A supply chain is a network of distribution facilities that perform the functions like raw material procurement, transportation of material and material management according to demand and supply cycle, and the distribution of these finished products to customers. Supply chain management (SCM) is a process practiced by integrated product or service producing firms to operate the supply chain more efficiently by introducing the new technology. Supply chain management helps in making strategic and operational decisions of supply chain locations, Productions, Inventory and Transportation.
When the operations go global and include multi disciplined functions, companies recognize the need to strengthen the Supply Chain Management as a separate discipline Giving timely attention towards SCM offers many advantages to the companies like reducing the risks in delivery and inventory, and meeting high performance goals of the operations as well escalation of sales and profits. With the pre valence of the online business, almost all the companies are implementing SCM to reduce lead times in customer delivery.
Though the list of companies that implement SCM as practice is endless, few of the leaders that encouraged the industry to implement SCM includes, IBM, DELL, Ford, Toyota, Walmart, Apple, Oracle, Symantec, Amazon, Netflix, etc. , All these giants experienced a need to improve their supply chain pushed by their customer demand and made a hurry invention towards integrating their existing system with technology. Dell’s early 90s Supply Chain Management Process and its struggle in order processing During the early 90’s Dell was known as second-tier PC maker.
The Dell’s order process system is not different from others. Dell was maintaining large component inventory to order its components and was paying advances to the suppliers. The company was executing its Customer service for sales through call centers. So Dell had to employ a large number of salespeople to work with customers to configure their orders. Also there is a problem of forecasting the mix of components that customers want to buy in their computers and keeping them in the inventory to respond to the inconsistent demand.
During 90’s Dell faced a financial crisis, upon which the company required funds to make a move from the list of declining Tier 2 manufacturers (Commodore, Zeos, etc. ) to the group of prospering Tier 1 producers (IBM, Compaq, etc. ), and this required even more cash. So in that situation the only way to raise the funds for the company is to reduce inventories in a drastic way. In order to achieve this Dell developed a business strategy and supply chain strategy that worked together in 1994.
The company kept its objective to focus on lowering inventory by 50 percent, improving lead time by 50 percent, reducing assembly costs by 30 percent, and reducing obsolete inventory by 75 percent. The implementation of new software enabled the customers to configure their orders themselves instead of depending on Dell’s support people. This has reduced the human resource cost and made the company a low cost provider Dell decided to catch up the major corporate accounts with the freed up cash. During those days even the major accounts were looking to buy from the reseller, making it a hard task to Dell to penetrate the segment. In order to grab these accounts Dell had to convince them with a promise of prompt service and delivery requirements along with price and quality. This made the company to look for a renovation in its distribution channels for the speedy delivery by eliminating the middle man. Evolution of Dell’s Supply Chain Management from the mid to late 90’s to till today The Dell’s success path was learned from its failures of its earlier times. The business strategy of Dell during late 1980’s and early 1990’s was differentiation through low cost, speed of delivery, and customer service.
However, Dell had to bear the 90 days of inventory on hand along with the other PC makers. The supply chain model was included a lot of middle men from the manufacturer to Customer, adding up the final cost as price In 1994, Dell changed its business model and order processing system. The company adopted direct-to-the-customer strategy, where the customer makes an order and the product will be dispatched from manufacturer to customer. Dell reduced the inventory costs. And after 1994, with this freed up cash, it has developed its growth strategy to move further to Tier 1 PC producer.
And in the year 1994 it self Dell made online venture, launching www. dell. com. And the company developed the portal further by adding up the e-commerce functionality in 1996 and started it online sales operations giving flexibility to the customer to choose the required components on their own. And in the next year i. e. , in 1997 Dell made a record of $1 million online sales. Since 1995, Dell has gained 12. 6 points of market share for desktops, laptops and PC servers, according to market researcher IDC — an increase of nearly 400%, to around a 16% share. (Kevin Maney ).
In 2001, Dell became the largest producer of personal computers in the world. While most tech companies have struggled since the crash began in 2000, Dell has nearly doubled its revenue since its 1999 fiscal year to an estimated $35 billion in fiscal year 2003. (Kevin Maney ). The sales for year 2007 were reported as $57,420. 0 millions as published on Hoovers. Today, Dell operates one of the highest volume Internet commerce sites in the world. Dell’s negative cash conversion cycle Dell has made a journey from the position of prepaid inventory to negative cash conversion stage.
The cash conversion cycle can be termed as the number of days between payment for raw materials and receipt of cash on selling goods from that raw material. The lower the number of days the shorter the firm’s money is tied up in operations and the company will have quick cash flow into the business. Generally companies announce the payment terms in the billing policy. A company which has quick money from sales and need not do the immediate pay for the supplies it get from suppliers, has a better financial position than its competitors.
