Module 6 Summative assessment 6.3
MODULE 6
SUMMATIVE ASSESSMENT 6.3
100 MARKS
THIS ASSESSMENT COVERS:
UNIT 13945 – DESCRIBE AND APPLY THE MANAGEMENT OF STOCK AND FIXED ASSETS IN A BUSINESS
UNIT
Please read the following case study and answer the 4 questions that follow.
http://www.mhhe.com/business/management/thompson/11e/case/dell5.html
Dell Computer Corporation
1.
Dell Computer's Strategy
Dell Computer's strategy was built around a number of core elements: build-to-order
manufacturing, mass customization, partnerships with suppliers, just-in-time components
inventories, direct sales, market segmentation, customer service, and extensive data and
information sharing with both supply partners and customers. Through this strategy, the
company hoped to achieve what Michael Dell called "virtual integration"—a stitching together
of Dell's business with its supply partners and customers in real time such that all three
appeared to be part of the same organizational team.5
1.1. Build-to-Order Manufacturing and Mass Customization
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Dell built its computers, workstations, and
servers to order; none were produced for
inventory. Dell customers could order
custom-built servers and workstations based
on the needs of their applications. Desktop
and laptop customers ordered whatever
configuration of microprocessor speed,
random access memory (RAM), hard-disk
capacity, CD-ROM drive, fax/modem,
monitor size, speakers, and other
accessories they preferred. The orders were
directed to the nearest factory. Until recently
Dell had operated its assembly lines in
traditional fashion, with workers each
performing a single operation. An order form
accompanied each metal chassis across the
production floor; drives, chips, and ancillary
items were installed to match customer
specifications. As a partly assembled PC
arrived at a new workstation, the operator,
standing beside a tall steel rack with drawers
full of components, was instructed what to
do by little red and green lights flashing
beside the drawers. When the operator was
finished, the components were automatically
replenished from the other side of the
drawers and the PC chassis glided down the line to the next workstation. However, Dell
reorganized its plants in 1997, shifting to "cell manufacturing" techniques whereby a team of
workers operating at a group workstation (or cell) assembled an entire PC according to
customer specifications. The result had been to reduce assembly times by 75 percent and to
double productivity per square foot of assembly space. Assembled computers were tested,
then loaded with the desired software, shipped, and typically delivered within five to six
business days of the initial order.
This sell-direct strategy meant, of course, that Dell had no in-house stock of finished goods
inventories and that, unlike competitors using the traditional value chain model (Exhibit 6), it
did not have to wait for resellers to clear out their own inventories before it could push new
models into the marketplace. (Resellers typically operated with 60-70 days' inventory.) Equally
important was the fact that customers who bought from Dell got the satisfaction of having their
computers customized to their particular liking and pocketbook.
Dell had three PC assembly plants—in Austin, Texas; Limerick, Ireland; and Penang,
Malaysia. The company was constructing another plant in Ireland to serve the European
market as well as a new plant in China (the company expected the market for PCs in China to
soon be huge). Both of the new plants were expected to come into use at the end of 1998.
1.2. Partnerships with Suppliers
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Michael Dell believed it made much better
sense for Dell Computer to partner with
reputable suppliers of PC parts and
components rather than to integrate
backward and get into parts and components
manufacturing on its own. He explained why:
If you've got a race with 20 players all vying
to make the fastest graphics chip in the
world, do you want to be the 21st horse, or
do you want to evaluate the field of 20 and
pick the best one?6
Management believed long-term partnerships
with reputable suppliers yielded several
advantages. First, using name-brand
processors, disk drives, modems, speakers,
and multimedia components enhanced the
quality and performance of Dell's PCs.
Because of the varying performance of
different brands of components, the brand of
the components was as important or more
important to some buyers than the brand of
the overall system. Dell's strategy was to
partner with as few outside vendors as
possible and to stay with those vendors as long as they maintained their leadership in
technology, performance, and quality. Second, because Dell committed to purchase a
specified percentage of its requirements from each of its long-term suppliers, Dell was
assured of getting the volume of components it needed on a timely basis even when overall
market demand for a particular component temporarily exceeded the overall market supply.
Third, Dell's formal partnerships with key suppliers made it feasible to have some of their
engineers assigned to Dell's product design teams and for them to be treated as part of Dell.
