Dell Computer Corporation

SYNOPSIS
In this report an examination will be made of the production and logistics system of Dell Computer Corporation. Emphasis will be placed on the following:
? The important aspects of Dell’s product/ service
? How effective is the firms resource planning procedures?
? Dells internal and external logistics process
? The key difficulties – potential points of failure in the Dell’s logistics process
? How technologies are being used or can be used to make the logistics function more efficient/effective?
What is Dell Computers all about?
Michael Dell founded Dell Computer Corporation in 1984 having only $1000 start-up capital. To date, his business has grown to become the second largest computer systems producer in the world, with average daily sales of more than $5 million. The ‘hub’ of Dells production system is based in the U.S (Round rock, Texas), while other factories are located in Nashville, Tennessee, Limerick, (Ireland), Penang, Malaysia, Xiamen, China and Eldorado do Sul, Brazil. Dell has offices in thirty-four countries around the world and sells its products and services in more than one hundred and seventy countries. The table below provides a break down of Dells global market growth and position. Monetary values are quoted in US$ in millions.

Continent Market Position Net Revenue as at January 28/2000 Annual Growth Rate
Dell Americas
Dell Europe/Middle East/Africa
Dell Asia Pacific and Japan
1
2
7 17879
5590
1796 48%
24%
52%
According to Dells forecast it is estimated that total revenue will amount to US$33 billion this year, where US$20 billion will be as a result of online transactions. (1)
In the Appendix of this report, a consolidated statement of income on Dells financial position for the year ending 28/1/00 is presented.

The important aspects of Dells Product and Service
Dells core competency lies in customising its product – computer hardware and software to the specific needs of the consumer. The organisation has been able to gain a cost advantage by creating a standardised product as well as achieving the market advantage of variety and uniqueness. The modular design of Dells products has made that possible. Dells use of modular design involves using a standardised building block/chassis to which; value is added by building each product to the customer’s specifications, the outcome being a unique finished product.

Modular design also gives Dell the increased flexibility in its procurement function. The diagram below highlights this flexibility:
Dell Computers Corp
Suppliers (figure 1.1) Suppliers
Figure 1.1 provides a simplistic example of Dells supply chain. The numbered squares each represent a component supplier. Hypothetically speaking lets us assume that supplier number 5 provides Dell with circuit boards. Management has discovered that it would be more efficient ordering that component from a regional supplier, therefore decides to cut supplier 5 out of the supply chain and switches to supplier number 6. The modular design of the product makes that possible as well as the fact that the bulk of the components are not being ordered from a single supplier. Dells product range includes the following:
Based on the information above it can be said that, Dell is one of the most ideal models of a market-orientated organisation. By having a direct relationship with its customers the organisation has been able to gain an understanding of their individual needs and therefore, strategically segmenting the market as follows:
? Home and Home office
? Small business Center (businesses under 400 employees)
? Medium and large business (businesses with over 400 employees)
? Internet Service Providers (Internet service providers, application service providers and web hosting companies)
? Health Care business
? Government agencies
? Education facilities
Dell has characterised its relationship with the market segments above under one broad heading that is The Dell Direct Model.

The Dell Direct Model
This model involves several factors namely:
? Build to order manufacturing
? Low cost high speed distribution and procurement system
? Direct relationship with customers
These three factors are essentially the backbone of Dells operations and the means through which the organisation is able to differentiate itself from competitors, therefore sustaining a significant competitive advantage. Dell is the entire distribution channel from the procurement to the delivery of the finished product/service to the consumer. By eliminating the middleman in the supply chain Dell is able to exert greater control over cost and quality in the product and the efficiency of the lead-time. The organisation realises that each of its market segments has different characteristics – different support costs, margins, levels of investment and capital growth.
Dells Direct model has brought about the following advantages:
? Tailored support needs and services for each market segment, there by avoiding the cost associated with the traditional distribution channel. There is no wholesaler or retailer support cost to bear, only customer support costs.

? As a result of not using a traditional distribution channel of manufacturer –wholesaler –retailer, Dell does not have to contend for shelf space for its products.

? Building to order means that the organisation operates on just eight days of inventory, if at all any. This is significantly advantageous in a dynamic technology industry. By having a limited stock of goods Dell reduces the risk and cost of associated with products becoming obsolete. Thereby, providing customers with the most up to date technology.

The Dell Direct model does not only involve a direct relationship with customers but also includes suppliers. Through the use of the World Wide Web, Dell has been able to integrate both customers and suppliers into its manufacturing and logistics function.
Dell manufacturing and Logistics process
Dell is the quintessential model of Just in Time management. Supplies and components are ‘pulled’ through the organisation to arrive where they are needed and when they are needed.
As highlighted earlier Dell operates on just eight days of inventory, alternatively components are pulled through the production system through use of the ‘Kanban’ system. Suppliers or workstations only deliver components when they receive a card (for example an e-mail) or an empty tote informing them those parts are/will is needed for production.

