Supply Chain of Dell

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PROJECT REPORT ON DELL’s SUPPLY CHAIN MANAGEMENT

PRACTICES

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Dell, Inc. is a multinational technology corporation that develops, manufactures, sells, and supports

personal computers and other computer-related products. Based in Round Rock, Texas, Dell employs

more than 82,700 people worldwide.

Dell grew during the 1980s and 1990s to become (for a time) the largest seller of PCs and servers. As

of 2008 it held the second spot in computer-sales within the industry behind HP. The company

currently sells personal computers, servers, data storage devices, network switches, software, and

computer peripherals. Dell also sells HDTVs that are manufactured by other brands.

In 2006, Fortune magazine ranked Dell as the 25th-largest company in the Fortune 500 list, 8th on its

annual "Top 20" list of the most-admired companies in the United States. In 2007 Dell ranked 34th

and 8th respectively on the equivalent lists for the year. A 2006 publication identified Dell as one of 38

high-performance companies in the S&P 500 which had consistently out-performed the market over

the previous 15 years.

ManufacturingIn the 1980s Dell became a pioneer in the “configure to order” approach to manufacturing –

delivering individual PCs configured to customer specifications. In contrast, most PC

manufacturers in those times delivered large orders to intermediaries on a quarterly basis.

To minimize the delay between purchase and delivery, Dell has a general policy of

manufacturing its products close to its customers. This also allows for implementing a just-in-

time (JIT) manufacturing approach, which minimizes inventory costs. Low inventory is

another signature of the Dell business model – a critical consideration in an industry where

components depreciate very rapidly.

Dell’s manufacturing process covers assembly, software installation, functional testing

(including "burn-in"), and quality control. Throughout most of the company’s history, Dell

manufactured desktop machines in-house and contracted out manufacturing of base notebooks

for configuration in-house. However, the company's approach appears to have started to

change. The 2006 Annual Report states “we are continuing to expand our use of original design

manufacturing partnerships and manufacturing outsourcing relationships.” The Wall Street

Journal reported in September, 2008 that “Dell has approached contract computer

manufacturers with offers to sell" their plants.

The specific DELL model is called the DIRECT MODEL of DELL.

THE DIRECT MODEL

Dell’s direct selling model traces its origins Michael’s idea of selling computers

directly to the consumers eliminating the need for distributors and middlemen. Michael

believed that by selling PCs directly to the consumers, the company would be able to better

understand the needs of its customers. The first computer that the company introduced in 1985-

Turbo PC, was advertised in computer magazines and sold directly to consumers. Dell also

began employing computer literate sales personnel, who guided consumers in their choice of

systems. Each system was assembled according to the preference of customers. This option

helped customers to get computers at a price lower than other brands.

The company also realized that in order to be on par with the top PC manufacturers like

Compaq and IBM, maintaining a high level of quality was necessary. However, this required

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more cash. The top executives of the company met and decided to increase their funds in hand

by reducing inventory. However, managing the difference between lead times for components

and lead times promised to customers was difficult. The new supply chain had to manage with

low components levels but without increasing the customer lead time.

Dell decided to produce PCs as per the orders it received and not to hold excess

inventory or finished products. The Heads of the Manufacturing and Marketing departments

decided to reduce component inventories. At the time of starting this process, their primary

focus was to reduce the inventory by 50 %, improve the lead time by 50 %, reduce obsolete

inventory by 75 % and reduce the assembly cost by 30 %.

Later, Dell decided to replace inventory with information, on the premise that with

more information on the needs and requirements of the target customers, the level of inventory

could be further reduced. The company decided to pass on the information to the suppliers,

who were provided access to company’s internal data about the demand for specific

components. Initially, the component inventory dropped from 70 days to 30-40 days and

consequently to 20 days. With reduction in components inventory having a positive effect on

each cash flow, the company decided to bring other tasks related to production in line with the

reduced inventory.

In the process of reducing inventory, Dell’s executives observed that as the inventory

was reduced, the component lead time improved while the finished product inventory also

reduced. This happened because Dell was aligning inventory and sales, rather than carrying

inventory against projected sales. Another benefit was in terms of returns. The returns grew as

Dell was able to eliminate carrying costs and also obsolete stock, and reap savings due to

cheaper components. The overall savings Dell derived from managing the inventory

encouraged it to try matching supply and demand on monthly, weekly and daily basis. This

reduced the variation in supply and demand and gradually it was no longer necessary for Dell

to maintain any component inventory.