And when a company pays to its suppliers after it get payment from its buyers, the condition is called having a negative cash conversion cycle. Dell executes a 44days negative cash conversion cycle. This says that Dell’s products are converted into cash before the company actually pays for them to its suppliers. Such payment upfront is the result of high demand for the product and supplies of the company. Though such negative cash conversion is entertained by many big enterprises, Dell is assumed as first PC retailer to enjoy such competitive cash management approach.
Usually Dell pays to its suppliers between 30-60 days after receiving the material and gets the payment from its buyers within 15-30 days. According to Stevens Dell’s cash conversion cycle is determined in the following way: Add Dell’s receivables, i. e. days sales outstanding and days sales in inventory, then subtracts days of payables. In the last quarter of 1999, Dell’s accounts receivables stood at 36 days but its payables ran up to 54 days while its days inventory came in at six. This worked out to a negative cash conversion cycle of 12 days. Sethuraman Dinakar) Describe Dell’s just in time inventory management system. The reason for current day Dell’s position in the Industry is their strategic focus to reduce inventory to streamline distribution. The new supply chain strategy has allowed them to keep only five days of inventory on hand (DI D RECT, 2001). Dell’s inventory is placed almost in the facility of its manufacturer from where the parts are being supplied directly to the customer point which is the quintessential JIT layout.
Mike Gray, the supply chain head of Dell describes it as the smallest amount of inventory of any company within this industry, where other companies in computer industry holds inventory between 20 and 30 days (Personal Communication March 10, 2005). JIT systems offer several cost-cutting advantages. For Dell it means the fewer computers on its shelves, the less money it looses per PC. JIT along with a significant reduction in depreciation cost for Dell which is 1 percent per computer per week. Besides this reduction in storage costs is another advantage of JIT to Dell.
The constant R ; D on JIT is allowing the Dell to maintain only four to five days of inventory by constantly uncovering and solving supply chain problems. Dell’s inventory levels in 2005 are about six days making 60 inventory turns a year, where as for competitors it is 12 to 30 turns a year. Such tight control of stock gives Dell an opportunity to control its expenditures and to have a negative cash conversion cycle. Technology employed by Dell Dell is constantly renovating its business model with strategies according to the need.
The initial costs of savings were derived from Dell’s direct-to- the customer strategy. Also Dell grabbed the opportunities of Internet much earlier than its competitors by establishing online sales on its e-commerce portal. The demand – pull strategy of inventory reduced the unnecessary inventory by supplying only the customer desired components. This has resulted in less carrying costs. Dell also offered many flexible payment options to its e-tailers and bagged more than $ 10 million dollars in its early days. The AOL and Dell’s partnership is an appreciable one in the communication industry.
According to Felice (cited Jessica Altman, et al. ,) in Dell’s services portfolio now spans from e-support to e-consulting, serving medium-sized companies to some of the world’s largest enterprises. According to Michael Lambert (cited Jessica Altman, et al. ,) with the help of PowerEdge 1300, Dell has introduced a highly reliable and manageable system that redefines server value. The ability of PowerEdge 1300 offers Dell to increase employee productivity by enhancing the utility of workforce tools like mail, file, print etc. Dell maintains specific intranets and backup/recovery systems to reduce the risk of digital threat. Dell adopts Altiris that works along with Dell OpenManage Client Administrator (OMCA). DellHost was designed for small and medium sized businesses through which Dell has increased its customer base, “forty percent of which are new to Dell” (Dell speeds web site hosting setup, 2004). Dell keeps consumer information lines open 24 hours a day, 7 days a week through call centers and online customer service tools.
Dell has constructed its own supply chain using i2 Supply Chain Management (SCM) solutions to plan orders and signal suppliers every two hours, which enables Dell to manufacture and deliver exactly according to the customer specifications. ‘Now Dell and i2 are working to deliver Dell’s supply chain management expertise and i2 SCM for end-to-end Supply Chain Management on award-winning Dell™ PowerEdge™ Servers and PowerVault™ Storage – the same platform used in Dell’s own supply chain management system. ‘ (Dell) Impact of transformation on Dell from a financial perspective & Inventory
The adoption of just-in-time and build-to-order strategies increased the coverage of Dell and bagged the customers throughout Europe, Africa and Middle East, Asia. Many sales and support centers were established across the globe to meet the needs of domestic and industrial customers. The expansion of Dell sales to online has increased made a record sales of $1 million in 1997. And according to IDC market researcher, Dell has gained 12. 6 points of market share for desktops, laptops and PC servers after 1995, which is an increase of nearly 400%, to around a 16% share. Kevin Maney). Even during the recession period during 2000, Dell’s stock was in the upper $50 range, which was far better than most of the big enterprises.
