Focused On Flow Dell's server plant emphasizes velocity and flexibility -- while balancing supply and demand.
ByJohn H. SheridanIn Austin, you hear a lot about "Dellionaires" -- veteran Dell Computer Corp. employees who've grown wealthy as the value of their company stock multiplied many times over. In a recent three-year period, for example, Dell's shareholder return was an incredible 3,630%. You also hear about things like "the million-dollar couch" -- furnishings purchased with money that, had it been invested in Dell stock, would have turned into a small fortune. And if you spend time with manufacturing executives of the highly successful computer firm, you're bound to hear quite a bit about the "Dell business model." Hailed as the driver behind the company's rapid growth, that model has several key components: direct sales to customers (rather than through retailers or value-added resellers), leveraged R&D, customer-service operations that take advantage of the expertise of partner firms, and mass-customization capability in a build-to-order (BTO) manufacturing environment. The result is a lean value chain in which product and materials move extremely fast, enabling Dell to rapidly introduce new technology, take advantage of falling component prices, and turn sales into cash long before it has to pay suppliers for the materials consumed. (In the second quarter of this year, Dell boasted a
negative 15-day cash-conversion cycle.) As much as anything, the linchpin that makes it all work is Dell's competence in manufacturing. And the company's current "showcase" plant is the 600-employee Americas Enterprise Systems' Power Edge server manufacturing facility in Austin. The server plant, which turns out the most complex products in the Dell line -- including high-end network servers and storage subsystems -- opened in 1998, when production work was shifted from a leased facility that had housed dedicated server operations since 1996. The new plant was designed to achieve high velocity, flexibility, and simplicity in the flow of materials. "In this factory we were able to take what we'd learned over several years and apply what we think are state-of-the-art manufacturing technologies to deliver value to the marketplace," says Ro Parra, a Dell senior vice president. Dell's share of the U.S. server market climbed from less than 1% four years ago to 17.1% last year -- making it No. 2 behind Compaq Computer Corp. One of Dell's major competitive advantages, Parra asserts, is that it captures product requirements directly from the end customer and then builds its computers to those specifications -- including software downloads. "We are able to keep systems from being manufactured twice -- and from being handled twice," he says. Not only does that keep costs down, but custom-built products typically are shipped to customers within five days after receipt of an order. That fast turnaround is possible because, like most Dell facilities, the server plant keeps its order backlog to a minimum and its cycle time short. Typical manufacturing cycle time, which has been reduced by 50% in the last three years, is now slightly more than one day, including testing. Flexibility -- a critical element of the direct BTO model -- is enhanced by the one-person build cells that populate the heart of the plant. Assisted by Web-based online work instructions, an experienced operator in a standard cell can assemble any of the 10 basic server platforms -- in various configurations. "With the old-style progressive-build approach, you pretty much batched your build every day," notes Mark Lozano, senior production control manager. "You couldn't change what was going down the line. But here, you can build whatever you want when you want. In one cell we can have a high-end machine following a low-end machine. That kind of flexibility allows us a much shorter cycle time for all of our platforms." Server components begin their journey through the plant at one of two locations. In one area, motherboards are prepped and installed into the computer chassis. In the second, a kitting area, other components are pulled from storage racks with the aid of a computerized "pick to light" system and placed into totes. From there, intelligent conveyors -- linked to a manufacturing-execution system -- deliver the materials to an open build cell, using a pull process. In the cell, the operator does the rest -- including putting in the screws. "The next person who can open it up is the customer," says Kris Vorm, director of server engineering. No downstream quality inspector examines the innards of the unit, unless subsequent electronic tests indicate a pesky quality problem. Under a "buddy" system, a builder will ask another operator to make a visual inspection before he or she screws the cover onto the box. Next stop is the extended-test rack where detailed diagnostics are conducted prior to downloading and testing the operating system and application software -- all based on the customer specs. The server plant was the first Dell facility to introduce direct shipment to end customers, skipping the need for a stop at a distribution center. Today, about 97% of its domestic orders are direct shipped. One key to the direct-ship capability -- as well as the flow of material through the plant -- is the number of dock