Case Study

Supply Chain Transformation at Dell

Nikhat Afshan*

The case presents the supply chain transformation strategy of Dell, which involved moving away from its
legendry make-to-order model to make-to-stock model. It highlights why Dell decided to adopt make-to-stock
model from which it had distanced itself for decades. Once known for several benefits such as no finished goods
or parts inventory, flexibility, and negative cash-to-cash cycle, it started adding great complexity and cost. Dell
decided to move to make-to-stock model while operating the make-to-order model for customers who value it,
but at a much reduced level.

The Direct Model has been a revolution, but it is not a religion. We will continue to improve
our business model, and go beyond it, to give our customers what they need. We will simplify
our organization to make it easier to hear customers and respond to them.1
– Michael Dell, Founder and CEO of Dell
‘Customer requirements are increasingly being defined by how they (customers) use
technology rather than where they use it. That’s why we won’t let ourselves be limited by
geographic boundaries in solving their needs.’ For me, this implies a continued need for world-
class excellence in global supply chain efficiency as well as maintaining Dell’s former qualities
for agility and responsiveness.2
– Michael Dell, Founder and CEO of Dell

Introduction
In an interview to Dan Gilmore, Editor-in-Chief of Supply Chain Digest3, on March 18,
2011,4 Annette Clayton, Vice-President, global operations and supply chain of Dell,
* Associate Professor, Department of Operations and IT, IBS Hyderabad (Under IFHE – A Deemed to be University
u/s 3 of the UGC Act, 1956), Hyderabad, Telangana, India. E-mail: nikhat.84@ibsindia.org
1
http://www.betanews.com/article/Michael-Dell-Evolving-Past-the-Direct-Sales-Model/1177971762
2
Bob Ferrari (2009), “Reflection on Dell’s Latest Reorganization”, available at http://www.theferrarigroup.com/
supply-chain-matters/2009/02/03/reflection-on-dells-latest-reorganization/, February 3.
3
Supply Chain Digest is the industry’s most valuable supply chain management and logistic publication.
4
Dan Gilmore (2011), “The Lessons from Dell’s Supply Chain Transformation”, Supply Chain Digest, available at
http://www.betanews.com/article/Michael-Dell-Evolving-Past-the-Direct-Sales-Model/1177971762, March 18.

60
© 2022 IUP. All Rights Reserved. The IUP Journal of Supply Chain Management, Vol. 19, No. 1, 2022
seemed very delighted to explain the achievement of the company which was the result
of the supply chain transformation that started almost three years back in 2008.
Quantifying the result of the supply chain transformation, Clayton said that at Dell
forecast error has been reduced by 300%, freight cost by 30% and manufacturing cost
by 30%. Further, the company reported the improvement in product availability by 37%
and delivery times by 33%.5 Dell decided to transform its supply chain when it realized
that its sales and profit had declined due to fierce competition in computer industry and
changes in the buying behavior of its customers. Analysts felt that Dell’s supply chain
transformation was a reaction to losing its market segment share to its close competitor
HP. Dell’s transformation included plans for formulating a new product design strategy,
$3 bn cost reduction in total cost and a renewed push into some of the fastest-growing
segments of the PC business, such as services, emerging markets, and small- and
medium-sized businesses.6 Analysts also felt that to grow Dell needed to expand its
customer value proposition to reach different market segments which required different
supply chain strategies across multiple dimensions. Dell partnered with Simchi Levi,
Professor at MIT, who helped Dell in realizing how many supply chains it needed and
what capabilities were required for each based on unique “customer value propositions”. 7
This entire transformation led to a shift from Dell direct model to multi-channel model
and transition from regional structure to three global customer business units—large
enterprise, small and medium enterprise, public and consumer business segment.

Background
Dell, formerly PC’s Limited, traces its origin to 1984. It was founded by Michael Dell, who
was then a student at the University of Texas. He started PC’s Limited to supply PCs
directly to customers in an endeavor to better understand their requirements and fulfill
them. He bought parts wholesale, assembled them into clones of IBM computers, and sold
them directly to customers. In 1985, he dropped out of school to fully concentrate on his
business after getting a financial support of $30,000 from his family. Dell pioneered the
“configure to order” approach for manufacturing and delivering each customers the
computers of their specification. The business model of selling PCs directly to the
customers eradicated the high overhead costs of a dealer network and provided customized
PCs to its customers at a very reasonable price. In the very first year of business, Dell
grossed more than $73 mn.8
5
Dan Gilmore (2011), “The Lessons from Dell’s Supply Chain Transformation”, Supply Chain Digest, available at
http://www.betanews.com/article/Michael-Dell-Evolving-Past-the-Direct-Sales-Model/1177971762, March 18.
6
Kevin Allison (2008), “Analysts Assess Dell’s New Strategic Thinking”, available at http://www.ft.com/intl/cms/s/
0/9c4e38a6-043a-11dd-b28b-000077b07658.html#axzz1QwHehpo7, April 7.
7
Dan Gilmore (2011), “ The Lessons from Dell’s Supply Chain Transformation”, available at http://www.scdigest.com/
assets/FirstThoughts/11-03-18.php?cid=4330, March 18.
8
http://printerinkcartridges.printcountry.com/printcountry-articles/printer-company-histories-press-releases/the-
history-of-dell

