DELL’S SUPPLY CHAIN

AND
THE IMPACT OF E –
COMMERCE

OPERATION MANAGEMENT
Dosen : Dr. Fahmy Radhi, MBA

Team IV (AP 13B) :

Rico Bonar
Andretti Reiza
Deasy Dewayani
Riandi Ichram
Widnayanto Agus Subekti
Ratriani Kartika M

PROGRAM STUDI MAGISTER MANAJEMEN

 UNIVERSITAS GADJAH MADA

I Company’s Profile

DELL was founded by Michael Dell in 1984 at Austin University with start up cost
US$ 1000 and Dell start by simply upgrading compatible IBM PC. Dell’s unique
idea is selling computer systems directly to customers through e-commerce

Dell is one of the world’s leading providers of computer products and services to
consumers and businesses with 57,600 employees in more than 80 countries.
Dell provides computer hardwares and the services needed to set up, maintain
and upgrade the hardwares. Dell has a unique supply chain based on e-
commerce where Dell and it’s suppliers and business partners acts as one virtual
company (integrated in a value web) due to the close cooperation and integration
of their activities.

The concept of the company : That Dell could best understand consumer needs
and efficiently provide the most effective computing solutions to meet those needs
by selling computer systems directly to customers.

Dell uses its online sales, premier pages and online support to open up some if its
own internal systems to its customers. It also allows corporate customers to link
up their own systems such as finance, procurement, MIS, and help desk to Dell’s
systems via the Internet and extranets.

These links enable Dell to keep track of every customer, to inventory equipment
upgrades and add-ons, to handle service and support requests directly, to
facilitate entry into service and support partners, and to capture feedback on
customer satisfaction with its products and service partners. For some large
corporate customers, the information network is richer still, including the complete
inventory of PCs worldwide for an individual company, thereplacement cycle, and
the disposition plans.

This extensive information bridge binds Dell more closely with its customers and
allows Dell to provide better service to its customers. The Internet and e-
commerce enrich the direct customer relationship that is at the core of Dell’s

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 business model. Through this relationship, Dell can channel the capabilities of its
value web to provide a wider range of services to its customers.

II Learning from Dell - the faithful implementer of 'Just in Time' and Supply
Chain Management

Dell has gained outstanding sales achievements by resorting to the unique direct
business model and highly efficient supply chain management systems. As a
result, many domestic IT enterprises began to study and imitate Dell. However,
their market performances have certain disparities with that of Dell, no matter
whether they are the manufactures that are learning from Dell's direct business
model, or whether they are like Lenovo, who is learning the supply chain model of
Dell. CCID Consulting, China's leading research, consulting and IT outsourcing
service provider, and the first Chinese consulting firm listed in Hong Kong,
believes that by simply copying the model of Dell without fully understanding the
management theory behind it is the decisive factor that leads to their failure.

Lenovo has also tried to make great efforts in promoting direct business models,
however, different from other manufactures, Lenovo focused on learning the
advanced supply chain management system of Dell and found huge areas of
development in their supply chain management, which greatly reduced the lead
production time and the level of inventory control, and it also improved the level of
satisfaction from customers.

Also, Lenovo has poached many senior managers from Dell, after merging the
PC department of IBM in order to integrate the supply chain system of Lenovo
and IBM efficiently. But the inventory hour remained 18 days less than Lenovo,
and with a higher efficiency of 90%. And, from a global point of view, the supply
chain of Lenovo is obviously suffering losses compared with that of Dell -- Dell
has consigned the production outsourcing to Taiwan manufactures that have
strong manufacturing capacities and low costs from an early stage and also first
finished the overall arrangement of their global supply chain. Lenovo's superiority
is very much confined to China.

Dell model; born from JIT

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''Just in Time'' was a production model which was implemented by Toyota Motor
Corporation in the 1960s. It emphasized the need to have just the required
accessories, just the required quantities and just the required time need for
production and distribution. In the 1980s, many American enterprises copied the
JIT model, however, with little effect.

JIT exposes all kinds of problems in management though reducing different sorts
of inventories, and it analyzes the reasons before resolving the problem to make
improvements. And, the pulling production that arranges the production according
to customer demand is one of the most effective ways to reduce inventory.

We believes that the direct business model and the supply chain management
system of Dell are acting as one. The two are supplementing each other with no
weak area.

First, the direct business model is continuing of the pulling production. The
traditional IT sales model makes use of distribution channels to finish the terminal
production sale. Under these kinds of circumstances, IT manufactures mainly rely
on market predictions and the sales data to arrange production, which is typical
pulling production.

