CASE STUDIES Dell's Value Chain Dell Computer, with close supplier relationships, encourages sup- pliers to focus on their individual technological capabilities to sus tain leadership in their components. Rescarch and development costs are too high and technological changes are too rapid for any une company to sustain leadership in every component. Suppliers are also pressed to drive down lead times, lot sizes, and invento- ries. Dell, in turn, keeps its research customer-focused and lever- ages that research to help itself and suppliers. Dell also constructs special web pages for suppliers, allowing them to view orders for components they produce as well as current levels of inventory at Dell. This allows suppliers to plan based on actual end customer demand; as a result, it reduces the bullwhip effect. The intent is to work with suppliers to keep the supply chain moving rapidly. the products current, and the customer order queue short. Then, with supplier collaboration, Dell can offer the latest options, can build to order, and can achieve rapid throughput. The payoff is a competitive advantage, growing market share, and low capital investment On the distribution side. Dell uses direct sales. primar- ily via the internet, to increase revenues by offering a virtually 448 PART 3 Managing Operations impossible. Therefore, traditional manufacturers are often unlimited variety of desktops, notebooks, and enterprise products. with product configurations that are not selling while simultan Options displayed over the internet allow Dell to attract customers ously being out of the configurations that are selling. Dell is bele that value choice. Customers select recommended product config- able to match supply and demand. urations or customize them. Dell's customers place orders at any One of the few negatives for Dell's model is that it was time of the day from anywhere in the world. And Dell's price is in higher outbound shipping costs than selling through distribe cheaper, retail stores have additional costs because of their brick- and-mortar model. Dell has also customized web pages that enable tors and retailers. Dell sends individual products directly to tomers from its factories. But many of these shipments are large business customers to track past purchases and place orders consistent with their purchase history and current needs. Assembly often one or a few products), while manufacturers selling through begins immediately after receipt of a customer order. Competing distributors and retailers ship with some economy of scule, using firms have previously assembled products filling the distribution large shipments via truck to warehouses and retailers, with the end channels (including shelves at retailers) before a product reaches user providing the final portion of delivery. As a result, Dell's ou the customer. Dell, in contrast, introduces a new product to custom- bound transportation costs are higher, but the relative cost is low ers over the internet as soon as the first of that model is ready. In an (typically 2% to 36). and, thus, the impact on the overall cost a industry where products have life cycles measured in months, Dell low enjoys a huge early-to-market advantage. What Dell has done is build a collaborative supply chain and Dell's model also has cash flow advantages. Direct sales allow an innovative ordering and production system. The result is what Dell to eliminate distributor and retailer margins and increase its Dell likes to refer to as its value chain-a chain that brings value own margin. Dell collects payment in a matter of days after prod- from supplier to the customer and provides Dell with a competi ucts are sold. But Dell pays its suppliers according to the more tra- tive advantage ditional billing schedules. Given its low levels of inventory, Dell is able to operate its business with negative working capital because Discussion Questions it manages to receive payment before it pays its suppliers for com- ponents. These more traditional supply chains often require 60 or 1. How has Dell used its direct sales and build-to-order model more days for the cash to flow from customer to supplier-a huge develop an exceptional supply chain? demand on working capital. 2. How has Dell exploited the direct sales model to improve open Dell has designed its order processing, products, and assem- tions performance? bly lines so that customized products can be assembled in a matter 3. What are the main disadvantages of Dell's direct sales model? of hours. This allows Dell to postpone assembly until after a cus- 4. How does Dell compete with a retailer who already has stock tomer order has been placed. In addition, any inventory is often in 5. How does Dell's supply chain deal with the bullwhip effect the form of components that are common across a wide variety of finished products. Postponement, component modularity, and tight Sources: Adapted from S Chopra and P. Meindl, Supply Chain Manage scheduling allow low inventory and support mass customization, ment, Brd ed. (Upper Saddle River, NJ: Prentice Hall, 2007): R. Kapacita Dell maximizes the benefit of postponement by focusing on new products for which demand is difficult to forecast. Manufacturers who sell via distributors and retailers find postponement virtually et al. "lowentowy Decisions in Dell's Supply Chain." Interfaces 34,00 May-June 2004) 191-205, and A. A. Thompson, A. 1 Strickland. 1. E. Gumble. "Dell, Inc, in 2006: Can Rivals Beat Its Strategy Crutor and Executing Strategy 15th ed. (New York, NY McGraw-Hill