Supply Chain Management: An Analysis of Dell’s Value Chain

Supply Chain Management

Case Paper on Dell’s Value Chain

Stephen Chene

MGT 565-Novi Campus

Supply Chain Management: An Analysis of Dell’s Value Chain

Question A: Define Supply Chain Management

Our book defines supply chain management as the “integration of the activities
that procure materials and services, transform them into intermediate goods and final
products, and deliver them to customers.” (Heizer, Render, 9th edition page 434). Within
this definition there are many functions and opportunities between the suppliers and
distributors that can improve the supply chain.

Supply chain management is also defined as the “management of material and

information flow in a supply chain to provide the highest degree of customer satisfaction
at the lowest possible cost.” (BusinessDictionary.com) Supply Chain Management
(SCM) requires commitment of supply chain partners to work closely to coordinate order
generation, order taking, and order fulfillment thus, creating an 'extended enterprise'
spreading far beyond the producer’s location.

A collaboration of other sites define SCM as managing a series of processes of

goods that move from the customer order through the raw materials stage, supply,
production, and distribution of products or services and ultimately to the customer. There
are hundreds of books and web-sites regarding supply chains and each one has tried to
create their own definition of supply chain management. While they all change the
words in an effort to stand out they all come down to the same basic principle. All
processes need to be integrated and you need to have superior relationships with
suppliers. The process includes every stage of the product, beginning with the raw
materials and doesn’t end until the product is delivered to the customer. The process
actually still continues until the consumer no longer needs any additional service on the
product. The company who manages these processes and relationships the best will
ultimately win and have the best supply chain. The competition is no longer between the
companies, it is between the companies’ management of the supply chain and who can
provide the maximum value.

There are many different aspects of SCM, but the essential goal in managing a
supply chain is to achieve an orderly flow of goods from extractors to consumers. While
that goal is essential, the newest discipline of SCM is the flow of demand and the flow of
cash up the chain. Without these other flows, the goods would never move: It’s demand
that provides for the movement and it’s the cash that provides for the motivation. They
are key to all of this is to find processes to improve on these basic operations (Taylor
2003).

Internet technology is also starting to be found in defining SCM. The reality is

that firms that use internet technologies have the ability to impact the fundamental
structure of a firm and its supply chain. Regardless of the uncertainty and doubt
regarding technology choices, information technology is fundamentally changing the way
firms develop, market, and support its products and services (Reddy and Reddy, 2003).
Using internet technology allows for great communication and the ability to compress the
supply chain.
Supply Chain Management: An Analysis of Dell’s Value Chain

The internet has also allowed us to improve our SCM operational effectiveness
and to know our own demand chain. SCM involves making it easier for external and
internal suppliers to collaborate with you, which enables you to specialize and focus on
developing core competencies. Technology is changing too fast and no one company can
specialize and be the best at everything. Therefore to improve on SCM we need to use all
resources possible and collaborate with everyone (Hoover et al., 2001).

According to the Gower Handbook of Supply Chain Management, the define

SCM as integration and collaboration of all aspects of the product. They believe that this
will be the area of most benefit in the foreseeable future. They say that you need to select
your supply chain partners that complement company objectives. They continue with the
notion that the supply chain structure is particularly important as technology continues to
enable supply chain improvements and the markets will expect supply chains to become
more lean and agile and increase shareholder value (Grower, 2003).

Below is a very simplistic model of a value chain. The book, Supply Chain
Management and Advanced Planning talks about how to integrate all aspects of the
business and when you do, you can add value at every stage (Stadtler and Kilger 2000).
This simplistic model is just another way to define SCM, but it shows to everything from
the legal department to the purchasing department and everything else in between is
intertwined in the SCM model. This also shows that at each stage value can be added to
improve operations.

In summary, supply chain management has to do with looking at every aspect of

the business and collaborating with all the suppliers and departments within the company.
Technology is continuing to change and open up new opportunities to improve the flow
between procurement of materials, to the finished product, onto delivery and service in
Supply Chain Management: An Analysis of Dell’s Value Chain

the future. Supply chain management is the essential component of any business and that
is where companies will find their opportunities for improvement.