Case Study 61
 In 1985, the company introduced its first PC named Turbo, which was sold for $795
in the US.9 The advertisement of computers was done in magazines and the PCs were sold
through direct sales. To place order, customers were required to dial a toll-free number. In
1988, the name of PC’s Limited was changed to “Dell Computer Corporation” and it
started expanding its business globally. In 1992, Dell was included in the list of 500 largest
companies in the world by Fortune magazine and Michael Dell became the youngest CEO
of a Fortune 500 company ever.10
In 1996, Dell started selling its computers via its website. In 2002, the company started
expanding its product line and included digital audio players, printers, handheld devices,
televisions, etc.11 (Refer Exhibit I). To recognize its expansion beyond computers, Dell
rebranded itself as Dell Incorporated.12 Dell Inc. built a new assembly plant in North
California in 2004, which led to further growth in international sales of its products in
2005.13 In the same year, Dell Inc. was ranked No. 1 in the Fortune magazine’s list of the

Exhibit I: Diversified Product Line of Dell

Our Products

Venue Pro Streek Inspiron Inspiron Due Vostro

Mini Desktops &
Notebooks

Latitude
Alienware Notebooks
Inspiron XPS
Desktops & Notebooks
Notebooks

Precision Mobile OptiPlex Precision PowerEdge

Storage Servers
Workstations Desktops Workstations Solutions

9
http://www.drivercure.com/vendor/view_vendor.php/Dell?company_id=903
10
“Building Better Computer”, available at http://www.successmagazine.com/From-the-Archives-Michael-Dell/
PARAMS/article/536/channel/19#
11
http://driverfinderpro.com/blog/dell-drivers/
12
http://www.drivercure.com/vendor/view_vendor.php/Dell?company_id=903
13
http://i.dell.com/sites/content/corporate/financials/en/Documents/10q05q1.pdf

62 The IUP Journal of Supply Chain Management, Vol. 19, No. 1, 2022
nation’s most admired companies, replacing Walmart which had held the position for the
past two years.14 In 2006, Dell Inc. purchased computer hardware manufacturer Alienware15
under the rare acquisition designed to boost Dell’s standing among PC enthusiasts and
also improve Alienware’s supply chain.16 By late 2006, Dell started losing its market share
to HP. According to research firm IDC,17 HP had a worldwide PC market share of 19.3%
for the quarter ending June 2006 and Dell had just 16.1% share, as compared to Dell’s
18.2% market share and HP’s 15.7% market share in the previous year.18 After several
quarters of sluggish sales, Dell started selling its PCs through the Walmart retail chain
showing a dramatic shift from Dell-Direct Model by June 2007.19 In 2008, Dell announced
that it is shifting from its legendry Dell Direct Model under its new supply chain
transformation strategy. This transformation included use of contract manufacturer,
selling through retail channel, and segmentation of supply chain using voice of customer
approach and removing complexity from supply chain. It closed its legendary Austin, TX,
computer factory in 2008 to make greater use of contract manufacturer for production of
its PCs.20 The supply chain transformation helped Dell in reducing total cost and
regaining cost leadership on which it had lost ground.

Dell Direct Model

Michael Dell pioneered a unique business model termed “Dell’s Direct model” to sell
computers directly to the customers, removing all the intermediaries like distribution and
retailing networks. This model was introduced by Dell with the objective of cutting
operating cost, improving delivery time and providing customers the customized
computers at reasonable price.21
Michael Dell introduced its first PC named “Turbo” in 1985, which was advertised
using newspapers and magazines. These PCs were sold directly to the customers
eliminating all the intermediaries like wholesalers and retailers. Customers were given
the preference of ordering PCs according to their choice and preference, and to help
14
“Dell Beats Wal-Mart as ‘Most Admired’”, available at http://money.cnn.com/2005/02/21/news/fortune500/
most_admired/, February 22, 2005.
15
Alienware is an American computer hardware company and now it is wholly-owned subsidiary of Dell Inc.
16
Tom Krazit (2006), “Dell to Acquire Alienware”, available at http://news.cnet.com/Dell-to-acquire-Alienware/
2100-1003_3-6052842.html, March 22.
17
IDC is a wholly-owned subsidiary of International Data Group, the world’s leading technology media events and
research company. It is the premier global provider of market intelligence, advisory services and events for the
information technology.
18
“Can Dell’s Turnaround Strategy Keep HP at Bay?”, available at http://knowledge.wharton.upenn.edu/
article.cfm?articleid=1799, September 5, 2007.
19
Raj Sheelvant (2008), “Dell’s Turnaround Strategy”, available at http://itstrategyblog.com/dell%E2%80%99s-
turnaround-strategy/, April 8.
20
“Supply Chain News: Dell Continues Its Supply Chain Transformation with Plans to Potentially Sell all Remain-
ing Factories to Contract Manufacturers”, available at http://www.scdigest.com/assets/On_Target/08-09-09-4.php.
September 9, 2008.
21
Richard San Juan, “‘Dell’s Direct Model’ to Success - Dell’s Business Plan”, available at http://www.gaebler.com/
Dell-Direct-Model-to-Success.htm

