"The way customers purchase computers is changing," admits Compaq Computer Corp. At the introduction of the new Deskpro models it explained: "Some customers want to buy products that will remain consistent in order to minimize the life-cycle costs associated with supporting and maintaining the installed base of PCs. Other customers want to take advantage of changes in technology to make the best purchasing decisions at any given time." Compaq's ability to accommodate those customers is at least as significant as the new products. The announcement is representative of a new wave of commitments the major PC manufacturers are making to customer needs. To do it, they are compressing the supply chain via such concepts as "build-to-order" rather than "build-to-forecast." Not too long ago, PC vendors followed a simpler, more traditional marketing model: first forecast demand and then push finished goods into markets via multitiered channels with many players. Although that model continually suffered from inaccurate forecasts, business survival was possible just by churning out the hottest new technologies every 18 months or so. That traditional model survived quite well until 1984 when Michael Dell came along and introduced a new way to compete -- not by technology alone, but by emphasizing the needs of the customers with an ability to satisfy and serve them quickly and efficiently. Dell put pressure on the industry's traditional players with a simple concept: sell personal computers directly to customers with no complicated channels. Since then Dell Computer Corp., headquartered in Round Rock, Tex., has become known as the world's leading direct-selling computer-system company (revenues for the last four quarters totaled $12.3 billion), and Dell has become the longest-tenured CEO in the computer industry. By 1993 the traditional competition was attempting to emulate Dell and other direct sellers such as Gateway 2000 Inc. without equal success. San Francisco-based Terrence Austin, an associate partner at Andersen Consulting, blames their failures on an incomplete understanding of the problem and troubles with execution. "What most of them didn't appreciate is that Dell had the luxury of starting without an existing channel structure," explains Austin, who co-authored Unlocking Hidden Value in the Personal Computer Supply Chain, a study of more than 200 companies in the PC industry done with Stanford University and Northwestern University. "When they started making noise about the Dell model and going direct, their channel partners rebelled, even threatening to begin pushing their competitors' products. "Backing off, computer vendors began to dilute the concept with concessions such as, We're going to introduce the direct model, but not with the best products or at prices the resellers can offer,' or When there is scarcity, we're going to allocate to the resellers first.' Before long you starve out the direct business." As Dell's markets softened in the early 1990s, any remaining direct-selling resolve among the traditional makers quickly faded. The industry went back to a technology focus -- marketing the fastest chip, the fastest bus architecture, and the best bundle of software, says Austin. But by 1995, as Dell's business took off again, the traditional PC vendors were once more initiating a resolve to gain the economics of the Dell model. This time, however, they are demonstrating an expanded understanding of the complexities of their task. "They know it is not as simple as adding a catalog business," adds Austin. The real goal, of course, is to get all the channels of distribution to behave as if they were direct distribution. All of the major builders have announced multiple variations of a compressed supply-chain strategy -- approaches dedicated to minimizing the number of inventory touch-points. For example, last year IBM Corp. announced that it would initiate a channel-configuration program in which its channel partners configure the product. Being able to increase supply-chain efficiency does far more than offer immediate gratification to customers. When component prices are falling, computer assemblers can quickly pass cost savings onto customers. With the older paradigm, they would be inundated with product inventory assembled with older, high-priced components. Vendors maintaining channel inventory also carry the penalty of price protection -- the amount paid to a channel partner whenever prices are lowered to move aged stock. "The repricing of that inventory is the single largest nonmaterial line item of cost for PC assemblers," says Austin. "The more inventory they can take out of the channel, the more margin they can extract from it." For example, Compaq reported in March that the shortfall in its first-quarter sales and earnings was caused by pricing actions. "We are putting in place price reductions and aggressive promotions in the first and second quarter to reduce these channel inventories and accelerate the implementation of our optimal distribution model," says Eckhard Pfeiffer, president and CEO. Optimizing the supply chain with concepts such as build-to-order especially benefits PC assemblers whenever technological change accelerates, notes James E. Heaton, the Chelsea, Mich.-based vice president of technology research for Boston-based Advanced Manufacturing Research Inc. He suspects that the current industry emphasis on lean supply chains is in anticipation of the PC changes recently addressed at the Microsoft Windows Hardware Engineering Conference. The overall focus at that event was on simplicity, quality, and new uses and form factors for the PC. In terms of ease of use, he describes 1998 as a watershed year -- "the PC is approaching the ease-of-use we take for granted in automobiles." The changes begin with the scheduled shipment of Windows 98 in late June to be followed by Windows NT 5.0 later this year or early in 1999. Also in the wings are the Windows 98-driven changes in PC hardware -- "probably the most significant change since the IBM 286," adds Heaton. In addition to making past generations of PCs seem like antiquated Model Ts, Windows 98 will provide support for many new advanced hardware features. Examples include greatly enhanced 3-D graphics, sound, and multimedia via networks, adds Heaton. In addition Microsoft is addressing ease-of-use issues through improved communications, built-in intelligence, and support for hardware technologies such as Universal Serial Bus and Device Bay, which build on the plug-and-play technologies originally delivered in Windows 95. No more plug and pray! The industry landscape depicted by the PC-industry study is complicated by more than supply-chain challenges and commodity-based marketing. Accompanying those trends are eroding price and profit margins. During the last five years profit margins have fallen approximately 50% for the major assemblers. One of the study's key points is that the degree to which competitors in the PC industry succeed or fail is ever more dependent on supply-chain efficiency. Many participants still focus mainly on products and markets and neglect aggressive management of the supply chain itself as a strategic source of value. Study participants also underappreciate the need to emphasize mutual benefit and the tremendous amount of trust and cooperation required. The study's authors, Hau L. Lee and Laura Kopczak of Stanford University and Andersen Consulting's Austin, offer three recommendations:
- Understand all the options for making choices strategically.
- Implement serious collaborative planning, not because it enhances value, but because it has become a requirement for survival.
- Design products for maximum market responsiveness -- the most overlooked and underutilized value-enhancement opportunity for supply chains, according to Austin.
