Inventory Decisions in Dells Supply ChainAuthor(s) Ro.docx

Inventory Decisions in Dell's Supply Chain
Author(s): Roman Kapuscinski, Rachel Q. Zhang, Paul
Carbonneau, Robert Moore and Bill
Reeves
Source: Interfaces, Vol. 34, No. 3 (May - Jun., 2004), pp. 191-
205
Published by: INFORMS
Stable URL: https://www.jstor.org/stable/25062900
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Interfaces infjIML
Vol. 34, No. 3, May-June 2004, pp. 191-205 DOI
i0.1287/inte.l030.0068
ISSN 0092-21021 eissn 1526-551X1041340310191 @ 2004
INFORMS
Inventory Decisions in Dell's Supply Chain
Roman Kapuscinski
University of Michigan Business School, Ann Arbor, Michigan
48109, [email protected]
Rachel Q. Zhang
Johnson Graduate School of Management, Cornell University,
Ithaca, New York 14853, [email protected]
Paul Carbonneau
McKinsey & Company, 3 Landmark Square, Stamford,
Connecticut 06901, [email protected]
Robert Moore, Bill Reeves
Dell Inc., Mail Stop 6363, Austin, Texas 78682
{[email protected], [email protected]}
The Tauber Manufacturing Institute (TMI) is a partnership
between the engineering and business schools at
the University of Michigan. In the summer of 1999, a TMI team
spent 14 weeks at Dell Inc. in Austin, Texas,
and developed an inventory model to identify inventory drivers
and quantify target levels for inventory in the
final stage of Dell's supply chain, the revolvers or supplier
logistics centers (SLC). With the information and
analysis provided by this model, Dell's regional materials
organizations could tactically manage revolver inven
tory while Dell's worldwide commodity management could

partner with suppliers in improvement projects to
identify inventory drivers and to reduce inventory. Dell also
initiated a pilot program for procurement of XDX
(a disguised name for one of the major components of personal
computers (PCs)) in the United States to insti
tutionalize the model and promote partnership with suppliers.
Based on the model predictions, Dell launched
e-commerce and manufacturing initiatives with its suppliers to
lower supply-chain-inventory costs by reducing
revolver inventory by 40 percent. This reduction would raise
the corresponding inventory turns by 67 percent.
Net Present Value (NPV) calculations for XDX alone suggest
$43 million in potential savings. To ensure project
longevity, Dell formed the supply-chain-optimization team and
charged it with incorporating the model into a
strategic redesign of Dell's business practices and supervising
improvement projects the model identified.
Key words: inventory, production: applications; industries:
computer, electronic.
History: This paper was refereed.
Dell and Our Project
Dell is the largest computer-systems company based
on estimates of global market share. It is also the
fastest growing of the major computer-systems com
panies competing in the business, education, gov
ernment, and consumer markets. Dell's product line
includes desktop computers, notebook computers,
network servers, workstations, and storage products.
Michael Dell founded the company based on the con
cept of bypassing retailers and selling personal com
puter systems directly to customers, thereby avoiding
the delays and costs of an additional stage in the
supply chain. Much of Dell's superior financial per
formance can be attributed to its successful imple

mentation of this direct-sales model.
While the computer industry has grown tremen
dously over the past decade, firms in this industry
face their own challenges. First, rapid changes in tech
nology make holding inventory a huge liability. Many
components lose 0.5 to 2.0 percent of their value per
week, and a supply chain packed with yesterday's
technology is nearly worthless. With its direct sales,
however, Dell carries very little inventory: the whole
organization concentrates on speeding components
and products through its supply chain. Dell delivers
new products to market faster than its competitors
and does not have to sell old products at a discount,
because it has none. Second, the traditional model of
vertical integration that the original equipment man
ufacturers (OEMs) follow to manufacture all of the
major components of their products has almost disap
peared in the computer industry. Research and devel
opment (R and D) costs are too high and technology
changes too rapid for one company to sustain lead
ership in every component of its product lines. Dell
has close-relationship agreements with its suppliers
that allow them to focus on their specific compo
nents. At the same time, Dell concentrates its research
on customer-focused, collaborative efforts to lever
age the collective R and D of its partners (Dell and
Magretta 1998), which includes cultivating its supply
chain competence.
Dell management was concerned that, although the
firm carried almost no inventory, its suppliers might
191

2019 19:24:25 UTC
Kapuscinski et al.: Inventory Decisions in Dell's Supply Chain
192 Interfaces 34(3), pp. 191-205, ?2004 INFORMS
be holding much more inventory than was needed to
provide desired customer service. For this reason, Dell
asked a team from the Tauber Manufacturing Institute
(TMI), a partnership between the engineering and
business schools at the University of Michigan, to
study this issue. Dell sought recommendations for
a sustainable process and decision-support tools for
determining optimal levels of component inventory
to support the final assembly process.
Dell bases its business model on integrating five
key strategies: rapid time to volume, products built
to order, elimination of reseller markups, superior
service and support, and low inventory and capital
investment. We designed our project and the resulting
tools to support Dell's low-inventory and low-capital
investment strategy and to extend its impact beyond
the plant floor into the preceding stage of its supply
chain. Tom Meredith, at the time chief financial offi
cer, said in the May 18,1999 earnings conference call:
"Customers see no advantage in a manufacturer low
ering inventory to six days if there are still 90 days in
the supply line." Our project was the first step taken
to combat the "90 days in the supply line."
Dell's Supply Chain
Dell's supply chain works as follows. After a cus
tomer places an order, either by phone or through the

Internet on www.dell.com, Dell processes the order
through financial evaluation (credit checking) and
configuration evaluations (checking the feasibility of
a specific technical configuration), which takes two
to three days, after which it sends the order to one
of its manufacturing plants in Austin, Texas. These
plants can build, test, and package the product in
about eight hours. The general rule for production
is first in, first out, and Dell typically plans to ship
all orders no later than five days after receipt. There
are, however, some exceptions. For example, Dell may
manipulate the schedule when there is a need to
replace defective units or when facing large customers
with specific service-level agreements (who have non
standard quoted manufacturing lead times) for their
orders.
In most cases, Dell has significantly less time to
respond to customers than it takes to transport com
ponents from its suppliers to its assembly plants.
Many of the suppliers are located in Southeast Asia
and their transportation times to Austin range from
seven days for air shipments to upwards of 30 days
by water and ground. To compensate for long lead
times and buffer against demand variability, Dell
requires its suppliers to keep inventory on hand
in the Austin revolvers (for "revolving" inventory).
Revolvers or supplier logistics centers (SLCs) are
small warehouses located within a few miles of Dell's
assembly plants. Each of the revolvers is shared
by several suppliers who pay rents for using their
revolver.
Dell does not own the inventory in its revolvers;

this inventory is owned by suppliers and charged to
Dell indirectly through component pricing. The cost
of maintaining inventory in the supply chain is, how
ever, eventually included in the final prices of the
computers. Therefore, any reduction in inventory ben
efits Dell's customers directly by reducing product
prices. Low inventories also lead to higher product
quality, because Dell detects any quality problems
more quickly than it would with high inventories.
Dell wishes to stay ahead of competitors who
adopt a direct-sales approach, and it must be able to
reduce supplier inventory to gain significant lever
age. Although arguably supply-chain costs include all
costs incurred from raw parts to final assembly, Dell
concentrates on Dell-specific inventory (that is, parts
designed to Dell's specifications or stored in Dell
specific locations, such as its revolvers and assembly
plants). Because assembly plants hold inventories for
only a few hours, Dell's primary target, and ours in
this project, was the inventory in revolvers.
Dell has a special vendor-managed-inventory
(VMI) arrangement with its suppliers: suppliers
decide how much inventory to order and when to
order while Dell sets target inventory levels and
records suppliers' deviations from the targets. Dell
heuristically chose an inventory target of 10 days
supply, and it uses a quarterly supplier scorecard to
evaluate how well each supplier does in maintaining
this target inventory in the revolver. Dell withdraws
inventory from the revolvers as needed, on average
every two hours. If the commodity is multisourced
(that is, parts from different suppliers are completely
interchangeable), Dell can withdraw (pull) those com
ponents from any subset of the suppliers. Dell often

withdraws components from one supplier for a few
days before switching to another. Suppliers decide
when to send their goods to their revolvers. In prac
tice, most suppliers deliver to their revolvers on aver
age three times a week.
To help suppliers make good ordering decisions,
Dell shares its forecasts with them once per month.
These forecasts are generated by Dell's line of busi
ness (LOB) marketing department. In addition to
product-specific trends, they obviously reflect the
seasonality in sales. For home systems, Christmas
is the top time of the year. Other high-demand
periods include the back-to-school season, the end
of the year when the government makes big pur
chases, and country-specific high seasons for foreign
purchases (foreign language keyboards are especially
influenced). Dell sales also increase at the ends of
quarters (referred to as the hockey stick).
2019 19:24:25 UTC
Interfaces 34(3), pp. 191-205, ?2004 INFORMS 193
After the center of competence (COC) checks a fore
cast for predicted availability of components, the fore
cast goes to Dell's commodity teams and becomes the
basis for a six-month rolling forecast that they update
weekly. The commodity teams make generic forecasts
for systems and components and break those forecasts
down to a level of the specific parts that need to be