Dell has been able to use an ‘integrated Kanban’ process to significant advantage, this process is divided into two areas, which are the transport Kanban and the production Kanban. The distinction between the two is the transport Kanban works on a daily schedule where components are produce by suppliers depending on the specific order for that day. As a result of building to order it is difficult for Dell to determine or forecast the particular components which would be needed, which justifies the use of the Kanban process.

On the other hand the production Kanban outlines when work has to be completed by a particular cell or workstation. Therefore based on that time-scale suppliers are able to determine at which point in the assembly line their particular component would be needed.
The integrated Kanban process is based on fixed production schedules and can therefore only be successful with an efficient and effective logistics process. This process is also dependent on mutual trust between Dell and suppliers. To foster this trust and harmonise its relationship with suppliers Dell is making use of E-Commerce technology. This will be discussed in a later section under the heading (Dells use of Technology to make its logistics function more efficient and effective). At this point an analysis of Dell’s external logistics.

The diagrams on the following page is a representation of a blueprint of Dells external logistics process:
The pictures labelled A, B, C, D, each represent a Dell customer. The diagram at the center of the page represents Dell’s Austin, Texas Factory, where numbers diagrams 1, 2, 3, 4, 5, 6 are suppliers.

When Dell receives an order from a customer, it is broken down into a list of the parts needed to build the computer. After this list has been compiled this information is fed to pertinent suppliers in the form of an electronic message. Those suppliers in turn would have an idea of what components would be needed from them, to facilitate timely delivery they expected to be located at least fifteen minutes away from Dell’s factory.

Communication with in the supply chain would be done via an extranet, where suppliers are also made aware of the production time-scale. Based on these time-scales which have been set suppliers can therefore determine how to best organise their production process to meet the specifications for components. These components are fed into Dell from each specialist supplier; some arriving as and when needed in the production process.

Dell found that the lead-time could be further reduced by having some of the components or peripherals sent directly to the customer rather than to the factory and then to the customer.

For example, when a computer is ready to be shipped, an e-mail is sent to a supplier who pulls from stock the specified video display unit/s and sends them/it to arrive with the PC.

During this entire process a Dell customer is able to go online and receive some feedback on the status of their order as highlighted in the Appendix of this report. Below, an insight is given into the internal processes involve in getting the finished product to the customer.

At this point a Dell sales representative confirms the order, that is
the configuration details and form of payment. Payment
can be made either by credit card or check. Credit card payments
take less than 24 hours to approve and therefore are processed much
quicker than other methods of payment. Any Correspondence
regarding approved orders would be done either via e-mail/telephone.

After the order has been processed, the configurations are sent
to manufacturing where, a the list of necessary components is
compiled. Each PC would then be linked by an electronic bar code
to its individual order number. This bar code facilitates a quick
response to any enquiries made by customers regarding the status
of any order. At this stage components would then be ordered from
specialist suppliers. The lead-time would depend on the availability
of parts and the configurations of individual orders. The customer
would be informed of this in the order processing stage.

When the parts are received they are separated according to the
individual orders. Each order is place in a tote/ bin with the
with a spec sheet. These totes are then carried
along a conveyor belt to the building process.

When the totes arrive, the assembly process commences. Each
system starts with a chassis to which the parts specified by the
customer are then added. Parts are also fed into the building process
from suppliers as and when needed. Computers are assembled within
a cell, each specialist worker within that cell is accountable
for the products quality.
After the hardware has been fully installed at this point the components
are tested on the basis of their individual functionality as well as
their integration into the whole system. This stage also involves
loading the software or operating system requested by the
customer. The aim of the testing phase is to ensure that the end user
of the product receives the highest quality and satisfaction.

When the products have successfully gone through the testing process
they are then boxed including any instruction manuals, these boxes are
then placed on conveyor belts destined to be loaded onto delivery
trucks.
Products, which are to be shipped out of the country, are prepared
for delivery. The necessary paper work is filled out and the products
sorted according to their individual destinations, delivery preparation
normally takes one day after production.

The computers are then shipped to customers, they are expected to
reach the customer within 2-5 days of the shipped date.

Dell has been able to improve the efficiency of the above processes
by using the Internet.

Dells use of Technology to make the logistics function more efficient and effective.

“The internet is shrinking time and distance it is reducing cost and adding velocity to business. What we see with the Internet is a mode of business that we refer to as Virtual Integration, where suppliers and customers are linked together using information”. (Michael Dell Speech Archive, The PC industry A Robust outlook). (1) The Dell philosophy is that to truly realise the economies and speed that the Internet provides the organisation needs a fundamentally different perspective on the nature of business relationships and on value created for customers. Therefore the aim of Virtual integration is to bridge the traditional gap between the firm and its stakeholders.

