Dell Direct Case Study

Supply Chain Management1

2013.4.18

Susie

Riri

Dell Inc. Case Study : Dell Direct

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Table of Contents

Storytelling- History of Dell- Case Questions

Analysis- Who is Dell?- External Analysis- Internal Analysis

Conclusion- Summary- Implications

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1976, Stephen Wozniak & Steve Jobs, Apple computer

1980, IBM, open architecture, off-the-shelf component- MS Dos from MS- Intel 8088 microprocessor- Tandon disk drive- Computerland and Sears Business as Retailers

1981, IBM commanded 42% of PC market share while Apple’s share was driven down to 20%

Structure of the computer industry Vertically-integrated corporations -> Horizontal “slices” Silicon platform | Computer platform | System software | Packaged application

This structure enabled IBM-PC “clones” like Compaq, Hewlett Packard One of them was DELL Computer Corp.

Personal Computer

Storytelling

Questions

Conclusions

Analysis

Dell History

$25265$25265MM

Birth &Childhood

Profitless Growth

ExplosiveGrowth

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‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99

$69.5M$69.5M $546M$546M

$3,475M$3,475M

‘83

Storytelling

Questions

Conclusions

Analysis

Net Revenue(in Million $)

Birth &Childhood

Profitless Growth

ExplosiveGrowth

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‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99‘83

Storytelling

Questions

Conclusions

Analysis

Net Income(in Million $)

Dell Corp. 1983, Founded by 19-year-old

Michael Dell in a dorm University of Texas at Austin Upgraded IBM-compatible PCs Then he assembled entire PC with

15% discount to established brands

Dell : Birth & Childhood (1983 – 1990)

Birth &Childhood

Profitless Growth

ExplosiveGrowth

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‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99‘83

Storytelling

Questions

Conclusions

Analysis


Dell : Birth & Childhood (1983 – 1990)

Support services such as 24-hour hotline and guaranteed shipment of replacement part

Quality at a reasonable price

Dell grew from nothing to $500M sales in 1990

Michael Dell became the richest person in Texas

International Expansion to serve to European, middle eastern and African markets

Simplicity EfficiencyAgility

Simplicity EfficiencyAgility

Birth &Childhood

Profitless Growth

ExplosiveGrowth

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‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99‘83

Storytelling

Questions

Conclusions

Analysis


Dell Pulled out of retail channel in mid-1994

“the benefit of exiting retail was not just the change in our financial condition, the real value was that forced all of our people to focus 100% on the direct model, the single-mindedness was a powerful unifying force”, Michael Dell, Direct from Dell

Dell Pulled out of retail channel in mid-1994

“the benefit of exiting retail was not just the change in our financial condition, the real value was that forced all of our people to focus 100% on the direct model, the single-mindedness was a powerful unifying force”, Michael Dell, Direct from Dell

Dell’s model being imitated by other

Entering Retail

Booked their first loss in 93’

Dell : Profitless Growth (1990 – 1994)

Dell History

Birth &Childhood

Profitless Growth

ExplosiveGrowth

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‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99‘83

Storytelling

Questions

Conclusions

Analysis


Launching www.dell.com

“We think about internet commerce as a logical extensions of our direct model…..Because we’re all about shrinking the time and the resources it needs to meet customer’s need….”


Internet increased efficiency of sales process and service

Extranet to let supplier share information with Dell

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Case Questions

What does Dell do well and where does it struggle? What contributed to Dell’s success and rapid growth in the

late 1990’s? What is Dell? A computer manufacturer? A consumer

electronics company? An IT service partner? What is their focus?

What did Dell do to set itself apart from the competition in the highly competitive and rapidly evolving personal computer industry?

How did Dell segment its customers? What types of customers? What were they like?

What are the advantages of this direct marketing and direct manufacturing model?

Storytelling

Questions

Conclusions

Analysis

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Analysis : Who? & What problems?

Who is Dell? Computer Manufacturer (Assembler) + IT service partner

High technology, Short life cycle

Fast Follower

Storytelling

Questions

Conclusions

Analysis

Build trust with suppliers…

Maintain latest technology

Secure customers (quality, price, service,…)

What’s the issue?