Case Study 63
them Dell employed computer-literate salespersons. These options helped customers in
getting customized computers at relatively cheaper price. Since its inception itself Dell
followed a customer-centric approach to business and dealt directly with the customers.
During the late 1980s, Dell established a customer support system, which provided
technical support to the customers on telephone. By 1991, it started offering free
installation of application software with its new computers, which differentiated it from
all other competitors.
Dell’s direct model was supported by its build-to-order production approach.
Customers were required to log on to the company’s website or use telephone network to
place the order with their own specifications. After receiving orders from customers,
computers were manufactured at Dell’s factory using the supply stock reserve. This
production approach resulted in manufacturing customized computers for each customer
at reasonable price and delivery of the product to the customers within 10 days.22 Starting
the production only after receiving the orders from customers and requesting materials
from suppliers as needed helped Dell in keeping minimal inventory and avoiding
overproduction of its products. In order to build computers of different configurations for
different customers, Dell operated at the “lot size of one” coupled with lean manufacturing
techniques to eliminate waste in the system.23 Another major focus of Dell had been its
inventory management. Talking about the inventory management, Dick Hunter, Vice-
President of Dell America’s Manufacturing and Distribution Operations said that Dell’s
inventory philosophy stands in contrast to the industry paradigm of inventory equaling
service. Dell was of the opinion that inventory equals costs, as no matter how much
inventory the firm holds, it usually is the wrong material. Dell follows a zero inventory
model because primarily the inventory in technology industry loses its value rapidly over
time—25% per year on an average or 0.5% per week.24 Dell’s low inventory had a great
impact on its overall performance. The attempt of Dell to keep low inventory helped in
reducing component lead time and enhancing its productivity. Dell could achieve high
inventory turnover ratio because it aligned its inventory to its sale rather than carrying
inventory against projected sale. This helped Dell in matching demand and supply and
eliminated the need to hold high inventory to provide high service level to customers.
In an interview with Fast company, Dell’s CEO, Kevin Rollins, discussed the disadvantage
of holding inventory in computer industry and said, “The longer you keep it the faster it
deteriorates—you can literally see the stuff rot, because of their short product lifecycles,
computer components depreciate anywhere from a half to a full point a week. Cutting
inventory is not just a nice thing to do but it’s a financial imperative”.25 Dell also reaped
22
“Dell’s Direct Model”, available at http://dqindia.ciol.com/content/top_stories/100110402.asp, November 4, 2000.
23
Dick Hunter (2005), “How Dell Succeeds in an Increasingly Competitive Market”, available at http://
www.industryweek.com/articles/tying_supply_chain_to_customers_11124.aspx, December 6.
24
Ibid.
25
Charles Atkinson (2005), “Dell Computers: A Case Study in Low Inventory”, available at http://
www.inventorymanagementreview.org/2005/09/dell_computers_.html, September 26, 2005

64 The IUP Journal of Supply Chain Management, Vol. 19, No. 1, 2022
 Table 1: Dell’s Inventory benefits in terms of return from its low inventory
Turnover Data as it eliminated inventory holding cost. Further,
it could utilize the cash which was freed from
Inventory Week’s
Year inventory in some value-adding activities. Dell’s
Turnover Inventory
effort in reducing its inventory through its entire
1992 4.79 10.856 supply chain can be seen from its inventory
1993 5.16 10.078 turnover ratio, as given in Table 1.
Another important aspect of Dell Direct
1994 9.40 5.532
Model was the wide use of Internet which helped
1995 9.80 5.306 it in getting even closer to customers and
sustaining the rapid growth of the company. The
1996 24.20 2.149
establishment of www.dell.com opened up the
1997 41.70 1.247 company’s product to a large number of potential
customers. This also provided customers a variety
1998 52.40 0.992
of customization options together with technical
1999 52.40 0.992 support and updates for their software.27 Another
breakthrough of Dell due to Internet was the
2000 51.40 1.012
start of E-Support Direct which provided tailored
2001 63.50 0.819 services designed to achieve high level of system
uptime and streamline customer support process.
2002 75.70 0.686922
Commenting on this initiative, Ro Parra, Dell
2003 99.50 0.522613 Senior Vice-President, said, “We intend to use
the internet to revolutionize the customer
2004 107.10 0.485528
support experience, just as we have used it to
2005 102.30 0.508309 revolutionize the computer buying experience.
2006 88.80 0.585586
E-Support-Direct from Dell offers
comprehensive internet-enabled support for
2007 77.50 0.670968 our customers and gives them customized
2008 53.80 0.966543 capability to easily automate and speed their
support process”.28
2009 49.00 1.061224
This unique business model allowed Dell to
2010 45.50 1.142857 pass on the cost benefit to the customers as there
are distributors or retailers adding to the cost and
2011 42.60 1.220657
time in supply chain. Kevin Rollins said, “Our
Source: S&P Index Data26 direct model has basic principles: Do not let
26
http://quicktake.morningstar.com/stocknet/efficiencyratios10.aspx?symbol=dell
27
Richard San Juan, “‘Dell’s Direct Model’ to Success-Dell’s Business Plan”, available at http://www.gaebler.com/
Dell-Direct-Model-to-Success.htm
28
Round Rock (1999), “Dell Unveils Internet-Enabled Customer Support Strategy; E-Support-Direct from Dell
Delivers Automated Resolution Capabilities”, available at http://findarticles.com/p/articles/mi_m0EIN/
is_1999_August_25/ai_55559778/, August 25.

