is shared among supply chain partners, each stage of the supply chain can the use actual customer demand to create more accurate forecasts, rather than relying on orders received from the previous stage, which can vary more than customer demand.

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Conclusion

Dell's mission is to be the most successful computer company in the world at delivering the best customer experience in markets it serves.

Dell’s most dominant strategy is Product Differentiation/ High Customization. Dealing directly with customers allows Dell to customize their orders according to the customers' needs.

References

www.dell.com http://slevi1.mit.edu/ Heizer, J, Render, B., “Operations Management”, 9th edition, Prentice Hall, 2008 The Power of virtual Integration: An Interview with DELL Computer’s Michael

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Dell By: Magretta, Joan, Harvard Business Review, 00178012, Mar/Apr98, Vol.76, Issue2

Advancing to the Virtual Value Chain: Learning From The DELL Model, Thomas C.Lawton and Kevin P.Michaels, Royal Hollaway School of Management, University of London

Strategic Management in the Computer Industry: DELL Computer Corporation, Proceedings of the International Academy for Case Stusies, Volume 5, Number 1

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