Supply Chain Integration

CASE STUDY Dell Inc.

Improving the Flexibility of the Desktop PC Supply

ChainElvia Leyva

CHAPTER 6

History of PC Industry

Dell’s Background and Direct Model

Contract Manufacturing

Critical Components of a Desktop

Problem

L6 vs. L5 Value Comparison

Root Cause Analysis

Project Methodology

Factors to be Considered

Complexity Analysis ( PROS AND CONS)

Case Questions

AGENDA

History of PC Industry

The first (PCs) became available. The cost was $50000 Very bulky. PCs had their own operating systems

1960’s…..

In the 1970’s… The first microcomputers in the market. Apple Computer introduced the first desktop Computer

Computers became cheaper popular among home and business users. New Software. Laptop computers with a size of a notebook The first commercially available portable computer was the Osborne 1 in 1981 the CP/M operating system

1980’s …..

In the 1990s…

Personal computers became more powerful and capable of handling more complex tasks

Ability to support graphics and multimedia Power led to increased usage of desktop computers by

movie studios, universities, and governments.

Dell was founded in 1984 by Michael Dell in the University of Texas–Austin.

BUSINESS MODEL: ELIMINATING THE RETAILERS FROM THE SALES CHANNEL AND SELLING DIRECTLY TO CUSTOMERS.

3 Manufacturing facilities in the United States: Austin, Texas; Nashville, Tennessee; Winston-Salem, North Carolina)

Facilities in Brazil, China, Malaysia, and Ireland

Dell’s revenue for the last four quarters totaled $56 billion.

Dell employs 65,200 people worldwide

Dell’s Company Background and its Direct Model

Contract Manufacturing The phenomenon of contract manufacturing began in the 1980s.

Responsible for producing materials or unassembled components in less expensive regions and shipping them to the OEM factories in the United States or Europe for product assembly.

By 2005, most PC producers used contract manufacturers to produce high-tech electronic products.

By 2005, almost all the desktop PCs sold in the United States were at first produced by contract manufacturers in China.

ChipsetAMDIntel

MotherboardASUS

FoxconnIntel

MiTAC

Desktop ChassisASUS

FlextronicsFoxconnMiTACLite-On

Desktop PCAcerAppleDell

Fujitsu SiemensGateway

HPLenovo/IBMLAN Chip

BroadcomIntel

Printed Circuit Board

BTI ElectronicsCompeq

GCEPlato Electronic

3. Dell incurs motherboard expedite/air-freight cost and 3rd-party integration cost.

4. CMs incur cost for idle labor dedicated for MB-chassis integration.

1. In June 2005 Dell’s desktop manufacturing division found that its Manufacturing costs in Level 5 had continued increase.

2. Empty chassis are shipped by ocean (L5) to Dell US & Europe first. Motherboards are then air-freighted to Dell US & Europe.

L5

MB

Chassis

5 Weeks

1 WeekDell

ManufacturingCustomer

Supplier Logistics

Center

3rd Party Integrator(managed by EquipmentManufacturers)

L6 vs. L5L6

MB

Chassis

5 WeeksChina

IntegrationDell

ManufacturingCustomerSupplier

Logistics Center

: L5 additional cost

Integrated inside a Dell facility

Chassis shipped on water

Motherboards shipped by air

Increased supply chain flexibility

Increased motherboard air-freighting costs

3rd-party integration cost in US

Separate logistical costs for chassis and motherboards

Integrated offshore &

outside a Dell facility

Integrated motherboard-inside chassis shipped on water

Labor savings

MB air-freighting costs are eliminated

Reduced motherboard packaging costs

Reduced supply chain flexibility

More motherboards need to be re-worked in the event of an MB ECN

L6 L5

L6 is more cost-effective than L5.

Manufacturing Costs

L5 COSTS MB Packaging MB Air-Freight MB US Transportation MB Inventory Holding Chassis & MB US transportation from SLC and back Local/Regional Integration MB Rework at Dell Dell L5 mgmt. Cost.

Raw MaterialChina Material Transp.

China Assembler’sChassis Ocean-shipping

Chassis US Transportation

Chassis Inventory Holding

US assembler’s at DELL

L6 COSTS

China Assembler

COMMONCOSTS

Root Cause Analysis MAJORITY OF EXPEDITES ARE CAUSED BY CHIPSET

SUPPLY SHORTAGE.

