Dell Computer Company

Dell Computer Corp.Dell Computer Corp.

Disdain inventoryDisdain inventory

Never sell indirectNever sell indirect

Always listen to the customerAlways listen to the customer

Inventory ConcernsInventory Concerns

Bad Spell in 1994 left Dell withBad Spell in 1994 left Dell with– 22ndnd quarter operating loss of $76 million quarter operating loss of $76 million– 55 days of inventory55 days of inventory– $154 million deficit in cash from business $154 million deficit in cash from business

operationsoperations

Dell execs swore at that time that changes Dell execs swore at that time that changes would be made and they would never put the would be made and they would never put the company in that position again.company in that position again.

Inventory p-2Inventory p-2

Supply Chain had to be revampedSupply Chain had to be revamped

Dell had made promise to ship customer Dell had made promise to ship customer their order within 5 days of order being their order within 5 days of order being receivedreceived

BUTBUT

There was a 45 day average lead time There was a 45 day average lead time necessary for purchasing parts.necessary for purchasing parts.

SOSO


Dell developed valuechain.Dell.ComDell developed valuechain.Dell.ComA novel ideaA novel ideaUse the Internet in a B2B format to control Use the Internet in a B2B format to control inventory levels at suppliers businessesinventory levels at suppliers businessesBasically, it was a you do this or else Basically, it was a you do this or else

This proved to be very effectiveThis proved to be very effectiveWHY?WHY?


Suppliers were truly world-wide (26B/yr)Suppliers were truly world-wide (26B/yr)

By becoming a mandatory member of By becoming a mandatory member of valuechain.dell.com, they exhibited valuechain.dell.com, they exhibited something to other computer something to other computer manufacturers, that being that they were manufacturers, that being that they were serious about being a leader in their serious about being a leader in their respective area of expertise.respective area of expertise.


Initially run by Dell but in time is was Initially run by Dell but in time is was turned over to the suppliers to runturned over to the suppliers to run

This targeted the supply issue of the This targeted the supply issue of the partnering companiespartnering companies

Within 1 year the Inventory was 4 days of Within 1 year the Inventory was 4 days of sales in amount, of course which is less sales in amount, of course which is less than the guarantee that the order will be than the guarantee that the order will be shipped within 5 days of receivingshipped within 5 days of receiving


This was 1999This was 1999Daily sales averaged approximately Daily sales averaged approximately $15,000,000.00 (70% in direct materials)$15,000,000.00 (70% in direct materials)Gross profit margin of 21% = $3,000,000Gross profit margin of 21% = $3,000,000Making the daily cost of sales $12,000,000Making the daily cost of sales $12,000,000The difference in days of inventory 55 – 4 = 51The difference in days of inventory 55 – 4 = 51Lets say that money is worth 6%Lets say that money is worth 6%This equates to a savings of $720,000 per dayThis equates to a savings of $720,000 per dayOr $36,720,000 for the 51 day change in Or $36,720,000 for the 51 day change in inventoryinventory


Daily sales in 1999 around 15,000,000Daily sales in 1999 around 15,000,000

Daily sales in 2001 in excess of Daily sales in 2001 in excess of 50,000,000 (more than 3 times the amount 50,000,000 (more than 3 times the amount from 2 years prior)from 2 years prior)

By 2001, the inventory carry was By 2001, the inventory carry was under 1 under 1 dayday

Think about those savings based on Think about those savings based on reworking the value chainreworking the value chain

Direct SalesDirect Sales

In order to handleIn order to handle– $ 1,000,000 per day in sales in 1996$ 1,000,000 per day in sales in 1996– $15,000,000 per day in sales in 1999$15,000,000 per day in sales in 1999– $50,000,000 per day in sales in 2001$50,000,000 per day in sales in 2001– $31 billion annual sales in 2002 (82M/day)$31 billion annual sales in 2002 (82M/day)

It takes speed. Something that cannot be It takes speed. Something that cannot be attained without direct control over the attained without direct control over the marketing and sales functionmarketing and sales function

Sales p-2Sales p-2

Michael Dell designed the company Michael Dell designed the company business model to be a build-to-order business model to be a build-to-order businessbusiness

It would survive if it was built on speed, It would survive if it was built on speed, speed to change based on industry speed to change based on industry demands.demands.

Demands had to be constantly gathered Demands had to be constantly gathered and measuredand measured

Sales p-3Sales p-3

With sales of over 7 billion per quarter in With sales of over 7 billion per quarter in 2001, there was a lot of data to synthesize2001, there was a lot of data to synthesizeDell works on the slimmest margin in the Dell works on the slimmest margin in the industry (21% in 1999) and becoming industry (21% in 1999) and becoming smaller all the timesmaller all the timeThey are the price leaderThey are the price leaderThis could not be accomplished if they This could not be accomplished if they were selling at wholesale prices to were selling at wholesale prices to retailersretailers