This was due to the strength of online sales backed up with strategy. Dell’s revenues doubled in 1999 and the estimates reached $35 billion in fiscal year 2003 (Kevin Maney). The current Dell operations include more than 10 manufacturing plants worldwide, 1 million part numbers, 3 million inventory movements per day, and more than 2 million bills of materials per year, as well as 1. million purchase order lines per year. (A. E. Ragab) The current day sales were published as $57,420. 0 millions by Hoovers. Producing 25,000 finished boxes per day which represents less than 7 hours stock at no cost of storage and offering the prompt and timely delivery services at the same time is a unique attribute of the Dell’s SCM strategy. The straight and streamlined distribution channel gives the company an advantage of 10% less operating costs than its competitors. For example if Gateway offers a PC for $ 500, Dell produces it only for $450.
The process of direct supply from manufacturing point and by placing its support people at the manufacturers support place, Dell maintains a less number of service people. With only 8,000 employees in the services division, Dell is offering IT consultation service across the globe. As per watchfire report the company’s website received 775 million page requests per quarter at 80 country sites in 27 languages/dialects and 40 currencies in 2006. Comparison of Dell’s Process to other similar companies (HP, Gateway) Dell is the early adopter of the strategic business model than its current competitors.
And analysts say that “Dell has a better business model than Hewlett-Packard,”. Though the consumer does not have any impact on what model of supply chain strategy Hewlett observes against the competitors, it makes a difference with the internal revenues. Dell’s regime and reign was continuing from the past 22 years, giving a clear edge to its competitors through its business innovations. Dell’s regime and reign was continuing from the past 22 years, giving a clear edge to its competitors through its business innovations.
During 1995 Dell shared 16% of market share where as the rivals Hewlett and Compaq together shared 16%. And in 1997, if Dell and HP both sold a computer that cost $1,000 to make, Dell would incur about $20 in inventory costs compared to HP’s $160. By 2005, Dell’s costs were $10 compared to HP’s $70 (Wharton) However the scenario seems to be changing with the slow growth of the competitors like Hewlett-Packard in terms of productivity and price. Now the game is not according to the technology up front in reducing the costs, but on formulating another business strategy in catching up the customers.
As many PC users are becoming techno experts and are keeping interest in assembling their PC as and when required, instead of ordering a box item. According to the recent IDC research, HP exhibits a worldwide PC market share of 19. 3% for the quarter ending June 30, whereas Dell has only 16. 1%. This is a reduction of market share for dell from 2005, where Dell was dominating with 8. 2% market share compared to HP’s 15. 7%. The 2007 third quarter earnings of Hewlett are reported as $2. 1 billion and the revenues as $25. billion, which shows a 16% increase over the same quarter of last year. Al these figures strongly alarm that Dell need to adopt another strategy instead of solely relying on its SCM to grow the business.
But Dell is not agreeing upon such figures. In one of the statement, Dell affirms that, “I think that there have been some competitors that have certainly improved their supply chains. But if you look at basic metrics, like return on capital or inventory management, they haven’t approached anywhere near the level that Dell does with its supply chain. Still there is a reason for us to believe that Dell’s strategy is continuing for the PC sales because the figures of Hewlett are not solely from PC sales as the company also draws it main revenues from printer sector. Dell’s outlook going forward and challenges company faces Though Just in Time is a very back bone to the company’s success story, Dell failed to supply several hundred million dollars worth of notebooks in the second quarter, due to painting and supply chain issues. Now the Dell’s trustworthiness is at risk with such instances.
Another concern for Dell is the immediate competitor, HP which is already shooting up it self in the market share and which takes advantage of Dell’s missteps. According to Siggelkow, there is also a risk that new initiatives will distract Dell from its supply chain operations. “The paint issue surprises me considering Dell’s ability to build to order,” he says. “Given the organization at Dell’s factories, this should not be a problem. ” It is becoming a fact that Dell’s build-to-order model is not able to meet the delivery requirements of major accounts.
Such kind of or repetitive delivery delays of Dell will cause the customer to go and buy the note books from the retailers like Gateway. Netessine (cited in Wharton) argues that Dell is approaching a point of diminishing returns. And as these returns diminish, the strengths of Dell’s rivals — HP’s retailing prowess, Apple’s product design and Acer’s low costs present a bigger challenge. “While Dell’s supply chain advantage is still there, it’s not as big anymore,” says Netessine.