Case Study 65
anyone come between us and the customer. Keep clear communication and no extra
costs”.29 Talking about its business model, Michael Dell said, “We have a pretty simple
system.” “The most important thing is to satisfy our customers. The second most
important is to be profitable. If we don’t do the first one well, the second one won’t
happen”.30
Commenting on this unique business model, Chip Saunders, President, Dell, Asia-
Pacific said, “We have about 50% of the profit pool of the whole PC industry.” Moreover,
using the pull system for production helped Dell in reducing inventory holding cost as it
follows zero inventory model.31 “Dell’s success had been, ‘You tell us what you want and
we will build it for you,’” said, Christian Terwiesch, an Operations and Information
Management Professor at Wharton.32
Using this model, Dell could also maintain negative cash conversion cycle which
means it received payments for its product even before it had to pay for the required raw
materials to its suppliers.33

Supply Chain Transformation at Dell

In 2008, Dell announced that it is moving into the retail business and making other
related transformation to its supply chain. Once known for supply chain excellence, it was
planning to move away from its legendry make-to-order model to make-to-stock model
from which it had distanced itself for decades. Michael Cannon, Dell’s President for global
operations, stated that “the Dell build-to-order and ‘do it all ourselves’ model served the
company well for almost 20 years, but the environment has changed34.” Comparing Dell
with its close competitor HP, Netessine, an operations and information management
professor at Wharton, illustrated that Dell supply chain is losing its edge.35 Low cost had
been the competitive advantage of Dell, but its competitors were approaching somewhere
near to its cost of production. He illustrated this by comparing the inventory cost of HP
29
Kathryn Jones (2003), “The Dell Way Michael Dell’s Famous Business Model Made his Company the World’s
Premier Computer Maker. Now He’s Branching into New Fields and Taking on Virtually Every Other Hardware
Manufacturer. Can “the Model” Stand the Strain?”, available at http://money.cnn.com/magazines/business2/
business2_archive/2003/02/01/335960/index.htm, February 1.
30
“Dell Model in Computer Market”, available at http://ebizcase-ariran.blogspot.com/2006/09/dell-model-in-com-
puter-market.html
31
Dick Hunter (2005), “How Dell Succeeds in an Increasingly Competitive Market”, available at http://
www.industryweek.com/articles/tying_supply_chain_to_customers_11124.aspx, December 16.
32
“Can Dell’s Turnaround Strategy Keep HP at Bay?”, available at http://knowledge.wharton.upenn.edu/
article.cfm?articleid=1799, September 5, 2007.
33
“Dell May Quit Direct to Consumer Model”, available at http://nsrivastava.blogspot.com/2007/05/dell-may-quit-
direct-to-consumer-model.html, May 9, 2007.
34
Julie Urlaub (2009), “Business Sustainability Re-Shaping the Supply Chain”, available at http://blog.taiga
company.com/blog/sustainability-business-life-environment/business-sustainability-re-shaping-the-supply-chain,
June 11.
35
“Can Dell’s Turnaround Strategy Keep HP at Bay?”, available at http://knowledge.wharton.upenn.edu/
article.cfm?articleid=1799, September 5, 2007.

66 The IUP Journal of Supply Chain Management, Vol. 19, No. 1, 2022
and Dell. In 1997, both the companies sold a computer that cost $1,000 to make; the
inventory cost incurred by Dell would be $20 compared to HP’s $160. But HP reduced this
gap, and by 2005, Dell’s costs were $10 compared to HP’s $70.36 Michael Dell also
acknowledged that the competitors have closed the supply chain gap and has shown great
improvement in their supply chain, but still Dell maintained the sizeable gap in cost. In
an interview with Knowledge@Wharton, Dell said, “I think that there have been some
competitors that have certainly improved their supply chains. But if you look at basic
metrics, like return on capital or inventory management, they have not approached
anywhere near the level that Dell does with its supply chain.” Netessine agreed with Dell’s
statement, but argued that Dell has reached a point of diminishing returns. And as these
returns diminish, the strengths of its rivals—Apple’s product design, HP’s retailing
prowess, and Acer’s low costs—will present a bigger challenge. Adding to his point, he
said, “While Dell’s supply chain advantage is still there, it is not as big anymore,
competitors of Dell have been quite effective. Now you can build to order from any
computer manufacturer37.”
The transformation at Dell is done largely to compete with HP which has become more
efficient under the leadership of Mark Hurd, says the expert from Wharton. HP has
leveraged its relationship with retailers to better target consumers adding to the sales of
its PCs. Commenting on the transformation at Dell, Netessine said that whether Dell can
truly change its model is a big question, but it has no choice. “Dell focused solely on its
supply chain, but Apple reminded consumers that design matters. Design of a computer
is not something you can forget. One way of dealing with Dell’s situation is to design
exciting machines,” said, Netessine.
According to Canon, Dell’s earlier Dell Direct Model added great complexity and cost.
It used to offer approximately 500,000 configuration options for many of its models,
though nowhere near that many were actually ordered.38 Since Dell had very flexible
supply chain, it was feasible for it to offer that huge configuration choice. But this
approach, on the contrary to popular belief, had led to higher product costs in many cases,
said Canon. Since Dell offered huge configuration options for its laptops, its basic model
had to be built in a way that supported all these add-ons to much higher end models. So,
if the customers ordered a high-end model, Dell earned good profit but if the customers
opted for a basic model, it lost margin because base unit incurred high cost to support the
potential add-ons and it further added to supply chain complexity. In today’s competitive
world, cost trumps speed and flexibility in computer industry and Dell is committed to
leading the industry in delivering equipment “at the lowest total landed cost” anywhere
36
“Can Dell’s Turnaround Strategy Keep HP at Bay?”, available at http://knowledge.wharton.upenn.edu/
article.cfm?articleid=1799, September 5, 2007.
37
Ibid.
38
Mark Hachman (2008), “Dell’s Revamp Could Strip Customers’ PC Option”, available at http://www.pcmag.com/
article2/0,2817,2280994,00.asp, April 2.

