Industryweek 2049 11124dickhunter

Tying Supply Chain To Customers

Dec. 8, 2005
How Dell succeeds in an increasingly competitive market.

Succeeding in today's competitive operations landscape requires patience, ingenuity, focus, an obsessive adherence to a clearly defined strategy and unwavering commitment to core values. For a manufacturing organization to succeed, it must have a tightly integrated supply chain that is constantly monitored and improved, but moreover it requires tying that critical end of the business directly to your customers -- an operational leap of faith that many in our industry are beginning to embrace.

At Dell we analyze our operational performance on an hourly basis and align our supply chain, manufacturing and logistics operations to meet our customers' needs. From a supply-chain standpoint, Dell is structured around its customers -- literally. A significant portion of our revenue comes from our business customers, and our operations strategy reflects that. We help our business and public-sector customers establish standard configurations that keep their total cost of ownership low and, in turn, make it easier to forecast future demand. Our strong consumer business gives our customers an opportunity to own the latest technologies at affordable prices while giving our suppliers the fastest route to market.

Dick Hunter, vice president, Dell Americas Manufacturing & Distribution OperationsThis can all be tied to our direct model, which is remarkably simple: Customers generate demand for custom-configured technology solutions that Dell provides (with the help of our suppliers). In order to build any configuration at any time for any customer and do it quickly, we operate with a "lot size of one" mentality and couple that with lean manufacturing techniques to eliminate waste in the process. As simple as it sounds, keeping it tuned to the needs of a growing global customer base is challenging and requires complex solutions, particularly with regard to maintaining a flexible supply chain.

Our primary focus with suppliers is around continuity of supply. We organize around that concept and focus on the velocity of inventory throughout the entire supply chain. Virtual integration, rather than vertical, gives us the crucial ability to focus on our core competency and leverage those of our suppliers, such as their R&D investments. As such, we are able to keep operating expenses low while focusing resources on areas where we can truly add value for our customers.

Regarding inventory, it's clear that the technology industry is headed toward a zero inventory model. This is primarily because the value of that inventory declines rapidly over time -- 25% per year on average or 0.5% per week. Dell's inventory philosophy stands in contrast to the industry paradigm of inventory equaling service. Inventory equates to cost, since no matter how much inventory you have, it's usually the wrong material. Under those circumstances, you should have as little as possible -- especially if it loses value rapidly.

Dell's procurement decisions are made using four criteria: quality, cost, delivery and technology. We are uniquely organized around these criteria because we separate contracting (cost negotiation, contract terms and conditions, and source selection and development) from commerce (purchase order release, tactical delivery management and payment). Cost is managed on a centralized basis while delivery is managed on a regional basis, aligning with our global manufacturing assets. Responsibility for quality is shared between the central and regional organizations.

Through virtual integration, we are able to quickly incorporate new technologies into our products and get them to our customers. Our suppliers appreciate it because they can get this technology into the market quickly and our customers love it because they have access to the latest technology. Because we don't have 45 days of old technology in the supply chain, we constantly press our supplier partners for the newest technologies for our customers.

Dell Inc.
At A Glance
By organizing around the concept of continuity of supply, Dell is able to mitigate supply issues and reap tremendous operational efficiencies, which are at the heart of how we do business. We do not produce anything in our factories until after the customer places their order. Customers benefit from this approach because: 1) our focus on continuity of supply ensures consistent global supply, 2) we can immediately respond to their needs (because we do not have to guess) and 3) Dell's efficiencies translate into consistently lower costs because we pass along material cost savings through our forward pricing techniques.

Tying all of this into one strategy and adhering to it, particularly in an environment ripe with price fluctuations, resource instability and natural and man-made catastrophes, is challenging but rewarding. It is proven to provide short and long term benefits for both the organization and its customers. As Dell has grown into a truly global organization, we've learned valuable lessons from our customers, our own growing pains and our suppliers. I view our supply-chain efficiencies as one component of a perpetual success engine -- it allows us to pass savings on to our customers which drives demand and market share and subsequently helps our suppliers drive their business. Rarely has such a seemingly disparate connection become so crystal clear.

Related Essays

Securing A Stellar Supply Chain: Only as strong as its weakest link, the supply chain can make or break manufacturers.
Keeping Up With The Times, by Lawrence J. Mosner, chairman and CEO, Deluxe Corp.
Partners For Life, by Tim Guertin, president and COO, Varian Medical Systems Inc.
Cost Reduction Essential To Competition, by Donna Covington, vice president/customer services, Lexmark International Inc.

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