ordered. If the forecast is not feasible, the LOB mar
keting department revises it, although such revisions
are very rare. The buyer-planner for each commodity
receives an updated rolling forecast weekly; suppliers
receive forecasts monthly.
The objectives of our project were to recommend
target inventories for the revolvers to minimize
inventory-related costs subject to a service-level con
straint and to develop a process and tools for iden
tifying and updating target levels for inventories of
the items in the revolvers. (Suppliers who make the
replenishment decisions attempt to follow Dell's tar
gets and guidelines.) Dell had been setting inventory
targets based on empirical data and judgment with
no clear reference to any desired service levels. Dell
hypothesized that it could reduce revolver inventory
markedly by using a more rigorous approach and
gaining better visibility of the inventory throughout
the supply chain. Once it determined an optimized
inventory level, Dell could collaborate with its sup
pliers to eliminate excess inventory.
Dell emphasized that it wanted to sustain any
changes over the long term, which would require
integrating them into its informational infrastruc
ture. ValueChain is a program intended to extend
Dell's successful direct-sales approach back into the
supply chain with the goal of increasing the speed
and quality of the information flow between Dell
and its supply base. The corresponding Web site
valuechain.dell.com is an extranet for sharing such
information as points of contact, inventory in the sup
ply chain, supply and demand data, component qual
ity metrics, and new part transitions. Dell envisions
using this site to exchange with suppliers current

data, forecasted data, new product ideas, and other
dynamic information that might help it to optimize
the flow of information and materials in the supply
chain.
By integrating the process and associated tools
that we developed with valuechain.dell.com, we want
to make the tools part of Dell's and its suppliers'
procurement-business processes. Dell and its suppli
ers through ValueChain can share such information
as target inventory levels to support collaboration on
future improvements.
Our Approach
We concentrated on the last stage of Dell's supply
chain, the revolvers, where the inventories of all com
ponents are Dell specific. Dell believes that inventory
savings at this level will produce comparable supply
chain savings. Also, analysis of this stage is a neces
sary first step to further improve the whole supply
chain. We looked at the inventories of an important
component, XDX, in the revolvers themselves and in
transit to revolvers. XDX is one of the major compo
nents of PCs, supplied by a few suppliers, that is fully
interchangeable (customers do not choose the man
ufacturer of this component when ordering the final
product).
In our analysis, we made several simplifying
assumptions. Because the supply chain provides a
fairly high service level, simultaneous shortages of
multiple components are very infrequent, and thus,
we could ignore them without significantly altering
the results. Although Dell regularly updates its fore

casts of demand and hence its desired inventory lev
els, we assumed stationary demand and inventory
targets during a rolling forecast horizon of 10 busi
ness days. We realized that the behaviors of demand
and inventories at the beginning and the end of a
product's life cycle differ from those mid life cycle;
however, we handled them separately and do not
describe them here. (Kurawarwala and Matsuo 1996
describe ramp-on using the Bass 1969 model.) We
call the inventory in the revolvers the revolver inven
tory and the revolver inventory plus any inventory
ordered but not yet delivered the system inventory.
Although revolver inventory determines the availabil
ity of parts, Dell can control it only by placing new
orders (increasing the system inventory).
Currently, Dell's suppliers order in batches (to off
set fixed ordering costs incurred every time an order
is placed) when inventory levels drop. However, the
actual order (batch) sizes and points (levels) at which
the suppliers reorder are quite inconsistent. Our first
task was to develop a tool that would bring con
sistency to suppliers' ordering decisions. (Our esti
mates of the benefits do not include benefits from
eliminating existing inconsistencies.) We considered
using continuous-time, discrete-time (time buckets),
or fixed-time-period approaches. Because suppliers
and buyer-planners react to changes in conditions
as they occur, we used a continuous-time approach
and the corresponding optimal policy, a (Q, R) pol
icy. Also, we found that (Q,R) policies are far eas
ier for the managers at Dell to understand and use
than the (s, S) policies used in periodic settings. In
a (Q, R) policy, R denotes the reorder point and Q is
the size of the order (that is, we order a batch of

size Q whenever system inventory drops to R). Con
sequently, R + Q denotes the order-up-to level. We
also used the newsvendor ratio to heuristically find
the best reorder point, R. We focused on identifying
the optimal reorder point R for XDX and assumed
that the order size Q would remain at its current level.
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That is, based on long-term data, we estimated the
order size Q suppliers were using and assumed it
would not change.
The reorder point is closely related to safety stock,
which is the extra inventory held to buffer against
multiple sources of variability. Specifically, safety stock
is the difference between the reorder point and the
average requirements during replenishment lead time
(the latter is also called pipeline inventory). Assum
ing normal distributions of forecast error and of
replenishment lead time and independence of fore
cast errors, the safety stock level for (Q, R) policy is
given by Z * Jfi2a2--?m^j, and the reorder point is
the sum of the pipeline inventory and safety stock.
That is,
R = lil?if + zJfjL2f a2 + iLi<Tf, where

[if is the average of the daily forecasted demand
during replenishment lead time,
ay is the standard deviation of daily forecast error
during replenishment lead time,
?jl1 and <jx are the mean and standard deviation of
the replenishment time, and
Z is a score that links safety stock with required
service level. For a desired service level defined as the
probability that demand is met from stock, Z = <?>-1
(service level), where <?( ) is the cumulative standard
normal distribution.
Safety stock protects against variability of demand
during lead time. Here, we control safety stock
through the total system inventory (the inventory in
the revolvers and the inventory on order), as these
two differ only by a constant. We can approximate
the optimal safety stock using the newsvendor logic
(Nahmias 1997). According to this approximation,
the probability of satisfying all demand (or the ser
vice level) needs to be equal to the critical fractile
cu/(cu + c0), where cu is the cost of not being able
to satisfy one unit of demand (underage cost), and
c0 is the cost of maintaining an unused unit of inven
tory between consecutive ordering decisions (overage
cost). The critical fractile is thus the same as the ser
vice level that balances the costs of carrying one too
many items versus one too few items in inventory.
With 4>() being the cumulative standard normal dis
tribution, optimal Z = ^>~1(cu/(cu + c0)). To calculate
the optimal service level, we needed data to estimate

cu and c0.
After specifying the model, we decided how to esti
mate the input parameters (for example, demand data
and cost coefficients) and focused on the supply chain
for XDX. For all of the input parameters, we used his
torical data.
We developed a user-friendly spreadsheet tem
plate, the revolver inventory model, which allows a
buyer-planner to set target inventory levels and track
actual inventory levels daily. The spreadsheet uses
historical data to estimate demand. It also estimates
such parameters as the costs of underage and over
age, calculates the suggested policy, illustrates the his
torical behavior, and permits numerical and graphical
analyses of scenarios. The revolver inventory model
also serves as a strategic or diagnostic tool by relating
components of the total-required-inventory levels to
the various underlying causes. For example, we could
determine what portion of the required inventory is
due to variation in the forecast error. We collected his
torical data for XDX for each of the variables identi
fied by the model and performed our original analysis
for the period from December 1,1998 through May 27,
1999 (we included a methodology for daily updates).
In the final step in this portion of the project, we used
the analysis of the data and the model to identify
areas for improvement.
The Golf Analogy at Dell
While many people at Dell understand inventory
replenishment concepts, we found that they had no

knowledge of formal operations-management theo
ries. To explain these ideas, we used an analogy from
golf, employing terms from the sport to describe the
expressions and conditions commonly found in basic
inventory equations. A golf course provides many
physical obstacles, such as sand traps, water hazards,
and the long distances to the hole. All of these ele
ments are completely out of the control of the golfer,
and they must accommodate these perils through
out the game. Like water hazards and sand traps,
several factors can hinder a smooth delivery of com
ponents in a supply chain, such as road construc
tion or congested highways. The distance between
the tee and the hole is analogous to the distance
from suppliers to the OEM. In golf, each hole has a
standard, or par that the course designer sets based
on a variety of factors. This par will not change
unless the designers of the course return and make
fundamental alterations to the layout. The interest
ing thing about par is that it gives golfers a target
to strive for. They have constant feedback on how
they are doing, compared to a set standard. With no
variability in the system, the inventory necessary to
maintain steady production depends on only three
factors: demand, replenishment time, and shipping
frequency (or the size of shipments). We dubbed this
level of inventory as par, based on the notion that a
problem-free manufacturing environment should run
efficiently with a certain natural level of inventory
just as an average, problem-free golfer should achieve
an expected score on a course. We calculated the par
2019 19:24:25 UTC

level of inventory for several points in the supply
chain:
total system par
= forecasted demand for time period
* (replenishment time for the supplier
+ time between shipments/2).
The first part of the total system par is some
times called the pipeline inventory, that is, the aver
age inventory ordered but not yet delivered, while
the second part is the cycle inventory, inventory
due to batching. By Little's law, the average time
between orders is given by Q/fif (Nahmias 1997) for
given order quantity Q and forecasted average daily
demand during replenishment lead time fij.
Dell's Handicap
In golf, a handicap is a measure of a golfer's perfor
mance relative to an expected baseline, the par. As a
golfer improves over time, his or her handicap score
decreases. We used this term and found it very effec
tive to describe safety stock and the reasons why the
organization might carry extra material.
Safety stock insures against potential variations on
both Dell's side and the supplier's side of the sup
ply chain. To gauge improvements and to determine
causes of variation, we separated the sources of vari

ance. We referred to the safety stock required to cover
problems and variance within Dell's portion of the
supply chain as Dell's handicap, and we referred to
the remaining inventory needed to guard against the
supplier's failures to deliver quality goods consis
tently on time as the supplier's handicap. For the
project, Dell and its suppliers agreed to outline the
elements that would constitute the supplier's handi
cap. We planned to make the supplier's handicap part
of the supplier scorecard.
Important elements of Dell's handicap are forecast
error and pull variance. We use variance in the sta
tistical sense as the expected value of the square of
deviations from target values. Dell forecasts its need
for individual components in two stages. In the first
stage, it forecasts an aggregate number of final prod
ucts; in the second, it estimates the mix of compo
nents (corresponding to different features). An error
is associated with each of the two stages. The absolute
difference between the number of units actually sold
on the aggregate level and the number forecasted is
called the aggregate deviation. The difference between
the actual units and the forecasted units that incorpo
rate a specific component (feature) is another forecast
error, labeled the attach deviation. Both are absolute
differences, not fractions. Outside of the forecasting
process, a deviation also exists between what Dell
pulls out of the revolver daily and what the supplier
expected Dell would pull based on the production
schedule. This is the pull deviation.
While aggregate demand is generally predictable
and not a major contributor to the safety stock, the
attach rate varies noticeably. Customer preferences

