The Value Of Velocity Dell's rules: disdain inventory, always listen to the customer, sell direct, and eliminate unnecessary touches. ByJohn TereskoDell Americas Desktop Operations, AustinAt a glance
Mass customization is routine with over 100,000 configurations possible for the corporate OptiPlex computer line. 96% of procurement is done via the Internet. 455 annual work-in-process turns. 52 annual inventory turns with zero finished-goods inventory. Master production schedule is updated every two hours. The process-speed emphasis at Dell Computer Corp.'s Desktop Operations facility in Austin is born of conviction deeper and older than the plant's quest for efficiency. That imperative was first demonstrated when founder Michael S. Dell, now CEO and chairman, was in elementary school. "When I was in third grade, I sent away for a high school diploma," he confesses in his book Direct From Dell (1999, HarperBusiness). He had seen an advertisement -- "Earn your high school diploma by passing one simple test" -- and recognized its significance. "If there was a way to get something done more quickly and easily, I wanted to try it." That imperative was still ingrained when he left the University of Texas at the end of his freshman year in 1984 to devote his time to his newly incorporated company. He established speed as the basis of an innovative build-to-order business model designed to heighten sensitivity to customer satisfaction. The premise is deceptively simple: Develop and continuously improve a business process to deliver high-performance computer systems directly to the end user. "More than 95% of the orders received are shipped within eight hours," says Sharon Boyle, the Austin plant's operations manager. Customers routinely receive their orders within five days of placing an order. There is no finished-goods inventory -- or warehouse. Far more than a marketing tactic, the Dell approach has become famous as a highly refined value-chain strategy that emphasizes velocity and flexibility with a critical balancing of supply and demand. Manufacturing is at the core of that strategy along with a willingness to tackle stretch goals to constantly improve efficiency and customer satisfaction. For example, "We're targeting productivity improvements of 100% over the next two years for the Dell Americas Desktop Operations," says Stephen C. Cook, senior manager, engineering. That kind of dedication has made the company a leader, but it stops short of being able to completely compensate for a down economy. Sales for the second quarter ending Aug. 3 were $7.61 billion compared with $7.67 billion the year before. Even so, the company has been able to increase shipments and market share. Outside the U.S. shipments rose 30% over the previous quarter (19% over the previous year). Inside the U.S., where overall industry volume fell 11%, the company reported a 13% increase in shipments over the previous quarter. Today, an increasing portion of that revenue comes in via the Internet. But when Dell.com (www.dell.com) was launched in June 1994, it provided only technical support information and an e-mail link. The next year Dell added an online configuration capability followed by online purchasing in 1996. The Web quickly became a natural extension of the company's direct-business model. In addition to buying online, customers could check the progress of their purchase from the manufacturing process through to delivery. "Daily online computer sales grew from $1 million in 1996 to $12 million in 1999 to reach approximately $50 million in the last quarter," says John P. Egan, director, desktop operations and distribution services. By the end of fiscal 2000, sales through the Web site reached nearly 50% of revenue, he adds. In 2000 the Desktop Operations in Austin began to overflow from Dell's Metric 12 facility into the newer Parmer North 2 (PN2) facility. Later this year, all Desktop Operations will be consolidated with PN2 becoming a new corporate showcase of the Dell direct-business model. PN2 also is an expression of the company's segmentation strategy, says Boyle. Where most companies segment by product, Dell segments by customer. Dell figures it refines and intensifies the relationship with the customer. "Knowing what the customer needs is a very effective inventory-fighting tool," adds Boyle. "At PN2, we began our manufacturing focus by producing our OptiPlex line of computing solutions for corporate customers," says Egan. "Recently, we have decided to add engineering workstations to our manufacturing workload," he adds. "They're officially being added in the third quarter of this year. We've moved from an OptiPlex-only focus to a desktop focus in the build area. In the shipping area, we're set up to handle anything from low-end servers down to low-end portables." Desktop Operations continues to refine the company's concept of a continuous-flow manufacturing environment where the dock doors at one end of the building receive components and the dock doors at the other end ship completed units to customers. Dell's mass-customization approach is facilitated by the flexible-build cells that replace the traditional progressive-build model. "In the Dell business model, the key issues are orders, touches, time, and high velocity," says Egan. The challenge for PN2 was how to upgrade the assembly sequence and integrate it with the shipping sequence -- in the same plant. "The idea of having to put the product on a truck and then unload it to just do something else [shipping] adds the penalties of [additional] touches and time. Our goal is always to take out the touches and time and deliver a better, higher quality, faster customer experience. PN2 is the first Dell building to have high-volume, integrated, and automated shipping capability." When Egan came to Dell after 18 years of manufacturing experience with IBM Corp.'s PC operations, he confronted the production implications of the direct-business model. One was a new relationship between sales and manufacturing. "Instead of sales