The process of Virtual integration is a hybrid of information technology and Vertical integration. Virtual integration is essentially an information sharing process, which could be in relation to design databases or methodologies. The Internet has made it possible for Dell to work in real-time with suppliers and customers engaged in “collaborative research or product development”. For example, Dell was able to introduce a new line of Notebook computers using the Internet to keep a common set of notes by engineers in the United States and Asia.
These engineers were able to share their expertise, and therefore able to work together to develop this new product.

In a traditional vertically integrated company months /years would be spent designing parts and building them.
Dells success in utilising the Internet in its business model is regarded as a benchmark for other businesses. At least 50% of the total number of goods produced by Dell Computers are made as a result of being online. In monetary terms an average of over US$40 million within a seven-day period. (1)
Dells Premier pages
To further personalise the relationship between the organisation and customers, using the Internet, Dell has created personalised WebPages called Premier Pages, which are tailored to customers needs. These pages are specifically designed for large corporate organisations containing information on accounts, procurement and purchase order processes unique to that customer.

The WebPages allows Dell to deliver service and support information directly to the customer, relating to their specific products.

Dell designed WebPages for suppliers, this allows the firm to provide them with information on customer feedback the quality of the product, forecast of current and future demand and special technical requirements and end user market pricing. Likewise Dell is able to receive feedback from suppliers concerning their capacity to produce certain quantities of components, information on inventories in their supply lines as well as their current cost structure. Therefore assisting management in making decisions on effective resource planning strategies.

Conclusions
How effective is Dells resource planning procedures?
Dells main resources are time and information, according to Michael Dell “The things we have learnt to value in the business and economic models of the 20th Century:
? the value of inventory is being replaced by the value of information
? physical assets are being traded for intellectual assets
? closed business systems are giving way to collaborative relationships”.

Dells corporate culture is based on the points highlighted above, transmission of information internal and external to the organisation has gone from one extreme of being timely to being real-time.

As highlighted earlier in this report, Dells Virtual Integration process has revolutionised the way manufacturer – supplier – and customer interact. Research and Development activities, which would normally take months or years, can now be done within a matter of days. This is best achieved by incorporating the efforts of engineers in different parts of the world.

“Time is money”; this clich? should be common knowledge to every businessperson. Dell awareness of the importance of reducing lead-time in its logistics process is one method of sustaining a competitive advantage. Through the use of Just In Time, the firm continually eliminates time-consuming activities, which do not add value to the product.

For Example, Dell at one point ordered components in bulk from one supplier as a means of receiving discounts. This process was regarded, as non-value added to the customer. Hence, Dell switched to three regional subcontractors, rather than using one main manufacturer.
The trade-off of the cost and benefits in one area resulted in lower cost and significant improvements in service to customers, by reducing the lead-time. Another benefit of J.I.T
to Dell is that the firm does not have to bear the risk or cost of components becoming obsolete. Moreover, the same benefit is gained by building to order rather than building and then merchandising.

Another effective Inventory Management Method used by Dell is in telephone sales suggested configurations might be altered to guide customers to PCs with widely available parts.

Dell compared to Competitors –
Competitors like IBM, Hewlett-Packard and Compaq have used Dell as a benchmark in analysing their own efficiencies and inefficiencies. They have also taken steps a developed their individual build – to – order processes and integrated supply chains in their efforts at reducing the lead-time of their products.
The major difference between Dell and its competitors is that while their inventory remain on shelves for months they eventually become obsolete as the pace of technology rapidly changes.
Dell does not start ordering components and building computers until an order is booked. (3)
Despite the numerous advantages of Dells logistics system highlighted above there are some shortcomings as highlighted below.

Points of failure in Dells logistics process
As a result of having such a timely and well planned logistic system, any interruption in the supply of components can have an impact on Dells short-term performance. Dell is primarily using some suppliers because of the unavailability of alternative sources. In the event these suppliers experience some difficulty, this would result in a domino effect on Dell.

The firm’s production process requires a very high level of quality, in relation to components, which are received sometimes from third party suppliers. There is a high level of risk involved in receiving components from in purchasing these parts, where the possibility exists of them being defective. This in turn would have a significant effect on the organisations corporate image.

References
(1) Dell.com
Michael Dell Speech Archives
The PC Industry a Robust outlook 10/09/98
Leadership in the Internet Economy 7/4/00
Collaborating in a Connected Economy 24/6/98
Building a competitive advantage in an Internet Economy11/1/99
Maximum speed Lessons learned from managing Hypergrowth 9/10/98
http://www.euro.dell.com/countries/uk/enu/gen/corporate/speech_1998-10-09-aus.000.htm
(2) Case No. 598-116 ‘Dell Online’ Professor V. Kasturi and M. Bell Harvard Business
School, April 1998.

(3) Case study ‘Whirlwind on the Web Information Processing computers’, G. McWilliams
(WWW.moorhead.msus.edu/peschke/Articles/dell.htm)
(4) Operations Management (multimedia version) Russell., S. R. and Taylor., W. B Third
edition Prentice Hall, 2000.

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