Case Study 67
on the globe, said Canon, which led to transformation of its existing model.39 Dell also
felt that there is a large segment of customers who just do not need its traditional supply
chain model and are happy with extended cycle and delivery times and fixed configuration
(Refer Exhibit II for different customer segment of Dell). Dell expected 5% reduction in
total cost as a result of its supply chain transformation when it announced its
transformation of supply chain.40

Exhibit II: Customer Segment for Dell

Different Segments IT Solutions

Large Enterprise Dell’s large enterprise customers include large global and national
corporate businesses. Dell has formed this customer segment to deliver
consistent and cost-effective services and solutions to many of the world’s
largest users. Dell’s effort in this segment is delivering innovative products
and services through data centers and cloud computing solutions.
Small and This segment is focused on helping small and medium-sized businesses get
Medium-Sized the most out of their technology by offering open, capable and affordable
Business solutions, and customizable services and solutions. Dell creates and
delivers small and medium business-specific solutions so that customers
across globe can take advantage of these emerging technologies and grow
their businesses.
Dell’s public customers include healthcare, educational, government and
Public law enforcement agencies. Dell provides them IT solutions and helps
them overcome their urgent IT challenges.
This segment of Dell is focused on what its customers want from the total
Consumer technology experience of entertainment, gaming, mobility and design.
Dell strives to deliver high quality entertainment to its consumers.

Talking about the supply chain transformation at Dell, Canon said that a few years
back, Dell’s supply chain was positioned at a place where most of the companies wanted
to be: “Almost no finished goods or parts inventory, flexibility/the epitome of mass
customization, negative cash-to-cash cycle (paid by customers before paying suppliers),
sophisticated demand management techniques to drive buyers to what was most profitable
or available in terms of PC configuration, cut out the middleman”.41 But now Dell itself
does not want to be there. “Our supply chain needs to change dramatically,” Canon said.42
39
Dan Gilmore (2008), “The New Supply Chain Lessons from Dell”, available at http://www.scdigest.com/assets/
FirstThoughts/08-04-10.php?cid=1609&ctype=content, April 10.
40
Ibid.
41
“The New Supply Chain Lessons from Dell”, available at http://mofeedshareswithu.blogspot.com/2008/04/informa-
tive-bits-and-bytes.html, April 11, 2008.
42
Dan Gilmore (2008), “ The New Supply Chain Lessons from Dell”, available at http://www.scdigest.com/assets/
FirstThoughts/08-04-10.php?cid=1609&ctype=content , April 10.

68 The IUP Journal of Supply Chain Management, Vol. 19, No. 1, 2022
Dell decided to still operate the model for the customers who value it, but at a much
reduced level. Dell has replicated the supply chain model of its competitor which a few
years ago was blamed by most for lagging behind Dell. Dell has transformed from make-
to-order to make-to-stock, some limited last minute configuration changes before
shipping, use of distributors, use of contract manufacturers and low-cost country
production and sales through retail channels.

Drivers of Supply Chain Transformation at Dell

In the interview with Supply Chain Digest, Annette Clayton, Vice-President of global
supply chain operation at Dell, pointed out the main drivers of supply chain
transformation at Dell as:
Ever-Changing Need and Preference of Customers: The computer industry has shifted
from PCs to notebooks which earlier contributed a smaller percent to Dell’s total sales.
The customers no more valued the wide configuration options offered by Dell and also
preferred buying the notebooks through retail more than online. “Customers are telling
us they want more and new ways to purchase our products. We are committed to finding
new ways to reach more customers and this is one example of a new approach”, said a Dell’s
spokeman.43 Further, Dell has also expanded its product offering and now it also provides
IT solutions to its customer by dividing them into four segments (Refer Exhibit II for
details). Hence, to provide the customers the choice which they value the most, Dell had
to improve its supply chain strategy.
Commoditization of Product: According to Annette Clayton, by 2013, $500 products will
approach 50% of the market in computer industry. Hence, Dell decided to remove the
extra cost from its supply chain focus. It had been identifying different sources in its supply
chain to reduce cost with the target of saving $3 bn from various activities by 2011.
Globalization: Dell is expanding more outside the US and had been focusing on
continuous improvement and execution of lean principles. Dell has moved from regional
structure to global structure and has re-aligned itself around three major customer
segments: Public sector, small and medium-sized enterprise, large enterprise and
individual customers. “We have laid the foundation for the transition from a global
business that’s run regionally to businesses that are really globally organized,” said,
Michael Dell.44 It expanded its partner network and leveraged its partner capabilities to
support its global supply chain structure.
Dell had realized that there cannot be a one-size-fits-all supply chain. Since it caters
to different customer segments, including both corporate and individual customers, it
needs to have different supply chain strategies for different customers. According to David
43
Kevin Allison and Chris Nuttal (2007), “Dell to Sell Computers Through Wal-Mart”, available at http://www.ft.com/
cms/s/2/1e0600ec-0a1b-11dc-93ae-000b5df10621.html#axzz1QkcIqAkL, May 24.
44
“Dell Reorganizing Global Structure”, available at http://www.bizjournals.com/austin/stories/2008/12/29/daily24.html,
December 31, 2008.

