- Michael Dell, founder and CEO of Dell Computer Corp, discusses how Dell has revolutionized its manufacturing process through a make-to-order system enabled by virtual integration with suppliers and customers via the internet. - Dell's build-to-order process allows it to avoid excess inventory issues and better meet actual customer demand. It has achieved major cost savings and efficiency gains over traditional vertically integrated computer manufacturers. - Dell has grown at five times the industry rate due to its highly scalable business model and low cost structure enabled by its virtual integration and just-in-time manufacturing approach.

1. Dell's Make-To-Order System Leaves
Competitors In The Dust
The Internet is upending the model for how businesses operate, and companies
that don't take advantage of the change will have a difficult time staying afloat,
says Michael Dell, chairman, CEO and founder of Dell Computer Corp.
"With the advent of the Internet, process innovation will no longer be measured
in minor increments," he told the World Congress on Information Technology
in Fairfax, Va. "Instead it will be possible to revolutionize processes in a way
that blurs traditional boundaries between supplier and manufacturer,
manufacturer and customer. This is already shrinking time and distance to a
degree not possible ever before." The Internet, he adds, is "turbocharging"
Dell's already turbocharged business.
Dell Computer is a case study of the power of this emerging business model.
Sales are soaring, due to Dell's build-to-order manufacturing system which is
dependent on the integration of information technologies throughout all aspects
of the company's operations. Dell describes his company as being "virtually"
integrated, as opposed to vertically integrated.
"In the case of computing technology, vertical integration was necessary in the
early years," he explains. "The supplier base was not well established, leaving
companies no choice but to design and manufacture product components
themselves. In this environment, proprietary technologies, priced at a premium,
provided the main source of competitive advantage."
But the vertically integrated companies, like Digital Equipment, are going
extinct. Virtual companies like Dell have established direct relationships "that
close the gap between customer, manufacturer and supplier," he says. Virtual
companies know precisely how to add value and they have established
partnerships with best-of-breed suppliers. These suppliers are integrated within
their businesses and must perform to the same quality standards and metrics.
Virtual companies use the Internet not as an add-on, but as an integral part of
their strategies. "Only then can you use it to cross traditional company-to-
company boundaries to achieve virtual integration," Dell told the 1,700
attendees from 100 different countries.
Michael Dell, 32, started his company with $1,000 and sold PCs directly to
customers. His business model of partnering with suppliers and customers

2. flowed naturally from these humble beginnings. "In this way, Dell obtained the
benefits of tightly coordinated supply-chain management that have normally
been associated with vertically integrated companies," he explained. "Building
a $14-billion business in 14 years like Dell was unthinkable just a decade ago.
By integrating virtually with both our customers and suppliers, we have been
able to achieve a highly scalable business and grow at five times the industry
rate."
The Internet is propelling Dell to even greater heights. The company is now
selling $5 million of products online every day and Internet sales are
approaching an annual run rate of $2 billion. "But online commerce and the use
of the Internet as a sales channel represent only a fraction of the Internet's value
to business," he says. "The real potential of the Internet lies in its ability to
transform relationships within the traditional supplier-vendor-customer chain."
The Internet is enabling the company to share information from its internal
processes with suppliers and customers, "creating true information
partnerships," says Dell. The rapid flow of information is saving time and
money. "It transforms organizations by eliminating paper-based functions,
flattening organizational layers and integrating global operations seamlessly."
Companies that adopt such information partnerships "have the potential to
fundamentally change the face of global competition and change our definition
of the value we provide to our customers and constituents."
Dell creates individual web pages for its customers that can be accessed with a
password through its Internet site. These "Premier Pages" contain detailed
account information unique to companies such as Ford Motor and Shell Oil.
Information is drawn from the same databases used by Dell's engineers and
technicians. "This doesn't necessarily result in major cost savings for Dell,"
says Dell. "But it HAS resulted in significant cost-savings for our customers,
enriching their relationships with Dell."
The company also is building similar web pages for its top 20 suppliers, who
provide about 90 percent of the components Dell purchases for its computers.
These pages "will allow our suppliers to provide us with rapid information on
their capacities, capabilities, inventories in their supply lines, component
quality and current cost structures."
This emerging Internet based system enables Dell to provide direct and
immediate customer feedback to suppliers concerning quality and reliability of
their components, current forecasts and future demand, special technical

