Customers are willing to choose from a few standardized and smaller number of off-the-shelf PCs, and are less concerned with customization.The power of the direct channel to deliver customization is less relevant in today’s more standardized market
Dell case study (management)
• Started by Michael Dell (19 at that time) in his dorm room at the University ofTexas in 1984 with $1000.• Company headquartered in Round Rock, Texas, U.S.A.• Its revenue is around US$ 63.07 billion in 2012.• In 2001, became the No. 1 computer systems company in the world.• At present (2013), it is the third largest PC vendor in the world after HP andLenovo.
• Dell has grown by both increasing its customer base and through acquisitions sinceits inception; notable mergers and acquisitions including Alienware (2006) and PerotSystems (2009).• Notable Acquisitions: - 2006 – Alienware 2009 - Perot Systems 2010 - KACE Networks 2010 - SaaS 2012 - Sonic Wall 2012 - Wyse
PRODUCT LINE• Desktop computers• Notebook computers• Network servers• Workstations• Storage products• Dell offers a total of 1.6 milliondifferent possible productconfigurations for all its product linesSUPPLIERS• MICROSOFT - for Windows• INTEL - for micro processors• NVIDIA - for Graphic chips• SONY - for monitors
Customer placesan Order(By phone orthrough the Interneton www.dell.com)Dellprocessesthe orderFinancialevaluation(creditchecking)Configurationevaluations(checking the feasibilityof a specific technicalconfiguration)Sends the orderto assemblyplant(any one inAustin, or anyother)Plantsbuild, test &package theproduct(about eighthours)Dell typicallyship all orders(no later than fivedays after receipt)2-3daysSUPPLIERS REVOLVERSCUSTOMERS
Dell’s success is a combination of:• Direct Sales.• Inventory Management• Supplier IntegrationTogether these allow for maximum effectiveness with minimum cost.
• Mass customization (end result: Deliversexactly what the customer wants)• Partnerships with suppliers• Just-in-time components inventories (QuickIntroduction of Latest Technology)• Direct sales• Market segmentation• Customer service• Extensive data and information sharing with both supply partners and customers.
• New Value Chain: Dell had no in-house stock of finished goods inventories unlikecompetitors using the traditional value chain model• Pull Mechanism: It did not have to wait for resellers to clear out their owninventories before it could push new models into the marketplace (typically operatedwith 60-70 days stock)• Personalization: Customers got the satisfaction of having their computerscustomized to their particular liking
• Dell Computer’s direct model departed from the industry’s historical rules on severalfronts: The company outsourced all components but performed assembly.It eliminated retailers and shipped directly from its factories to end customers.It took customized orders for hardware and software over the phone or via theInternet.It designed an integrated supply chain linking Dell’s suppliers very closely toits assembly factories and order-intake system
• BUILD-TO-ORDER MODEL• DIRECT TO SELL• INVENTORYMANAGEMENT is primarily about specifying the size andplacement of stocked goods.1. Just-in time inventory management - 3 days.2. Focus on speed of inventory delivery process.MICHAEL DELL –“8 days of inventory competitors 40 days, if Intel comes out with a newchip, I am going to get that to the market 32 days sooner”
BUILD TO ORDER• In contrast to others who produce –to stock, dell first receives the order andthe money and only then starts to build, using that money to purchase fromsupplier• Therefore there is customization of products for each and every customer.• While other companies had to guess, DELL knew exactly what its customerswanted before manufacturing the product• Others had to maintain inventory as there existed middlemen, so to supportreseller and retail channels.
SupplierManufacturing(SLC)WarehouseFactory / MergeCenterMaterialTransfer• To compensate for long lead times & buffer against demand variability, Dellrequires its suppliers to keep inventory on hand in the revolvers.• Revolvers or supplier logistics centers (SLCs) are small warehouses located withina few miles of Dell’s assembly plants.• Each of the revolvers is shared by several suppliers who pay rents for using theirrevolver.• Dell does not own the inventory in its revolvers; this inventory is owned bysuppliers & charged to Dell indirectly through component pricing.
• Dell has a special vendor-managed-inventory (VMI) arrangement with its suppliers• Suppliers decide how much inventory to order & when to order while Dell sets targetinventory levels & records suppliers’ deviations from the targets.• Dell withdraws inventory from the revolvers as needed -- on average every two hours.• It uses a quarterly supplier scorecard to evaluate how well each supplier does inmaintaining this target inventory in the revolver.
CustomerLocal SuppliersDell FactoryRevolvers(SLCs)Suppliers3 days of inventory - Inventory turns of 122 per yearDeliverySupplier Owned Dell Owned
• Value Chain is intended to extend Dell’s successful direct-sales approach back intothe supply chain• The goal of it is increasing the speed and quality of the information flow betweenDell and its supply base• The portal, valuechain.dell.com acts a secure extranet for Dell suppliers tocollaborate in managing the supply chain• Dell envisions using this site to exchange with suppliers current data, forecasteddata, new product ideas, and other dynamic information
SELECTIONi. Qualityii. Priceiii.Deliveryiv.Response to feedback.EVALUATION - to measure performance uses suppliers score• Cost• Delivery• Availability of technology• Velocity of inventory• Ways in which they did business with dell over the internet.
