Operations Management: Dell's Supply Chain Management

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Operations Management: Dell's Supply Chain Management

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Table of Contents

Executive Summary3

Introduction4Issues4

Literature Review4-6

Solutions and Recommendations6-7

References

Appendices

Executive SummaryThe paper puts forth a critical discussion regarding the supply chain management practices at Dell. A model of excellent supply chain itself, Dell has faced recent challenges in its operations and supply chain management that has led to falling sales and profits for the company. Historically, there have been periods of supply delays, poor customer service and procurement issues. The direct model introduced by the company has its pros and cons both. However, as the paper discusses, this model has lost its competitive edge in recent years simply because it has been replicated by major competitors such as HP and Acer and today its not a novelty to have made to order PCs the way it was few years ago. Because its supply chain system is so dependent on the reliability and commitment of its suppliers, a breakdown at one stage of the companys supply chain can create havoc in the entire supply chain stream. The suppliers, too, feel pressurized to come up to Dells standards simply because theres nothing such as long term supplier partnerships in Dell. The moment a supplier underperforms, he/she is removed from the list of suppliers which is rather demotivating for the suppliers. However, for Dell, this is just another way of doing business and keep thriving as a low-cost, high quality PC provider. The company also faced issues for reasons external to its own operations; for instance, the recall of Sony batteries. Furthermore, the company has always had to reach a compromise between its business to business market and its consumer market as traditionally the company has always focused on the latter. The issue with this is that the company has focused on the technical benefits of its products rather than seeking the emotional aspect tied to its products. Perhaps, the root cause of Dells problems has been that it has largely been a selling and marketing company rather than a production company; thus, its suppliers are not suppliers, they are the actual producers on which the companys brand image thrives. It is the suppliers who deliver the product that the company promises and any mismatch between the two can lead to potential loss of goodwill. Thus, Dells supply chain has been an area related to its core competencies and as the paper discusses, the ultimate solutions offered by Dell have been related to changes in its supply chain and policies that enable the company to retain its competitive edge in its business model, which has become a challenge specially when competitors such as HP have replicated it.

