Inventory Model at Dell

Based on Paper authored by

Kapuscinski et al.,
In Interfaces, Vol.34, No. 3
Dell Inc.,

Direct sales model

Dell carries very little inventory
Dell has close relationship with
suppliers
Suppliers may carry extra inventory
Dell wants that also to be reduced
Many of the suppliers are located in
Southeast Asia
Revolver inventory

Lead time varies from 7 days to 30

days
To compensate, Dell requires its
suppliers to keep inventory on hand in
the Austin revolvers
These are small warehouses located
within a few miles of Dell’s assemply
plant.
Revolver inventory

Dell does not own the inventory in its

revolvers
It has a special VMI arrangement with
its suppliers
Suppliers decide how much and when
to order
Dell sets target inventory levels
Working of VMI arrangement

Dell withdraws inventory from

revolver on average every two hours
Some commodities are multi-sourced
Dell often withdraws components
from one suppliers for a few days
before switching to other supplier
Suppliers by average send three
times a week to revolver
VMI-working

Dell shares its forecasts with them

once per month
Commodity teams make generic
forecasts for systems and
components
These are then broken down to
specific parts.
Previous practice in determining
target inventory level
Dell had been setting inventory target
levels based on empirical data and
judgment with no clear reference to any
desired service levels.
Dell was interested to study the system
and suggest to reduce the inventory level
Once it determines optimum level, then it
can collaborate with the suppliers through
informational infrastructure.
New approach as developed by the
team
It is with reference to a component –
XDX
Recall SS=Z*SQROOT of LσR 2 +
R2SL2
Golf analogy
A Golf course provides many obstacles
such as sand traps, water hazards etc.,
and all are out of control for the Golfer.
Each hole has a standard or par and that
will not change unless the designers of the
course makes some changes.
The par gives a target for the golfer
Similarly a par can be designed for
inventory: total system par =forecasted
demand for time period*(replenishment
time for the supplier + time between
shipments/2)
Golf analogy

In Golf, a handicap is a measure of a

golfer’s performance relative to an
expected baseline, the par.
As he improves, his or her handicap
score decreases
This Handicap is used for safety
inventory as appropriate term
Handicaps in supply chain

Dell’s handicap-portion of SS required

to cover problems and variance in
Dell ‘s portion of the supply chain
Supplier’s handicap: remaining SS
needed to guard against the
supplier’s failures.
Elements in Dell’s Handicap

Forecast error
Pull variance
Forecast error

Two variances: Aggregate deviations and

attach deviations
The absolute difference between the
number of units actually sold on the
aggregate level and the number forecasted
is called aggregate deviation (in the case of
components it is called attach deviation)
All deviations are converted into variances
Attach variance will be grater than or equal
to aggregate variance
Pull variance

A deviation exists between what Dell

pulls out of the revolver daily and
what the supplier expected Dell would
pull based on the production
schedule.
Pull Variance

Commodity in question is multi-

sourced
Dell will pull components from all
suppliers switching from one to next.
Because of this there is a variability in
inventory level with suppliers.
Dell pulling in batches of different
sizes also result in larger variance.
Example

If each of the 2 suppliers has 50% of

the business, then each would expect
to supply 1000 units during the day.
(Say demand for XDXs is 2000). But
if Dell ignored the ratio, and pulled all
2000 from supplier A and none from
B, it would cause high levels of
forecast error.
Dell’s Handicap

Pull variance inventory

Attach variance inventory
Aggregate variance inventory