change every day, sometimes drastically, despite
Dell's amplifying or reducing demand through sales
and price reductions or increases for various compo
nents. The attach deviation is the difference between
the expected demand for a component and the actual
number of components Dell uses, assuming that Dell
pulls at the predetermined percentage and has made
no aggregate-level error. For example, suppose that
Dell forecasts an aggregate demand for 4,000 units,
2,000 of which would have XDXs attached, represent
ing a 50 percent attach rate. If the actual demand
turns out to be 3,200 units, then the forecasted
demand at the aggregate level deviates from the
actual by 800 units. However, suppose that demand
perfectly matches the forecast of 4,000 (resulting in
an aggregate deviation of 0), but only 1,500 com
puters need an XDX. In this case, the actual attach
rate is only 37.5 percent and the attach deviation is
2,000 - 1,500 = 500. This attach deviation can be cal
culated for each supplier. If Suppliers A and B each
have 50 percent of Dell's business for this device, Dell
would plan to consume 1,000 of A's XDXs and 1,000
of B's XDXs. If the pulled quantities are proportional
to the allocated ratios (50 percent for each supplier),
then each would provide 750 units. In this case, the
attach deviation equals 1,000 ? 750 = 250 for each sup
plier. (The actual pull is 250 units less than the fore
casted pull of 1,000 units.)
Safety stock is driven by variances (in the square
root formula for safety stock), and therefore, we trans
late all of the deviations into corresponding variances.
Our objective is to examine the total variance and to
attribute it to specific causes. Because it is more dif

ficult to forecast on the component level than on the
aggregate level, we expect that the attach variance will
be greater than or equal to the aggregate-level vari
ance. By subtracting the aggregate-level variance from
the attach variance, we can estimate the incremen
tal contribution of attach rates to the variance, even
though these effects are obviously not independent.
If the commodity in question is multisourced, Dell
must further allocate the attach rate forecast to indi
vidual suppliers. Dell tends to pull material from
competing suppliers in batches, switching from one to
the other, rather than taking a fixed percentage from
each one. Thus, even without any aggregate-level
variance or attach variance, the suppliers' inventory
is different than forecasted. This is referred to as the
pull variance (Figure 1). Dell pulled different numbers
of units of XDX from two suppliers' revolvers. Dell's
2019 19:24:25 UTC
196
Interfaces 34(3), pp. 191-205, ?2004 INFORMS
12/1 12/2 12/3 12/4 12/5 12/7 12/8 12/9 12/10 12/1112/12
12/14 12/15 12/16 12/17 12/18 12/19 12/21
I Supplier A M Supplier B Date

Figure 1: Dell pulled different numbers of units of XDX from
two suppliers' revolvers. Light bars and dark bars
correspond to quantities pulled by two different suppliers. The
arrows above the graph denote the range of days
during which Dell pulled predominately one supplier's goods.
Dell's pulling in batches of different sizes results
in a larger forecast error than would be the case if it used all
components in a fixed ratio (level schedule or
level pull).
pulling in batches of different sizes results in a larger
forecast error than would be the case if it used
all components in a fixed ratio (level schedule or
level pull). Even though the suppliers do not order
every day, they continuously monitor the inventory
levels and, therefore, the pull variance influences their
decisions.
We compute the pull variance using the same
underlying logic as the other two variances except
that it derives from the build-pull error instead of the
forecast-build error. So, if Dell expected to use 2,000
XDXs per day and it actually used 2,000, the aggre
gate and attach deviations would be zero. If each of
the two suppliers has 50 percent of the business, then
each would expect to supply 1,000 units during the
day. However, if Dell ignored the percentage of busi
ness and pulled all 2,000 units from Supplier A and
none from Supplier B, it would cause high levels of
forecast error (and confusion) for both suppliers. If,
on the other hand, Dell pulled according to the fore
casted business percentage for each supplier, it would
eliminate the pull deviations (and consequently vari
ance). The data clearly indicate that the variance from

Dell's pulls is greater than the variance in the attach
rate, which is greater than the aggregate variance,
thus leading to inflated inventories.
Using these three variances as inputs to the model
results in three different inventory requirements. Even
though interdependencies exist among these vari
ances, by calculating the differences between these
inventory requirements, Dell can estimate the cost of
error propagation from the aggregate level, through
the detailed component level, to the actual variance
of pulls from the revolvers (Figure 2). The inventory
Safety stock = Z * ?l?)o] + ?i<?
Figure 2: In this breakdown of Dell's handicap, the left side
shows the levels of inventory required due to the
accumulation of variance. The right side illustrates how we
associate the inventory with each of the underlying
causes. We interpret the incremental inventory as a result of
the three causes.
2019 19:24:25 UTC
Supplier's
handicap
Dell's
handicap

Replenishment time
Figure 3: We developed a total inventory breakdown assuming
the current
sources of inefficiency, and we call the inventory driven by
aggregate vari
ance, attach variance, and pull variance Dell's handicap.
driven by aggregate variance, attach variance, and
pull variance is called Dell's handicap (Figure 3). Our
next logical step was to attack this level of inventory
through various improvement initiatives.
Data Collection and Analysis
The model provides Dell with a scientific tool to
determine the revolver inventory levels and hence to
manage its supply chain in a systematic way. The
model can also create a reference point for future
improvements and estimate the savings Dell can
obtain by changing its current manufacturing sys
tem. Specifically, buyer-planners can use the model to
manage their inventory at a desired service level, and
commodity managers can use it to measure improve
ments in the supply chain. To implement the model,
we needed to gather historical data and create a self
contained, user-friendly spreadsheet template buyer
planners can use daily.
Data Collection
We collected data for the period from December 1,
1998 through May 27, 1999. Three companies (A, B,
and C) supplied XDXs to Dell during this period.
Supplier A supplied two different XDXs, Supplier B
and Supplier C each provided one part number but

many versions of that part. The parts supplied by A,
B, and C are labeled as XA1, XA2, XB, and XC.
We used two groups of data in our analysis: data
related to the economics of safety stock (mainly the
costs of underage and of overage) and data related
to historical estimates of the variance of lead-time
demand.
The Cost of Underage
We calculated the cost of underage by evaluating the
impact of not having an XDX in inventory. We did
not consider the costs of switching among suppliers
but instead concentrated on the cost of running out
of XDXs altogether. Consequently, we based lost mar
gins on cancelled orders and compensation for the
expedited shipping costs for delayed orders. The data
included estimates of
?the lost profit from a canceled order,
?increased shipping cost for not having a compo
nent when needed (the product is express shipped to
the customer or the shipping charges are reduced or
waived or both),
?the portion of customer orders that results in a
lost profit, and
?the fraction of orders that incur higher shipping
costs.
Several costs (for example, for substitution and for
air freight) are caused by part shortages, and they are
not easy to quantify; many have a greater impact on

profit than lost sales. We advised Dell to try to quan
tify all of these costs in the future. They include
?providing a better part at the same price as the
requested part,
?paying a penalty, for example, a percentage of the
price of the system for each day above the standard
lead time (as specified in some of Dell's contracts),
?making price concessions on future orders
because of noncompliance with stated lead times,
?losing sales opportunities with disappointed cus
tomers, and
?losing sales when sales representatives call cus
tomers to explain delinquent orders instead of calling
other customers to make new sales.
The Cost of Overage
In calculating the cost of overage, we recognize that
the effect of current ordering decisions is limited to
the time between consecutive deliveries of the compo
nent. During that time, capital is tied up, price erosion
occurs, and the revolver assesses a storage charge. We
considered the following data in determining the cost
of overage:
?We assumed that the supplier's annual cost of
capital was slightly higher than Dell's.
?We estimated price erosion based on empirical
data on price decreases for XDXs.
?We estimated that the average time between

deliveries was two days based on conversations with
sales representatives from all suppliers. Most said that
they order from their factories approximately three
times per week. Dell's need for the parts and suppli
ers' presumptions about the size of the order, and not
preset schedules, drive their ordering.
2019 19:24:25 UTC
Lead Time Demand Variance
We collected the following data for use in our histor
ical study of variance of lead-time demand for XDXs:
?Dell's daily pulls from the revolver for produc
tion but not other pulls (for replacement parts or for
quality issues), although they were still used to deter
mine the inventory level in the revolver,
?daily receipts of suppliers' components at the
revolver,
?daily quantities of in-transit inventory between
the suppliers and the revolver,
?daily sales or builds of systems needing XDXs,
?Dell's forecasts to its suppliers specifying the
quantity of each supplier's XDX that Dell expects to
use during the next month, and
?the suppliers lead times for XDXs obtained

from the suppliers' representatives in Austin (includ
ing day stamps indicating when parts became
Dell-specific), transport times, and the amount of
Dell-specific finished-goods inventory suppliers held
at their manufacturing and configuration sites.
We could not calculate the standard deviation of
supplier lead times with the data collected; we esti
mated it based on anecdotal evidence. Also, in many
cases, suppliers made deliveries of more than one
batch, which meant that average lead time could be
an inappropriate variable. Because the purpose of
safety stock is to reduce the risk of running out of
inventory, we used the lead time for the first batch as
an estimate of the relevant variable.
Other Parameters
We collected the data to derive values for other
needed parameters.
?We calculated the daily quantity of inventory in
the system (the system inventory) by adding inven
tory in the revolver to that in transit for each part
number on each production day.
?We calculated the forecast error for demand dur
ing lead time by directly collecting data on the quan
tity analyzed. That is, we considered buckets of time
equal to the lead time and calculated the forecast error
for each bucket by summing the forecasted demand
for all days in the bucket and subtracting Dell' actual
pulls over the same period. Then, we calculated a
standard deviation of these errors. To express the
error as a portion of average demand, we divided