When new products were launched, suppliers' engineers were stationed in Dell's plant. If early
buyers called with a problem related to design, further assembly and shipments were halted
while the supplier's engineers and Dell personnel corrected the flaw on the spot.7 Fourth,
Dell's long-run commitment to its suppliers laid the basis for just-in-time delivery of suppliers'
products to Dell's assembly plants in Texas, Ireland, and Malaysia. Some of Dell's vendors
had plants or distribution centers within a few miles of Dell's Texas assembly plant and could
deliver daily or even hourly if needed. To help suppliers meet its just-in-time delivery
expectations, Dell openly shared its daily production schedules, sales forecasts, and newmodel introduction plans with vendors.
Michael Dell explained one aspect of the information-sharing relationship with suppliers as
follows:
We tell our suppliers exactly what our daily production requirements are. So it's not, "Well,
every two weeks deliver 5,000 to this warehouse, and we'll put them on the shelf, and then
we'll take them off the shelf." It's, "Tomorrow morning we need 8,562, and deliver them to
door number seven by 7 am."8
Dell also did a three-year plan with each of its key suppliers and worked with suppliers to
minimize the number of different stock-keeping units of parts and components in designing its
products.
1.3. Why Dell Was Committed to Just-in-Time Inventory Practices
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Dell's just-in-time inventory emphasis yielded major cost advantages and shortened the time it
took for Dell to get new generations of its computer models into the marketplace. New
advances were coming so fast in certain computer parts and components (particularly
microprocessors, disk drives, and modems) that any given item in inventory was obsolete in a
matter of months, sometimes quicker. Having a couple of months of component inventories
meant getting caught in the transition from one generation of components to the next.
Moreover, there were rapid-fire reductions in the prices of components—most recently,
component prices had been falling as much as 50 percent annually (an average of 1 percent
a week). Intel, for example, regularly cut the prices on its older chips when it introduced newer
chips, and it introduced new chip generations about every three months. And the prices of
hard-disk drives with greater and greater memory capacity had dropped sharply as disk drive
makers incorporated new technology that allowed them to add more gigabytes of hard-disk
memory very inexpensively.
The economics of minimal component inventories were dramatic. Michael Dell explained:
If I've got 11 days of inventory and my competitor has 80 and Intel comes out with a new 450megahertz chip, that means I'm going to get to market 69 days sooner.
In the computer industry, inventory can be a pretty massive risk because if the cost of
materials is going down 50 percent a year and you have two or three months of inventory
versus eleven days, you've got a big cost disadvantage. And you're vulnerable to product
transitions, when you can get stuck with obsolete inventory.9
Collaboration with suppliers was close enough to allow Dell to operate with only a few days of
inventory for some components and a few hours of inventory for others. Dell supplied data on
inventories and replenishment needs to its suppliers at least once a day—hourly in the case
of components being delivered several times daily from nearby sources. In a couple of
instances, Dell's close partnership with vendors allowed it to operate with no inventories.
Dell's supplier of monitors was Sony. Because the monitors Sony supplied with the Dell name
already imprinted were of dependably high quality (a defect rate of fewer than 1,000 per
million), Dell didn't even open up the monitor boxes to test them.10 Nor did it bother to have
them shipped to Dell's assembly plants to be warehoused for shipment to customers. Instead,
utilizing sophisticated data exchange systems, Dell arranged for its shippers (Airborne
Express and UPS) to pick up computers at its Austin plant, then pick up the accompanying
monitors at the Sony plant in Mexico, match the customer's computer order with the
customer's monitor order, and deliver both to the customer simultaneously. The savings in
time, energy, and cost were significant.
The company had, over the years, refined and improved its inventory-tracking capabilities and
its procedures for operating with small inventories. In 1993, Dell had $2.6 billion in sales and
$342 million in inventory. In fiscal year 1998, it had $12.3 billion in sales and $233 million in
inventory—an inventory turn ratio of seven days. By comparison, Gateway, which also
pursued a build-to-order strategy, had 1997 sales of $6.3 billion and inventories of $249
million—an inventory turn ratio of 14 days. Compaq had inventories of $1.57 billion at yearend 1997, and 1997 sales of $24.6 billion (thus turning its inventories about every 23 days).