The cash that was freed up due to reduction in inventory levels was used to target

corporate customers. Dell had the hard task of convincing corporate customers that the

products it provided were of good quality and was cheaper compared to those of its

competitors. Customers were also not sure that Dell would be able to meet its service and

delivery deadlines. Once the corporate customers were convinced that they could order what

they needed, rather than buy what was available with the resellers, they moved on to Dell.

After Dell started fulfilling specific orders, while maintaining high quality standards, several

corporate began approaching Dell with their requirements.

Dell established its website in 1994, when the company’s total revenues were US $

3.5bn. Online pricing was introduced in 1995, and online sales began in 1996. Within six

months Dell’s revenues on the Web stood at US $ 1 million a day. The internet proved to be a

shot in the arm for Dell’s direct model as it was able to facilitate transactions, reduce costs, and

improve relationships with customers. The website initially catered to the needs of individual

customers. Once the order was received, it was sent to a specific e-mail box. It was ensured

that the order was complete and had all the required details and was then sent to the build-to-

order system. Once the order was placed, customers could log in to check the status of their

order. By 1997, sales through Internet were at around US $ 1bn, and Dell was the first

company to record more than US $1 billion in online sales. By 1998, Dell’s sales through the

Internet accounted for more than half of its total sales.

Dell’s direct model was directly supported by the way the company’s activities were

organized globally. Its corporate headquarters, located in Round Rock, Texas, also served as

the regional headquarters for the US, Canada, South America, and Latin America. Other

regional headquarters at Singapore catered to the Pacific Rim including Japan, China, India,

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Australia and New Zealand. The company also had regional offices in several countries, which

functioned under the regional headquarters.

New product development was undertaken in the US and the products were customized

according to the requirements of specific markets, taking into consideration power supplies,

language specific keyboards and procurement and product development teams were located in

Austin. Major components were sourced centrally, while consumables were sourced locally.

ROLE OF DELLs SUPPLIERS

In order to manage its operations with low inventory levels, Dell collaborated closely

with its suppliers. The company’s procurement decisions were based on four criteria-quality,

cost, delivery and technology. Suppliers were selected on the basis of cost (given a weightage

of 30 %) and quality, service and flexibility (with a weightage of 70%). Commenting on the

supplier selection process, Kevin Kettler, Chief Technology Officer, Dell said, “Features,

functions and performance level is one piece, but we also ask can they hit the quality

requirements? Can they provide continuity of supply for the volumes we’re looking at? Do

they have the capability to diagnose a customer-related issue and interact? Do they have

capabilities to quickly diagnose it with Dell as we trace it back to a component-level issue?

What’s a favorable arrangement for both Dell and the company so that we’re both successful?”

Dell separated activities related to contracting like cost negotiation, contract terms,

source selection from commerce-related activities like purchase order release, delivery

management and payment. Cost was centrally-managed while delivery was managed

regionally.

Printed circuit board assemblies and sub-assemblies were handled by contract

manufacturers or OEMs. Components and peripherals like CD ROM drivers, monitors,

keyboards and pointing devices were supplies by the offsite suppliers. Software was supplied

by standard suppliers like Microsoft or as per the requirements of the corporate customers.

Most of Dell’s suppliers were located in Asian countries. As bringing the components

from the suppliers’ factories to Dell took anything between 7 and 30 days depending on the

mode of transportation, Dell required all its suppliers to maintain a warehouse close to its

factories. They could either manufacture the product at the warehouse or produce at another

place and ship the finished product to the warehouse. Most of Dell’s Asian suppliers produced

some components near Dell’s manufacturing facilities, while other components were produced

in Asia and shipped in to their own warehouses near Dell’s factories. The warehouses known as

Suppliers Logistics Centers (SLC) were located a few miles away from Dell’s assembly plants.

Each SLC could be shared by more than one supplier. Typically, Dell required suppliers

to maintain inventory for 8 to 10 days in SLCs. Dell took the inventory from SLCs as required,

usually replenishing its stocks every two hours. It was up to the suppliers to decide on

maintaining inventory at SLCs. Most suppliers replenished the stocks at SLCs thrice a week.

Dell had a vendor managed inventory arrangement with its suppliers. As per the

arrangement, Dell set the target inventory levels-typically 10 days. The vendor had to decide

when to order the inventory and the quantity to order to maintain the levels set by Dell. The

suppliers also had to decide on sending the components to SLCs so that Dell could take the

components as and when required.

