Dell Case Study

Supply Chain Management: An Analysis of Dell’s Value Chain

Supply Chain Management

Case Paper on Dell’s Value Chain

Stephen Chene

MGT 565-Novi Campus


Question A: Define Supply Chain Management

Our book defines supply chain management as the “integration of the activities that procure materials and services, transform them into intermediate goods and final products, and deliver them to customers.” (Heizer, Render, 9th edition page 434). Within this definition there are many functions and opportunities between the suppliers and distributors that can improve the supply chain.

Supply chain management is also defined as the “management of material and information flow in a supply chain to provide the highest degree of customer satisfaction at the lowest possible cost.” (BusinessDictionary.com) Supply Chain Management (SCM) requires commitment of supply chain partners to work closely to coordinate order generation, order taking, and order fulfillment thus, creating an 'extended enterprise' spreading far beyond the producer’s location.

A collaboration of other sites define SCM as managing a series of processes of goods that move from the customer order through the raw materials stage, supply, production, and distribution of products or services and ultimately to the customer. There are hundreds of books and web-sites regarding supply chains and each one has tried to create their own definition of supply chain management. While they all change the words in an effort to stand out they all come down to the same basic principle. All processes need to be integrated and you need to have superior relationships with suppliers. The process includes every stage of the product, beginning with the raw materials and doesn’t end until the product is delivered to the customer. The process actually still continues until the consumer no longer needs any additional service on the product. The company who manages these processes and relationships the best will ultimately win and have the best supply chain. The competition is no longer between the companies, it is between the companies’ management of the supply chain and who can provide the maximum value.

There are many different aspects of SCM, but the essential goal in managing a supply chain is to achieve an orderly flow of goods from extractors to consumers. While that goal is essential, the newest discipline of SCM is the flow of demand and the flow of cash up the chain. Without these other flows, the goods would never move: It’s demand that provides for the movement and it’s the cash that provides for the motivation. They are key to all of this is to find processes to improve on these basic operations (Taylor 2003).

Internet technology is also starting to be found in defining SCM. The reality is that firms that use internet technologies have the ability to impact the fundamental structure of a firm and its supply chain. Regardless of the uncertainty and doubt regarding technology choices, information technology is fundamentally changing the way firms develop, market, and support its products and services (Reddy and Reddy, 2003). Using internet technology allows for great communication and the ability to compress the supply chain.


The internet has also allowed us to improve our SCM operational effectiveness and to know our own demand chain. SCM involves making it easier for external and internal suppliers to collaborate with you, which enables you to specialize and focus on developing core competencies. Technology is changing too fast and no one company can specialize and be the best at everything. Therefore to improve on SCM we need to use all resources possible and collaborate with everyone (Hoover et al., 2001).

According to the Gower Handbook of Supply Chain Management, the define SCM as integration and collaboration of all aspects of the product. They believe that this will be the area of most benefit in the foreseeable future. They say that you need to select your supply chain partners that complement company objectives. They continue with the notion that the supply chain structure is particularly important as technology continues to enable supply chain improvements and the markets will expect supply chains to become more lean and agile and increase shareholder value (Grower, 2003).

Below is a very simplistic model of a value chain. The book, Supply Chain Management and Advanced Planning talks about how to integrate all aspects of the business and when you do, you can add value at every stage (Stadtler and Kilger 2000). This simplistic model is just another way to define SCM, but it shows to everything from the legal department to the purchasing department and everything else in between is intertwined in the SCM model. This also shows that at each stage value can be added to improve operations.

In summary, supply chain management has to do with looking at every aspect of the business and collaborating with all the suppliers and departments within the company. Technology is continuing to change and open up new opportunities to improve the flow between procurement of materials, to the finished product, onto delivery and service in


the future. Supply chain management is the essential component of any business and that is where companies will find their opportunities for improvement.

Questions B: How does the Dell case study relate to the definition of SCM?

Supply chain management is all about improving processes. There are thousands of processes involved when it comes to making a Dell computer. According to Curt Johnson, Director of Worldwide Procurement IT, “The availability of our supply chain systems is paramount to keeping our factories running. . . . any downtime costs us thousands of dollars per minute." (Dell.com). That quote speaks directly to the definition of supply chain management provided by the book and it validates the importance of integration and collaboration.

The Dell case study talks about how Dell develops close relationships with suppliers. Dell realizes that they can’t do everything on their own, but by working together everyone can win. In order to improve the process for the customer and the bottom line for Dell, they press suppliers to drive down lead times, lot sizes and inventories. To help suppliers Dell does a lot of customer research and shares that research with the suppliers. Dell also constructed Web pages for suppliers. This is an amazing advancement in supply chain management because it allows the suppliers to view orders for components that they produce as well as knowing the current inventory at Dell. This allows them to plan based on actual demand and not trying to guess what demand will be. Collaborating with the suppliers keeps the supply chain moving rapidly, keeps the products current, and the customer queue short.