However, the direct model of Dell faces directly to the terminal customers. It is
typical pulling production which embodies at the taches such as receiving initial
orders from the customers, assembly and logistics. Certainly, the production of
Dell bases on the difference delay but not only randomly relying on waiting for the
orders of the customers.

Second, direct sales promote the dynamic adjustments of the supply chain
management system. The ''delivering goods in 7 days'' promise of Dell is on the
basis of a consummate back-end supply chain system, however, the most
important reason why IT manufactures do not dare to develop direct business on
a large scale is because there is no guarantee for the delivery date. The formation
of the 7-day promise of Dell is the result of the improved back-end supply chain
management.

Different from traditional distribution channels, the direct business model of Dell
has advanced higher requirements for the prompt response to the customers.
Once the order of the customers cannot get the prompt response, it means that

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some links in the supply chain management will have problems and Dell has to
make amends and adjustments.

Thirdly, information platforms build the bridge of dynamic adjustments. In order to

implement JIT, the Toyota motor corporation arranged numerous raw material
suppliers in Toyota, Japan. And now, the global supply chain system of Dell
cannot summon all the manufactures together. However, Dell can deliver the
order information to the upstream accessory manufactures efficiently and
promptly through the information platform. The manufactures can produce and
assemble the accessories according to the electronic order and provide the goods
according to the timetable. If the supply chain bottlenecks, the information
platform can trace the problem.

In a word, the success of the Dell model is the result of the interaction of the
direct business model and supply chain management system. If there is no rapid
response demand shock from the customer, Dell may be intoxicated in its own
supply chain system and lose its momentum bit by bit. And similarly, if there is no
high effect supply chain system, the uncertainty of the direct business model of
Dell will be larger and its fast response ability will be weakened.

At the current stage, the domestic manufactures have studied the direct business
model or the supply chain management model well. But few can combine the two
aspects together and jointly develop them. And at the same time, once the
manufactures come across difficulties in the attempting to process the direct
business model, they will retreat and also lack of the JIT idea of self-denial.

Dell’s Growth

 Dell was founded with start up cost US $ 1,000.

 In 1988 Dell Computer went public & raise $30 milion.

 In 1991, Michael Dell become the youngest CEO of a Fortune 500 company.

 As of January 2005, Dell Computer Corp. was the world’s largest direct selling
computer company.

 In 2005, Dell was ranked as America’s most admired company by Fortune.

Dell’s revenue growth at 19% (7% higher than industry average) and its

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 operating efficiency resulted net margin of 6% while the rest of the industry
lagged behind at 1%.

 By 2005, the company was valued at more than $100 billion.

DELL’S Strategy

 Direct Selling from manufacturer to consumer; selling computer systems

directly to consumers.

 Dell outsourced all components but performed assembly.

 Dell took customized orders for hardware & software over the phone or via
internet.

 Dell designed an integrated supply chain linking Dell’s suppliers very closely to
its assembly factories and order-intake system.

 To augment the direct sale approach, Dell set up kiosk in malls & planned a
series of marketing campaigns

DELL’s Management System

Dell using flat structure organization as a competitive advantage :

 Localized decision making

 Execution speed and energy

 Efficient channels of communication and the accessibility to the management

without dampening effects of bureaucracy

 Quickly roll out strategies and to respond competitive markets

Dell communicated “Facts are your friend” and “What its meant for the company’s
future” to the employees, customers and shareholders.

III Situation analysis

Supply Chain Management yang diterapkan di Dell :

Extends the internal supply chain by linking to the external supply chain under
indirect control of the firm.

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  Integrated relation with supplier and customer

 Focuses on customer orientation

Dell has executed its “E-Works” strategy through a new Information Infrastructure
sales force and through partnerships with service and software providers, rather
than by transforming itself into a services company.

Supply Chain Integration :

In terms of designing, building and delivering PCs, this is still roughly the way Dell
operates, although a significant share of Dell’s products (particularly notebooks) are
built by contract manufacturers and shipped directly to the customer. However, as
Dell expands its boundaries beyond simply selling PCs, it has replaced the simple
value chain with a new model that we call the value web or the virtual corporation.

Figure 1. Indirect PC value chain

Suppliers PC Dstributor Retailers Final

Makers Resellers Customer
Integretor

Figure 2. Direct PC value chain: Dell’s hardware delivery system

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 Suppliers Dell Final Customer

Flow of Dell’s Supply Chain :

Keuntungan bagi DELL menggunakan pola Supply Chain tsb:

 Dell brings products to market faster than its competitors

 Customization and quick response

 Attract large business customers

 Reduce Bullwhip Effect

 Collecting the payments

IV .Answer The Question from the CASE

1. Although it might seem that Dell, with its build-to-order model, is

best equipped to benefit from e-commerce, a traditional PC
manufacturer, selling through distributors and retailers, may also have a
lot to gain from e-commerce. Why?