doors in the building. Designed to facilitate a flow process, the plant has 52 dock doors that can be used for delivery and shipping. On one side of the plant components are pulled as needed from suppliers' trucks parked at dock doors. Each truck holds about four hours' worth of inventory. On the far side, when a completed server is boxed for shipment, it is immediately loaded onto a truck. Refinements to the pull process and close coordination with suppliers have enabled the plant to reduce its on-hand inventory by 65% -- down to just six days' worth of sales. In a lean BTO plant -- where a new customer order arrives roughly every 20 seconds -- keeping demand and supply in balance can be a tricky proposition. Dell addresses the issue in weekly meetings that involve production, supply-management, and channel-management personnel. "They meet face-to-face," explains Keith Maxwell, a senior vice president in the firm's Americas manufacturing organization, "and they talk about supply issues, demand upsides and downsides, and how to adjust to [balance] the two. You have to bridge what is classically not very well bridged in most organizations -- the chasm between sales and operations." "You have to have give-and-take discussions," adds Dick Hunter, director of supply-chain management for Dell's Americas unit. "You can't do it with software." Because the Dell direct-sales model provides real-time information about customer buying trends -- avoiding the 60-to-90-day delay that might occur in reseller channels -- the server plant is able to provide suppliers quick feedback on marketplace demand. Suppliers are required to have the ability to increase shipments by as much as 25% on 30 days' notice. "For new products, during the first 90 days, we may even ask for as much as 50% upside capability," notes Trent McCarley, a senior manager in Dell's worldwide manufacturing engineering unit. Many of the plant's suppliers have on-site resident planners who manage their own inventory on a replenishment basis. Planning information is shared weekly with key suppliers, who also have access to such information as daily consumption rates via secure Web pages. "Our goal," says Hunter, "is to have an electronic feed of day-to-day and hour-to-hour consumption. We believe that information can replace inventory in the pipeline." When an upsurge in demand for a particular component outstrips the capability of the supply chain, Dell salespeople will attack the demand side of the equation. "Because we have such a tight relationship between production and sales, we have the ability to adjust sales incentives -- and to adjust demand," explains Rocky Bullock, vice president for enterprise-systems operations. Demand also can be affected by adjusting leadtimes, notes materials manager Mike Gray. For example, if 10-gigabyte hard drives are in short supply, the leadtime for servers with such drives might be extended to 15 days, while offering five-day leadtimes for products with 20-gigabyte drives. "The great part of our model," says Gray, "is that it is managed at the point of sale." One of Dell's key strengths, Bullock emphasizes, is its ability to manage capacity -- including shifting production work among Austin-area plants to accommodate seasonal peaks and valleys in different product lines. "That is important," he says, "because we still have dramatic sales variability despite the tight demand-supply process." Empowered teams on the plant floor also play a critical role in supporting the BTO process. In the assembly area, for example, each team sets its own work schedule for the day and tracks its progress against the schedule. "If they fall behind, they develop recovery plans -- as a team -- to try to get back on schedule," says Bullock. "You can't have command-and-control when things are changing almost hourly from your customer." Three critical metrics that Dell employees focus on are customer-centered: ship-to-target rates (the percentage of shipments made within five days of receiving an order); the combined initial field incident rate; and "on-time, first-time fix" by customer-service technicians. Employee profit-sharing bonuses are tied to the three key metrics, which must show a 15% year-to-year improvement in order to generate a bonus equal to that given in the prior year. Typically, profit-sharing accounts for up to 20% of Dell employees' annual compensation. At the annual employee meeting last November, CEO Michael Dell added a sweetener: Each employee was granted 200 stock options. Dell also announced that, henceforth, each new employee would receive 100 options upon joining the firm. So the ranks of Dellionaires is likely to continue to grow.
At A Glance
- A 62% gain in value-added productivity in the last two years, accompanied by a 245% increase in sales
- A 65% reduction in on-hand inventory -- to just six days' worth of sales
- 61 annual inventory turns, with zero finished-goods inventory
- 216 annual WIP turns
- Reduction in manufacturing cycle time in three years -- 50%
- A scrap/rework rate of just 0.12% of sales
- 90% of production workers participate in empowered teams
- 99.5% of purchased materials do not require incoming inspection
- 97% of domestic orders are shipped directly from the plant
- Reduction in manufacturing costs, including materials, in two years -- 35%