3. requirements and pricing. The page Dell has created for Intel "allows us to
much more quickly and efficiently manage order and flow and to control just-
in-time delivery of inventory," says Dell. The system soon will be tied to all of
Dell's suppliers' factories throughout the world.
"By working virtually with Dell, we challenge our suppliers to reach new
heights of quality and efficiency," says the young business icon who is worth
more than $1 billion. "This improves their process and their inventory control,
which creates greater value for them, as well as for Dell."
Thanks to the Internet, Dell soon will be measuring inventory in hours or even
minutes, instead of days, "moving from just-in-time delivery to real-time
delivery," he explains. "I do not think this vision is that far into the future." The
company has reduced inventory from more than 30 days a few years ago to
fewer than eight days today.
"No longer can a manufacturer afford to treat a supplier from whom every last
ounce of cost-savings must be wrung," he says. "Nor can a customer be treated
simply like a market for products and services at the best possible price.
Instead, both suppliers and customers must be treated as partners and
collaborators - jointly looking for ways to improve efficiency across the
ENTIRE spectrum of the value chain, not just in their respective businesses. In
the virtual economy, collaboration is a new competitive imperative. It is an
imperative I urge you to consider." Dell's web site is www.dell.com.
Shortly after his presentation, Dell sat down with a small group of reporters
including Manufacturing News editor Richard McCormack. Here is what he
had to say.
An Interview With Dell Founder Michael Dell
Q: How hard is it going to be for Apple and Compaq to go to a make-to-order
manufacturing system similar to yours?
Dell: It depends on whose order they're making it to. Making it to the dealer's
order is pretty easy. Making it to the customer's order is a whole other matter.
A lot of these guys talk about build-to-order and what they're really talking
about is building to the dealer's order. So when you go into the store and look
up at those systems, those were built to order -- built to somebody's forecast of

4. what somebody was going to buy and hopefully they were right. But as we see
right now with four or five or six weeks or however much inventory there is in
the channel, obviously they have more mistakes than successes.
Q: So how hard will it be for them to build to the customers' order similar to
your model?
Dell: What you first have to do is extract the dealer from the relationship and
the dealer might not like that because they are fundamentally a dealer. They
like to deal with things. They sell things and
they make money on them and if they don't sell one company's products, they'll
sell somebody elses'. This is the whole issue of channel conflict. It gets back to
this idea that the traditional business system was set up for a long series of
events that were all strung together and if you just take a web site and stick it
on the end of the very last one, it doesn't create all of the benefits a company
like ours has; it's just a web site. You have to fundamentally change the way
the business works before you get the benefits.
Q: Do the OEMs face the risk of becoming commoditized? With everybody
using the same types and sizes of hard drives, mother boards, the machines are
becoming more and more similar. How do you stand out from the crowd?
Dell: If you look at our results, you'll see that we have stood out from the
crowd. This industry started with a differentiation around technology. That
never goes away. There is always the hot box and the fastest computer. But that
is not the only element.
There is the issue of cost and this is an area where Dell has differentiated very
significantly because we have the lowest cost structure in the industry. We have
the most efficient asset management. We have a business system that has a
structural competitive advantage.
The next element is the whole area of service and relationships and the
fundamental integrity of the whole process from order to delivery to product
reliability to service and support. If you look at those areas, quite frankly the
industry hasn't done that great as a whole....A lot of these machines fail more
than they should.