Questions B: How does the Dell case study relate to the definition of SCM?

Supply chain management is all about improving processes. There are thousands
of processes involved when it comes to making a Dell computer. According to Curt
Johnson, Director of Worldwide Procurement IT, “The availability of our supply chain
systems is paramount to keeping our factories running. . . . any downtime costs us
thousands of dollars per minute." (Dell.com). That quote speaks directly to the definition
of supply chain management provided by the book and it validates the importance of
integration and collaboration.

The Dell case study talks about how Dell develops close relationships with
suppliers. Dell realizes that they can’t do everything on their own, but by working
together everyone can win. In order to improve the process for the customer and the
bottom line for Dell, they press suppliers to drive down lead times, lot sizes and
inventories. To help suppliers Dell does a lot of customer research and shares that
research with the suppliers. Dell also constructed Web pages for suppliers. This is an
amazing advancement in supply chain management because it allows the suppliers to
view orders for components that they produce as well as knowing the current inventory at
Dell. This allows them to plan based on actual demand and not trying to guess what
demand will be. Collaborating with the suppliers keeps the supply chain moving rapidly,
keeps the products current, and the customer queue short.

Dell’s web-site collaboration with suppliers is ingenious because of its direct sales
to customers via the internet. The SCM definition talks about integration from the
procurement of materials, transforming them into final products and then delivering the
final products, but Dell takes that one step further. Dell waits until the customer tells
them what specifically they want and then the procurement starts. This allows for a
virtually unlimited variety of options for their products while offering lower costs and
higher margins for Dell.
Supply Chain Management: An Analysis of Dell’s Value Chain

Below is a diagram of Dell’s Value Chain. This simplistic model shows how
everything is intertwined and it all begins and ends with the customer.

Dell’s Value Chain

Part of Dell’s integration and success is based on their communication and high
standards with its suppliers. When you look at the SCM definitions it involves
communication, training, and follow up with suppliers. Below is a list of expectations
regarding core components for Dell’s suppliers that were taken from Dell’s website:

“At the center of Dell's global supplier management program is our supply chain
management system that includes a number of core components:

Certification and Standards

 ISO 14001 certification.  We require our suppliers to be compliant with ISO

14001, the most widely-recognized standard for environmental management
systems, by Jan. 31, 2004 or submit a schedule for achieving certification and
obtain Dell approval.
Supply Chain Management: An Analysis of Dell’s Value Chain

 OHSAS 18001 certification.  We require our suppliers to be compliant with

OHSAS 18001, a prominent European standard for workplace health and safety
management systems, by Jan. 31, 2004 or submit a schedule for achieving
certification and obtain Dell approval.

Training and Communication

 Training.  Dell provides training on its supplier expectations during its annual
supplier conference as well as updates in quarterly business reviews. In addition,
Dell provides training in a variety of relevant areas, such as environmental
practices, to suppliers.
 Supplier social responsibility and environmental responsibility
agreements. As part of every new supplier contracting process, Dell requires
suppliers to sign an agreement acknowledging they are aware of and will abide by
Dell requirements and principles.

Reviews and Compliance

 Business reviews.  In order to embed socially responsible behavior into business

activities, Dell includes a review of requirements and principles in quarterly
business reviews that are held with key suppliers.
 Self audits. Dell asks key suppliers to conduct a self-audit to review with Dell
management on an annual basis, using a standard scorecard format. These audits
are required to be signed by a member of senior management of the supplier.
 Dell executive oversight and review. Dell's supply-chain management system is
overseen by chief procurement officers and senior vice presidents of Dell Inc.
Issues of concern related to supply chain practices are raised in regular operations
reviews with these executives and, if appropriate, also raised in Dell's business
conduct committee and to the chief executive officer.
 Board of directors oversight. Issues of concern related to supply-chain practices
will, as appropriate, be raised with the Dell Board of Directors and/or its various
committees.
 Engagement with third parties and non-governmental organizations
(NGOs). Dell will engage with third parties and NGOs as it deems necessary in
order to ensure the effective implementation and oversight of its supplier
principles.