With some suppliers, who had been with Dell over a long time, Dell agreed to purchase

a particular percentage of the components it required. This was to ensure that an adequate

supply of products was available even when the demand in the market was higher than the

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supply. Some of the engineers from the major suppliers worked in tandem with the new

product development teams in Dell. This enabled the suppliers to understand Dell’s

requirements, and in case there was a problem with the components, the engineers from the

suppliers were available to rectify it immediately.

Due to this close collaboration with suppliers Dell was able to manage with an

inventory of just a few hours for some components. Some of the partnerships that Dell entered

into with its suppliers enabled it to operate with almost zero inventory levels. A case in point

was Sony, which supplied monitors for Dell. These high quality monitors, with very few

defects, were not tested by Dell. These monitors were not shipped to Dell’s assembly lines, but

were shipped directly to Dell’s customers.

Dell shared with its suppliers the data pertaining to sales forecasts once a month. The

data was generated by the marketing department of the company and took into account various

factors like the demand for new products, and seasonality trends like the demand from the

government departments at the end of the year, demand from school children at the start of the

academic year, and holiday season demand during Christmas.

The availability of the components at the suppliers’ end was checked by the Center of

Competence in Dell and sent to commodity teams in the company. The commodity teams made

a six-month forecast, which was updated every week. It was the responsibility of the

commodity teams to break the forecasts down to the component level.

Dell believed in maintaining a close relationship with its suppliers. All the inventory

data, including the long-term planning data, volume expectations, and replenishment data was

shared with them. Dell was of the view that if it had more information to share with its

suppliers, it could expedite the process of building the products and receiving material from

suppliers, and minimize its inventory. Dell constantly passed on data on demand and supply

trends to its suppliers. The company gathered information about inventory levels of the

suppliers and the suppliers were required to share information on their capacity to deliver

products on time, new technology drivers, etc. Dell provided the details of customer demand to

its suppliers, and details of changes in demand patterns.

Dell demanded that its suppliers should be extremely flexible to accommodate short-

term demand fluctuations. The company provided suppliers with data on real-time customer

demand, and every week, suppliers were given an order commitment from Dell for the

following week. The suppliers needed to send their consent to meet the company’s demands

immediately. Every supplier was given a supplier report card and their performance was

constantly monitored against the metrics set by Dell.

Every day Dell rated vendors on several parameters like cost, technology and service

and the scores were posted on a website. Every quarter, Dell’s officials met with the suppliers,

and provided them feedback on their performance and its expectations from them. Each

supplier was given a scorecard comparing it with other suppliers in the industry in terms of

cost, reliability, quality and on time delivery. Based on the comparison, the suppliers were

awarded a certain percentage of Dell’s purchases in the next quarter. One of the suppliers was

chosen s per its aggregate performance on the four parameters and given ‘the best supplier’

award during the annual supplier conference.

Dell’s suppliers also maintained low levels of inventory. The company had about 30

suppliers who provided 75 % of the components required by the company and they maintained

inventory for an average of 8 to 10 days. If the inventory exceeded 10 days, Dell worked

together with the suppliers to ensure that optimum inventory levels could be maintained by

them.

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In mid-1998 Dell launched Valuechain.dell.com, a site which let the suppliers know

what the company’s components requirements were at any given moment, so that they could

plan their own production schedule accordingly. This helped improve vendor management as it

led Dell exchange information with its suppliers in real time. Valuechain.com also helped Dell

to place orders in real time instead of relying on daily or weekly batch order transfers.

In 2004 and 2005, Dell conducted a Supplier Self Assessment, through which suppliers

were made aware of its supplier principles and labor management systems. With an extensive

global supply chain, Dell was of the view that it had the responsibility of working with its

suppliers to promote sustainable environmental practices, the health and safety of people and

fundamental human rights. Dell’s approach was drawn from a review of global best practices,

management systems and acknowledged standards. Included among these were the United

Nations Declaration of Human Rights, the UN Convention on the Rights of the Child,

fundamental conventions of the International Labor Organization (ILO), Electronic Industry

Code of Conduct International Organization for Standardization (ISO 14001), Occupational

Health and Safety Assessment Series (OHSAS 18001), The Soul of Dell, The Dell Code of

Conduct as well as the benchmark of other corporations and industries across the globe.