• Returns grew disproportionately as the carrying costs and obsolete stock isavoided.• Saves enormous amounts of money on purchasing components because thecomponent prices drop by 3 percent per month.• Reduces handling cost. Common factors that drive up holding costs includeopportunity costs, increased rent required for the space of the inventory,higher premiums to insure the inventory, and cost of obsolete goods.
• Service became a feature of Dells strategy in 1986• It provided free on-site service for a year after sale• Contracted with local service providers to handle customer requests for repairs• On-site service was provided on a next-day basis• Technical support via a toll-free number, fax, and e-mail
Global PC Market Share by Units, Percent. 2001-2005Rank 2001 2002 2003 2004 20051 Dell 13.3HP-Compaq16.2 Dell 15.0 Dell 16.4 Dell 16.82 Compaq 11.1 Dell 15.2 HP 14.3 HP 14.6 HP 14.53 HP 7.2 IBM 6.0 IBM 5.1 IBM 5.5 Lenovo 6.94 IBM 6.4 NEC 3.4 Fujitsu 3.8 Fujitsu 3.8 Acer 4.65 NEC 3.8 Toshiba 3.2Toshiba2.9 Acer 3.4 Fujitsu 3.8Others58.1 56.0 58.9 56.4 53.3Global PC Market Share - 2001-2005
Global PC Market Share by Units, Percent. 2006-2011.Rank 2006 2007 2008 2009 2010 20111 Dell 15.9 HP 18.2 HP 18.4 HP 19.3 HP 17.9 HP 17.22 HP 15.9 Dell 14.3 Dell 14.3 Acer 13.0 Dell 12.9 Lenovo 13.03 Lenovo 7.0 Acer 8.9 Acer 11.1 Dell 12.2 Acer 12.0 Dell 12.14 Acer 5.8 Lenovo 7.4 Lenovo 7.2 Lenovo 8.1 Lenovo 9.7 Acer 11.25 Toshiba 3.8 Toshiba 4.0 Toshiba 4.5 Toshiba 5.1 Toshiba 5.4 ASUS 5.9Other 51.6 47.1 44.5 42.3 42.1 40.7
Limitation of direct sell model in emerging market Buying habit Not access to internet Lack of online payment (i.e. credit card)
INTHE PAST TODAY PC customizability was highlyappreciated by customers Surplus stock lost value quickly Demand was typically low for eachproduct variant Assembly-to-order more effectivethan selling pre-configured PCs inretail stores Customers are willing to choose froma few standardized PCs model. Inventory of standardized modelsmoves fast Demand was relatively high for eachstandardized model PC became a popular commodity,price has dropped significantly Direct sell model is less effective intoday’s more standardized market
DirectsellRetailstoresHybridbusinessmodel“The direct model has been a revolution, but it’s not a religion.”- Michael Dell in April, 2007 memo to employee - In Jun 2007, Dell offered two PC models through Wal-Mart stores sell Inspironnotebook computers through Wal-Mart’s Sam’s Club outlets. In Oct 2007 Dell sold its PC through, China’s largest electronics retailer fiftyGomez Electrical Appliances stores Later Dell also extended its international retail strategy by opening its first retailstore in Russia
Strength:1. Direct Model Approach, it provides Dell away to interact to customers directly2. Customization of products3. Reliability, Service and Support4. Latest TechnologyWeakness:1.Market share growth is slow due tocompetition; Fake products/ imitations affectsales2. Overdependence on Suppliers.3. Lack of Dell Stores, can be an issue for somecustomers.Opportunity:1. With increase in e-commerce the online retailstores of Dell provide them better framework totap new business2. The Direct approach Model of Dell wouldhelp them there existing to sell the other ITproducts, so new product developmentopportunity is for Dell3. Tablet and Smart phone Market.Threats:1. With the increase in innovation in the marketthe computer systems are becoming outdated, soDell should constantly come out with newproducts2. People need the quality products at low pricewhich was Dell strength due to it’s customizesolution, but now its competitors are coming upwith products in same price range
• It’s bad news for a PC manufacturer (Particularly if it don’t also produce tablets ormobile phones.) A new study predicts that the rise in sales of tablets and cell phoneswill directly, and negatively, affect the sales of PCs, which have already beensteadily slowing down.• Many people attribute the decline of PC sales to various factors, like the growingpopularity of smartphones and tablets.• Last year, tablet sales totalled around 116 million units; this year it’s expected tojump up to 197 million, a nearly 70 percent increase. The reason for the increase islargely due to decreasing prices, love of the cloud, and addiction to apps. On theother end of the spectrum, while PCs sold 341 million units last year, anticipatedsales will drop to 315 million this year.
• DELL, literally has no market share in tablet and smartphone segment. It solelydepends on Laptops and Desktops in consumer market for its revenue.• Due to decline in PC sales, Dell Profits plunged by 47% in 2012.• The much hyped Windows 8 didn’t play any part in increasing the PC sales.
• Dell in $24 Billion Deal to Go Private in 2013 (biggest by far since the days of therecession)• Microsoft helped with up to $3 billion loan as part of the financing. (This is not thefirst time for Microsoft. In 1997, It rescued Apple with a $150 million investmentfrom Bankruptcy)• Reason - Dells in the midst of a complex restructuring, realigning its focus tobecome more of a full-featured, enterprise-oriented company. (By going private, ithas NO stress from share holders to generate profits)