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Analysis (MECE)

Storytelling

Questions

Conclusions

Analysis

ExternalEnvironment

When?Where?

Why?How?

InternalCompetence

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Analysis (MECE)

Storytelling

Questions

Conclusions

Analysis

When?Where?

Why?How?

SWOT Analysis

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External Analysis (PEST)

When & Where : 1980s~1990s, in U.S.

Category Issue Threats/Opportunities

Political E-government (90s)Opportunity – Increase in Govt.

spending on IT infra

EconomicU.S. Economic Recovery (80s)

U.S. Economic Boom (90s)Opportunity – companies and individuals spend more on IT

Social

Rising incomes and demand for IT in Asia, Europe, Middle East

Opportunity - ½ of world’s population, new market

Change from Industrial Societyto Information Society

Opportunity – increasing demand for servers and network

gear

Technological

Explosion in data information and content (1PC/1Person) Opportunity – increasing

demandWWW era opened

Storytelling

Questions

Conclusions

Analysis

Lot’s ofOpportunities!!Lot’s ofOpportunities!!

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External Analysis (Porter’s 5 Forces)

Storytelling

Questions

Conclusions

Analysis

Computer Industry

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Analysis (MECE)

Storytelling

Questions

Conclusions

Analysis

When?Where?

Why?How?

SWOT Analysis

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Analysis : Internal Analysis (AHP)

ReduceChannel

Costs

Why?

How?

MinimizeInventory

Speed ofExecution

(JIT)

DirectCustomerRelation

CloseRelation

w.Suppliers

Initiatives

1)Direct Model2)Customers & Segmentation3) WWW

Simplicity, Efficiency, Agility

Storytelling

Questions

Conclusions

Analysis

New Sales

SecureCustomer

s

IncreaseEfficiency

Build Tight

Relations

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Initiative 1. Dell Direct Model

Indirect Channels

Reseller Customized the PC to customer requirements, installed components and provided additional service and support

Fig. Corporate PC Sales through Indirect Channels

Based on Forecasting

Storytelling

Questions

Conclusions

Analysis

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Direct Model Bypassing the dealer channel, selling directly to

consumer Focus on Speed of Execution and Minimum Inventory

Characteristics of Direct Model Eliminate costs & risks of carrying large inventories JITM : high velocity, reduced channel costs from 15% to 2% of

production revenue Direct customer relationship Latest tech. introduced faster than indirect channels Use IT to control value chain and achieve a high deg. of

coordination Build-to-order

Build-to-Order

Storytelling

Questions

Conclusions

Analysis

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Storytelling

Questions

Conclusions

Analysis

Days of supply in Dell’s Inventory

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Manufacturing Process No Warehouse Space No inventory other than work in process (WIP) Components arrive from suppliers just in time for

manufacturing through the factory’s cargo doors

Manufacturing is synchronized to avoid storing parts or finished systems This needs close relationship with suppliers Dell has small number of suppliers - even reduced number from 204 in 1992 to 47 in 1997 Trust Manufactures like Sony, Logistics like UPS

• No test time

SS CCMMStorytelling

Questions

Conclusions

Analysis

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Customer Service First on-site service for PC’s “We’ll be out tomorrow to fix it”

1,300 technicians, accessible by phone 24 hours a day 90% solved by standard troubleshooting procedures

Employs Third-party maintenance providers like Unisys, Wang, Decision one consulting and Digital Equipment Tight coordination with maintenance providers feels like

Just one large company

In Computerworld’s 1998 survey Dell ranked first in user satisfaction followed by Gateway

SS CCMMStorytelling

Questions

Conclusions

Analysis

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Build-to-Order : Pros & Cons

Advantages Disadvantages

Selling direct to customers cuts out the middleman, which increases Dell’s margins.

Customers not able to touch and feel the product, which is a large ticket purchase

Mass customization using standard parts allows Dell to control their costs and enables them to pass savings to customer.

Build to order requires innovation and investment in manufacturing technologies and facilities.

