Wednesday, September 4, 2013
Dell modifies its supply chain strategy
Dell modifies its supply chain strategy
This blog post is in relation to the first week’s reading assignment and from an article that I came across this week.
Dell, a 57 billion dollar industry, employs its supply chain systems unlike any other PC maker on the planet. The company was one of the first to introduce a configure-to-order (CTO) model where customers could have millions of configurations to customize their PCs according to their requirements. Through the direct sales approach, Dell builds systems to order, which helps the company to introduce new products and technologies faster than its competitors. Dell’s unique model has shaped the company in estimating customer requirements, forecasting demand, and providing low-cost PCs to customers.
The only downside to this business model is the shipment time of about 7-14 days, as PCs are made after an order is placed. Due to changing market trends, Dell’s PC business since last quarter has experienced market share losses. In order to tackle this situation, Dell has transformed its core principles and devised a new strategy called the ‘End user computing’ growth plan that deals with simplifying its business, gaining new market share through new prospective customers, employing end-user computing solutions and scaling alternate computing solutions.
Dell is to introduce a ‘Smart Selection’ program where it will pre-build the most popular PC configurations that customers desire and ship them within 24 hours. With this new build-to-order (BTO) model complementing its existing CTO model, Dell hopes to provide a wider spectrum of options that will be available for customers to choose from. This initiative changes the whole supply chain landscape for Dell, since it now has to think about increasing the warehouse capacity, unlike their previous CTO model where they could afford to keep small inventory space. On the other hand, Dell’s long history of direct customer sales (about 2 billion customers), gives them a wealth of customer intelligence and help gain a competing advantage over their rivals. Close relationships with customers through direct sales, helps Dell precisely meet the demand and maintain low inventory as possible. Also since limited configurations are produced, you know exactly what is inside each system, which makes maintenance and troubleshooting for the original equipment manufacturer (OEM) less complex.
With the offering of BTO and CTO models, Dell can customize their SKUs for different countries and channels. This helps to lower cost and drive revenue. The cost reductions will come out of supply chain and support. In line with this strategy, Dell plans to develop specific models for education. For China, it is optimizing their offerings with different colors, richer configuration and thinner form factors. In this regard, Dell’s Wyse business, the cloud –client computing business is on a growth trajectory with revenues touching $ 1 billion. Dell believes that this is the real future dollar play and is working on driving its long term growth.
Figure 1 Source: Dell Inc.
By incorporating both BTO and CTO models in their supply chain, Dell has to deal with a very complex mechanism at hand. Aside introducing a new model and customer-centric strategy, it is important for Dell to excel with their CTO model (a model they cannot, to as it brings in billions of dollars in revenue) and the new improvised supply chain strategy. In order to recoup all of their investments made on End User Computing growth strategy and to convert all of their market losses to profits, Dell must excel in all of their departments to generate revenue and improve profit margins.
Dell is introducing both CTO and BTO models for their growth strategy. Are these models complementary to each other and can they provide the desired economies of scale (economies of scale are the cost advantages that enterprises obtain due to size, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output. Often operational efficiency is also greater with increasing scale, leading to lower variable cost as well.  )?
33. Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 157. ISBN 0-13-063085-3.