Case Study 69
Samchi-Levi, the supply chain consultant at Dell, supply chain can be segmented on the
basis of customer value proposition, product characteristic and channel to market.45
Customer Value Proposition: According to Levi, the supply chain strategy is determined
by customer value proposition. He cited examples of the companies where their supply
chain strategy is derived from their customer value proposition (Table 2).

Table 2: Customer Value Proposition of Different Companies

Example Customer Value Proposition Supply Chain Strategy

Zara High Fashion Content Speed to Market

Walmart Everyday Low Pricing Cost Efficiency

Amazon Product Selection and Availability Efficient and Reliable Order Fulfillment

Cisco Product Innovation Efficiency Through Outsourced

Manufacturing and Logistics

Dell Direct Customer Experience Responsiveness Through Configure to Order

Source: Adapted from PPT of Supply Chain Video Cast, “Supply Chain Transformation at Dell” by Simchi Levi

Dell had been following Dell Direct Model to become more responsive through
configure-to-order to match its customer value proposition, which was all about customer
experience. But Dell realized that customers no more value the wide range of configuration
offered by it and cost became the competitive edge in computer industry. Talking about
the supply chain strategy Scott Brown, Manager of supply chain analysis and design of
Plexus Corporation, said, “What is needed is the ability to segment your markets into the
needs of those markets and design the supply chain that provides the value the customer
is looking for”.46
Channel Type: Levi in his presentation stated that the sales channels, retail and online,
require different supply chain strategies. He segregated the retail and online channels
(Table 3).
Product Varieties: Supply chain strategy also differs for different products. Some products
need pull strategy, while some products need push strategy. For the products being sold
online, Dell adopted pull strategy, while for the products sold through retail channels, it
adopted push strategy. The pull strategy adopted for online sale helped Dell to become
more responsive, shorten lead time, and in on-time order fulfillment. This strategy was
apt for the customized product since it has high margin. On the other hand, for the
standardized product sold through retail channel, Dell adopted push strategy to minimize
45
“The Dell Supply Chain Transformation”, available at http://www.sctvchannel.com/webinars/videocast3.php?
cid=4186&ctype=content&CntID=MTk1NjU3fDEzMDk1MTYwMjY=, March 16, 2011.
46
“Readers Respond: New Supply Chain Lessons from Dell”, available at http://www.scdigest.com/assets/FirstThoughts/
08-05-02.php, May 2, 2008.

70 The IUP Journal of Supply Chain Management, Vol. 19, No. 1, 2022
 Table 3: Difference Between Retail and Online Channels
Channel Retail Online
Product Variety Low High
Customization Limited High
Forecast Accuracy High Low
Volume by Configuration High Low
Cost of Lost Sales Low High
PC-Retail PC-Direct
Source: Adapted from PPT of Supply Chain Video Cast, “Supply Chain Transformation at Dell” by Simchi Levi

product cost and compete on price. This is also on the basis of the Supply Chain Strategy
framework given by Marshall L Fisher in his article, “What Is the Right Supply Chain for
Your Product?”, where he argued that different products (functional products and
innovative products) need different supply chains. The efficient supply chain (push) is a
perfect match for functional products, while it is not suitable for innovative products, and
responsive supply chain (pull) is apt for innovative products, while it is a mismatch for
functional products. Similarly, the products sold through online versus retail differ from
each other on various dimensions (Refer Table 3) and hence require different supply
chains. Emphasizing the need for different supply chains for different products Simchi-
Levi, said that even the companies which sell their products through single channel
needed different supply chains for different products. For example, Amazon sells its
products through single channel, but the products are very different in their
characteristics: low volume, high volume, slow moving products, and fast moving
products, and each of these product categories requires different supply chain strategies.47
Similarly, Levi stated the need for different supply chains for corporate customers and
individual customers of Dell (Table 4). Both the customer segments require different
supply chain strategies because they differ on the dimensions given in Figure 1.

Table 4: Difference in Supply Chain Strategy for Corporate Customer

and Individual Customer
Customers Corporate Individual

Product Variety Customized High

Product Design For Client Market

Forecast Accuracy High Low

Volume by Product High Low

Customer Relationship Tight Loose

47
“Clayton Discusses Role of Dell’s Program Management Office, How Company Handle Change Management and
More”, available at http://www.scdigest.com/ontarget/11-04-05-2.php?cid=4398, April 5, 2011.