In 2006, collaborative projects were carried out with suppliers, to hiring about

awareness in the areas of working hours, health & safety and environment. The team consisting

of personnel from Dell and its suppliers used Business Process Improvement (BPI) methods to

define and measure improvement in the suppliers’ processes. Dell used BPI to understand,

analyze and improve its own business processes, product quality and services as well.

All the suppliers were required to comply with ISO 14001 environmental management

standards and OHSAS Certification, a standard for workplace health and safety management.

All the suppliers were also trained in areas like environmental practices, health and safety and

Electronic Industry Code of Conduct (EICC).

BALNCING DEMAND AND SUPPLY

Dell maintained a database to track the purchasing patterns of corporate customers and

their budget cycles, in order to forecast demand. It also maintained a similar database for

individual customers in order to cater to their future requirements for PCs. Through its

forecasting techniques, Dell was able to forecast demand with 75% accuracy. Thrice a day, the

changing demand patterns were communicated to the major suppliers.

In all the countries in which Dell operated it had a direct sales force, which was

directed by the marketing department located at the headquarters. The sales force was

primarily responsible for marketing the Pcs to the corporate and public sector customers. Dell

maintained a sales force in all the regional offices. As Dell sold directly to the corporate

customers, it kept track of their purchases and gained knowledge about the PC requirements of

the major customers. Dell loaded customized software and also placed the asset codes required

for some of its corporate customers. Several customers reported considerable savings through

these services Dell provided. The company placed some of its personnel in the factories and

offices of major customers like Boeing. These employees were involved in planning the

client’s requirement and provide them optimum solutions to meet those requirements.

Every month Dell developed a production plan and conducted sales plan meetings.

In the meetings, the department heads arrived at product strategies, competitive factors and

constraints. Every week, the lead time meeting was conducted with personnel from sales and

marketing, and the supply chain. They interpreted the demand trends, tried to resolve supply

issues and focused on lead times for delivering products to the customers. If it was found that

the lead time for a product was increasing, the procurement of the product was expedited or

additional suppliers were brought and the customers were encouraged to buy substitute

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products. If any component was found to be accumulating, customers were provided incentive

to buy those products. The pricing also changed from week to week reflecting the demand

management in the company. The product lead times were updated everyday.

In case the demand exceeded supply at any given point in time, Dell had more

than one supplier for each of components to expedite supply. If the component was generic,

Dell checked with alternative suppliers. Once all the supplier options were exhausted, Dell

used its marketing team to shift demand. Within hours, the marketing team would create

advertisements for computers with components that were in abundant supply. Through these

advertisements, Dell created demand for other products by putting them on its own website and

also some other popular websites. Dell also used other media including television, magazines ,

catalogs and newspapers. For example , at any particular time, if Dell was in short supply of

60GB hard drives and the demand was more, advertisements would immediately he placed on

Dell’s website providing an alternative of 80 GB hard drives, which were in adequate supply.

According to Dick L Hunter, Vice president, Supply Chain Management , Dell, “If we’re short

on Sony 17” monitors, we could offer a 19-inch model at a lower price or even at the 17-inch

price. We know if we do this a lot of demand will move. Supply chain experts call this process

of creating demand for products that were adequate in supply ‘demand shaping’.

PRODUCTION PROCESS

Dell received orders via the telephone, internet, e-mail, etc. Orders were received by business

units, which downloaded the orders every 15minutes. With advancement in technologies, the

choices available for the consumers also widened. Customers could use Dell’s website

www.dell.com, to configure their customized computer and place an order for it. Customers

could choose from a variety of products ranging from desktops, notebooks servers, printers,

etc. the website catered to different segments of customers like individuals, home office

customers, small businesses, medium businesses, large businesses and public sector customers

like government departments, educational institutions and healthcare institutions.

Customers could customize their computers by selecting processors, operating

system, display screen, memory hard drive, video card, audio cars, etc. as well as accessories

like printers, power options, T.V. tuner, etc. for products like notebooks, Dell provided choices

in terms of batteries and carrying cases. The other services included warranty services,

installation, internet, etc. After the customers had selected the options, a summary of all the

components, accessories, software and services chosen by the user were displayed, along with

the price. At every step, the customers could get more details on the components they were

selecting. If some of the components the customer was opting were in short supply, the website

warned that choosing that particular component could delay the shipping date.