Build to order allows for JIT, reducing costly inventories of components, which may quickly become obsolete.

Competitors are able to outsource to third party manufactures, pushing the burden of component inventory costs onto suppliers.

This strategy can be applied to other competitors?Does it still work well NOW?

Storytelling

Questions

Conclusions

Analysis

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Build-to-Order (Now and Then)

Storytelling

Questions

Conclusions

Analysis

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Analysis : Internal Analysis (AHP)

ReduceChannel

Costs

Why?

How?

MinimizeInventory

Speed ofExecution

(JIT)

DirectCustomerRelation

CloseRelation

w.Suppliers

Initiatives

1)Direct Model2)Customers & Segmentation3) WWW

Simplicity, Efficiency, Agility

Storytelling

Questions

Conclusions

Analysis

New Sales

SecureCustomer

s

IncreaseEfficiency

Build Tight

Relations

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Initiative2 : Customer Segmentation

Storytelling

Questions

Conclusions

Analysis

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Initiative2 : Customer Segmentation

Storytelling

Questions

Conclusions

Analysis

• Dell Focuses on Computer-literate customers• Targeted segments where revenues could grow faster

than expense

We figured they (competitors) could be the ones to teach consumers about PCs,while we focused our efforts on more profitable segments

We figured they (competitors) could be the ones to teach consumers about PCs,while we focused our efforts on more profitable segments

• Gold Accounts (sales of $5-$10million) ; Platinum accounts (sales >$10million)

• Platinum Councils to listen their customer opinions

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Initiative3 : WWW

Storytelling

Questions

Conclusions

Analysis

Increased Efficiency of Customer Service

Build Relationship with Supplier (Extranet)



The real potential of internet is its ability to transform relationships within traditional supply chain and to create value that can be shared…..

The real potential of internet is its ability to transform relationships within traditional supply chain and to create value that can be shared…..

It’s more valuable to be in front with imperfect internet implementation rather than to be a late comer with the perfect website..

It’s more valuable to be in front with imperfect internet implementation rather than to be a late comer with the perfect website..

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Analysis (MECE)

Storytelling

Questions

Conclusions

Analysis

When?Where?

Why?How?

SWOT Analysis

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Summary : Core Competence

Competency Description

Build to order• Allows for JIT, keeping inventory costs down• Keeping manufacturing in-house enables control

of quality and faster new product releases

Direct to Sales• Cuts out retail markup• Maintain higher profit margins and lower price

Value added services

• Do not just sell product, sell values• Proactive in solving clients pain• Customer services like software downloading

differentiate Dell from competitors in B2B market

Internet Coupled Biz. Model

• Sell directly to end customers• Dell was much less mature compare to IBM/HP

when Internal took off, less efforts to adapt system

Storytelling

Questions

Conclusions

Analysis

IBM and HP’s: product innovation & development Dell’s: expertise in assembling and catering business needs

•Yellow: Possible for competitors•Green: Very difficult

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Conclusion

Storytelling

Questions

Conclusions

Analysis

• Dell’s Focus on Customer Segmentation

“Behind the simple proposition of direct selling is a complex infrastructure that dell has developed over 15 years”

“Dell’s service advantage may be a greater differentiator than its 10-15% cost advantage, Dell has everything we want in a tech company, especially Focus, Dell does nothing but PCs

“Behind the simple proposition of direct selling is a complex infrastructure that dell has developed over 15 years”

“Dell’s service advantage may be a greater differentiator than its 10-15% cost advantage, Dell has everything we want in a tech company, especially Focus, Dell does nothing but PCs

“DELL eliminated the need for inventory or middlemen and gave itself a built-in price advantage, which it in part keeps as profit and in part passes on to customers.”Fortune 2005

“DELL eliminated the need for inventory or middlemen and gave itself a built-in price advantage, which it in part keeps as profit and in part passes on to customers.”Fortune 2005

• Perfected the credo— “Cut out the middleman.”

• Internet as Natural Extension of Business Model

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Thank You!

“The only constant thing about business is that everything is changing.

We have to take advantage of change andnot let it take advantage of us.”

-Michael Dell-