IntroductionDell, a renowned PC (Personal Computer) manufacturer is a hallmark of efficient, closed-loop, supply chain management. The company was the first to introduce the Direct Model whereby the role of intermediaries (retailers and distributors) in the downstream supply chain was eliminated (Ferugson & Davis, 2007). The company provides low-cost, customized PCs that are ordered either online or via the telephone (Ferugson & Davis, 2007). The reason why the company provides low-cost PCs is because the companys own cost is significantly reduced by the elimination of intermediaries, plus, the company could accurately predict demand and the nature of demand thus eliminating costs arising from failure to do so. A combination of all this has enabled the company to achieve a strategic competitive advantage. However, in 2006, Dell faced problems when customers complained of long lags in deliveries (Appendix 1). The following section discusses key issues faced by Dell at that time. Key IssuesIncreasing customer complaints were a product of several issues. The recall of Sony battery cells used in laptops created unfavorable image of Dell (Knowledge@Wharton, 2007). As a result, Dells market share reduced and was captured by its competitor HP (Hewlett Packard). The reason for this was that HP had started imitating Dells direct model and enhanced its supply chain at a time when Dell was facing problems, which ultimately led to Dells loss of competitive advantage (Knowledge@Wharton, 2007). This called for the use of retail distribution by Dell which acted as cost constraint for the company. Literature ReviewDell has set the industry standards for supply chain management. Its closed-loop system has been a source of providing spare parts for used Dell PCs in the market (Spenger & Schroter, 2003). The techniques used by Dell in its supply chain are shown in Appendix 2 (Kumar & Craig, 2007). As the diagram shows, the company has used the CRM technology and a demand pull manufacturing system along with minimum (almost zero) inventory to go lean and cut down costs. It also uses the concept of reverse supply chain whereby the customer returns are managed in this most efficient manner by offering alternatives such as recycling of old PCs (Appendix 3).However, in 2006 and the following years, the company faced problems with its business model. The company overestimated demand , had problems in purchasing, low product quality and poor accounting practices which led to a demand-supply mismatch, ultimately translating into late deliveries and long wait times for customers (Holzner, 2006). The Optiplex PCs sold between 2003 and 2005 were subject to failure due to poor engineering and a leaking capacitor installed on the PCs motherboard (Rakowski et al., 2010). The capacitors had been outsourced from a supplier Nichicon; the resulting news led to lawsuits worth $300 million against Dell stating that the management was aware of the problem prior to shipment of PCs (Rakowski et al., 2010). The problem exacerbated when the defective capacitors were replaced by other defective capacitors demonstrating a huge breakdown in Dells upstream and downstream supply chain (Rakowski et al., 2010). This had not been the only problem with Dell. In 2002 it faced a huge crisis and an inventory blackout when around 10,000 unionized workers went on a strike for 10 days which led to the closure of 29 ports in U.S.A and an ultimate deadlock as far as supply of raw materials and finished goods was concerned (Boyer & Verma, 2009). Since Dell thrived on a zero inventory, Just-in-Time system with zero buffer stock and since it sold rather than manufacturing computers, the company was hard hit by this catastrophe (Boyer & Verma, 2009). The companys extremely lean, real-time; business model left it vulnerable to supply chain difficulties. Furthermore, Dells business model thrives on the reliability and commitment of its suppliers; Dell does not carry the inventory; the supplier does. If there is a breakdown in the supply chain, the supplier is totally responsible (Sunil, 2010). This requires suppliers to be cost-effective, flexible and do things in Dell time (Sunil, 2010). They have just 1.5 hours of time to supply the materials to the assembly line (Govil & Proth, 2001). Hence, long term partnerships are difficult to sustain because those suppliers that arent competitive enough get wiped out of the supply chain automatically. Suppliers often see Dell as cold-eyed, unwavering and hard-edged in its dealings with them because the company doesnt relax its policies for the sake of its relationships with suppliers (Mangan et al., 2008). The standard is constantly raised by competition amongst suppliers because of which they feel pressurized to give in their best or else they get replaced by more efficient suppliers. Since Dell is largely a sales company rather than a manufacturing one; it always runs the risk of engaging in a multitude of 3PL relationships which has the potential of leading to a less than optimal level of supply chain (Bozarth, 2006). The challenge for Dell is, thus, to reduce the amount of 3PLs it intends to work with in order to enhance its distribution and transportation with suppliers. Furthermore, the company, in 2007, faced purchasing difficulties caused by minor problems in the paint of laptops (Heizer et al., 2009). Dell had issues where its laptops paint was at the risk of being contaminated in dust which resulted in repaints and ultimately in backlogs in laptops of every color other than black (Knowledge@Wharton, 2007). Hence, the companys shipments reduced by a large amount and added to the woes of customers who were complaining or poor customer service prior to this problem as well. There were also issues where new technology required for ultra-light LCD computers led to shortage of suppliers (Knowledge@Wharton, 2007). The shortage of supply along with greater than anticipated demand led to demand-supply mismatch. Customers were thus inclined to move away from the e-ordering system to the traditional retail ordering one, which would play to the advantage of Dells arch rival, HP (Kapuscinski et al., 2004).The main issue with Dell, therefore, is that its business model of supply chain excellence along with direct, made-to-order laptops is losing its edge in the market as its competitors including HP and Acer compete along the same lines. Hence, the initial gains accruing to Dell because of its lean system is not that large today because the companys approaching its point of diminishing returns as far as supply chain costs are concerned (Johnson, 2006). Another issue with Dell has been its focus on business to business markets. The problem arises when Dell implements its made-to-order model for consumers who have little knowledge about the technical specifications and lack judgement regarding prices. Whereas Dell sells its products based on the technical specifications of its motherboard, hard disk, and graphics, customer buy the laptops from a different perspective- one which is based on showing off the laptop to friends, family and carrying it as a reflection of ones identity and personality. Hence, Dell definitely needs to move from its tech-savvy orientation which needs to be reflected in its dealings down the supply chain (Knowledge@Wharton, 2007).Solutions and RecommendationsThe company has addressed several issues of its supply chain management issues that have sprung up every now and then. One major solution is for the company to reposition its selling point from technical benefits to an emotional appeal, by offering standard versions of computers along with customization and enabling greater information at the customer end by greater interaction between the supplier and the customer. Furthermore, the company could enhance round the clock, real time communication with its suppliers in various parts of the world, including Malaysia, China, Taiwan, and shipping partners in U.S, who could then alert the company on a regular basis as to the anticipated bottlenecks in supply chain. The company could order its suppliers to set up their own monitoring systems whereby special, dedicated teams engage in a SWOT analysis of the environment of Dell. Logistics experts could then be dispatched in various problem areas and regions in order to gather hands-on data on the problems prevailing there and send a report detailing the problem areas. This team of logistics experts would then work in sync with other specialists in the supply chain in order to design a contingency plan in line with standard operating procedures that can be implemented quickly and flexibly when crisis arises. As far as the inventory blackout of 10 days was concerned, the company could have anticipated exact time at which the parts would be cycled through the harbors, which is almost exactly what it did. Additionally, Dell should offer a stronger reward system for its suppliers and give them a sense of participation in the company rather than engaging in short term relationships with suppliers. The company should provide greater support to its suppliers in order to enable its suppliers to reduce their inventory to zero as well. There are particular problems with its one major supplier, Maxtor whose supplier MMC Technology stocks up to 3 weeks inventory. The reason is that it takes approximately a week to conduct performance testing, a week to do the shipment from its factory in California to Singapore and a week worth of buffer stock that is required to be held by Maxtor.To conclude the company ought to upgrade its information technology system with its supplier, ensuring greater interaction and engaging in long term relationships rather than short term relationships in order to enhance morale of suppliers and ensure best quality input from them. Since the companys business model has not been replicated by competitors such as HP and Acer, the differentiating edge shall now be as to how the company manages its supplier relationships and ensures they have a direct stake in the performance of the company.