Case Study 71
 Figure 1: The PC Industry – Retail Versus Online

Retail Channel Online Channel

Efficient Supply Chain Match Mismatch

Responsive Supply Chain Mismatch Match

Source: Adapted from Simchi-Levi

Dell segmented its supply chain on the basis of its customers and channels (retail and
online). But there were questions as to whether this strategy will even complicate its
supply chains. Dell took advantage of synergies across different segments which reduced
complexity and it also benefitted from the economies of scale and scope. For example, Dell
used the same infrastructure for its different supply chains.
Annette Clayton said that supply chain transformation at Dell is end-to-end. They
have tried to map the voice of customers into their supply chain strategy. Dell has broken
its supply chain into a few simple supply chains catering to the needs of different
customers. Dell has almost two billion customer interaction every year and it has leveraged
this information to deliver customers what they value the most. Dell’s customer-centric
approach bagged it Forrester Research’s prestigious “Voice of the Customer” Award.48
Talking about this prestigious award, Gary Fox, Dell Director global customer experience,
said, “Forrester’s recognition underscores Dell’s overarching commitment to customers”.49
He further stated, “we understand that our company’s continued success is based on a
common theme—putting customers at the heart of everything we do. How customers use
their technology to grow and succeed is at the center of why we exist”.50 Dell used voice
of customers to segment its supply chain which is explained in the given metric
(Figure 2).
At Dell, supply chain segmentation is done on the basis of location of push or pull
horizon within each supply chain, the lead time from customer order to delivery, and
number of choices available to the customers and also the warranty and service processes.
According to new segmented supply chain, the customers will have wide options. The
customers with specific needs can choose configurable products. Those customers who
48
“Dell Earns Forrester Research’s Prestigious ‘Voice of the Customer’ Award”, available at http://allenmireles.com/
blog/sharing-social-media/, July 2, 2010.
49
“Forrester Research Announces Voice of the Customer Award Winner”, available at http://www.forrester.com/
ER/Press/Release/0,1769,1342,00.html, June 29, 2010.
50
“Dell Earns Forrester Research’s Prestigious ‘Voice of the Customer’ Award”, available at http://allenmireles.com/
blog/sharing-social-media/, July 2, 2010.

72 The IUP Journal of Supply Chain Management, Vol. 19, No. 1, 2022
 Figure 2: Quality Function Deployment Matrix

Voice of the Customer

I want a When can I buy My order My order I got it I get

product, I get it? from is “in is “in and use support.
service Dell production.” transit.” it.

Global
Demand Online Build to Multiple
Planning Stock Transportation Modes
Product Warranty
Design
World-Class
Purchasing Sales Build to
and Supply Agent Plan Partner Network
Management Customer
Care
World-Class Build to Customization and
Retail
Preconfigured

Partner Personalization
Configured

Order
Customer

Relationships
by Dell

Technical
Customer Distributor Configure Supply Chain Support
Commitments or to Order Service Options
VAR

Cost-to-Serve Financials

Data and Tools

Source: Adapted from Dell

want to use Dell as a trusted advisor can choose pre-configured products, customers who
value speed can choose from finished goods inventory or planned production products and
can purchase them either direct or through the retail channel.51 Dell also created a
standard process to introduce new supply chain requirements. It formed “center of
excellence” that takes inputs from marketing, sales and operations, evaluates the customer
benefit and business strategy, and then creates the right changes within product
development and supply chain design.52

Outsourcing
As part of supply chain transformation, Dell also decided to make greater use of contract
manufacturers to build its computers. Dell’s manufacturing plants were once known for
their cutting-edge efficiency and wide use of automation in delivery parts and moving
finished goods across work cells.53 Dell had been using Asian-based contract manufacturer
51
“Dell Supply Chain Transformation”, available at http://www.supplychainknowledge.asia/articles/20110208_2,
February 22, 2011.
52
Mathew Davis, “Case Study for Supply Chain Leaders : Dell’s Transformative Journey Through Supply Chain
Segmentation”, available at www.jda.com/file_bin/casestudies/Gartner_Dell_Private.pdf
53
“Dell Continues Its Supply Chain Transformation with Plans to Sell All Remaining Factories to Contract
Manufacturers”, available at http://www.opssession.blogspot.com/, September 24, 2008.