Dell’s web-site collaboration with suppliers is ingenious because of its direct sales to customers via the internet. The SCM definition talks about integration from the procurement of materials, transforming them into final products and then delivering the final products, but Dell takes that one step further. Dell waits until the customer tells them what specifically they want and then the procurement starts. This allows for a virtually unlimited variety of options for their products while offering lower costs and higher margins for Dell.


Below is a diagram of Dell’s Value Chain. This simplistic model shows how everything is intertwined and it all begins and ends with the customer.

Part of Dell’s integration and success is based on their communication and high standards with its suppliers. When you look at the SCM definitions it involves communication, training, and follow up with suppliers. Below is a list of expectations regarding core components for Dell’s suppliers that were taken from Dell’s website:

“At the center of Dell's global supplier management program is our supply chain management system that includes a number of core components:

Certification and Standards

ISO 14001 certification. We require our suppliers to be compliant with ISO 14001, the most widely-recognized standard for environmental management systems, by Jan. 31, 2004 or submit a schedule for achieving certification and obtain Dell approval.


OHSAS 18001 certification. We require our suppliers to be compliant with OHSAS 18001, a prominent European standard for workplace health and safety management systems, by Jan. 31, 2004 or submit a schedule for achieving certification and obtain Dell approval.

Training and Communication

Training. Dell provides training on its supplier expectations during its annual supplier conference as well as updates in quarterly business reviews. In addition, Dell provides training in a variety of relevant areas, such as environmental practices, to suppliers.

Supplier social responsibility and environmental responsibility agreements. As part of every new supplier contracting process, Dell requires suppliers to sign an agreement acknowledging they are aware of and will abide by Dell requirements and principles.

Reviews and Compliance

Business reviews. In order to embed socially responsible behavior into business activities, Dell includes a review of requirements and principles in quarterly business reviews that are held with key suppliers.

Self audits. Dell asks key suppliers to conduct a self-audit to review with Dell management on an annual basis, using a standard scorecard format. These audits are required to be signed by a member of senior management of the supplier.

Dell executive oversight and review. Dell's supply-chain management system is overseen by chief procurement officers and senior vice presidents of Dell Inc. Issues of concern related to supply chain practices are raised in regular operations reviews with these executives and, if appropriate, also raised in Dell's business conduct committee and to the chief executive officer.

Board of directors oversight. Issues of concern related to supply-chain practices will, as appropriate, be raised with the Dell Board of Directors and/or its various committees.

Engagement with third parties and non-governmental organizations (NGOs). Dell will engage with third parties and NGOs as it deems necessary in order to ensure the effective implementation and oversight of its supplier principles.

Correction and Enforcement

Correction. In recognition the complexity of the world in which we do business, when suppliers fail to meet these principles, Dell and the supplier will create an action plan to ensure future compliance. Performance against the plan to adhere to Dell's standards shall not take more than one year.


Enforcement. Dell reserves the right to terminate at any time, even before corrective plans are developed and implemented, agreements with suppliers that fail to comply with our Supplier Commitment Policy or our Supply Chain Management Requirements.

In summary, Dell’s case study relates to the definition of supply chain management because they have strong relationships with suppliers, constant communication and use of technology to improve operations. They have strong written standards and expectations with follow up as well as training to work better with the suppliers. All of this ultimately is to improve relations with the customer and gain market share and profitability.

Dell is definitely an industry leader when it comes to the direct sales model and the compression of their supply chain. They have made great improvement beyond what the competition has been able to do. To improve, I see two areas of opportunities. The first is their challenge and costs of shipping individual computers out to consumers. The second is their additional costs to service the customer themselves especially after the product has been delivered.

Question 1: How has Dell used its direct sales and build-to-order model to develop an exceptional supply chain?

Many of the challenges in improving the supply chain come with all of the unknowns. Most companies produce products they think the consumer will want. Then they ship these products to the retail stores. The stores then try to sell the products that are on their shelves to the customers. The supply chain shows down while they are figuring out what to build. Then they work with suppliers to get the raw materials and components for the products. The chain slows down more while they are building the products and shipping them to the stores. Then the supply chain is still slow while they wait for the products to sell and get paid.

Dell has used its direct sales and build-to-order model to create this exception supply chain by integrating everything from the beginning to the end process. Dell starts by researching customer to find out what they want. As soon as an initial product is


designed, Dell starts to market that product on the web-site. Dell does not start to produce any of the products until the customer tells Dell exactly what they want and pays for the product. Only then does the procurement process start. Dell has improved the supply chain to make it exceptional by integrating the suppliers. The suppliers have a Web page which informs them of pending orders. This allows the suppliers to plan based on actual demand. This sales model created an exceptional supply chain because this integration of activities from the procurement of materials to the final product and Dell’s direct shipment to the customer can be done in a matter of hours compared to months. In addition, this allows for exceptional cash flow compared to traditional methods since the payment is received before Dell pays for the components itself.

