13 January, 2009
Successful Supply Chains
It seems that supply chain management has become one of the most essential, and yet,
very controversial topics in modern business planning and development. Scholars argue that
well managed supply chains are the driving force of any successful company. In this case we
shall review and discuss Dell’s supply chain management techniques.
In this case Dell can be viewed from two sides, represented by two different time
periods. The first is before April 2008, and the second one – after that. What does April 2008
indicate? It was the beginning of the end of the mass customization model. As announced by
Dell, mass customization has been their guiding light for almost 20 years now. However, it
seems that according to Mike Cannon, President of Global Operations at Dell –which is, in
essence, a chief supply officer role, Dell needs a change. The change has to be not only in their
manufacturing model, but as well as in their supply chain.
According to Jay Heizer and Barry Render, a successful supply chain is one that can
“enable effective communication amongst members by sharing information and engaging in joint
forecasting of sales” There are three aspects of a successful supply chain, which are: forecast
sharing, real time order status determination, and last but not least, partners sharing inventory
data. These criteria suggest a so called “Virtual” supply chain. This means that there are no
physical facilities taking care of the raw materials or semifinished goods. Instead, they get
delivered upon request. Jeremy Hammant offers the following definition of a virtual supply chain:
“[Virtual] supply chains [are] made up of loose affiliations of companies, organized as a supply
network, where physical assets are replaced by information.
Scholars suggest that we have entered the age of “virtual vs. vertical.” Their argument is
that it is not about who is bigger, anymore, but rather who is faster. Or as quoted by Mr.
Hammant, “the fast eats the slow.” Dell has proven that it’s been the fastest in the last 20 years,
utilizing its stateoftheart supply chain. However, times have come that customer demands are
being met by competition because of the huge variety of manufacturers, and thus products.
Therefore, Dell’s top management have realized that the company should reduce costs.
McKinsey & Co. have identified several grave problems affecting the supply chain of
almost every high tech manufacturer. When building a large, and sophisticated electronic
information exchange system, one cannot omit the fact that even though the system is efficient,
it is not effective enough, from employee stand point. The systems are so complex, that very
often employees have to be educated additionally how to use it, which costs money and labor
time. Dell has automated everything to the smallest resistor. Electronic signature cards and
request forms minimize the complexity of the system. The article provided by McKinsey also
suggests that large hightech manufacturers face a problem with forecasting precision, which is
caused by ever increasing volumes and unlimited array of customer preferences. Dell however
is proud to announce that they spend tens of millions dollars on research and forecasting. This
aids the company by ensuring precision in their forecasting models. R&D at Dell also takes care
of the data quality and seamless exchange of it. For example, Intel knows exactly how many
chips Dell is going to need every single day, and they have known it in advance, so that they
can meet the demand. This of course eliminates storage and large inventories that are hard to
liquidate if necessary. Dell has also established deep and trusty relationships with its suppliers,
so that an environment of trust and mutual understanding and anticipation can be created,
which also makes both supplier’s and manufacturer’s lives easier.
Nevertheless, even Dell has been experiencing problems in the past year. As I
mentioned earlier, April 2008 marked the beginning of the end of the mass customization model.
Mike Cannon announced that this model is now too costly and there is simply not enough
demand for it. One would doubtfully ask, exactly how much has demand shrunk for Dell? The
answer is: enough to close the Austin, TX plant, which was the largest one, and move the
European station from Ireland to Poland. Mike Cannon does not refute the supply chain model
that the company currently uses, however he claims that “[Dell’s] supply chain needs to change
dramatically.” The past supply chain model, Canon said, cost Dell more than 3 billion dollars,
which could be saved if the supply chain gets redesigned. In other words, top managers have
realized that vertical supply chain is bad, condemning ownership of all supply chain aspects, like
Henry Ford suggested over 100 years ago, but they have also realized that purely virtual supply
chain is even worse, because it is too hard to coordinate, despite of its flexibility. Therefore, Dell
have decided to follow their competitors’ supply chain models, which is frequent orders of
offshore low cost components, and maintaining some inventories. Mike Cannon has announced
that Dell is going to follow a cost strategy, rather than differentiation. “[Dell] also sees its future
growth tied heavily to developing markets – where the price/cost structure must be radically
different. Of course, Dell is not giving up its loyal customers; however it will shrink this model
from 500,000 separate configuration options to about 150,000. As mentioned above, this action
will save Dell more than 3 billion USD.
We have observed a radical change in supply chain organization. First, Henry Ford
suggested purely vertical supply chain – owning all the resources needed for production. Later,