the result by the average of the forecasts for the next
10 days, a number we believed was appropriate after
observing some real data.
?We calculated the days of inventory Dell held
(a measure common at Dell) by dividing a given day's
inventory level by the average of the forecasts for the
next 10 days. In addition to expressing a given day's
inventory in terms of inventory days, we also calcu
late the average inventory in units.
?To assess Dell's method of making ordering deci
sion, we translated the system inventory levels just
before orders into corresponding Z-scores. That is, we
used the system inventory to solve for the Z-score
for each lead-time bucket and then converted the
Z-score into the corresponding service level, using the
standard normal distribution. The resulting quantity
described the imputed service level.
?We determined the optimal XDX inventory lev
els, in transit and system inventory levels, for the
aggregate and for individual suppliers that should
have been carried. These values were calculated using
the following formulas:
average in-transit inventory = ^??x^, and
average system inventory = R + Q/2 = (/x? + L/2)fif
~^~Zo"DfLT,
where Q is the order size, L is the average time
between shipments received at the revolver, (rDfLT =
JfjAaf +/??aj is the standard deviation of demand
during the lead time, and R = ?n^f + ZaD LT is the

reorder point.
?We calculated the optimal number of days of
XDX that Dell should have held by dividing each
day's optimal inventory by the average of the fore
casts for the next 10 days. We calculated these figures
for each part number for each date included in the
study. (We wanted to compare the optimal number of
days with the actual number of days of inventory in
the system.)
Data Analysis
Although interested in the inventory savings, Dell's
management wanted to be very cautious and to over
estimate, rather than underestimate, inventory needs
to avoid damaging customer service due to unavail
ability of components.
Although our model can handle all the factors listed
below, we initially ignored some factors that would
have reduced inventory needs even further. First, Dell
assembles most of its products two or three days after
receiving an order. To be conservative, we ignored
this extra lead time. We can easily incorporate its
effects by reducing suppliers' delivery times to the
revolvers. Second, Dell wanted to run the model at
its current average service levels for each component
before making any further changes. Third, pooling
might provide benefits because three firms were sup
plying interchangeable parts. For all three suppliers
combined, to achieve a 98 percent service level, each
would need to achieve a much lower service level
(about 70 to 75 percent if they were of comparable
sizes). Before exploiting the benefits of pooling, Dell
wanted to eliminate the current operational disadvan

tages caused by clumpy pulls. Also, we ignored ramp
up and ramp-down effects.
2019 19:24:25 UTC
Part number System Z-score System service level (%)
Aggregate 2.26 98.80
XA1(A) 1.50 93.27
XA2(A) 1.51 93.49
XB(B) 1.25 89.35
XC(C) 0.93 82.42
Table 1: In this table of historical average system service
levels (as of
May 27,1999), the parts supplied by A, B, and C are labeled as
XA1, XA2,
XB, and XC.
Given these simplifications and Dell's require
ments, we started by investigating the historical ser
vice levels and then the forecast error.
Service Level
The aggregated imputed historical service level of
98.80 percent was surprisingly close to the optimal
service level of 98.66 percent provided by the model
(Table 1). Individual products, however, had signif

icantly different average service levels, and actual
service levels (and the corresponding Z-scores) var
ied significantly over the course of the study (Fig
ure 4). Inventory theory would suggest a fairly stable
level of service. If demand were stationary, both the
reorder point and the inventory order-up-to levels
would be constant. Even when demand forecasts vary
from period to period, because the costs of underage
and overage are very stable, the expected service level
and the corresponding Z-score, where Z = 4>_1(cM/
(cu + c0)), should remain constant (unless there are
substantial nonstationarities). We therefore expressed
the inventory levels just before orders were placed
as Z-scores. Our results show major swings of the
Z-scores, which indicates that Dell's suppliers do not
follow a (Q, R) policy. We understood that they used
ad hoc techniques, and we were not able to capture
them formally. We suspect that these swings were
caused by suppliers overreacting to current situations
and possibly by long-term trends. (We performed the
same analysis for inventory order-up-to levels, which
should also remain stable, yet they were equally
volatile.) While individual orders varied widely dur
ing the study period, the average service level for
all three suppliers combined was very close to the
optimal.
Our estimates of the average historical service level
are very close to the estimates of optimal service lev
els, and thus the average service level should remain
at the current level. However, because in the past
inventories shifted erratically and Dell had no consis
tent policy, it should be able to reduce average inven
tory by following a consistent policy.

Forecast Error
We gathered information on historical forecasts for
XDX and the actual Dell pulls and compared the two
for each of the replenishment periods. Forecast error
is a critical input in determining the optimal inven
tory level. In our model, we assumed the errors to
be random. However, it was apparent (and confirmed
by formal analysis) that at the commodity level the
errors are not independent from period to period. The
error showed strong linear trends (Figure 5).
The strong error trends could arise from several
factors, including forecasting. Like many companies,
Dell passes forecasts through various internal organi
zations before disseminating them to suppliers. While
innocently acting with the company's best interest
in mind, each group used its own judgment and
biases to modify the forecasts of demand. Such iter
ative hedges and adjustments can erode the qual
ity of the original information. Dell's supply-chain
7 -
6
5 (fi
(D
8 4
CO
*3
2
1

0
%
20 40 60 80
Time
100 120 140
Figure 4: In this graph of Z-scores for system inventory
associated with historical service levels over the course
of the study, each point corresponds to a placed order.
2019 19:24:25 UTC
200
Interfaces 34(3), pp. 191-205, ?2004 INFORMS
O
c
2.50
2.00
1.50
1.00
? 0.50 c
O
CO

CO
?
0.00
-0.50
-1.00
-1.50
-2.00
-2.50
/ v.* ~?
-"V
r
11/21 12/11 12/31 1/20 2/9 3/1 3/21 4/10 4/30 5/20 6/9
Figure 5: The forecast error for XDX over the course of study
showed strong linear trends.
optimization team has targeted these forecasts for
process improvement. Despite this concern, we used
the forecast data to estimate inventory levels. We exer
cised extra caution, however, and to reduce potential
inaccuracy, we dealt with the lack of independence
heuristically (as described in the data analysis sec
tion). In this way, we believe that we did not compro
mise the results from the model, even though the lack
of independence reduced the accuracy of the model's
recommendations.
In graphing forecast error for XA2, we observed
strong cyclic behavior (Figure 6). This can be
attributed to the frequency and format of the data

Dell provides to the suppliers. The information is pro
vided weekly in monthly buckets. Suppliers generally
divide these aggregate monthly figures evenly into
four weekly buckets but do not divide it further by
days of the week. Sometimes they may even consider
the forecast for two weeks as demand needed in one
day (the first day of the two weeks). As a result, the
forecast for cumulative demand becomes a step func
tion, while it actually grows linearly.
Several other factors (most related to human errors)
can contribute to forecast inaccuracies beyond nor
mally expected levels. Ultimately, these forecast errors
could prompt Dell to investigate its forecasting pro
cedures and possibly adopt a more quantitative
approach.
Results Analysis
After analyzing the data required for the model, we
created an Excel-based tool for the buyer-planners.
This spreadsheet-based tool was self-contained and
included an overview of an input area, actual cal
culations, suggested decisions, and explanations of
the logic for each step. To provide detailed infor
mation on each component, we created a series of
charts dynamically linked to source data. These charts
depicted
?current inventory versus recommended inven
tory in units,
?current days of inventory versus recommended
days of inventory (the above output translated into

days),
/ * * #
*
11/21 12/11 12/31 1/20 2/9 3/1 3/21 4/10 4/30 5/20 6/9
Figure 6: The forecast error for XA2 over the course of study
showed a difference between actual orders and
forecasted values before Christmas in December of 1998.
2019 19:24:25 UTC
?current service level compared to the recom
mended level,
?inventory drivers, that is, inventory units broken
down into causes (such as aggregate error, attach rate
error, and pull error), and
?inventory percentage drivers, that is, inven
tory units broken down into causes and listed as
percentages.
Data at this moment must be manually (copy and
paste) entered, but Dell is independently proceeding
with automating this link.
Service Levels

After developing a format for the data and determin
ing the historical service levels, we examined what
the model's recommendations would have been for
the past six months. Because the levels of service
for individual products were significantly different
from those the model would have recommended, Dell
and the TMI team agreed to implement the model.
The implementation, however, would be split into
two stages. In stage 1, historical service levels would
be imposed and used as an input to the model; in
stage 2, service levels for individual products would
be adjusted in accordance with the model's recom
mendations. Not surprisingly, in stage 1, the model's
outputs were close to the average historical levels
(Table 2).
Optimal vs. Actual Inventory Levels
While the order-up-to levels that we calculated using
the model remained fairly stable over time, the actual
Average historical Average level
level suggested by the model
Part number Units Days Units Days
Aggregate 81,606 11.0 77,643 10.7
XA1(A) 32,351 11.2 24,625 8.4
XA2(A) 26,625 22.1 27,147 23.7
XB(B) 21,111 9.8 18,186 8.2
XC(C) 44,109 9.6 43,414 9.3
Table 2: The historical average inventory levels were fairly
close to aver
age inventory levels suggested by the model as of May
27,1999.