The orders were processed after checking the credit of the customers and

configuration evaluation, where the feasibility of the configuration selected by the customer

was checked. As of 2003 Dell received about 50,000 orders per day and around 25,000 orders

were received via the internet. All orders were sent to Dell’s Legacy order Management

System , which received the inventory status and generated requests for the materials. The

request was then sent to suppliers. After the order from the customers was received, in order to

process order, a barcode was printed and attached to the components, and this remained on

them through the assembly line.

Every two hours, the production lines in every factory located across the globe were

rescheduled. At the beginning of the cycle, the component providers had 90 minutes to deliver

the products for the next schedule of production. Dell on its part required 30 minutes to take

the material and deliver the components to the assembly line. The process took two hours, and

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after this another production cycle began. Without maintaining inventory and warehouses for

storing finished goods. Dell still managed to process orders on time by ordering the

components from its suppliers, only after the final order was received.

The schedule for making a product was drawn up and sent to the factory

accompanied by a order number. At the same time, a message was sent to SLCs. After

receiving the information, the suppliers delivered the required materials at the specified dock

door to send them to the assembly line. Personnel from the suppliers were present at Dell’s

facilities to run the process smoothly.

Dell assumed the ownership of the components only after they had reached its

production line. For example in Topfer Manufacturing Center in North Austin, however there

were around 110 cargo bays , there were thin white lines forming a rectangle. Tractor trailers

with components from the suppliers were lined up at the bays. When the assembly lines

signaled requirements of a particular component, a forklift went on to the trailer containing the

component and took the pallet containing the components. When the pallet crossed the white

line on the floor, a barcode scanner recorded the movement and at that point of point, the

inventory was registered into Dell’s books.

Once all the required components were ready, the customer order was picked up and the barcode was scanned. Then the parts required were sent on a conveyer. Belt. As the parts went into the assembly. Each was scanned to ensure future traceability. The system was assembled and a quick test was carried out to verify if the order was executed as per the customer specifications. After the verification, the unit was placed back on the conveyer belt. The assembling was carried out by a single worker, and it was the responsibility of the worker to maintain the quality of the product.

The next step was loading the software and ensuring that the application run correctly. This process took up to four hours. The technician present there detected any failures that occurred and rectified them immediately from companies like Microsoft and Intel were added. The unit thus assembled was cleaned and placed in a box with a barcode on the box.

Prior to 1997, Dell operated the assembly line in a traditional manner, where each worker was responsible for a single task. A chassis with the order containing specifications of the customers was sent across the production floor and the components like drives and chips were installed. The PC which was partly assembled was sent to a workstation, which contained steel racks with several drawers full of components. Red and green lights they needed to pick up. Once the components were picked up from the drawers from the other side they were replenished. In 1997, Dell decided to carry out the entire assembly at a single location, thereby reducing the assembly time by 15%.

At random, 10% of the products were selected and audited to check if the product was according to the customer satisfaction and to ensure theat it was in a proper condition. The random audit comprised of two Extended Test – ET1 and ET2. In ET1, motherboard and extended parts were examined and in ET2, hard drives were tested. When the unit failed in problem was related to hardware or software. If it was realised that the problem was due to a part supplied by the supplier, a meeting was held the supplier to correct the mistakes. In case the corrective action was not taken by the supplier, Dell procured parts from an alternative supplier.

Before the unit was packed, a separate box containing the keyboard, documentation, and mouse, which was supplied by a sub-contractor was added. The barcodes used on the product were used on this box too. Using the barcode, addressing was done. By reading the barcode, the boxes were sorted depending on their final destination and were shipped to different distribution hubs. For example, Dell’s plant in Limerick, Ireland had associated with it. The hub at Limerick served Ireland, Eastern Europe, Middle East and the African markets, except South Africa. The hub at Liverpool served the UK market, the hub at Tillberg, Netherlands catered to the mid-European market. Another hub located at Gottenberg in Sweden served the markets in the Nordic countries. The hub located in Johannesburg catered to the South African market.

All the Dell factories had flexible assembly lines. For example, Dell’s facility at Limerick, Ireland had five assembly lines for manufacturing desktop PCs, two lines for notebooks and one line for servers. The lines used for notebooks and servers could also be used for assembling desktops. The factory at Limerick operated in two shifts from 8 a.m. to 4 p.m. and system, and it planned production in such a way that all orders were fulfilled within five days from the receipt of the request. To replace defective units and to process large orders from corporate customers with certain specifications, Dell rescheduled its activities.

