Question 2: SCM 711S

Case Study: Competitive Advantage at Dell Inc. Michael Dell started Dell Inc. in 1984 when he was an undergraduate student at the University of Texas. Two decades later, Dell has grown to become one of the worlds great computer companies, with a leading share in the personal computer and server businesses. In fiscal 2004, a year in which most computer makers lost money due to slumping global demand for PCs, Dell saw its revenues jump by $6 billion, to $41 billion, made $3.5 billion in operating profit, and gained over 2 percent in global market share. Approximately one-third of Dells sales were made outside the United States. Dell credits much of its strong performance in a tough environment to a cost structure that is the lowest in the industry. That cost structure is in part the result of Dells global manufacturing and supply chain management strategy.

Dell has manufacturing sites in Brazil, Ireland, Malaysia, and China, in addition to three sites in the United States (and a fourth now under construction). The sites were chosen for low labour costs, the high productivity of the local workforce, and their proximity to important regional markets.

Dell prefers to manufacture close to regional markets to reduce shipping costs and increase the speed of delivery to customers. (Dell still manufactures computers in the Unite Sates because its U.S. workforce is very productive and the United States is its largest market, so it pays to be close to U.S. customers.)

In addition to manufacturing, much of Dells customer support operations are also performed outside of the United States with a major centre in Bangalore, India (U.S. customers calling Dells customer support are likely to be connected to a service agent in India). India was chosen not just because of low wage rates, but also because of the availability of an educated and English-speaking workforce. However, moving customer support offshore has not been all smooth sailing. Differences is accent and culture between U.S. callers and Indian employees led to a spike in complaints from customers following the 2001 opening of the Bangalore call centre, and in 2004, Dell moved some of its support operations for larger corporate customers back to the United States. Dells support operations for retail customers, however, are still located in Bangalore, and Dells Management states it is committed to maintaining its Indian calling centre. Dells supply base is also global. Dell has some 200 suppliers, more than half of which are located outside the United States. Thirty suppliers account for about 75 percent of Dells total purchases. Over 50 percent of its major suppliers are in Asia.

From inception, Dells business model was based on direct selling to customers, eliminating wholesalers and retailers. The original thought was that by cutting out the middle of the distribution chain, Dell could offer consumers lower prices. Initially, direct selling was achieved through mailings and telephone contacts, but since the mid-1990's many Dells sales have been made over the internet, and by, 2004, some 85 percent of all sales were made through this medium. Internet selling has enabled Dell to offer its customers the ability to customize their orders, mixing and matching products features such as microprocessors, memory, monitors, internal hard drives, CD and DVD drives, keyboard and mouse format and the like, to get the system that best suits their requirements.

While the ability to customise products, when combined with low prices, has Dell attractive to customers, the real power of the business model is to be found in how Dell manages its global supply chain to minimize inventory while building PCs to individual customer orders within three days. Dell uses the internet to feed real-time information about order flow to its suppliers. Dells suppliers, wherever they are located, have upto-the-minute information about demand trends for the components they produce, along with volume expectations for the next 4 to 12 weeks that are constantly updated as new information becomes available. Dells suppliers use this information to adjust their own production schedules on real-time basis, producing just enough components for Dells needs and shipping them by the most appropriate mode, typically truck or air express, so that they arrive just in time for production. This tight coordination is pushed far down the supply chain, with Dell sharing key data with its suppliers principal suppliers. For example, Quanta of Taiwan makes notebook computers for Dell that incorporate digital signal processing chips from Texas Instruments. To better coordinate the supply chain, Dell passes the information to Texas Instruments from Quanta. This allows Texas Instruments to adjust its schedules to Quantas needs, which in turn can adjust its schedules according to data from Dell. Dells goal is to drive all inventories out of the supply chain apart from those in transit between suppliers and Dell. Effectively replacing inventory with information. Although Dell has not yet achieved this goal, the firm has reduced inventory to the lowest level in the industry. In 2004, Dell carried only three days of inventory, compared to 30, 45, or even 90 days worth at competitors. This is a critical advantage in the computer industry, where component costs account for 75 percent of revenues and typically fall by 1 percent per week due to rapid obsolescence. For example, when larger, faster hard drives are introduced, which occurs every three to six months, the value of previous generation hard drives is significantly reduced.

So, if Dell holds one week of inventory, and a competitor holds four weeks, this translates immediately into 3 percent worth of component cost advantage to Dell, which can mean a 2 percent advantage on the bottom line. Driving inventory out of the system also dramatically reduces Dells need for working capital and boosts the companys profitability.

Dells Internet-based customer ordering and procurement systems have also allowed the company to synchronize demand and supply to an extent that few other companies can. For example, if Dell sees that it is running out of a particular component, say, 17-inch monitors from Sony, it can manipulate demand by offering 19-inch model at a lower price until Sony delivers more 17-inch monitors. By taking such steps to fine-tune the balance between demand and supply, Dell can meet customers expectations. Also, balancing supply and demand allows the company to minimize excess and obsolete inventory. Dell writes off between 0.05 percent and 0.1 percent of total materials costs in excess or obsolete inventory. Its competitors write off between 2 percent and 3 percent, which again gives Dell a significant cost advantage.

Case Study Source: Hill, C. W. (2007). International Business: Competing in the Global Marketplace. New York: McGraw-Hill/Irwin.

QUESTIONS

2. What factors might make it difficult for other PC companies to adopt Dells model? (15 Marks)