5. PC Magazine just did a user service and reliability study and Dell got an A
grade for both desktops and notebooks and we're the only vendor to do so. For
a second year in a row, we were the only vendor to get that A grade. Some of
our competitors got D grades, and I'm not talking about the smaller
competitors.
Clearly if you look at Dell's business system and the fact that we're growing
five times the market growth rate and had a return on capital of 229 percent,
that is not any way indicative of a commodity business. So at least one
company has learned how to differentiate itself and do quite
well.
Q: Is the Internet changing your mix of customers?
Dell: About 88 percent of our business is to companies and institutions and
about 12 percent to consumers. The interesting thing about the Internet is that it
is initially attracted to the consumer. But this whole idea of a "Premier Page"
with large businesses is taking off. Customers like Shell Oil are transferring
from physical purchase orders to electronic purchase orders. One of the things
we do with a lot of companies is we set up employee purchase programs. We
set one up with Shell on their same web page and the employees purchased
about 6,000 PCs on line, in addition to the PCs the company bought.
Q: How important is the release of Windows 98 to your company?
Dell: I'm not sure if a lot of customers would have waited to get their new
computer with Windows 98 on it....The beauty of the situation here is we don't
have to decide if customers want Windows 98, Windows 95, NT or OS2. The
customer gets to decide. We're building machines that don't care what operating
system they have. They don't care as long as it has the one the customer wants.
Unlike our competitors on the indirect channel, they have to forecast for 200
megahertz, 300 megahertz, 400 megahertz, Windows 95, Windows 98,
Windows NT, 2 Gig, 4 Gig, 8 Gig, 17-inch, 15-inch. This is why you have an
inventory problem. If you go into a computer superstore and look up you'll see
the failed forecast of some poor guy who has to forecast what people are going
to buy when they come to the store. That is a problem our company doesn't
have because of our use of information.
Q: Coming up in September, there is a request for a preliminary injunction
against Microsoft by the Justice Department that would force Microsoft to

6. allow computer makers like yourself the chance to make substantive changes to
Windows 98. Would you welcome that ability to make changes, such as to
unbundle the browser or change the startup screen?
Dell: There are two aspects to that. If you buy a system from us in Windows 98
it installs and sets up very, very quickly because we effectively break the seal
of the software, install the system and get it all set up and then reseal it. We do
this electronically. There are no people doing this. It's being done in the factory
as the systems are being built.
The benefit of that is the user gets that machine and instead of having to go
through this long complicated install process, they turn on their computer and
enter their name and it's ready to go. So there are things we can do that improve
the customers' experience.
One of the concerns we have is that if you start making every component of a
system a different product, then you get into this whole problem of what kind
of PC do you have? What kind of memory manager do you have? What kind of
JAVA do you have? What kind of application interface do you have? Do you
have this driver or that driver? You lose the whole concept of compatibility.
We have something in the PC industry that is a beautiful thing. You have 300
million machines and you can buy a piece of software and you're assured that it
will work on your machine, so long as your machine is not out of date. You
know it's going to work. If the integrity of that gets messed up because there is
some type of legislated architecture for computers, then that is not a good idea.
This is what [Fed Chairman Alan] Greenspan is referring to in his recent
comments [about his misgivings concerning the antitrust case being pursued
against Microsoft by the Justice Department].
Q: The House of Representatives passed the Internet Tax bill that holds off on
assessing taxes on products sold over the Internet. It looks like you won't have
to pay sales tax for three years when you receive orders online. What does that
mean for your company and is there pressure from your municipality that sees
you as a money bag?
Dell: This is a complicated issue. The reason it's complicated is because if I'm a
customer and I buy something off a web site, I don't know if that web site is in
Toronto or Singapore, Taipei, Timbuktu, or Tonga Tonga. You get on the web
and you don't know where this thing is.