Question 2: How has Dell exploited the direct sales model to improve operations performance?

Dell has been able to exploit the direct sales model because of the internet. Dell has been able to attract customers that value choice from all over the world. Dells prices are cheaper because they don’t have the brick and mortar to pay for and customers can now customize their products. Dell can introduce a new product to customers over the internet as soon as the first model is ready. “In an industry where products have life cycles measured in months, Dell enjoys a huge early-to-market advantage” (Heizer and Render 2008).

Dell has compressed its supply chain by directly linking the orders directly to the suppliers. Suppliers can view existing orders so they know if or how many components to produce and ship. This supply chain compression gives Dell a substantial unit cost advantage over someone else. With an inventory turnover rate of about 60 times per year, Dell has minimized the rapid depreciation and inventory write-off costs that typically hurt the PC industry. Also because of its direct sales model, Dell operates on a negative cash conversion cycle. Dell receives its money prior to having to pay its suppliers for the components.

Dells direct sales model has improved operations because the customer can order exactly what they would like without Dell having to worry about stocking every imaginable product. Dell receives the orders and payment for the item and the customer receives the exact product and accessories they want within day’s delivery right to their house.

Question3: What are the main disadvantages of Dell’s direct sales model?

Dell’s direct sales model has many advantages but there are a few disadvantages of the direct sales model. The biggest component is the shipping aspect and others include the customer service component before, during, and after the product is completed.

Since Dell is handing all aspects of the computer building process directly and sending it to the customer, they have to pay for the cost of shipping. Other companies


mass produce the computer and send them in bulk. Dell is at a disadvantage because they are sending individual or very small orders directly to many consumers.

The other issue of the direct sales model is that you have to shoulder all the related support costs, from handling information requests before the sale to taking and tracking orders to handling service inquiries after the sale. You do not have the ability to pass any of those costs onto retailers because you are handling every aspect of the transaction.

In summary, the direct sales model provides a cost advantage on the production side, but brings a cost disadvantage on the support side.

Question 4: How does Dell compete with a retailer who already has a stock?

In this day and age of the internet there seems to be a constant battle between the internet sales model and the brick and mortar businesses. Each has their advantage and disadvantages and whoever is the most competitive and strategic will win.

Since many consumers like to see and feel a product before purchasing Dell had to create a different way to compete. The most obvious is the price issue. Since Dell doesn’t have to pay for the brick and mortar buildings, they can sell at a lower price because of their lower fixed costs. The other big way that Dell competes with a retailer that already has computers in stock is by allowing the consumer to customize their computer to exactly what they want. The stores have limited supplies with limited selection. Due to the supply chain model they have set up, Dell allows customers virtually unlimited option for them to customize their computer. In addition, Dell can produce the computer in a matter of hours and have it shipped to the customer in a matter of days.

In summary, Dell competes with a retailer by offering a lower price and allowing the consumer to customize the product to the options that they prefer.

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

Theoretically the Bullwhip effect does not occur if all orders exactly meet the demand of each period. This is consistent with findings of supply chain experts who have recognized that the Bullwhip Effect is a problem in forecast-driven supply chains, and careful management of the effect is an important goal for in supply chain management. Therefore it is necessary to try to figure out demand as far in advance as possible.

Dell has achieved this by constructing Web pages for the suppliers. These pages allow the suppliers to view order for components they produce as well as how much stock is currently in inventory at Dell. This allows the supplies to build for demand in real time.


In summary, if you can build in real time based on actual demand you will not have to worry about inventory build-up of unnecessary components and products. Dell’s customized web-page for suppliers allows them to reduce the bullwhip effect.

References


Business Dictionary.com (n.d.) Supply Chain Management. Retrieved from

http://www.businessdictionary.com/definition/supply-chain-management-

SCM.html

Grower Handbook of Supply Chain Management. (2003) (5th ed.)Burlington, VT:

Author.

Hoover Jr., W., Eloranta, E., Holmstrom, J., Huttunen, K. (2001). Managing the

Demand-Supply Chain. New York-Wiley Operations Management.

Reddy, R., Reddy, S. Ph.D., (2001). Supply Chains to Virtual Integration. New York-

McGrall-Hill.

Stadtler, H., Kilger, C. (2000). Supply Chain Management and Advanced Planning-

Concepts, Models, Software and Case Studies. New York-Springer.

Dell.com. (n.d.) Suppliers Principles: Supply Chain Management Systems. Retrieved

from

http://www.dell.com/content/topics/global.aspx/about_dell/values/supp_citizen/

supply?~ck=ln&c=us&cs=NAR&l=en&lnki=0&s=bsd

Taylor, David A Ph.D (2004). Supply Chains, A Manager’s Guide. Boston: Addison-

Wesley.

http://www.businessdictionary.com/definition/supply-chain-management-SCM.html

http://www.businessdictionary.com/definition/supply-chain-management-SCM.html

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Dell Case Study