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From time to time, Dell improved its plants and introduced new technologies while constructing new plants. In 2004, Dell chose North Carolina for establish in a new plant. The company opted for a plant in the US, against the trend of starting plants abroad though major competitors like HP were outsourcing assembly of their PCs to third parties based in Asia. Analysts were of the view that this decision had more to do with bottom line and cost-effectiveness that the company could achieve by manufacturing the computers closer to its customers. According to Charles Wolf, Analyst, Needham & Company, “When everybody is outsourcing, Dell continues to manufacture in the United States because over two decades of fine-tuning, they have figured out how to do it cheaper and smarter.

Dell imported higher value components from outsourced plants in Asia and carried out final assembly in the US. Another unique feature of the Carolina Plant was the placement of inbound small components suppliers within the factory premises. Dell had set aside 150,000 sq ft of space in 750,000 sq ft plant to stage the inventory, next to the assembly line. By placing the small components suppliers within the factory premises, Dell was able to eliminate transportation costs and reduce the supply time from an average of two hours.

At the plant, the inventory was divided into three levels based on the demand. The high demand products included motherboards, low capacity hard drives, etc, which were present in every computer; the low demand products were products like hard drives with high capacity and specifically requested items like floppy drives, and LCD monitors. The SLCs were located in the ground floor and teh assembly on the mezzanine floor. Large components like monitors and speakers were handled at an offsite SLC. This was a deliberate move by Dell, to save floor space associaoted with storing large components. From the new plant, the company aimed to deliver desktop computers within two days on teh US East Coast.

THE BENEFITS

Dell maintained nearly zero inventories for some of its components. With the value of inventory declining rapidly at an average of 0.5% a week, holding a significant amount of inventory did not prove to be an advantage. As Dell did not hold large inventory of finished products, it did not have to sell technologically obsolete products at a discount. Dell was able to bring in new products according to the needs of the customers into the market faster than its

competitors. In 2004, the inventory turnover rate in Dell was at 107 times a year, compared to 8.5 times at HP and 17.5 times in IBM.

Dell’s production system functioned on negative working capital. Usually, computer manufacturers paid the suppliers 30 days before the PC was skipped to the market. In Dell’s case, it received payment from the customers on order, after which the specified order was carried out. The suppliers were paid 36 days after Dell received payments from its customers.

Through the Direct Model, Dell was able to incorporate new technologies quickly into its products and take them to customers almost two months ahead of its competitors. Bothe suppliers and customers benefitted from this, as the suppliers could not use the latest technologies. The consumers derived benefits also in terms of cost as Dell passed along the material cost savings to them through forward pricing. Dell decided on the optimum price of the PC for achieving a high sales volume. It then considered a target price and the expected volume and communicated to the vendors who adjusted their price accordingly. In the process, Dell was able to meet the expected price and the vendors also benefitted as they were to sell higher volumes of the components.

The efficiency of Dell’s supply chain become apparent in October 2002, During a 10-day labor lockout by dockworker at 29 West coast ports, including Los Angeles, San Diego and Seattle. Due to the strike, several cargo ships with raw materials and finished goods were unable to unload their cargo. Dell, which maintained inventory only for a very short period was expected to be hit hard by the strike, as the components would fail to reach the factories on time. However, Dell was well-prepared to face the situation and had a contingency plan in place, as it was aware of the impending strike much in advance. The company chartered cargo planes from UPS, China Airlines, and other cargo carriers, much before others could. The suppliers in Asia were ready with the components to be loaded into the planes at Shanghai and Taipei airports and so on time was wasted in loading the components.

Dell even had a plan to face the situation after the strike when the ports were filled with thousands of container. Dell’s freight specialist in all the major ports in Asia ensured that Dell’s cargo was the last to be loaded in the cargo ships, so that they would be the first ones to be unloaded at US ports. After the strike was called off, Dell’s components arrived at the US west coast in 50 ships, but Dell was in a position to assess, when the ships would be unloaded and when it would be sent to the supply chains of several companies, with more

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than three days of components inventory, went through without it missing a single customer order.