system inventory levels fluctuated widely (Figure 7).
The average system inventory levels were close to
those suggested by the model, but the actual num
ber of units in the system at any time differed drasti
cally from the number required. For example, around
February 1, 1999, the model showed that the sys
tem should have held nine to 11 days of inventory
to handle expected fluctuations in demand and sup
ply. However, the actual number in the system was
close to 18 days of inventory. The extra seven days of
inventory in the revolver were costly for the supplier.
Likewise, in the beginning of March, Dell was carry
ing five to seven days worth of inventory, while the
model showed that eight to 10 days were required.
This means Dell was at a much higher risk of stock
ing out during that period. Clearly Dell should avoid
such huge fluctuations. The systematic ordering pol
icy we proposed will eliminate most of them and
make Dell aware of the remaining ones.
10 t
Actual Inventory
Order-up-to Level
- Average Recommended Inventory
Reorder Point
12/01/98 01/20/99 03/11/99 04/30/99
Figure 7: Although on average actual XC inventory was close
to the average recommended by the model, the indi
vidual observations indicate that most of the time the actuals

differed from the recommended levels significantly.
2019 19:24:25 UTC
These two examples illustrate the potential bene
fits of a management tool like the proposed inventory
model that can quantify the inventory needed in the
system at any time. Dell's buyer-planners who mon
itor the inventory levels should communicate with
suppliers and require inventory levels based on the
model's recommendations to prevent Dell from risk
ing a stock-out or paying for unnecessary inventory.
Inventory Percentage Drivers
One of the important features of the model is its
ability to categorize causes of required inventory. We
analyzed the historical data for XDX and found that
attach variance and pull variance each contributed
20 to 25 percent to the total inventory. After hearing
several suppliers complain about the clumpy pull, we
expected the pull variance to be nonnegligible. The
attach variance shows that Dell's forecasts at the com
modity level leave room for further refinement (Fig
ure 8). We broke down the drivers for inventory based
on the following assumptions:
?The supplier handicap was one day based on the

procurement team's experience with supplier delay,
?the replenishment time variance was (one day)2,
and
?the aggregate variance we assumed to be zero
because no data were available. (Should the data
become available, they would not change the aggre
gate level of inventory recommended but would alter
the breakdown percentages.)
Around 15 percent of the total inventory is associ
ated with par. If there were no variance in the entire
manufacturing system, Dell would need only 15 per
cent of the inventory it needed at the time of our study.
Granted, problems and fluctuations will always exist,
but this lower bound shows that Dell has tremendous
Supplier
Handicap (Days)
Pull (or Supplier
Part) Variance
(Days)
Attach (or
Component)
Variance (Days)
Replenishment
Time Variance
(Days)
Par (Days)
Figure 8: This breakdown of total inventory shows the
inventory

associated with the drivers of inventory (based on historical
data).
room for inventory reductions if it can implement and
sustain the recommended improvements.
Days of Inventory vs. Units of Inventory
Dell and its suppliers describe inventory levels in
terms of days of supply. Days of supply is a much
more stable measure than units of inventory. As long
as target service levels remain unchanged over a
given period and demand does not change dramat
ically, days of inventory will not vary significantly.
(When the coefficient of variation is constant, days
of inventory should remain constant.) However, the
actual units of inventory may change over time as
demand changes (Figures 9 and 10). The compo
nent has a recommended inventory level of close to
60 days for nearly the entire product life span, yet
the actual reorder points fluctuate widely. In particu
lar, there is a dramatic drop in recommended days of
inventory in early January 1999. Although the recom
mended days of inventory decrease, the units recom
mended do not because the average demand per day
is rapidly increasing (Figure 10). The day calculation
is an average of 10 future days' forecasts; in this case,
the forecasts were increasing rapidly. Furthermore,
two more factors amplify the level of fluctuation: the
historical service level of 99 percent and the tremen
dous supplier pull variance. This example shows why
it is important for the buyer-planners to manage
inventory in terms of both units and days. The combi
nation of the two charts will allow better understand

ing and improved decisions, which should translate
into decreased costs for Dell and its suppliers. While
we believe that days of inventory will remain the pri
mary tool for deciding how much to order, buyer
planners can use graphs of units of inventory to
see whether the requirements for a given part are
stable or changing. They can interpret any difference
between the targeted number of days and the actual
number of days of inventory into monetary exposure
from holding too much or too little inventory.
Our model does not capture ramp-up and ramp
down scenarios. XA2 was in its ramp-down phase
between late March and early April of 1999, after
which Dell ceased using the product. Looking at both
graphs of units of inventory and days of inventory,
however, one can easily recognize such ramp-down
and ramp-up periods.
Our results highlight the degree of error in the fore
casts suppliers were using and should encourage Dell
to investigate why the error was higher than expected
(for example, Dell may not have informed the sup
pliers promptly of changes or Dell may have delayed
a product launch because of a quality problem). This
should spark Dell's immediate action to correct data
frequently and improve its business process.
Furthermore, the high inventory level should
encourage Dell to reconsider the optimal service level
2019 19:24:25 UTC

Order-up-to Level
Average Recommended Inventory
Reorder Point
-Actual Inventory
12/01/98 01/20/99 03/11/99 04/30/99
Figure 9: The XA2 component has a recommended inventory
level close to 60 days, but the actual reorder points
fluctuate widely. The recommended days of inventory
decreased at the end of December and beginning of January
because the forecasts were growing rapidly.
120,000
100,000 4
80,000 4
60,000
40,000 4
20,000
Order-up-to Level
Average Recommended Inventory

Reorder Point
Actual Inventory
12/01/98 01/20/99 03/11/99 04/30/99
Figure 10: The recommended units of XA2 inventory increase
in January due to increased demand.
2019 19:24:25 UTC
for a supplier. Dell specified that it wanted to main
tain the existing service levels initially. A service level
of 99 percent is extremely high and most likely exces
sive given the data we collected. For this compo
nent, Dell could operate with a lower level of supplier
service.
Trial Implementation and Impact
After we analyzed the data and developed the tools,
we moved to initial implementation. We conducted
several tutorials, during which we discussed the the
ory behind the model and the specific instructions for
using the tools (in Excel format).
The goal of the tutorials varied depending on the
group targeted. For instance, in training the buyer
planners of XDXs, we focused on using the tactical

tool (to set inventory levels and track them); whereas
in training the supply-chain-optimization team, we
stressed the theory behind the model and the drivers
of inventory levels (so that they could conduct
improvement projects and quantify their impact). In a
tutorial for all of the XDX suppliers, we concentrated
on Dell's efforts to reduce the inventories it required
them to hold and asked them to help Dell to collect
the data needed to run the model.
We also assessed the improvement projects we
identified earlier. Other supply-chain-optimization
team members were identified as leaders for these
projects, and we roughly quantified the effects some
of the improvement projects will have on Dell and its
suppliers.
Finally, we discussed our project with teams for
commodities other than XDX with the idea of find
ing commodities most appropriate for analysis with
our model and validating the model's assumptions
for other commodities.
The vocabulary we introduced in our project per
sists at Dell, particularly par and handicap. Dell
has started other projects to eliminate elements of
its handicap. It has defined sources of variability
and linked various variance-increasing and variance
decreasing actions to costs and benefits. On a tactical
level, our project led to Dell's implementing tools to
identify optimal inventory levels.
We analyzed a number of scenarios to estimate
the financial impact of various improvement projects.
Using the model to extrapolate savings across all
XDXs, we calculated the cost savings Dell could

achieve by reducing inventory. We used inventory
drivers and the corresponding breakdown of inven
tory costs to estimate the reductions in inventory that
could be achieved through various improvements.
Eliminating the clumpy pull, reducing the replen
ishment time by 25 percent, doubling the delivery
frequency, and reducing the attach-rate error through
scheduling methods would all help to decrease
inventory. Using specific estimates (for price erosion,
storage charges, and costs of parts), we estimated
that Dell could reduce the current 10.5 days average
inventory level by 38 percent. By removing approxi
mately four days of safety-stock inventory, Dell could
achieve perpetual savings for all XDXs that will pass
through the revolver in the future. The resulting NPV
of savings is $43 million, at an eight percent cost of
capital. While the actual implementation for XDX is
still under way, Dell has used the model to set tar
get inventory levels for networking accessories at the
revolvers. So far Dell has decreased inventories for
its PowerConnect line of business from 20 days to
between 10 and 15 days, which is close to the target
of 10 days recommended by the model, and it expects
estimated annual savings of $2.7 million.
These benefits are likely lower than the true savings
possible as they ignore the facts that Dell does not
implement the current inventory policy consistently
(the Z-scores are not stable) and does not set service
levels correctly, basing them on historical service lev
els. Consequently, we expect actual savings to be even
higher than our estimates.

Throughout the project, we concentrated on a basic
solution and showed its use as not only a tactical, but
also a diagnostic tool. If such a tool yields savings
for a fairly sophisticated manufacturer like Dell Inc.,
most likely it would also benefit other companies with
similar supply-chain issues.
We presented the model to all the stakeholders
and prepared the buyer-planners to use it before we
departed. Also, the project was awarded the second
prize at the Spotlight (a formal festive presentation of
results from all TMI projects) held at the University
of Michigan in September 1999. A second TMI team
continued the project, focusing on decreasing variance
on the suppliers' side, and a third team focused on
an efficient process for collecting and maintaining the
inputs to the model.
References
Bass, F. M. 1969. A new product growth for model consumer
durables. Management Sei. 15(5) 215-227.
Dell, M., J. Magretta. 1998. The power of virtual integration:
An
interview with Dell Computer's Michael Dell. Harvard Bus.
Rev.
76(2) 72-84.
Kurawarwala, A. A., H. Matsuo. 1996. Forecasting and inven
tory management of short life-cycle products. Oper. Res. 44(1)
131-150.
Nahmias, S. 1997. Production and Operations Analysis, 3rd ed.
Irwin,

