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Chapter 6 Supply network design 139
Operations in practice Dell: no operating model lasts forever 1
When he was a student at the University of Texas at
Austin, Michael Dell’s sideline of buying unused stock
of PCs from local dealers, adding components, and
re-selling the now higher-specification machines to
local businesses was so successful he quit university
and founded a computer company which was to
revolutionize the industry’s supply network management.
But his fledgling company was just too small to make
its own components. Better, he figured to learn how to
manage a network of committed specialist component
manufacturers and take the best of what was available in
the market. Dell says that his commitment to outsourcing
was always done for the most positive of reasons. ‘We
focus on how we can coordinate our activities to create
the most value for customers’. Yet Dell still faced a cost
disadvantage against its far bigger competitors, so they
decided to sell its computers direct to its customers,
bypassing retailers. This allowed the company to cut out
the retailer’s (often considerable) margin, which in turn
allowed Dell to offer lower prices. Dell also realized that
cutting out the link in the supply network between them
and the customer also provided them with significant
learning opportunities by offering an opportunity to get
to know their customers’ needs far more intimately.
This allowed them to forecast based on the thousands
of customer contact calls every hour. It also allowed
them to talk with customers about what they really
want from their machines. Most importantly it allowed
Dell to learn how to run its supply chain so that
products could move through the supply chain
to the end-customer in a fast and efficient manner,
reducing Dell’s level of inventory and giving Dell
a significant cost advantage.
However, what is right at one time may become a
liability later on. Two decades later Dell’s growth started
to slow down. The irony of this is that, what had been
one of the company’s main advantages, its direct sales
model using the Internet and its market power to squeeze
price reductions from suppliers, were starting to be seen
as disadvantages. Although the market had changed,
Dell’s operating model had not. Some commentators
questioned Dell’s size. How could a $56 billion company
remain lean, sharp, and alert? Other commentators
pointed out that Dell’s rivals had also now learnt to run
efficient supply chains (‘Getting a 20-year competitive
advantage from your knowledge of how to run supply
chains isn’t too bad.’) However, one of the main factors
was seen as the shift in the nature of the market itself.
Sales of PCs to business users had become largely
a commodity business with wafer-thin margins,
and this part of the market was growing slowly
compared to the sale of computers to individuals.
Selling computers to individuals provided slightly
better margins than the corporate market, but they
increasingly wanted up-to-date computers with
a high design value, and most significantly, they
wanted to see, touch and feel the products before
buying them. This was clearly a problem for a company
like Dell which had spent 20 years investing in its
telephone- and later, internet-based sales channels.
What all commentators agreed on was that in the
fast-moving and cut-throat computer business,
where market requirements could change overnight,
operations resources must constantly develop
appropriate new capabilities.
However, Michael Dell says it could regain its spot
as the world’s number one PC maker by switching its
focus to consumers and the developing world. He also
conceded that the company had missed out on the boom
in supplying computers to home users – who make up
just 15% of its revenues – because it was focused on
supplying businesses. ‘Let’s say you wanted to buy a
Dell computer in a store nine months ago – you’d have
searched a long time and not found one. Now we have
over 10,000 stores that sell our products.’ He rejected
the idea that design was not important to his company,
though he accepted that it had not been a top priority
when all the focus was on business customers. ‘As
we’ve gone to the consumer we’ve been paying quite
a bit more attention to design, fashion, colors, textures
and materials.’
Source: Corbis/Gianni Giansanti/Sygma