Case Study 73
for the first stage production of its notebook computers, but the final options were added at
Dell-owned factory. This approach was termed as “Two touch”, since it used two factories.54
This approach involved extra manufacturing and logistic cost which was absorbed by Dell’s fat
profit margin for many years. But due to change in market condition from high to low margin
and rapid shift from computers to notebooks, this two-touch process became a financial burden
for Dell when notebooks were a small percent of sales. For the production of PC, Dell used
its own factory situated in Texas, Tennessee, North Carolina, Florida, Ireland, India, China,
Brazil, Malaysia and Lodz, Poland. Dell decided to shop these factories to contract
manufacturers, following the footsteps of its competitors like HP which builds less than 50%
of its own PCs and laptops.55 Mostly, companies in high-tech world outsource their production
processes to reduce fixed assets and fixed supply chain cost and enhance overall flexibility.
Other reason for outsourcing is that companies want to concentrate on their core competency
and do not want to devote their resources for manufacturing expertise.
According to The Wall Street Journal, “Contract manufacturers can generally produce
computers more cheaply because their entire operations are narrowly focused on finding
efficiencies in manufacturing, as opposed to large firms like Dell, which must also balance
marketing and other considerations”.56 Commenting on Dell’s use of contract manufacturer,
Michael Canon, said that Dell is committed to leading the industry in delivering
equipment “at the lowest total landed cost” anywhere on the globe and obviously greater
use of outsourcing and the flexibility that it brings is a key part of that strategy.57 The use
of contract manufacturer and other related moves would reduce supply chain costs at Dell
by some $3 bn annually, said, Dell.58 Brian Galdden, Dell CFO, said, “The cost actions we
took this past year made us more competitive and delivered value to customers in a
challenging economic environment, in fact, we now have a clear view to additional
opportunities, and are raising our cost-reduction target to $4 bn”.59 Canon also stated that
Dell had “underestimated the capabilities of our supply chain partners” such as CMs in
the past. Industry analyst Roger Kay, said, “Dell is following the lead of some rivals as they
spread contracts among manufacturers to get more competitive terms”.60
54
Justin Scheck (2008), “Dell Plans to Sell Factories in Effort to Cut Cost”, available at http://online.wsj.com/
article/SB122058183649202581.html, September 5.
55
“YAY Dell is Going Out of Business!!!”, available at http://killerotakurobots.com/news/yay-dell-is-going-out-of-
buisness/
56
Justin Scheck (2008), “Dell Plans to Sell Factories in Effort to Cut Cost”, available at http://online.wsj.com/
article/SB122058183649202581.html, September 5.
57
“Supply Chain New: Dell Continues Its Supply Chain Transformation with Plans to Potentially Sell All Remain-
ing Factories to Contract Manufacturer”, available at http://www.scdigest.com/assets/On_Target/08-09-09-
4.php?cid=1912&ctype=content, September 9, 2008.
58
Jessica Davis (2009), “Recession Hits Dell in Q4”, available at http://mobile.channelinsider.com/c/a/Dell/Reces-
sion-Hits-Dell-in-Q4/, February 26.
59
Antone Gonsalves (2009), “Dell Cost Cutting $1 Billion as Profit Falls 48%”, available at http://www.inform
ationweek.com/news/hardware/desktop/214700011, February 26.
60
Kirk Ladendorf (2009), “Dell Gets Leaner with Sale of with the Sale of Two Years Old Polish Plant”, available at
http://www.statesman.com/business/dell-gets-leaner-with-sale-of-2-year-96680.html, December 3.

74 The IUP Journal of Supply Chain Management, Vol. 19, No. 1, 2022
 Dell has sold its Austin-based manufacturing plant in 2008 and also announced that
it would transfer the ownership of Lodz plant situated in Poland to Foxconn Technology
Group by 2012. Lodz was Dell’s main manufacturing plant serving Middle East, Africa and
Europe. Dell had been closing its plants around the world with a mission to cut $4 mn
from its operating cost by early 2011.61 Selling of the factories was under the supply chain
transformation strategy of Dell and it started increasing its reliance on contract
manufacturers, something which its competitors did first. “A lot of companies are already
on that model,” said Mike Cannon, Dell’s Production Chief, in an interview earlier this year.
“We’re playing catch-up there.” Commenting on the wide use contract manufacturer and
selling of its production plant, Frink said, “It is part of our ongoing effort to become more
efficient, the intent is to leverage the capabilities of (third-party manufacturers) so we can
direct our resources to other areas of our supply chain so we can innovate and add value”.62
Dell has reported in its annual report that it has reduced fixed costs by selling, closing and
consolidating manufacturing and other facilities, and has moved toward a more variable cost
manufacturing model. Dell has expanded the use of contract manufacturers and manufacturing
outsourcing relationships to achieve its goals of generating cost-efficiencies, better serving its
customers, delivering products faster, and building a world-class supply chain.

Conclusion
Dell had been known for its legendry Dell Direct Model for decades and cited as an
example of supply chain excellence in the entire industry. Its new move to abandon the
direct model and adopt a customer-centric approach to its supply chain strategy had been
a great surprise for everyone. This new strategy of segmenting supply chain according to
different customer segments and different channels is a unique practice which has not
been adopted by any company. Although the need for having different supply chains for
different products has been highlighted by academicians, most of the companies had only
one supply chain for all types of products. The new initiative of Dell of having four types
of supply chain has started showing results. Since its transformation in 2008, it has
achieved 300% reduction in forecasting error, 30% reduction in freight cost and 30%
reduction in manufacturing cost; product availability increased by 37% and order to
delivery improved by 33%. This result shows that Dell is heading towards creating another
example of supply chain excellence. According to Noakes, “Dell’s industry-leading supply
chain history has given us the skills to be agile and flexible. It is this history that provides
the framework and skills to reach the next levels of success and supply chain leadership.”

Reference # 34J-2022-03-03-02
61
Kirk Ladendorf (2000), “Dell Gets Leaner with Sale of with the Sale of Two Years Old Polish Plant”, available at
http://www.statesman.com/business/dell-gets-leaner-with-sale-of-2-year-96680.html, December 3.
62
John Paczkowski (2009), “Dell Polishes Off Polish Ops”, available at http://allthingsd.com/20091203/dell-polishes-
off-polish-ops/, December 3.

Case Study 75
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prohibited without permission.