Correction and Enforcement

 Correction.  In recognition the complexity of the world in which we do business,

when suppliers fail to meet these principles, Dell and the supplier will create an
action plan to ensure future compliance. Performance against the plan to adhere to
Dell's standards shall not take more than one year.
Supply Chain Management: An Analysis of Dell’s Value Chain

 Enforcement. Dell reserves the right to terminate at any time, even before

corrective plans are developed and implemented, agreements with suppliers that
fail to comply with our Supplier Commitment Policy or our Supply Chain
Management Requirements.

In summary, Dell’s case study relates to the definition of supply chain

management because they have strong relationships with suppliers, constant
communication and use of technology to improve operations. They have strong written
standards and expectations with follow up as well as training to work better with the
suppliers. All of this ultimately is to improve relations with the customer and gain
market share and profitability.

Dell is definitely an industry leader when it comes to the direct sales model and
the compression of their supply chain. They have made great improvement beyond what
the competition has been able to do. To improve, I see two areas of opportunities. The
first is their challenge and costs of shipping individual computers out to consumers. The
second is their additional costs to service the customer themselves especially after the
product has been delivered.

Question 1: How has Dell used its direct sales and build-to-order model to develop
an exceptional supply chain?

Many of the challenges in improving the supply chain come with all of the
unknowns. Most companies produce products they think the consumer will want. Then
they ship these products to the retail stores. The stores then try to sell the products that
are on their shelves to the customers. The supply chain shows down while they are
figuring out what to build. Then they work with suppliers to get the raw materials and
components for the products. The chain slows down more while they are building the
products and shipping them to the stores. Then the supply chain is still slow while they
wait for the products to sell and get paid.

Dell has used its direct sales and build-to-order model to create this exception
supply chain by integrating everything from the beginning to the end process. Dell starts
Supply Chain Management: An Analysis of Dell’s Value Chain

by researching customer to find out what they want. As soon as an initial product is
designed, Dell starts to market that product on the web-site. Dell does not start to
produce any of the products until the customer tells Dell exactly what they want and pays
for the product. Only then does the procurement process start. Dell has improved the
supply chain to make it exceptional by integrating the suppliers. The suppliers have a
Web page which informs them of pending orders. This allows the suppliers to plan based
on actual demand. This sales model created an exceptional supply chain because this
integration of activities from the procurement of materials to the final product and Dell’s
direct shipment to the customer can be done in a matter of hours compared to months. In
addition, this allows for exceptional cash flow compared to traditional methods since the
payment is received before Dell pays for the components itself.

Question 2: How has Dell exploited the direct sales model to improve operations
performance?

Dell has been able to exploit the direct sales model because of the internet. Dell
has been able to attract customers that value choice from all over the world. Dells prices
are cheaper because they don’t have the brick and mortar to pay for and customers can
now customize their products. Dell can introduce a new product to customers over the
internet as soon as the first model is ready. “In an industry where products have life
cycles measured in months, Dell enjoys a huge early-to-market advantage” (Heizer and
Render 2008).

Dell has compressed its supply chain by directly linking the orders directly to the
suppliers. Suppliers can view existing orders so they know if or how many components
to produce and ship. This supply chain compression gives Dell a substantial unit cost
advantage over someone else. With an inventory turnover rate of about 60 times per
year, Dell has minimized the rapid depreciation and inventory write-off costs that
typically hurt the PC industry. Also because of its direct sales model, Dell operates on a
negative cash conversion cycle. Dell receives its money prior to having to pay its
suppliers for the components.

Dells direct sales model has improved operations because the customer can order
exactly what they would like without Dell having to worry about stocking every
imaginable product. Dell receives the orders and payment for the item and the customer
receives the exact product and accessories they want within day’s delivery right to their
house.

