Dell Computer Corp.
Disdain inventory
Never sell indirect
Always listen to the customer
Inventory Concerns
Bad Spell in 1994 left Dell with
– 2nd quarter operating loss of $76 million
– 55 days of inventory
– $154 million deficit in cash from business
operations
Dell execs swore at that time that changes
would be made and they would never put the
company in that position again.
Inventory p-2
Supply Chain had to be revamped
Dell had made promise to ship customer
their order within 5 days of order being
received
BUT
There was a 45 day average lead time
necessary for purchasing parts.
SO
Inventory p-3
Dell developed valuechain.Dell.Com
A novel idea
Use the Internet in a B2B format to control
inventory levels at suppliers businesses
Basically, it was a you do this or else
This proved to be very effective
WHY?
Inventory p-4
Suppliers were truly world-wide (26B/yr)
By becoming a mandatory member of
valuechain.dell.com, they exhibited
something to other computer
manufacturers, that being that they were
serious about being a leader in their
respective area of expertise.
Inventory p-5
Initially run by Dell but in time is was
turned over to the suppliers to run
This targeted the supply issue of the
partnering companies
Within 1 year the Inventory was 4 days of
sales in amount, of course which is less
than the guarantee that the order will be
shipped within 5 days of receiving
Inventory p-6
This was 1999
Daily sales averaged approximately
$15,000,000.00 (70% in direct materials)
Gross profit margin of 21% = $3,000,000
Making the daily cost of sales $12,000,000
The difference in days of inventory 55 – 4 = 51
Lets say that money is worth 6%
This equates to a savings of $720,000 per day
Or $36,720,000 for the 51 day change in
inventory
Inventory p-7
Daily sales in 1999 around 15,000,000
Daily sales in 2001 in excess of
50,000,000 (more than 3 times the amount
from 2 years prior)
By 2001, the inventory carry was under 1
day
Think about those savings based on
reworking the value chain
Direct Sales
In order to handle
– $ 1,000,000 per day in sales in 1996
– $15,000,000 per day in sales in 1999
– $50,000,000 per day in sales in 2001
– $31 billion annual sales in 2002 (82M/day)
It takes speed. Something that cannot be
attained without direct control over the
marketing and sales function
Sales p-2
Michael Dell designed the company
business model to be a build-to-order
business
It would survive if it was built on speed,
speed to change based on industry
demands.
Demands had to be constantly gathered
and measured
Sales p-3
With sales of over 7 billion per quarter in
2001, there was a lot of data to synthesize
Dell works on the slimmest margin in the
industry (21% in 1999) and becoming
smaller all the time
They are the price leader
This could not be accomplished if they
were selling at wholesale prices to
retailers
Sales p-4
Top PC Makers –1999
Compaq 16.10%
Dell14.80%
Gateway 9.30%
Hewlett-Packard 8.60%
IBM 8.00%
Others 43.20%
Sales p-5
Sales by Price
1998 – Actual 2003 – Projected
$0 to $599
3.00%
27.00%
$600 to $999
31.00%
38.00%
$1,000 to $1,999
51.00%
34.00%
$2,000 and over
15.00%
1.00%
Sales p-6
Sales of this magnitude are made possible
with the supply chain that runs the
Inventory control area,
AND
Running their business in Real Time
They understand on Monday afternoon if
PC sales are slowing down, and they can
adjust prices accordingly
The Customer
Direct Sale – Made to order
40% buy non name brand computers
Dell owns $3 billion dollars of these sales
as of now
Taking away market from Foreign
companies that have long had the “white
box” market niche
Customers p-2
Dell has the lowest transaction costs in the
market
What does this mean???
As a stockholder?
As an employee??
As a Customer??
Customer p-3
Proof of transaction costs
Figure 4Profit Margins for Dell and major competitors
Company Gross Margin % Operating Margin %Profit Margin %
Dell
20.62
8.97
7.46
IBM
36.38
12.39
8.64
Hewlett-Packard 28.53
7.97
7.30
Compaq
23.18
5.50
3.86
Gateway
22.81
7.97
5.67
Concluding comments
Dell has two main philosophies
– Supply and Demand are never in balance,
company strategy is to manage when they
deviate
– “Always have enough, and have nothing left
over.”
Concluding comments
Executing those philosophies takes
Huge dollars invested in training
employees
Huge dollars invested in technology to
enable the processes to work
Concluding comments
Michael Dell agrees that the Internet gives
customers unprecedented power to seek
out the lowest prices, but he argues that it
can also be used to deepen relationships
and ultimately build far greater customer
loyalty than before.
Resources
Shah, J. (October 2001), Dell Makes Good on Inventory Vow: Creation of three SCM
Organizations has helped boost efficiency. EBN. 1286,PG52
Shah, J. (December, 2001), Dell writes the book on efficiency: Processes focus on understanding
where supply, demand diverge. EBN. 1293, PG32
Anonymous, (June 1999), Survey: Business and the Internet: You’ll never walk alone. The
Economist. 351, B11-B21
Shah, J & Serant, C. (August 2002), IS supply chain prowess enough?: Dell confident time is right
to enter white-box market. EBN. 1327, 3
Souza, C. (November 2001), Real-Time business may be the real ticket: Technology enablers
seen as a good investment. EBN. 1289, PG4
Sabatini, J. (August 2000) Direct to Dell: I hunt for Michaels supply chain secrets. Automotive
Manufacturing and Production. 112, 74-76
Lewis, N. (February 2001), Dell Portal Adds ‘Value’” Valuechain.dell.com provides pipeline to info
exchange. EBN. 1251, PG62
Teresko, J. (October, 2001), The value of velocity. Industry Week. 250, 43-44