63.5%

24.5%

8.3%3.8%

Chipset supplier decommitor supply issues

Quality/Eng Issues

Dell Forecast Accuracy

NPI

BPI project team established to evaluate the following 6 scenarios:

1. Keep as current: 3rd-Party Integrator (3PI) managed by Equipment Manufacturers

2. DAO Cellular Integration: Enable the Dell factory work cells to perform L5 L10 mfg. work

3. Offline Integration: Keep the current L6 L10 mfg. process unchanged; add a separate facility to handle MB-chassis integration work

a) At SLC (Supplier Logistics Center)b) At a Dell-leased building

4. 3PI managed directly by Dell5. L6 from Equipment Manufacturers’ Mexico plants

Project Methodology

For each of the 6 scenarios, BPI project team assessed the following attributes:

1. Smooth & sustainability process2. Cost per box3. Product quality4. Capital investment5. Material handling/cost-accounting6. Logistics

Project Goal Identify the optimal scenario

based on these input attributes

Factors to be Considered

Complexity AnalysisOption 1

Option 2(original)

Option 2(revised) Option 3A Option 3B Option 4 Option 5

Worldwide Procurement 10 1 1 1 1 5 10Regional Procurement 8 5 5 5 5 5 10Master Scheduler 5 5 5 5 5 5 5Production Control 5 10 10 7 7 7 5Operations 1 10 10 5 5 1 1DAO Quality 5 10 10 5 5 1 1Processing Engineering 1 10 10 5 5 1 1Supplier Quality Eng(Regional) 10 1 1 1 1 5 7Supplier Quality Eng(Global) 1 1 1 1 1 1 10Cost Accounting 5 1 1 10 10 10 1Inventory Control 1 5 5 5 7 10 1Logistics 5 1 1 5 5 5 10

Total: 57 60 60 55 57 56 62Cost per Box $10.07 $7.00 $7.90 $7.54 $7.70 $7.61 $7.00

The “Cost per Box” data has been modified to respect Dell’s data confidentiality.Option 1: EM-managed 3PI Option 2: Integration at DAO work cellsOption 3A: Integration at SLC/hub Option 3B: Integration at Dell-leased

bldg.Option 4: Dell-managed 3PI Option 5: Integrated chassis from Mexico

PROS vs CONS Least impact for Ops & PE Dell does not own inventory during MB-chassis integration at 3PI

Most expensive option WWP and Regional Procure. have more intense EM and 3PI mgmt./coordination Most difficult option for SQE

Less complex for WWPSQE mgmt. is reduced L5 and L6 parts are ordered and tracked independently clear-cut Cost Accounting Easiest option for Logistics

Long ramp time of new builders Difficult for PC to run deviations of both L5 and L6 in one process simultaneouslyDAO Quality concern from an L5-L6 hybrid mfg. model

Less complex for WWP SQE mgmt. is reduced

Most complex for Cost Accounting Extra PC and IC headcounts required

Less complex for WWP SQE mgmt. is reduced

Most complex for Cost Accounting and IC Extra PC and IC headcounts required Requires additional lease commitment

Easiest option for Ops & PE DAO Quality expected to improve as Dell directly manages 3PI

Most complex for Cost Accounting and IC – difficult to manage Parts Cost at a Dell-managed 3PI

Lowest possible cost compared to China L6 Overall easiest option for Dell

Requires Regional Procure. to manage L6 out of EM facilities from regions overseas. Increased SQE mgmt. Multi-regional logistics coordination is a concern.

Q1: Why does L5 incur higher manufacturing and logistics costs than L6? What are some of the costs that are incurred in L5 but not in L6? Are there any costs that apply to only L6 but not L5?

Q2: Which of the six proposed manufacturing solutions should Dell implement, based on the survey result? Why? What are the pros and cons of this recommendation? Option 3A (Offline Integration at the SLC)

AdvantagesThe Capital expenditure will be low with no Impact in the existing process

Less Complex for Worldwide ProcurementSupplier quality engineering management is reduced

DisadvantagesMost Complex for Cost AccountingRequires extra Production control & Inventory control

headcounts

Case Questions

Q3: How easily sustainable is the recommendation for Q2 if the chipset supply shortage further deteriorates?

It would be sustainable up to some point. Dell having its own factory can control the 3PI. Lead time the integration will take place only after 5th week.

Q4: How good is the methodology employed by the BPI team to determine the optimal manufacturing option for Dell? Are there more effective approaches?

Methodology of BPI team was excellent. Conducting a survey and involving all the departments shows how the Supply Chain works.

Survey was sent to the experts in each area and also involved the day to day business process. It would be the best source of information.

Some other effective approaches can be Push & Pull strategy Geographical Location of suppliers

Q5: How can Dell effectively address the root causes contributing to the increase of L5 manufacturing?   By providing motherboards in a timely fashion to CMs Making sure that Chipset suppliers don’t have multiple suppliers

and also have always safety stock.

Trying to reduce lead time Decreasing Quality/engineering issues Forecast correctly to evade demand fluctuations Design a way to plan demand in a better way when a new product

comes up in the market