Dell's goal was to get its inventory turn down to three days before the year 2000.
1.4. Direct Sales
Selling direct to customers gave Dell firsthand intelligence about customer preferences and
needs, as well as immediate feedback on design problems and quality glitches. With
thousands of phone and fax orders daily, $5 million in daily Internet sales, and daily contacts
between the field sales force and customers of all types, the company kept its finger on the
market pulse, quickly detecting shifts in sales trends and getting prompt feedback on any
problems with its products. If the company got more than a few similar complaints, the
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information was relayed immediately to design engineers. When design flaws or components
defects were found, the factory was notified and the problem corrected within a matter of
days. Management believed Dell's ability to respond quickly gave it a significant advantage
over rivals, particularly over PC makers in Asia, that made large production runs and sold
standardized products through retail channels. Dell saw its direct sales approach as a totally
customer-driven system that allowed quick transitions to new generations of components and
PC models.
Despite Dell's emphasis on direct sales, industry analysts noted that the company sold 10-15
percent of its PCs through a small, select group of resellers.11 Most of these resellers were
systems integrators. It was standard for Dell not to allow returns on orders from resellers or to
provide price protection in the event of subsequent declines in market prices. From time to
time, Dell offered its resellers incentive promotions at up to a 20 percent discount from its
advertised prices on end-of-life models. Dell was said to have no plans to expand its reseller
network, which consisted of about 50-60 dealers.
1.5. Market Segmentation
To make sure that each type of customer was well served, Dell had made a speco finer, more
homogeneous categories (see Exhibit 7).
In 1998, 90 percent of Dell's sales were to business or government institutions and of those
70 percent were to large corporate customers who bought at least $1 million in PCs annually.
Many of these large customers typically ordered thousands of units at a time. Dell had
hundreds of sales representatives calling on large corporate and institutional accounts. Its
customer list included Shell Oil, Exxon, MCI, Ford Motor, Toyota, Eastman Chemical, Boeing,
Goldman Sachs, Oracle, Microsoft, Woolwich (a British bank with $64 billion in assets),
Michelin, Unilever, Deutsche Bank, Sony, Wal-Mart, and First Union (one of the 10 largest
U.S. banks). However, no one customer represented more than 2 percent of total sales.
Because corporate customers tended to buy the most expensive computers, Dell commanded
the highest average selling prices in the industry—over $1,600 versus an industry average
under $1,400.
Dell's sales to individuals and small businesses were made by telephone, fax, and the
Internet. It had a call center in the United States with toll-free lines; customers could talk with
a sales representative about specific models, get information faxed or mailed to them, place
an order, and pay by credit card. Internationally, Dell had set up six call centers in Europe and
Asia that customers could dial toll free.12 The call centers were equipped with technology that
routed calls from a particular country to a particular call center. Thus, for example, a customer
calling from Lisbon, Portugal, was automatically directed to the call center in Montpelier,
France, and connected to a Portuguese-speaking sales representative. Dell began Internet
sales at its Web site (www.dell.com) in 1995, almost overnight achieving sales of $1 million
per day. In 1997 Internet sales reached an average of $3 million daily, hitting $6 million some
days during the Christmas shopping period. In the first quarter of 1997, Dell's Internet sales
averaged nearly $4 million daily; and the company expected that 1998 sales at its Web site
would reach $1.5 billion. The fastest growing segment of Dell's international segment was on
the Internet in Europe, where sales were running at a weekly volume of $5 million in early
1998. Internet sales were ramping up rapidly from Asian buyers. In early 1998, Dell's Internet
sales were about equally divided between sales to individuals and sales to business
customers. Nearly 1.5 million people visited Dell's Web site weekly to view information and
place orders, about 20 times more than called to talk with sales representatives over the
telephone.
In 1997, 31 percent, or $3.8 billion, of Dell's sales came from foreign customers. Europe,
where resellers were strongly entrenched and Dell's direct sales approach was novel, was
Dell's biggest foreign market. Dell's European sales were growing at 50 percent annually. The
market leader in Europe was Compaq, with a 14.8 percent market share, followed by IBM with
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8.3 percent, Dell with 7.8 percent, Hewlett-Packard with 7.6 percent, and Siemens Nixdorf
(Germany) with 5.6 percent. In Britain, which Dell had entered in the late 1980s, Dell had a 12
percent share, trailing only Compaq. Sales of PCs in Europe were expected to reach 22-24
million in 1998 and 28.5 million in 1999. Total European sales in 1997 were 19.7 million units.
