Dell orders components only when end user places an order

ALAN PEAT
IN THE cut-throat world of computer manufacturing, one company – US-based Dell Computers - focused on optimising supply chain management to help it develop into one of the international majors in the industry.
This was one of the case studies highlighted in author Martin Christopher’s book 'Logistics and Supply Chain Management'. “While the industry leaders vied amongst themselves to introduce PCs with ever more impressive technology, little consideration was given to the mundane business of supply chain management,” says Christopher.
“The computers they produced were invariably made-to-forecast and because of the way they were sold – through shops, resellers, and systems integrators – were then destined to languish for an average of two months in warehouses or on shop shelves before being purchased by the customers.”
But Dell concentrated on custom-building units to order, and remained focused on the end-user, avoiding the inherent double-jeopardy created by the dynamics and economics of the industry.
Firstly, according to Christopher, around 80% of the costs of manufacturing a PC are component costs, which have been falling since the industry’s inception - particularly the all-important processors that continue to fall in price by an average of 30% a year.
“The longer these components wait to be sold,” he said, “the worse value they become.”
One part of Dell’s strategy is that many of the components it uses are not ordered from a supplier before it receives a customer order. And, to achieve such levels of co-operation and integration, Dell has reduced its number of suppliers from 204 companies in 1992 to just 47.
At the same time, it has preferred to source from suppliers close to its plants rather than from more distant offshore suppliers – even though the local manufacturing costs may be higher.
From 1994, when Dell pulled out of the retail market, it has concentrated on finding ways to leverage the strengths of its original direct sales strategy (including Internet sales since 1997) concentrating on minimising inventory, and increasing returns on capital employed.
Dell’s operations were closely re-examined to squeeze every possible moment of non-value adding time out of its procurement and assembly processes.
Just-in-time (JIT) supply was an all-important part of this procedure, and, since 1997, Dell has been a model of JIT manufacturing.
The success of this strategy continues, and the result is reflected in Dell’s annual report for its last financial year.
In the fourth quarter, the company recorded total volume increases for all products worldwide of 19% - nearly seven points faster than the industry excluding Dell.