Supply Chain Integration:

Improving The Flexibility Of The Desktop PC

Supply Chain

GROUP 2
 Computers In General:
• The first successfully sold desktop was Apple II introduced by Apple Computer in 1977 and the
first commercially available portable computer was Osborne 1 in 1981
DELL:
• Dell was started by Michael Dell in his dorm room at the University of Texas in 1984
• It used the direct model of eliminating the retailers from the sales channel and selling directly
to the customers with the aim of delivering customised systems to customers at lower than
average market price
• In 1993, Dell was among the top 5 computer system makers worldwide
• In 2001, it became the leader in computer systems worldwide
• Three major manufacturing facilities:
– Austin, Texas
– Nashville, Tennessee
– Winston-Salem, North Carolina
• Dell’s Revenue for the last 4 quarters(2005) totaled $ 56 billion and employed 65,200 employees
worldwide.
CURRENT PORTFOLIO:
• Desktop computers
• Notebook computers
• Network servers
• Workstations
• Storage products
• LCD TVs
• Printers
• Projectors
• Handhelds
DELL’S SUCCESS IS A COMBINATION OF:

• Direct Sales Model

• Inventory Management (Minimum Inventory Counts)
• Supplier Integration

TOGETHER, THESE ALLOW FOR MAXIMUM EFFECTIVENESS

WITH MINIMUM COST.
• Mass customization (end result: Delivers exactly what
the customer wants)
• Partnerships with suppliers
• Direct sales
• Customer service
• Dell’s direct model departed from the industry’s historical standards on several
fronts:
 The company outsourced all components but performed assembly

 It eliminated retailers and shipped directly from its factories to end

customers

 It took customized orders for hardware and software over the phone or via
the internet

 It designed an integrated supply chain linking Dell’s suppliers very closely to

its assembly factories and order-intake systems
CRITICAL COMPONENTS OF A DESKTOP PC AND MAJOR
COMPONENT MANUFACTURERS
MANUFACTURING
LEVELS
PROCESS DEFINING L5 AND L6: AN OVERVIEW OF
THE RELATED SUPPLY CHAINS
Q1. WHY DOES L5 INCUR HIGHER MANUFACTURING
AND LOGISTICS COSTS THAN L6?
 Dell’s inability to provide Mother Boards (MBs) in a timely fashion to Contract
Manufacturers(CMs) forces it to switch to L5 manufacturing.

 These situations occur when -

 Chipset supplier de-commits or supply issues
 Quality/Engineering Issues
 Dell Forecast Accuracy
 New Product Introduction

All of the above situations creates an ADDITIONAL UNEXPECTED DEMAND of

MBs that were not part of agreed forecast.
 Q1. WHY DOES L5 INCUR HIGHER MANUFACTURING
AND LOGISTICS COSTS THAN L6? (CONTD…)
EFFECT: Forces Dell to switch to L5 Manufacturing where –

 MANY STAKEHOLDERS ‘TOUCH’ THE PROCESS i.e. TOO MUCH MOVEMENT

OF INVENTORY: Contract Manufacturers, SLC management, 3PI staff, CM staff
managing the 3PI production, Dell factory associates and engineers.

 TOO MANY COOKS IN THE KITCHEN SITUATION : Many changing hands

handling the inventory => More complex processes => increased management issues,
confusions, frustrating situations and last minute fires related to MB quality issues.

OVERALL EFFECT : Increased manufacturing time and costs, logistics time, lead time,
and difficulty in managing overheads in L5.
WHAT ARE THE COST THAT INCURRED IN L5 AND NOT IN
L6?
 Cost of integration with 3PI which includes:
 Management and collaboration overheads as stakeholders
involved increases
 Inventory movement/Logistic cost between SLC and 3PI site
 Local (US) Integration Cost – i.e. integrating the components -
 Chassis
 Floppy disk drive
 Fan/Heat sink
 Power supply

INCREASED LOCAL LABOUR COST WHICH IS

ALSO MORE EXPENSIVE
 In L5, EXTRA AND SEPARATE LOGISTICAL
COSTS - PACKAGING, TRANSPORTATION and
INVENTORY HOLDING COSTS of MBs (shipped by
air) and Chassis (shipped on water) => Therefore,
increased MB air-freighting costs.
 WHAT ARE THE COST THAT INCURRED ONLY IN L6 AND
NOT IN L5?
 In L6, 3PI related costs are eliminated as integration is done offshore and outside Dell
Facility (in China)

 So, the New Additional Cost in L6 is the CHINA INTEGRATION COST done by a CM.
This is, however, cheaper than local integration in L5.

 Also, more motherboards need to be reworked in the event of a

MB Engineering Change Notice
 Q2: WHICH OF THE SIX MANUFACTURING SOLUTIONS SHOULD DELL
IMPLEMENT BASED ON THE SURVEY RESULT? WHY?
• Based on the survey result, Dell should implement OPTION 4 which is DELL-MANAGED 3PI. The
Project study mainly talks about DAO (Dell American Operations) and Factory operational
improvement and not about increasing the demand forecasting abilities.

• These qualities will be purely shown by the complexity of 3 things:

a) Operations
b) DAO Quality
c) Process Engineering
• The COMPLEXITY SCORE of option 4 in the above
MENTIONED STANDARDS IS THE LOWEST.
It equals OPTION 5 in these three standard
but loose out on the other standard.