Boston, MA.
Dick Hunter, Vice President, Americas Manufac
turing Operations, Dell Inc., One Dell Way, Round
Rock, Texas 78682-2244, writes: "Thank you for the
2019 19:24:25 UTC
opportunity to describe the benefits that Dell Com
puter Corporation has experienced by implementing
the Inventory Analysis model in our supply chain. A
team of University of Michigan Tauber Manufactur
ing Institute students and professors developed this
model with us in 1999. This model and corresponding
logic changed our thinking by directing us to focus on
the drivers of variation in our supply chain as a key
method to reduce inventory and improve velocity.
"Understanding the variation drivers quantified in
this model, we have taken action to change how we
pull inventory from supplier logistics centers into our
factories. As a result, our suppliers see a more linear,
predictable pull of product. For Dell, this means that
supply continuity becomes more robust as suppliers
are better able to handle unforecasted upsides.
"Supplier logistics center inventory levels have not

been reduced so far; rather we have increased our
service level to our factories and customers. Dell's
ability to deliver quality systems to our customers has
increased since inventory previously in place to han
dle pull-variation is now able to extend our imple
mentation time for quality improvements. Similarly,
exogenous factors such as overseas natural disasters
are less likely to impact the velocity with which we
deliver our systems.
"A systematic reduction of inventory using this
model requires an integrated solution with a signif
icant I/T investment. Dell is working towards that
direction based on the model algorithms to minimize
channel inventory and reap the benefits of increased
service levels through reduced variation."
2019 19:24:25 UTC
Contents191192193194195196197198199200201202203204205I
ssue Table of ContentsInterfaces, Vol. 34, No. 3 (May - Jun.,
2004), pp. 171-244Front MatterMetrics for Managing Online
Procurement Auctions [pp. 171-179]Allocating Vendor Risks in
the Hanford Waste Cleanup [pp. 180-190]Inventory Decisions in
Dell's Supply Chain [pp. 191-205]Practice Abstracts [pp. 206-
207]Schlumberger Optimizes Receiver Location for Automated
Meter Reading [pp. 208-214]The Slab-Design Problem in the
Steel Industry [pp. 215-225]Decision Rules for the Academy
Awards versus Those for Elections [pp. 226-234]Book
ReviewsReview: untitled [pp. 235-236]Review: untitled [pp.
236-237]Review: untitled [pp. 237-238]Review: untitled [pp.
238-239]Review: untitled [pp. 239-240]Books Received for
Review [pp. 240-241]Back Matter
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research online articles - never just the home page.
· Avoid wikis, blogs, tweets, videos, dictionaries, and
encyclopedias as outside references - use Masters-level sources
like the Journal of Marketing or the Journal of International
Business - No wikis, prezis, slideshares, dictionaries,
encyclopedias, videos, interviews, & podcasts allowed as
references – only scholarly written sources from well-respected
sources.
Be sure to use the Writing Resources (see left menu) view the
"Instructor's Writing Guide and Reminders" under "Writing
Guide & Resources".
Plan ahead and do not wait until the last minute! Upload and
submit completed Case Study assignments via the associated
submission link (see below) by the end of assigned week.
CASE STUDY GRADING CRITERIA
POINTS POSSIBLE
POINTS EARNED
Substance of Paper - Minimum 500-words – solid MARKETING
content. Template must be used & submitted in MICROSOFT

WORD document. Minus 5 points if template is not used.
Subject headers required – Introduction, Question # 1, etc. &
Conclusion – minus 5 points if not used for organization.
Writing caliber includes spelling, grammar, etc. (SEE
announcement in classroom – non-adherence to those items will
be deducted here). Do not write out questions – minus 3 points
if you do.
No Abstract is desired.
35
Two AUTHORED Outside Reference cited in APA format and
credited within your reference page at the end of your paper.
One source MUST be a peer reviewed Marketing reference –
specifically from the Journal of Marketing (if you deviate from
this peer-reviewed source, gain pre-approval 48-hours before
the paper is due by sending the actual article to your instructor
to gain approval). Minus 3 points if you do not use the
Marketing Journal but have two other authored sources that are
valid. Citations must be appropriately done within paper in
APA FORMAT. Always provide the exact web site address for
this course in your recap of references for full credit.
If reference page and citations do not match 100% - minus 10
points. Verify BEFORE you submit your paper.
No wikis, prezis, slideshares, dictionaries, encyclopedias,
videos, interviews, & podcasts allowed as references – only
scholarly written sources from well-respected sources.
10
APA formatted paper with cover page and reference page,
Times New Roman 12 font, 1" margins, double-spacing, etc.
5
Total Points Earned
50

Shortened Title Goes Here 4
Running head: TITLE IN LESS THAN 51 CHARACTERS
CAPITALIZED
Assignment #
Your Name Here
Central Michigan University – MKT560
Date (optional)
Introduction
Start your paper here. An introduction paragraph is a good idea.
It should state the purpose of the paper and provide a roadmap
for the reader.
Please run the spelling and grammar checker before you submit
your paper. It will catch mistakes like more than one space
between sentences, spelling errors, punctuation mistakes, and
split infinitives. Specific errors common in student papers that
are not standard APA format include not having 1 inch margins
on all sides of your paper and use two spaces between
sentences. Note that in this example, there are no blank lines
between paragraphs. This is correct in APA format.
Question # 1
Paragraphs start with an indentation using the ruler setting. Do
not use spaces or the tab key. Do not use the “enter” key to get
to the next line, just keep typing, and let the computer do the
work. Please note that the references at the end of this paper are
not cited in the text. This is not okay. They are there to give
you examples of correct APA format for references. You must
use APA citation format for all sources you use to write your
paper.
Question # 2

paper.
You might not use this level of heading in your papers.
However, consider it is to your advantage to ensure the reader,
i.e., the instructor, sees the organization of your content fits the
assignment criteria. Every paragraph should have at least three
sentences and contain only one idea (this is not a good example
of that!)
Question # 3 (if there is one – if not, delete)
paper.
Conclusion
Your final paragraph should provide a summary of your paper.
This reminds the reader of where you took them on your road
trip. It is similar to reviewing your photographs after a
vacation. There should be no new information included in the
conclusion.
References
Do you need help with your APA format of references? Check
out http://www.calvin.edu/library/knightcite/index.php

One September, a fraud squad, led by Jean-Claude Van Espen, a
Belgian magistrate, raided Airbus’s headquarters in Toulouse.
“They wanted to check whether there was possible falsification
of
documents, bribery or other infractions as part of the sale of
Air-
bus aircraft to Sabena,” says Van Espen’s spokesman. The team
of 20 Belgian and French investigators interviewed several
Airbus
employees during its three-day stay in Toulouse and carted
away
boxes of documents.
In November 1997, Sabena had approved an order for 17 Airbus
A320s (narrow-bodied aircraft), which it did not need. Even
more
oddly, it had doubled the order at the last minute to 34, a move
that
helped trigger the airline’s collapse four years later.
Although nominally controlled by the Belgian government,
Sabena
was run by the parent company of Swissair, SAirGroup, which
had
owned a stake of 49.5 percent since 1995 and which also went
bust in
2001. A former Sabena manager, who arrived after the Airbus
order
was placed, says that the planes were not needed: “It was a fatal
busi-
ness decision.” A Belgian parliamentary commission’s recent
report
confirms that the Airbus order was a big cause of Sabena’s
collapse.

Van Espen’s separate criminal investigation is continuing.
According to the report, it started in October 2001 after
Philippe
Doyen, then a Sabena employee, lodged a complaint. Among
other
things, he suggested to Van Espen that he interview Peter
Gysel, a
former Swissair employee now working at Airbus, who put
together
Sabena’s deal with Airbus. Gysel denies any impropriety. The
for-
mer Sabena manager says: “I never got the slightest whiff that
the
decision was driven by kickbacks, side-payments, and so on.
But I
cannot rule anything out.” Neither does Van Espen.
Today airlines are ordering about 400 aircraft a year. But in
good times, 800 planes, worth around $60 billion, are sold a
year.
In the past 10 years, Airbus (originally a consortium, now
owned
80 percent by EADS and 20 percent by BAE Systems) has
caught
up with Boeing, which had enjoyed two-thirds of the market
since
its 747 jumbo-jet entered commercial service in 1970.
Many aircraft are no doubt bought and sold in entirely conven-
tional ways. But many are not. After all, lots of airlines are still
state-owned and not subject to normal business rules. Commis-
sion payments (licit or illicit) on multimillion-dollar aircraft
deals
increase the capital cost of aircraft, which are therefore subject
to

higher depreciation or operating-lease charges, or both. But
these
extra costs are barely discernible in the pool of red ink created
by
the carriers’ perennial losses.
Aircraft purchases drag on for years, as airlines play Boeing and
Airbus off against each other. Especially in a buyer’s market,
deep
discounts are common, performance guarantees are demanding,
and manufacturers have to offer all sorts of sweeteners (e.g.,
air-
craft trade-ins, unusual guarantees) to persuade an airline to
switch
to their aircraft.
Unsurprisingly, given the regulated nature of international air
travel, politics plays a part. For instance, no sooner had Air
Mauri-
tius bought Airbus A340s in 1994 than it obtained an upgrade
from
Paris Orly to Charles de Gaulle airport, which is Air France’s
main
base with better onward connections.
Aircraft purchases have long been associated with controversy.
In the 1970s, when Lockheed was still making civil jets, it was
caught bribing Japanese officials to buy its L1011 wide-bodied
airliner. A Japanese prime minister was later charged and
convicted
in 1983 for taking a bribe. Prince Bernhard of the Netherlands
also was disgraced for his involvement with Lockheed. This
scan-
dal led in 1977 to Congress passing the Foreign Corrupt
Practices