Sales p-4Sales p-4

Top PC Makers –1999Top PC Makers –1999

Compaq 16.10%Compaq 16.10%

Dell14.80%Dell14.80%

Gateway 9.30%Gateway 9.30%

Hewlett-Packard 8.60%Hewlett-Packard 8.60%

IBM 8.00%IBM 8.00%

Others 43.20%Others 43.20%

Sales p-5Sales p-5

Sales by PriceSales by Price

1998 – Actual 2003 – Projected1998 – Actual 2003 – Projected

$0 to $599$0 to $599 3.00% 3.00% 27.00%27.00%

$600 to $999$600 to $999 31.00%31.00% 38.00%38.00%

$1,000 to $1,999$1,000 to $1,999 51.00%51.00% 34.00%34.00%

$2,000 and over$2,000 and over 15.00%15.00% 1.00% 1.00%

Sales p-6Sales p-6

Sales of this magnitude are made possible Sales of this magnitude are made possible with the supply chain that runs the with the supply chain that runs the Inventory control area,Inventory control area,

ANDAND

Running their business in Real TimeRunning their business in Real Time

They understand on Monday afternoon if They understand on Monday afternoon if PC sales are slowing down, and they can PC sales are slowing down, and they can adjust prices accordinglyadjust prices accordingly

The CustomerThe Customer

Direct Sale – Made to orderDirect Sale – Made to order

40% buy non name brand computers40% buy non name brand computers

Dell owns $3 billion dollars of these sales Dell owns $3 billion dollars of these sales as of nowas of now

Taking away market from Foreign Taking away market from Foreign companies that have long had the “white companies that have long had the “white box” market nichebox” market niche

Customers p-2Customers p-2

Dell has the lowest transaction costs in the Dell has the lowest transaction costs in the marketmarket

What does this mean???What does this mean???

As a stockholder?As a stockholder?

As an employee??As an employee??

As a Customer??As a Customer??

Customer p-3Customer p-3

Proof of transaction costsProof of transaction costsFigure 4Profit Margins for Dell and major competitorsFigure 4Profit Margins for Dell and major competitors

Company Gross Margin % Operating Margin %Profit Margin %Company Gross Margin % Operating Margin %Profit Margin %

Dell 20.62 8.97 7.46Dell 20.62 8.97 7.46

IBM 36.38 12.39 8.64IBM 36.38 12.39 8.64

Hewlett-Packard 28.53 7.97 7.30Hewlett-Packard 28.53 7.97 7.30

Compaq 23.18 5.50 3.86Compaq 23.18 5.50 3.86

Gateway 22.81 7.97 5.67Gateway 22.81 7.97 5.67

Concluding commentsConcluding comments

Dell has two main philosophiesDell has two main philosophies

– Supply and Demand are never in balance, Supply and Demand are never in balance, company strategy is to manage when they company strategy is to manage when they deviatedeviate

– ““Always have enough, and have nothing left Always have enough, and have nothing left over.”over.”


Executing those philosophies takesExecuting those philosophies takes

Huge dollars invested in training Huge dollars invested in training employeesemployees

Huge dollars invested in technology to Huge dollars invested in technology to enable the processes to work enable the processes to work


Michael Dell agrees that the Internet gives Michael Dell agrees that the Internet gives customers unprecedented power to seek customers unprecedented power to seek out the lowest prices, but he argues that it out the lowest prices, but he argues that it can also be used to deepen relationships can also be used to deepen relationships and ultimately build far greater customer and ultimately build far greater customer loyalty than before.loyalty than before.

ResourcesResourcesShah, J. (October 2001), Dell Makes Good on Inventory Vow: Creation of three SCM Shah, J. (October 2001), Dell Makes Good on Inventory Vow: Creation of three SCM Organizations has helped boost efficiency. EBN. 1286,PG52Organizations has helped boost efficiency. EBN. 1286,PG52

Shah, J. (December, 2001), Dell writes the book on efficiency: Processes focus on understanding Shah, J. (December, 2001), Dell writes the book on efficiency: Processes focus on understanding where supply, demand diverge. EBN. 1293, PG32where supply, demand diverge. EBN. 1293, PG32

Anonymous, (June 1999), Survey: Business and the Internet: You’ll never walk alone. The Anonymous, (June 1999), Survey: Business and the Internet: You’ll never walk alone. The Economist. 351, B11-B21Economist. 351, B11-B21

Shah, J & Serant, C. (August 2002), IS supply chain prowess enough?: Dell confident time is Shah, J & Serant, C. (August 2002), IS supply chain prowess enough?: Dell confident time is right to enter white-box market. EBN. 1327, 3right to enter white-box market. EBN. 1327, 3

Souza, C. (November 2001), Real-Time business may be the real ticket: Technology enablers Souza, C. (November 2001), Real-Time business may be the real ticket: Technology enablers seen as a good investment. EBN. 1289, PG4seen as a good investment. EBN. 1289, PG4

Sabatini, J. (August 2000) Direct to Dell: I hunt for Michaels supply chain secrets. Automotive Sabatini, J. (August 2000) Direct to Dell: I hunt for Michaels supply chain secrets. Automotive Manufacturing and Production. 112, 74-76Manufacturing and Production. 112, 74-76

Lewis, N. (February 2001), Dell Portal Adds ‘Value’” Valuechain.dell.com provides pipeline to info Lewis, N. (February 2001), Dell Portal Adds ‘Value’” Valuechain.dell.com provides pipeline to info exchange. EBN. 1251, PG62exchange. EBN. 1251, PG62

Teresko, J. (October, 2001), The value of velocity. Industry Week. 250, 43-44Teresko, J. (October, 2001), The value of velocity. Industry Week. 250, 43-44

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Dell Computer Company