• Also the cost per box for OPTION 4 is $7.61 WHICH IS NOT SO HIGH AS COMPARED FOR THE
NEXT BEST OPTION which is option 3A (Integration at SLC/hub)

• Both cost and complexity is lower in Option 4 vs Option 1, that is, in the current option (Worldwide and
Regional Procurement is easier as no dependence on 3PI managed by CM)
COMPLEXITY ANALYSIS
 PROS AND CONS FOR OPTION 4
PROS:
• The BIGGEST ADVANTAGE that Dell will get is that it will have a DIRECT AND FULL CONTROL over the 3PI
(Third Party Integration). This leads to REDUCED LOGISTICS COSTS and BACKLOGS DUE TO THE 3RD
PARTY INTEGRATION

• Since Dell will NOT BE NEEDING TO DEVELOP A HUGE INFRASTRUCTURE, the manufacturing
infrastructure will be low in the process, therefore LESS CAPITAL EXPENDITURE. This will also mean less
impact on the supply chain and lead time.

• LEAD TIME FOR PRODUCT DELIVERY AND COMPLEXITY DECREASES

as touch points reduces (since less stakeholders touching the process and less movement of inventory)

• DAO QUALITY IMPROVES as 3PI is managed by Dell

and not by OEMs, therefore quality control is better.
• Less manufacturing infrastructure change required, less impact on existing Supply Chain Network

• A self owned 3PI will also imply effective quality control as ownership is in Dell’s hand. As More Clear Definition of
Quality Ownership is possible => Dell will possess greater opportunity to deal with product quality related issues.

• OPTION 4 ALLOWS DELL TO FOCUS ON MORE VALUE ADDING PORTION OF MB-CHASSIS

INTEGRATION
 PROS AND CONS FOR OPTION 4
CONS:

• Since the 3PI is managed directly by Dell, CONTROL PROCESSES

(PRODUCTION, INVENTORY, and ACCOUNTING CONTROL) INCREASES.

• In particular, Most Complex for Accounting

and Inventory Control.
This option makes it difficult to manage
inventory cost at a Dell-managed 3PI

NET CONCLUSION BASED ON PROS AND CONS -

Option 4 enables Dell to focus on the more value-

added portion of the MB-chassis Integration
 Q3: How Easily Sustainable Is Your Recommendation For The
Previous Question If Chipset Shortage Further Deteriorates?
• If we look at the problem (operational complexity) presented in the
case, option 4 ( Dell managed 3PI) most reliably solves the these issues

• However, if a problem like acute chipset shortage crops up, none of the
options provided ( including option 4) will be easily sustainable

• This is because the chipset integration with the motherboard occurs

before the L5 and L6 manufacturing stages

• Thus when a chipset shortage occurs, no matter what option we choose,

a delay in production of the desktop will occur since the motherboard
cannot be manufactured without the chipset (produced by companies
like Intel, AMD)
Q3: How easily sustainable is your recommendation for the previous
question if chipset shortage further deteriorates? (CONTD..)

• In the case when Dell manages the 3 PI (option 4), Dell directly interacts with the
suppliers and contract manufacturers

• Hence, it is easier to control and manage inventory and thus, take care of any
kind of supply shortfalls
• Eventually, if we had to choose an option in case of chipset shortage,
the better option would have been
option 3A ( integration at SLC/hub)

• This might be because as compared to option 4, 3A has more simpler worldwide

procurement, better regional and global supplier quality engineering which will
allow Dell to manage shortages better by controlling the suppliers. (Note: This
argument is Based On Survey Metrics)
Q4. How good is the methodology employed by the BPI team to determine
the optimal manufacturing option for Dell? Are there more effective
approaches?
• The BPI Team came up with 6 different manufacturing options which were
evaluated on different factors such as Ability To Procure Materials (Both Regional
And Worldwide), Production Control, Operations, Process Engineering, Supplier
Quality & Quantity, Inventory Control, Logistics And Cost Per Box.
• The Adopted Methodology By The BPI Was COMPREHENSIVE as it took into account both -
COMPLEXITY AND COST - which was based on inputs from all Departments/Stakeholders such
as
Operations, Logistics, Quality,& Accounting.
THUS the resulting solutions are very holistic in nature and considered relevant trade-offs between
complexity and cost.

• SOME OTHER EFFECTIVE APPROACHES CAN BE:

• Balanced Push & Pull Supply Chain Strategy Approach
• Strong contractual obligations with the chip manufacturers in order to avoid any
defaults(Parameters like Payment Terms Flexibility, Bulk Purchases etc. could help Dell to be #1
priority for Vendors).
 Q5. HOW CAN DELL EFFECTIVELY ADDRESS THE ROOT CAUSES
CONTRIBUTING TO THE INCREASE OF L5 MANUFACTURING?

• Root Cause for L5: Demand Fluctuations

Dell AMF expenses
from Forecasted Demand
Chipset
• SOLUTION:
supplier
o Ensuring the Chipset supplier don’t decommit or
have any other supply issues (By Better and Stricter
decommit
Contracts Agreements) or supply
o Have Multiple Suppliers/CMs Portfolio issues
o Keeping Buffer stocks (63.5%)
o Forecast accurately to avoid demand fluctuations Quality/engi
by investing in market research neering
o Reduce customization options issues(24.5
%)
 More Recommendations for Future:
PUSH-PULL APPROACH
 Dell’s approach can be as a Push-Pull Strategy and they should refine/develop it further-
 Push Portion (occurs Prior to Assembly)–
 As Component Inventory is managed by Dell
 Company pushes several options to customers, based on options that company could effectively control
 Pull Portion (starts From Assembly)–
 As Final assembly is in response to a specific customer request
 In other words, customer’s choice is pulling demand for Dell

Since Dell has to manage demand fluctuations in the SHORT RUN while maintaining its
capability to fulfill the steady demand => It makes sense for Dell to go for a WELL
BALANCED Push-Pull Supply Chain Strategy in future
=> But in this case, Dell would need to control the options offered to its customer base via its
push strategy which would then drive the pull options for customer.