Act (FCPA), which forbids American companies, their officers,
or
their representatives from bribing foreign officials.
Critics often have pointed out that American firms can sidestep
the FCPA by using foreign subsidiaries and nationals to pay
bribes.
Boeing says that its policy is to adhere to the spirit and letter of
the
FCPA, that its systems of controls ensure employees comply
with
this policy, and that no Boeing employee has been charged
under
the FCPA. In 1982 Boeing pleaded guilty to false statements
about
commissions on the sale of commercial aircraft prior to 1977.
Boe-
ing also says that there have been public hearings in the
Bahamas
over allegations of bribery in the 1990 sale of deHavilland
aircraft
to Bahamas Air, during Boeing’s ownership of deHavilland.
Airbus has not been subject to such constraints. France ratified
an OECD convention to outlaw bribery of foreign public
officials
in 2000. Until then the government even permitted French
compa-
nies tax deductions for giving bribes.
For years, as they steadily lost market share to the European
challenger, the Americans have been outspokenly critical of
Airbus.
In the 1980s the beef was the huge subsidies that European
govern-
ments poured into the industry. Now that Airbus repays such

launch
aid, that is less relevant, especially as Boeing receives indirect
subsi-
dies through America’s defense budget and space program.
But the American government also has spoken out on the sub-
ject of bribery. Grant Aldonas, an undersecretary for
international
trade, told a congressional committee: “Unfortunately this
[aircraft
manufacturing] is an industry where foreign corruption has a
real
impact . . . this sector has been especially vulnerable to trade
distor-
tions involving bribery of foreign public officials.”
According to a European Parliament report, published in 2001,
America’s National Security Agency (NSA) intercepted faxes
and
phone calls between Airbus, Saudi Arabian Airlines, and the
Saudi
government in early 1994. The NSA found that Airbus agents
were
offering bribes to a Saudi official to secure a lion’s share for
Airbus
in modernizing Saudi Arabian Airlines’ fleet. The planes were
in
a $6 billion deal that Edouard Balladur, France’s then prime
min-
ister, had hoped to clinch on a visit to see King Fahd in January
1994. He went home empty-handed.
James Woolsey, then director of the Central Intelligence
Agency,
recounted in a newspaper article in 2000 how the American gov-
ernment typically reacted to intelligence of this sort. “When we

have caught you [Europeans] . . . we go to the government
you’re
bribing and tell its officials that we don’t take kindly to such
corrup-
tion,” he wrote. Apparently this (and a direct sales pitch from
Bill
Clinton to King Fahd) swung the aircraft part of the deal
Boeing’s
and McDonnell Douglas’s way.
KUWAITI KICKBACKS?
Not even the NSA, however, knows about everything in the
aircraft-
manufacturing industry as it actually happens. Consider the
history
of an Airbus order placed by Kuwait Airways Corporation
(KAC),
another state-owned airline.
Ethics and AirbusCASE 2-4
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cat12354_case2_CS2-1-CS2-29.indd 12 4/3/19 11:05 AM
Cases 2 The Cultural Environment of Global Marketing
CS2−13
In November 1995, Reuters reported that Kuwaiti prosecutors
had questioned Bader Mallalah, KAC’s then chief financial
officer,
over allegations of embezzlement made against him by KAC.
The
firm’s chairman, Ahmed al Mishari, had suspended Mallalah

from
his job the previous month. But KAC had trumped up the allega-
tions against Mallalah to put the lid on a story of corruption in
which its then chairman was himself involved.
That story began exactly five years earlier in Cairo, where KAC
had set up temporary headquarters after Iraq’s invasion of
Kuwait
in August 1990. Most of its planes would inevitably be lost or
dam-
aged, so al Mishari was planning a shiny new postwar fleet.
Nat-
urally, both Boeing and Airbus were asked to tender. Both firms
expected politics to play a part in KAC’s choice, especially
after an
American-led coalition had liberated Kuwait.
Shortly after the liberation of Kuwait, Boeing and KAC met in
London. One person present says al Mishari gave the impression
that the order would be Boeing’s. After all, until then, American
companies had won most of the large reconstruction contracts
from a grateful government.
Airbus hoped otherwise. In 1991, shortly before the Paris Air
Show, Jean Pierson, the then-boss of Airbus, met al Mishari at
the
Churchill Hotel in London. The two talked in private for part of
the
time, so what they discussed is not known. Two clear
inferences,
however, can be drawn from subsequent events: al Mishari
prom-
ised the order to Airbus, and Pierson pressed for an
announcement
at the imminent air show.

As substantial public funds were involved, KAC was supposed
to follow the formal process in Kuwait before placing the order.
This process included approvals from the Ministry of Finance
and
the public-spending watchdog. None of these approvals was
sought
before the air show. In June 1991, at the show, al Mishari
stunned
Kuwaiti officials and Boeing when he announced a firm order
for
15 Airbus aircraft, worth $1.1 billion, and options for nine
more,
worth up to $900 million. A delighted Pierson trumpeted the
deal
as Airbus’s first single order for all its aircraft types.
Most unusually, Boeing was not asked for its “best and final”
offer, according to a former KAC employee. Boeing’s response
to
the announcement was to offer generous discounts to KAC—so
that
its package was around $100 million cheaper than its rival’s—
but
it was too late. The upshot of a meeting in the summer of 1991
between the boss of Boeing Commercial, furious American offi-
cials, and the Crown Prince of Kuwait was a messy compromise.
KAC would order the engines for the Airbuses from General
Elec-
tric; Boeing would receive an order for two wide-bodied planes
as
a sop; and the firm order for 15 Airbus aircraft would go ahead
provided that KAC bought from Boeing in the future.
This compromise left al Mishari in a rather awkward spot. KAC
had an option to buy nine more aircraft from Airbus. An airline
is

usually able to walk away from an option deal if it forfeits the
modest
deposit paid. But this case was far from normal. The company
that
was to take up the option was not KAC itself but a subsidiary,
Avia-
tion Lease and Finance Company (ALAFCO), which al Mishari
had set up in Bermuda in September 1992. ALAFCO was to buy
the
aircraft and lease them to KAC. In late 1992 al Mishari
confirmed
to Pierson that ALAFCO would buy the nine planes and sent off
a $2.5 million deposit. By buying the planes through ALAFCO,
al
Mishari intended to bypass formal governmental approval.
There was more to the deal. Airbus chipped in a total of
$450,000 between 1992 and 1994 to help with the costs of set-
ting up and running ALAFCO. On December 15, 1992,
ALAFCO
appointed a part-time commercial adviser, Mohamed Habib El
Fekih, a Tunisian national. His day job was then as head of
sales
in the Middle East—for Airbus. Under his ALAFCO contract of
employment, a copy of which The Economist has and which was
to
run for three years from January 1993, El Fekih received $5,000
a month and $80,000 in back pay for “services” rendered to
ALAFCO from February 1, 1990—31 months before ALAFCO’s
incorporation—to December 31, 1992. The $5,000 was paid
each
month from ALAFCO’s account number 201-901-04 at the Com-
mercial Bank of Kuwait in New York to El Fekih’s personal
account
at Crédit Lyonnais’s branch in Blagnac, France, where Airbus is

based on the outskirts of Toulouse.
By 1993 three of the nine aircraft under option, all cargo planes,
were nearly ready for delivery. However, Mallalah, who was
also
ALAFCO’s chief executive, insisted that the transaction be
subject
to formal procedure in Kuwait. This meant competitive tenders
from Airbus and Boeing. Unsurprisingly, Airbus, with inside
knowl-
edge from its two-hatted vice president, El Fekih, was able to
match
exactly offers from Boeing, after Boeing came in over $50
million
cheaper. With nothing to choose between the offers, ALAFCO
selected Airbus, on the grounds that KAC’s fleet now comprised
predominantly Airbus aircraft.
The deal sailed through KAC’s board and the Ministry of
Finance. However, Mallalah provided Kuwait’s public spending
watchdog with full details of ALAFCO’s order for the cargo
planes.
It refused to sanction the deal. Consultants concluded in early
1995
that the purchase of the cargo aircraft was not justified. The
Min-
istry of Finance told KAC not to proceed. After Mallalah
submit-
ted a report to KAC’s board on the affair, El Fekih resigned
from
ALAFCO in March 1995.
El Fekih says that he acted in an honest way; Pierson approved
his ALAFCO contract, as did the boards of KAC and ALAFCO;
his ALAFCO contract had nothing to do with the sale of Airbus
to

KAC; KAC canceled its option; ALAFCO never bought any
Airbus
aircraft; he acted as a consultant to help set up ALAFCO as an
aircraft-financing company; and he declared his earnings to the
tax
man. Airbus says that it offers this sort of support to customers,
when asked. The present owners of the ALAFCO business
confirm
that ALAFCO bought three Airbus aircraft.
Of the other six aircraft under option, three were not converted
into firm orders. Two Airbus A320s were leased to Shorouk Air
in
Egypt. This joint venture between KAC and EgyptAir was
specifi-
cally set up to find a home for them but is being liquidated
because
of massive losses. Kuwait’s Ministry of Finance leased another.
Al Mishari, sacked as the chairman of KAC in 1999 after spend-
ing almost his entire career with the airline, owns a shopping
com-
plex in the Salmiya district of Kuwait, which local wags have
dubbed
the “Airbus Centre.” Al Mishari, whose family is wealthy,
suffered
financial problems when the Kuwaiti stock market collapsed in
the
early 1980s. Al Mishari declines to comment, as does KAC.
It is not irrelevant to ask if the price of the Airbus aircraft was
inflated to allow for kickbacks. No evidence of graft has ever
come
to light. However, no policeman, in Kuwait (or elsewhere), has
looked for any.