1.6. Customer Service
Service became a feature of Dell's strategy in 1986 when the company began providing a
guarantee of free on-site service for a year with most of its PCs after users complained about
having to ship their PCs back to Austin for repairs. Dell contracted with local service providers
to handle customer requests for repairs; on-site service was provided on a next-day basis.
Dell also provided its customers with technical support via a toll-free number, fax, and e-mail.
Dell received close to 40,000 e-mail messages monthly requesting service and support and
had 25 technicians to process the requests. Bundled service policies were a major selling
point for winning corporate accounts. If a customer preferred to work with his or her own
service provider, Dell gave that provider the training and spare parts needed to service the
customer's equipment.
Selling direct allowed Dell to keep close track of the purchases of its large global customers,
country by country and department by department—information that customers found
valuable. Maintaining its close customer relationships allowed Dell to become quite
knowledgeable about its customers' needs and how their PC network functioned. Aside from
using this information to help customers plan their PC needs and configure their PC networks,
Dell used its knowledge to add to the value it delivered to its customers. For example, Dell
recognized that when it delivered a new PC to a corporate customer, the customer's PC
personnel had to place asset tags on it and then load the software from an assortment of CDROMs and diskettes—a process that could take several hours and cost $200-$300.13 Dell's
solution was to load the customer's software onto one of its own very large Dell servers at the
factory and, when a particular version of a customer's PC came off the assembly line, to use
its high-speed server network to load that customer's software onto the PC's hard disk in a
few seconds. If the customer so desired, Dell would place asset tags on the PC at the factory.
Since Dell charged customers only an extra $15 or $20 for the software-loading and assettagging services, the savings to customers were considerable. One large customer reported
savings of $500,000 annually from having Dell load its software and place asset tags on its
PCs at the factory.14 In 1997, about 2 million of the 7 million PCs Dell sold were shipped with
customer-specific software already loaded on the PCs.
Corporate customers paid Dell fees to provide support and service. Dell then contracted with
third-party providers to make the necessary service calls. When a customer with PC problems
called Dell, the call triggered two electronic dispatches—one to ship the needed parts from
Dell's factory to the customer sites and one to notify the contract service providers to prepare
to make the needed repairs as soon as the parts arrived.15 The service providers sent the
bad parts back to Dell. Dell then endeavored to diagnose what went wrong and what could be
done to see that the problem wouldn't happen again. Problems relating to faulty components
or flawed components design were promptly passed along to the relevant supplier, who was
expected to improve quality control procedures or redesign the component. Dell's strategy
was to manage the flow of information gleaned from customer service activities both to
improve product quality and speed execution.
Dell had plans in place to build Application Solutions Centers in both Europe and North
America to assist its customers and independent software providers in migrating their systems
and applications to Intel's new next-generation, 64-bit computing technology. Dell was
partnering with Intel, Microsoft, Computer Associates, and other prominent PC technology
providers to help customers make more effective use of the Internet and the latest computing
technologies. Dell, which used Intel microprocessors exclusively in its computers, had been a
consistent proponent of standardized Intel-based platforms because the company believed
those platforms provided customers with the best total value and performance. Dell
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management considered both Intel and Microsoft as long-term strategic partners in mapping
out its future.
In recent months Dell, following Compaq's lead, had created a capital services group to assist
customers with financing their PC networks.
1.7. Virtual Integration and Information-Sharing
But what was unique about Dell's latest incarnation of its strategy was how the company was
using technology and information-sharing with both supply partners and customers to blur the
traditional arm's-length boundaries in the supplier- manufacturer-customer value chain that
characterized Dell's earlier business model and other direct-sell competitors. Michael Dell
referred to this feature of Dell's strategy as "virtual integration."16 On-line communications
technology made it easy for Dell to communicate inventory levels and replenishment needs to
vendors daily or even hourly.