sending out a plan where we build it and they have to sell it, Dell's direct model doesn't build it until it is sold." The process at PN2 starts when over 12,000 corporate customers of all sizes log onto their accounts through customized interfaces and place orders, track existing orders, and manage assets via the Web. "When we start manufacturing the product, it already has the customer's name on it. When I was at IBM manufacturing we would build PCs and then it would be up to the sales channels to sell them." When Egan presents the Dell business concept to visitors, he likens it to a continuous pipe where the flow from order placement to delivery is only as fast as the most constricted piece permits. "Our challenge is to open it up and let it flow," he asserts. Egan quickly adapted to the data-driven culture where the production-floor mantra is "facts are your friend." In designing PN2, Dell consciously omitted both parts and finished-goods warehouses knowing that information could be substituted for inventory by smoothing procurement, process flows, and shipments. Even casual visitors to PN2 will notice the "nerve center," a computer control room on the mezzanine that overlooks the sprawling 250,000-sq-ft production floor. "It serves to oversee the total performance of the facility in a real-time basis. It can handle all of the variables -- whether to dispatch maintenance, make some sudden changes in what operations is going to do, handle the contact with IT if there is some trouble-shooting that needs to get done, and handle inbound and outbound logistics. "In designing the building, we consciously made no allowances for the 'safety' reservoirs our earliest facilities had," says Egan. "We now depend on information systems to eliminate the need for inventory buffers and to smooth flows in our value chain." Web-Exclusive Best Practices ByJohn Teresko Benchmarking contact: Stephen C. Cook, senior manager, engineering, [email protected], 512/723-5291. Factory Integrated Shipping There is some historical irony in Parmer North 2's (Dell's Desktop Operations facility) (PN2) relentless elimination of needless product touches. In the earliest conceptual planning steps for the facility, PN2 had a chance of becoming an example of exactly what not to do! One of the earliest proposals actually entertained the idea that the building would be built as a distribution center for a previous manufacturing plant. Wiser ideas prevailed and PN2 instead became a manufacturing facility incorporating factory-integrated shipping. PN2's ability to integrate shipping with manufacturing eliminated logistical issues, improved quality, and accelerated process velocity. The result: cycle time was halved. The facility now ships 93% of all orders directly from the plant to the customer. Exceptions include the orders requiring special customer palletization requirements, asset tagging services, international shipments, and multi-order systems. Before direct ship, a third-party logistics company was used to transfer product from the manufacturing facility to a distribution center every two hours. Keeping Demand and Supply Balanced The Dell direct sales system doesn't claim to eliminate all errors, but it has shown an ability to learn from misjudgments. For example, at the peak of 1989's rising economy, the company uncharacteristically accumulated an inventory of memory chips just as the technology changed and the market declined. That lesson intensified Dell's disdain for inventory. Today, using state-of-the-art scheduling tools and supplier relationships, material planners are linked directly to supplier inventories and orders for parts are placed electronically and delivered two hours from order placement. The company emphasizes the use of information to replace inventory. Dell doesn't even own the inventory until it passes through its dock doors. Inventory levels are as low as six hours total and the need for a traditional warehouse is eliminated. (Dell certifies all suppliers so it is not necessary to check deliveries.) If customer demand for a particular part or product exceeds supply-chain capacity, Dell initiates a demand solution. "It is not unusual for us to fine tune our Web page offerings daily, even several times a day," says John P. Egan, director, desktop operations and distribution service. "The idea is to steer customer demand [via value pricing] toward components that are readily available. Typically the customer gets a higher specification component without an increase in price." Staying Competitive Investments in technology and new facilities are integral to the company's success with its direct sales model. In 1998 62% of Dell's facilities were greater than two years old. In 2001, only 27% were older than two years, says Egan. Each upgrade raises the performance bar. For example, he says process improvements implemented at PN2 tripled units made per sq ft and doubled productivity. But don't get the impression that process improvements are only implemented when Dell moves manufacturing into a new facility. In the coming year, stretch goals for the PN2 plant are expected to double productivity. Egan says that gain will come from automating repetitive and non-value-added tasks such as parts picking, box erecting, packaging, labeling, and pallet loading. Egan emphasizes that staying competitive with the Dell model starts with product design -- and he's alluding to much more than customer-oriented product features. He's referring to meeting customer needs with a product configuration that can achieve the highest velocity through the supply chain and the manufacturing process. "Any design agenda should emphasize squeezing time out of every step of those processes. One way is by using the design process to simplify inventories by paring the number of component variations. Another is to reduce the number of parts needed for assembly. For example with the newest OptiPlex chassis, the number of screws to build a system has been reduced from 17 to an average of four," explains Egan.