THE PROBLEMS

In the years 2005 and 2006, Dell faced several problems, and lost its coveted position as the largest selling PC manufactured to HP. HP was able to surge ahead of Dell by procuring components at a cheaper price and improving its supply chain management practices. Dell’s problems included growing complexities in its products line and pricing system. At the same time, demand from the corporate buyers, who accounted for a major share of Dell’s sales fell. According to a survey by CIO Insight, technology spending among companies with revenues of US$500mn decreased by 1.3% in 2006. While corporate spending was falling, Dell’s share in the corporate market was also in decline. In a study by Goldman Sachs, it was found that Dell and HP were losing their market share. According to the report, “Dell’s troubles seem to be bleeding into its corporate business which up till now had been a stronghold. In 2006, Dell had to recall several notebook computers due to battery faults. These problems were accompanied by problems relating to financial reporting and growing dissatisfaction about Dell’s after sales support. minimising overheads, especially those related to holding inventory and in retail channels. With the prices of components dropping, Dell was able to reduce costs and maintain its price advantage. By 2006, competitors like HP made massive changes in their supply chains and were able to close the price gap by achieving cost savings through closure of several assembly plants, and reduction in manpower. This enabled HP to reduce the price of its low-end PCs to match those of Dell.

Analysts were of the view that Dell’s strength lay solely in its supply chain, and the company had nothing much to boast of on the product or R&D front. When a company has only one area of strength, any problem in that area would have severe repercussions. They opined that the supply chain was getting too complicated, and so was the product line.

Additionally, customer preferences were changing with several additional and new features being incorporated in the PCs. The customers preferred to know more about the utility and

unique features of PCs from sales people- this was one of the reasons why HP had taken over from Dell at the top spot. When consumers walked into retail stores to buy PCs, most of the time they found PCs from HP prominently displayed. HP opted for a mixed sales channel by selling computers directly as well as through retailers.

In the case of notebook computers, consumers preferred to take a look at the notebook computer before buying it, and Dell could not provide this because its products were not available at the retail stores. Apart from this, in developing countries like China, customers wanted to see even the desktop PCs and other products before arriving at a purchase decision.

Though Dell reaped significant cost savings through its direct model on the support side, the model could not provide much cost advantage. All the support related activities and costs associated with them had to be borne by Dell, right from information requests, queries, taking orders, after sales service, etc. While the cost of PCs was falling by the day owing to cheaper components and automated manufacturing, the cost of support activities remained high, as the level of automation in support tasks is limited. Dell faced a lot of problems associated with customer support and had to invest heavily on revamping its support activities and on increasing the number of customer support personnel. Analysts opined that as long as support costs formed a small part of the total cost of a product, the direct model was viable. In the case of Dell, the share of support costs was constantly going up the prices of PCs fell. Industry experts felt that Dell was losing the competitive advantage it had gained over the years by using the Direct Model.

In the second quarter of 2006, Dell’s net income fell by 51% as compared to the second quarter of 2005. Analysts were of the view that Dell had ignored the customer and had failed to maintain efficient customer service. By the third quarter of 2006, HP surpassed Dell by a few units and by the fourth quarter, HP was leading in the global PC market. According to Gartner, while the worldwide PC shipments grew by 9.5% in plans to open stores in New York and Austin by the end of 2007. At these locations, customers could see the products, test them, discuss them with store personnel and place the order online.

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Industry experts suggested that Dell could create products with a longer shelf-life, like digital televisions and printer cartridges, in addition to a few desktops and notebooks and sell them through the Dell retail stores. Another step Dell could take was to enter the commercial retail segment and compete with the likes of HP and Acer, but this was an area in which Dell wasn’t experienced enough. Dell could also consider partnering with stores like Costco- the stores Dell had been using to sell some of its outdated components since 2005. In case Dell developed a retail footprint, it would also be able to address some of the customer service issues and improve its support system.

In what was termed Dell’s first step into the global retail segment, in May 2007, dell announced that it had entered into an agreement with wal-mart. According to the agreement, Dell would sell its sub-US$700 Pcs through more than 3400 outlets of wal-mart. Dell’s desktops would be sold through wal-mart stores in the US, Canada and Puerto Rico. According to Gary Severson, senior VP, Home Entertainment, wal-mart, “Dell is a proven electronics brand and adds a new complement to our other high quality desktop selections, and we are very excited to now bring our customers new access to a product they want, with the ability to purchase a Dell right away.”

Though Dell had made a foray into retail, analysts were of the view that Dell was not attuned to the retail format and it would be very difficult for the company to change, going retail would require Dell to forecast demand, build inventory and deal with retailers. According to Steve Baker, VP, industry Analysis, NPD group, “A Dell store might work, but traditional retail would be hard. They just don’t know it.”

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