Boeing offers an example of how the lines were becoming blurred between Dell and its
customers. Boeing, which had 100,000 Dell PCs, was served by a staff of 30 Dell employees
who resided on-site at Boeing facilities and were intimately involved in planning Boeing's PC
needs and the configuration of Boeing's network. While Boeing had its own people working on
what the company's best answers for using PCs were, Dell and Boeing personnel worked
closely together to understand Boeing's needs in depth and to figure out the best ways to
meet those needs.
A number of Dell's corporate accounts were large enough to justify dedicated on-site teams of
Dell employees. Customers usually welcomed such teams, preferring to focus their time and
energy on the core business rather than being distracted by PC purchasing and servicing
issues.
In addition to using its sales and support mechanisms to stay close to customers, Dell had set
up a number of regional forums to stimulate the flow of information back and forth with
customers. The company formed Platinum Councils composed of its largest customers in the
United States, Europe, Japan, and the Asia-Pacific region; regional meetings were held every
six to nine months.17 In the larger regions, there were two meetings—one for chief
information officers and one for technical personnel. As many as 100 customers and 100 Dell
executives and representatives, including Michael Dell himself, attended the three-day
meetings, at which Dell's senior technologists shared their views on the direction of the latest
technological developments, what the flow of technology really meant for customers, and
Dell's plans for introducing new and upgraded products over the next two years. There were
also breakout sessions on such topics as managing the transition to Windows NT, managing
the use of notebooks by people out in the field, and determining whether leasing was better
than buying. Customers were provided opportunities to share information and learn from one
another (many had similar problems) as well as exchange ideas with Dell personnel. Dell
found that the information gleaned from customers at these meetings assisted in forecasting
demand for the company's products.
Dell had developed customized intranet sites (called Premier Pages) for its 3,000 largest
global customers; these sites gave customer personnel immediate on-line access to
purchasing and technical information about the specific configurations of products that their
company had purchased from Dell or that were currently authorized for purchase.18 The
Premier Pages contained all of the elements of Dell's relationship with the customer—who the
Dell sales and support contacts were in every country where the customer had operations,
detailed product descriptions, what software Dell loaded on each of the various types of PCs
the customer purchased, service and warranty records, pricing, and the available technical
support.19 Dell was readying Premier Page software improvements for introduction in the
second half of 1998 with even greater functionality. One new feature made it easy for a
customer to specify what types of machines and options their personnel should be authorized
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to purchase. Other features included allowing customer personnel to access detailed
information about Dell products on-line, view all the different machines and options the
customer had authorized for its personnel, obtain the price of the particular PC they wanted,
place an order, and have the order automatically routed to higher-level managers for
approval. These features eliminated paper invoices, cut ordering time, and reduced the
internal labor needed to staff corporate purchasing functions. Dell was said to have the most
comprehensive Web-based PC commerce capability of any PC vendor. The company's goal
was to generate 50 percent of its sales on the Internet within the next two or three years by
setting up Premier Pages for virtually all of its large customers and adding more features to
further improve functionality. So far, customer use of Premier Pages had boosted the
productivity of salespeople assigned to these accounts by 50 percent.
The company also gave its large customers access to Dell's own on-line internal technical
support tools, allowing them to go to www.dell.com, enter some information about their
system, and gain immediate access to the same database and problem-solving information
that Dell's support personnel used to assist call-in customers.20 This tool was particularly
useful to the internal help-desk groups at large companies.
1.8. Demand Forecasting
Management believed that accurate sales forecasts were key to keeping costs down and
minimizing inventories, given the complexity and diversity of the company's product line.
Because Dell worked diligently to maintain a close relationship with its large corporate and
institutional customers, and because it sold direct to small customers via telephone and the
Internet, it was possible for the company to keep a finger on the pulse of demand—what was
selling and what was not. Moreover, the company's market segmentation strategy paved the
way for in-depth understanding of its customers' evolving requirements and expectations.
Having credible real-time information about what customers were actually buying and having
first hand knowledge of large customers' buying intentions gave Dell strong capability to
forecast demand. Furthermore, Dell passed that knowledge on to suppliers so they could plan
their production accordingly. The company worked hard at managing the flow of information it
got from the marketplace and seeing that it got to both internal groups and vendors in timely
fashion.