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 Traditional PC manufacturer also have a lot to gain from e-commerce : since
they can reach it’s customer by advertising through internet and they can built
website so the customers can see their detailed product by browsing to their
website.

2. How has Dell exploited the advantage of the internet to improve

performance?

 Dell uses direct sales via Internet, whereas Traditional PC

manufacturers previously assemble PCs ready for purchase at retail
stores.

 PCs have life cycles of only a few months

 uses the Internet to sell its products

 offers a virtually unlimited variety of PC configurations.

 Buyers can click through Dell and assemble a computer system piece
by piece, based on their budgets and needs

 To facilitate B2B sales, the Dell site offers each corporate customer an
individualized interface called “Premier page”

3. What is the main disadvantage of Dell’s selling PCs over the

internet?

a. High Distrubution Cost

b. Dell company can’t enjoy EoS (Economies of Scale) in shipping

because it sends individual PCs to customers from its factories,
While competitors :

o Sell through distributors and middlemen

o Ship their products with EoS using large truck shipments

to warehouses and retailers

o End user providing the final portion of delivery

The transportation cost of a PC relative to its price is generally

between 2-3%.

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 c. Lack of market reach ; it can not reach new
corporate and government customers through internet, it must reach
them through direct sales force

d. It does not have the benefit of distribution

channel to extend its reach, it must rely on advertising, marketing,
sales representative

4. How does Dell compete with a retailer who already has a PC in

stock?

• Price advantage of Dell (elimination of retailer and distributor’s

margin results in increase in Dell’s profit margin and cheaper prices
for cusomer)

• Lower inventory cost due to lower days of inventory (5 vs 30-90

days)

• Lower cost of materials due to automated procurement process

which is more efficient and faster, also enabling lower days of
inventory

• Negative working capital because it’s Dell’s supplier who has

inventory of materials and indirectly financing Dell’s growth

• More accurate forecasts derived from better saless information

and direct feedback from customer

• Differentiation in ability to let customers customize their orders to

meet their needs

5. How does Dell’s supply chain deal with the bullwhip effect?

Bullwhip effect is the increasing fluctuation in orders that often occurs as

orders move through the supply chain. This will increase the cost associated
with inventory, transportation, shipping & receiving, while decreasing customer
service & profitability.

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 Dell’s supply chain deal with bullwhip effect with “Drop Shipping and Special
Packaging” method. :

a. Dell will send directly to end user customer, rather than to seller or retailer.
So it will save cost of transportation & time.

b. Dell focus on Assembling PC as its core competence. Whenever their

customer want to buy Dell PC, together with other component, such as
printer. They will only ship to customer its Dell PC, but the printer will be
drop shipped from printer manufacturer.

V Conclusion

Dell started out as a specialist company in the PC industry’s horizontally-

segmented industry structure. It assembled its own computers from standard
parts and components manufactured by others and delivered its products directly
to customers. Dell focused on the relationship with the customer, but in order to
sustain a high growth rate while providing necessary customer service, Dell built a
complex web of relationships rather than doing everything itself.

With its build-to-order model, Dell viewed final assembly as a core competency
which was kept inhouse, but it outsourced components, pre-assembly and
logistics. Service and support were also viewed as a key part of relationship
selling, so Dell kept control of the function but outsourced some service delivery
functions to business partners (resellers, system integrators, service companies)
who would help customers to install, support, and service Dell PCs. Thus, Dell
became a virtual corporation as a matter of business strategy. The key to the
strategy was fully exploiting information technology, the Internet, and e-
commerce.

Dell’s innovation was not the individual pieces of the strategy—customer focus,
supplier partnerships, mass customization, or just-in-time. The real innovation
was how to combine them using information and IT to coordinate across company
boundaries to achieve new levels of efficiency and effectiveness for the entire
value system. The fundamental insight was that IT could allow Dell to achieve
coordination of the system and keep its control over the customer relationship.

To do so, Dell focused on using IT and the Internet to improve internal processes
such as ordering, assembly, delivery and support, to coordinate its broader value

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web, and to enhance the customer relationship. A key idea governing process
improvements is that information should be diffused as widely as possible
throughout the value web to enhance the performance of the entire network and
provide rapid feedback to the center. This means that Dell can analyze trends,
problems, solutions, performance, and customer satisfaction in real time, creating
positive feedback flows that keep the whole system functioning well.

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