Question3: What are the main disadvantages of Dell’s direct sales model?

Dell’s direct sales model has many advantages but there are a few disadvantages
of the direct sales model. The biggest component is the shipping aspect and others
include the customer service component before, during, and after the product is
completed.
Supply Chain Management: An Analysis of Dell’s Value Chain

Since Dell is handing all aspects of the computer building process directly and
sending it to the customer, they have to pay for the cost of shipping. Other companies
mass produce the computer and send them in bulk. Dell is at a disadvantage because they
are sending individual or very small orders directly to many consumers.

The other issue of the direct sales model is that you have to shoulder all the
related support costs, from handling information requests before the sale to taking and
tracking orders to handling service inquiries after the sale. You do not have the ability to
pass any of those costs onto retailers because you are handling every aspect of the
transaction.

In summary, the direct sales model provides a cost advantage on the production
side, but brings a cost disadvantage on the support side.

Question 4: How does Dell compete with a retailer who already has a stock?

In this day and age of the internet there seems to be a constant battle between the
internet sales model and the brick and mortar businesses. Each has their advantage and
disadvantages and whoever is the most competitive and strategic will win.

Since many consumers like to see and feel a product before purchasing Dell had
to create a different way to compete. The most obvious is the price issue. Since Dell
doesn’t have to pay for the brick and mortar buildings, they can sell at a lower price
because of their lower fixed costs. The other big way that Dell competes with a retailer
that already has computers in stock is by allowing the consumer to customize their
computer to exactly what they want. The stores have limited supplies with limited
selection. Due to the supply chain model they have set up, Dell allows customers
virtually unlimited option for them to customize their computer. In addition, Dell can
produce the computer in a matter of hours and have it shipped to the customer in a matter
of days.

In summary, Dell competes with a retailer by offering a lower price and allowing
the consumer to customize the product to the options that they prefer.

Question 5: How does Dell’s supply chain deal with the bullwhip effect?

Theoretically the Bullwhip effect does not occur if all orders exactly meet the
demand of each period. This is consistent with findings of supply chain experts who have
recognized that the Bullwhip Effect is a problem in forecast-driven supply chains, and
careful management of the effect is an important goal for in supply chain management.
Therefore it is necessary to try to figure out demand as far in advance as possible.

Dell has achieved this by constructing Web pages for the suppliers. These pages
allow the suppliers to view order for components they produce as well as how much
Supply Chain Management: An Analysis of Dell’s Value Chain

stock is currently in inventory at Dell. This allows the supplies to build for demand in
real time.

In summary, if you can build in real time based on actual demand you will not
have to worry about inventory build-up of unnecessary components and products. Dell’s
customized web-page for suppliers allows them to reduce the bullwhip effect.

References
Supply Chain Management: An Analysis of Dell’s Value Chain

Business Dictionary.com (n.d.) Supply Chain Management. Retrieved from

http://www.businessdictionary.com/definition/supply-chain-management-

SCM.html

Grower Handbook of Supply Chain Management. (2003) (5th ed.)Burlington, VT:

Author.

Hoover Jr., W., Eloranta, E., Holmstrom, J., Huttunen, K. (2001). Managing the

Demand-Supply Chain. New York-Wiley Operations Management.

Reddy, R., Reddy, S. Ph.D., (2001). Supply Chains to Virtual Integration. New York-

McGrall-Hill.

Stadtler, H., Kilger, C. (2000). Supply Chain Management and Advanced Planning-

Concepts, Models, Software and Case Studies. New York-Springer.

Dell.com. (n.d.) Suppliers Principles: Supply Chain Management Systems. Retrieved

from

http://www.dell.com/content/topics/global.aspx/about_dell/values/supp_citizen/sup

ply?~ck=ln&c=us&cs=NAR&l=en&lnki=0&s=bsd

Taylor, David A Ph.D (2004). Supply Chains, A Manager’s Guide. Boston: Addison-

Wesley.