7. The cost of shipping a small package anywhere in the world in three days is
$80.00. The question that local jurisdictions have to deal with is not only state
to state, but outside the U.S. because in a sense this is a pretty easy thing for a
merchant to overcome, just stick your web site [in another country].
What we worry about is let's say we are selling in the United States and are
complying with all the applicable issues and a competitor is selling in a
jurisdiction that doesn't have those tax structures and is in another country.
How is the U.S. government going to protect the businesses here and make sure
there is some type of global competitiveness? That's a big issue, much more
complicated than the state-to-state issue. If you just deal with the state-to-state
issue, we're really blinding ourselves to the way the Internet works.
We don't have any problem with fair and equitable tax structures, but the
challenge is....Toronto is not that far away. It's not that hard for a business to
set up in Toronto and with NAFTA you can ship stuff over the border.
Q: Since more of your business is reliant on the Internet, what do you see as
the big hurdles for electronic commerce?
Dell: Privacy is a concern that the individual consumer has. Our company has
been vocal on this issue. We have a very clear privacy policy in our company
and we clarified it again this week. We don't share our information or sell our
mailing list and we use the information only to service that customer. We allow
our customers to remove themselves from the mailing list if they want. But
when you go out and look at the gazillions of web sites not everyone has
figured out that they need a privacy policy and we want to encourage
everybody to do that.
The availability of high-speed access is another hurdle. I was in New York last
week on a panel with [the] FCC chairman and he was talking about the World
Wide Wait. In the home today, the average person is getting on the Internet at
28 kilobits and this is just really slow. So until we have megabit speeds, cable
modems, satellites -- some broadband communication -- you're not going to
have people using Internet to its full potential.
You have standards emerging with regards to commerce, security and the good
news is that a lot of these things are being worked out.

8. Q: One of the big themes of this conference has been the need for companies to
take higher regard to the needs of third-world countries by providing them with
access to the Internet and PCs. Do you feel any responsibility at Dell to do that?
Dell: Well, we feel a lot of responsibility to helping lower the cost of
computing and deploy the technology around the world. However, we are a
capitalist enterprise and we have to answer to a number of different
constituencies here. But Dell probably more than any other company in the
industry -- and I'm not trying to sound too boastful here -- has made a big
contribution in lowering the cost of PCs by fundamentally wringing out a lot of
inefficiency in the distribution channel and that in itself has made this
technology much more affordable.
We're spending a lot of time trying to figure out how we bring our business all
around the world. We're building a plant in China. We have a plant in
Malaysia. We are going to build a plant in South America and we're at the stage
where we are dealing with the next 40 countries. We have the first 40 and that
will put us into a lot of emerging markets.
Q: Do you see the $200 computer as a way to reach the masses? Is that a real
viable commodity?
Dell: The $200 computer has been around for a long time. I remember having
the Sinclair kit computer and you can always build a low-cost machine, but
does it really do anything of substance and do people want to buy it? Therein
lies the problem.
I know a lot of corporations that have old 386 machines they'd love for people
to take off their hands, but the problem is these machines don't run software, so
just lowering your price doesn't solve the problem because it gets to the point
where it has limited to no utility and it doesn't run the software.
Every time I go to China or other emerging countries, they don't talk about
$200 computers. They talk about Pentium IIs running at 400 megahertz. They
want the latest technology. They don't want to be treated like second-class
citizens from a technology standpoint.
It would be great if you could have a $200 computer, but it's not like we make
them for $100 and sell them for $2,000. The issue is that the cost that goes into
developing the products is pretty expensive.

9. If you want to understand the costs, start with Applied Materials, KLA
Instruments and Tokyo Electron -- the people who make the semiconductor
equipment. If you want to build a plant that makes semiconductors that go into
computers, write a check for $2.5 billion. If you write a check for $2.5 billion,
somebody ultimately is going to say, "I want a return on that money," and you
can't sell computers for $200 after you've spent $2.5 billion on a plant.

10. If you want to understand the costs, start with Applied Materials, KLA
Instruments and Tokyo Electron -- the people who make the semiconductor
equipment. If you want to build a plant that makes semiconductors that go into
computers, write a check for $2.5 billion. If you write a check for $2.5 billion,
somebody ultimately is going to say, "I want a return on that money," and you
can't sell computers for $200 after you've spent $2.5 billion on a plant.