Forecasting was viewed as a critical sales skill. Sales-account managers were coached on
how to lead large customers through a discussion of their future needs for PCs, workstations,
servers, and peripheral equipment. Distinctions were made between purchases that were
virtually certain and those that were contingent on some event. Salespeople made note of the
contingent events so they could follow up at the appropriate time. With smaller customers,
there was real-time information about sales, and direct telephone sales personnel often were
able to steer customers toward configurations that were immediately available to help finetune the balance between demand and supply.
1.9. Research and Development
Company management believed that it was Dell's job to sort out all the new technology
coming into the marketplace and help steer customers to options and solutions most relevant
to their needs. The company talked to its customers frequently about "relevant technology,"
listening carefully to customers' needs and problems and endeavoring to identify the most
cost-effective solutions. Dell had about 1,600 engineers working on product development and
spent about $250 million annually to improve users' experience with its products—including
incorporating the latest and best technologies, making its products easy to use, and devising
ways to keep costs down. The company's R&D unit also studied and implemented ways to
control quality and to streamline the assembly process. Much time went into tracking all the
new developments in components and software to ascertain how they would prove useful to
computer users. For instance, it was critical to track vendor progress in making longer-lasting
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batteries because battery life was important to the buyers of portable computers. Dell was the
first company to put lithium ion batteries with a life of 5.5 to 6 hours in all of its laptop models.
1.10. Advertising
Michael Dell was a strong believer in the power of advertising and frequently espoused its
importance in the company's strategy. Thus, Dell was the first computer company to use
comparative ads, throwing barbs at Compaq's higher prices. Although Compaq won a lawsuit
against Dell for making false comparisons, Michael Dell was unapologetic, arguing that "[the
ads were] very effective. We were able to increase customer awareness about value."21 Dell
insisted that the company's ads be communicative and forceful, not soft and fuzzy.
The company regularly had prominent ads in such leading computer publications as PC
Magazine and PC World, as well as in USA Today, The Wall Street Journal, and other
business publications. In the spring of 1998, the company debuted a multi-year worldwide TV
campaign to strengthen its brand image.
1.11. Entry into Servers
Dell entered the market for low-end PC servers (those priced under $25,000) in the second
half of 1996. The company had opened a 23,000-square-foot plant dedicated to server
production, trained 1,300 telemarketers to sell servers, assigned 160 sales reps with systems
know-how to big customer accounts, and recruited a staff of systems experts to help the sales
reps. It had contracted with companies such as Electronic Data Systems, which had in-depth
systems and networking expertise, to help provide service to large customers with extensive
server networks. Dell's server plant used "cell" manufacturing instead of an assembly line to
permit faster product updates and keep costs low; there were 30 cells at the plant, each with a
self-contained work team that performed the entire assembly process from a kit of
components and a customized motherboard.
Dell's entry into servers had several purposes. The use of servers by corporate customers
was growing rapidly. The margins on servers were large. Moreover, purchase price was not
as significant a factor in selecting which brand of server to buy because servers required far
more in the way of service, support, and software. Several of Dell's rivals, most notably
Compaq, were using their big margins on server sales to subsidize price cuts on desktops
and notebooks in an attempt to win corporate PC accounts away from Dell. According to
Michael Dell, "To neutralize that, Dell needs to be in the server market." The company
expected that sales of servers would grow to about 50 percent of corporate revenues by
2001.
Dell's build-to-order and sell-direct strategies gave it a significant pricing advantage over
rivals. Servers from such competitors as Compaq, IBM, and Hewlett-Packard, all of which
relied on networks of resellers, were estimated to cost 15 to 20 percent more than Dell
servers. However, analysts were skeptical about whether Dell could provide the same quality
of service and support to server customers that resellers could. To counter that perception,
Dell had bolstered its field sales and support staff to 600 employees and created an in-house
consulting group to assist customers. For customers that required extensive system support
and integration, Dell partnered with systems experts that were not resellers, such as
Electronic Data Systems and Arthur Andersen.
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Please answer the following 4 questions:
1. How can you differentiate between fixed assets and stock in a business unit with specific reference to
the case study above? (20 marks)
2. How would you explain the influence that stock management can have on the profitability of a business
with specific reference to the case study above? (30 marks)
3. How would you explain the management of fixed assets in a business unit with specific reference to the
case study above? (20 marks)
4. How can you apply the basic principles of stock and fixed asset management to a business unit with
specific reference to the case study above? (30 marks)
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