INDIA INK
What about cases where police have carried out investigations?
In
March 1990 India’s Central Bureau of Investigation (CBI) filed
a first information report (FIR). It was investigating allegations
that Airbus had bribed highly placed public servants and others
to
induce Indian Airlines (IA) to order its aircraft.
CS2−14 Part 6 Supplementary Material
In March 1986 state-owned IA had ordered 19 Airbus A320s,
worth $952 million, with an option for 12 more, later exercised.
This order was despite the fact that, when IA set up a committee
in
1983 to recommend replacement aircraft for its aging Boeing
fleet,
the A320 was not considered—it had not then been launched or
flown. With approval from the Indian government, IA had in
July
1984 paid Boeing a deposit for 12 Boeing 757s, large narrow-
bodied
aircraft.
Several civil servants and IA officials were named in the FIR.
One
name not on the list was that of Rajiv Gandhi, India’s prime
minister
in 1984–89, who was killed in a bomb explosion in May 1991.
How has the CBI’s investigation progressed in the intervening
years? Hardly at all, despite the hounding on public-interest

grounds
of the CBI in Delhi’s High Court since 1998 by B. L. Wadehra,
an
anti-corruption lawyer based in Delhi. The Economist has
examined
the publicly available court documents—the CBI’s status
reports on
its investigation are secret—from Wadehra’s litigation.
These papers allege, first, that in October 1984, weeks before
Gandhi, a former pilot, succeeded his mother, IA received an
offer
from Airbus for A320 aircraft, a smaller and less expensive
plane
than Boeing’s 757. It required urgent attention. Second, in
Novem-
ber, the aviation ministry gave IA just three days to appraise the
offer for Gandhi’s office.
Much later, in 1990, Indian Express, an Indian newspaper,
reported a leaked manuscript note that showed that Gandhi had
decided at a meeting on August 2, 1985, that IA “should go in
for
Airbus A320 aircraft.”
Gandhi’s correspondence file on the deal mysteriously van-
ished. The court papers show that civil servants reconstructed
29 pages of the missing file for the CBI by obtaining copy
corre-
spondence from government departments. Remarkably, this task
took seven years—and even then the reconstruction was only
partial.
After the green light from Gandhi, approvals from IA and
government bodies were a formality. For instance, the IA board
approved the Airbus order at a meeting on August 30, 1985,

which
started at noon. The quality of the analysis presented to the
board
on the competing offers was pitiful. The board considered only
one
criterion—comparative fuel efficiency. Even for that, the data
were
incomplete. The A320 with the engine chosen by IA had yet to
be
tried and tested anywhere; provisional data only were included
in
the report for Boeing 737s “since no technical data were
supplied
by the company.”
But Boeing had not been asked for any because two hours
before
the board meeting, at 9:50 a.m., IA’s managing director, who is
named in the FIR as an alleged recipient of kickbacks, received
a
letter from Richard Elliott, then Boeing’s regional sales
director.
Boeing offered to supply up to 35 of its 737 aircraft, its narrow-
bod-
ied rival to the A320, with a discount of $5 million per plane.
This
offer would reduce IA’s investment in new planes by $140
million,
stated Elliott. IA’s board brushed the offer aside on the grounds
that “if Boeing was [sic] too serious . . . they [sic] could have
made
the offer earlier.”
The Delhi court has a withering opinion of the help Airbus has
given the CBI. It allowed Wadehra to add Airbus’s Indian
subsid-

iary to his action on the grounds that Airbus in France was not
cooperating. Airbus told Wadehra that French law forbade it
from
answering his questions. “[Airbus] sells its aircraft on their
merits,”
the firm insisted.
The court has castigated the CBI for its dilatory approach. It
took the Indian authorities until 1995 to contact Airbus for
infor-
mation, only to be told that such requests should be routed
through
the French government. The CBI told Wadehra, despite trying
Interpol and diplomatic channels, it was not getting any help
from
the French government. The French embassy in Delhi in effect
told Wadehra to get lost when he wrote to ask why France was
not
cooperating.
Wadehra’s case became topical because IA’s board approved
an order for 43 Airbus planes, worth around $2 billion. The
order
now needs government approval. However, in September 2000,
the
Delhi court ruled that the Indian government should not approve
further purchases from Airbus until the CBI had obtained the
infor-
mation it wanted from the French.
The upshot of the IA story is that no serious attempt has been
made to establish whether or not Airbus paid kickbacks to
Gandhi
and associates. The CBI has not answered written questions.

MOUNTIES AND BANKS
But there are police forces that have shown rather more resolve
and
initiative than the CBI. One important case establishes that
Airbus
has paid “commissions” to individuals hiding behind shell
compa-
nies in jurisdictions where ownership of companies is not a
matter
of public record, and where strict bank secrecy applies.
Airbus’s first big sale in North America was a $1.5 billion deal,
signed in 1988, to sell 34 aircraft to the then state-owned Air
Can-
ada. The middleman was Karlheinz Schreiber, a German-
Canadian
with connections to politicians in Germany and Canada.
Schreiber
emerged as a figure in the financing scandal that engulfed
Germa-
ny’s Christian Democrat party and its top politician, Helmut
Kohl,
a former chancellor, in the late 1990s.
In August 1999 the Royal Canadian Mounted Police, acting on
a German arrest warrant, nabbed Schreiber. In 2000, Schreiber
was
charged in Germany with tax evasion on money he had received
for
the Airbus transaction and other deals. The Süddeutsche
Zeitung,
a German daily, supplied a copy of Schreiber’s indictment to
The
Economist. According to this document, Airbus signed a consul-
tancy contract (amended four times) with International Aircraft
Leasing (IAL) in March 1985. IAL, which was to help with the

Air
Canada deal, was a shell company based in Vaduz,
Liechtenstein,
and a subsidiary of another Liechtenstein-registered shell,
Kensing-
ton Anstalt.
According to the indictment, between September 30, 1988,
and October 21, 1993 (i.e., as Air Canada took delivery of
Airbus
planes), Airbus paid a total of $22,540,000 in “commissions” to
IAL. Then $10,867,000 was paid into IAL’s account at the
Verwal-
tungs-und Privat-Bank in Vaduz and $11,673,000 into IAL’s
account
number at Swiss Bank Corporation (SBC) in Zurich. During
extra-
dition proceedings against Schreiber in 1999, Airbus admitted
to
these payments. In October 2000, Schreiber won a suspension of
execution of his case.
The court ruled that IAL belonged to Schreiber, and also that,
to the extent that Schreiber had paid out the Airbus
“commissions”
as Schmiergelder (“grease monies”), these payments could be
tax
deductible. Schreiber’s German tax lawyer later told the court:
“Schmiergelder were not openly paid to the ‘greased’ person by
[Air-
bus]. It was through third persons to make reception anonymous
and the Schmiergelder unrecognizable as such.”
So who got the commissions? After years of police investiga-
tions in at least five jurisdictions, it is still not clear. According
to

The Last Amigo, a well-researched book on the affair by Harvey
Cashore and Stevie Cameron, both Canadian journalists, a lot
was
withdrawn in cash. Cashore, a producer on The Fifth Estate, the
Cases 2 The Cultural Environment of Global Marketing
CS2−15
Canadian Broadcasting Corporation’s main investigative
program,
says that Schreiber’s bank records and diaries showed that he
usu-
ally followed a simple formula for dividing up the money: half
for
Canadians and half for Europeans.
The book alleges that there may have been a smaller scam
within the bigger scam: An Airbus employee may have got some
of
the money. Some of the money was transferred into subaccounts
at SBC in Zurich. One of the subaccounts, code-named
“Steward-
ess,” received as much as one-eighth of the commissions. The
book
suggests that this account was intended for Stuart Iddles,
Airbus’s
senior vice president from 1986 to 1994.
Iddles’s wife bought Casa Las Estacas, a luxurious beachfront
villa in Puerto Vallarta, Mexico, in September 1992. Documents
in The Economist’s possession show the price was $1.5 million.
According to a person involved in the deal, the money was

wired
from an account in the name of the Ciclon Foundation at the
Zurich branch of Lloyds, a British bank. Mrs. Iddles confirms
that
she bought the villa in 1992 but says she has not the “foggiest
idea”
how much it cost, or which bank the money came from. Mr.
Iddles
has denied any impropriety. Airbus says it has not been indicted
in
any jurisdiction over the Air Canada deal, or over any other
sales.
It adds that no investigator has found unethical behavior on its
part.
SYRIAN SCANDALS
Only one case of Airbus’s colluding with a middleman
apparently
to bribe officials to buy its aircraft has led to convictions.
Accord-
ing to Syria’s state news agency, three people were sentenced in
Syria in October 2001 to 22 years’ imprisonment each (later
reduced to 10 years) for “serious irregularities” in connection
with
state-owned Syrianair’s order for six Airbus A320s in 1996. The
court also imposed a fine on the three of $268 million. They
were
a former minister for economic affairs, a former transport
minister,
and Munir Abu Khaddur, the middleman. Khaddur was
sentenced
in absentia and is reportedly living in Spain. The court found
that
the men had forced the airline to buy the planes, worth $240
mil-
lion, and as a result Syrianair had incurred “big financial

losses.”
The only inferences to be drawn are either that there was a mis-
carriage of justice or that bribes were paid. If the latter, the
news
agency did not release details of how much the men embezzled.
Quite why bribes would have been necessary is puzzling.
Because
America deems Syria to be a sponsor of terrorism, Boeing has
long been prohibited from exporting there. The Syrian
government
declines to comment.
The result of investigations discussed at the beginning of the
case into instances of corruption or alleged corruption by
Airbus
suggests that Van Espen will have a very long haul as he tries to
establish whether “commissions” influenced Sabena’s decision
to
buy Airbuses. The order for the 34 A320s could be viewed as
incom-
petence. But nobody can predict the results of Van Espen’s
inquiry.
The parliamentary report says Sabena’s board received some
lacunary information that was misleading. The choice of Airbus
supposedly meant Sabena was confident of strong sales growth.
Yet
a month after the order was placed, SAirGroup’s chief
executive,
who also sat on Sabena’s board, said: “We’re now in the last
year
or years of the boom in air travel.” (We do not mean to imply
by
inference that the chief executive was corrupt.)

Most of what is recounted in this case happened before Airbus’s
present top management team arrived, before it was established
as
a proper company, and before France adopted the OECD
conven-
tion on bribery.
No one doubts the company’s ability to compete across the
whole product range with Boeing. By the time the Paris Air
Show is
over, Airbus will probably be well ahead of its rival in market
share,
thanks to an attractive range of planes. But if charges of
corruption
involving Airbus were to emerge from Van Espen’s
investigation of
Sabena, that would deal the company’s reputation a severe
blow.
AIRBUS LOBBIES TO RELAX
ANTI-BRIBERY RULES
Released documents have revealed how companies used their
lobbying
power to loosen official rules designed to stop corruption. In
behind-
the-scenes maneuvers, Rolls-Royce, BAE Systems, and the
aircraft
giant Airbus persuaded then-trade secretary Patricia Hewitt to
allow
them to keep secret details of the middlemen used to secure
interna-
tional contracts.
She brushed aside the advice of U.K. government officials who
argued that these middlemen are often used to channel bribes to
foreign politicians and officials to win contracts. The

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