References Boyer, K.K. & Verma, R., 2009. Operations and Supply Chain Management for the 21st Century. Mason: South-Western Cengage Learning. Bozarth, 2006. Introduction to Operations and Supply Chain Management. 2nd ed. New Delhi: Dorling Kindersley Pvt. Ltd. Ferugson, S. & Davis, J., 2007. A new Dell direction: Is it the right course? eWeek, 14 May. pp.22-26. Govil, M. & Proth, J.-M., 2001. Supply chain design and management: strategic and tactical perspectives. Florida: Academic Press. Heizer, Jay & Render, 2009. Operations Management. New Delhi: Dorling Kindersley Pvt. Ltd. Holzner, 2006. How Dell Does It. New Delhi: Tata Mc Graw- Hill. Johnson, A., 2006. Dell upgrades local supply chain. Manufacturer's Monthly, 05 September. pp.30-30. Kapuscinski, R., Zhang, R.Q., Carbonneau, P. & Robert Moore, B.R., 2004. Inventory Decisions in Dells Supply Chain. Interfaces, 34(3), pp.191-205. Knowledge@Wharton, 2007. Can Dell's Turnaround Strategy Keep HP at Bay? Knowledge@Wharton, 05 September. pp.1-4. Kumar, S. & Craig, S., 2007. Dell, Inc.s closed loop supply chain for computer assembly plants. Information Knowledge Systems Management , 6, p.197214. Kumar, S.; Craig, S., 2007. Techniques of Dells supply chain. Available at: [Accessed 21 May 2011]. Kumar, S.; Craig, S., 2007. Dells reverse supply chain. Available at: < http://web.ebscohost.com/ehost/detail?vid=10&hid=110&sid=601be125-a60d-4b00-9448-52f9eac93110%40sessionmgr104&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=buh&AN=25811560> [Accessed 21 May 2011]

Mangan, J., Lalwani, C. & Butcher, T., 2008. Global logistics and supply chain management. New Jersey: John Wiley & Sons. Rakowski, Tang, C.Y. & Kammala, 2010. Supply Chain and Distribution Management. Berlin: Grin-Verlag. Spenger, T. & Schroter, M., 2003. Strategic Management of Spare Parts in Closed-Loop Supply Chains A System Dynamics Approach. Interfaces, 33(6), pp.7-17. Sunil, C., 2010. Supply Chain Management. 4th ed. New Delhi: Dorling Kindersley Pvt. Ltd. William Hoffman, 2007. Worldwide PC Sales Growth, Dell vs. Industry, 2005-2006. Available at: [Accessed 23 May 2011].

Appendix 1

Source: William Hoffman, 2007. Worldwide PC Sales Growth, Dell vs. Industry, 2005-2006

Appendix 2

Techniques in Dells supply chain

Source: Kumar, S.; Craig, S., 2007. Techniques of Dells supply chain

Appendix 3Reverse Supply Chain- DellSource: Kumar, S.; Craig, S., 2007. Dell- Reverse Supply Chain

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