Dell Direct Case Study for Supply Chain Management Course, KAIST 2013

1. Supply Chain Management
1
2013.4.18
Susie
Riri
Dell Inc. Case Study : Dell Direct

2. 2
Table of Contents
Storytelling
- History of Dell
- Case Questions
Analysis
- Who is Dell?
- External Analysis
- Internal Analysis
Conclusion
- Summary
- Implications

3. 3
 1976, Stephen Wozniak & Steve Jobs, Apple computer
 1980, IBM, open architecture, off-the-shelf component
- MS Dos from MS
- Intel 8088 microprocessor
- Tandon disk drive
- Computerland and Sears Business as Retailers
 1981, IBM commanded 42% of PC market share while
Apple’s share was driven down to 20%
 Structure of the computer industry
Vertically-integrated corporations -> Horizontal “slices”
Silicon platform | Computer platform | System software | Packaged application
 This structure enabled IBM-PC “clones” like Compaq,
Hewlett Packard
 One of them was DELL Computer Corp.
Personal Computer
Storytelling
Questions
Conclusions
Analysis

4. Dell History
$25265M$25265M
Birth &
Childhood
Profitless
Growth
Explosive
Growth
4
‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99
$69.5M$69.5M $546M$546M
$3,475M$3,475M
‘83
Storytelling
Questions
Conclusions
Analysis
Net Revenue(in Million $)

5. Birth &
Childhood
Profitless
Growth
Explosive
Growth
5
‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99‘83
Storytelling
Questions
Conclusions
Analysis
Net Income(in Million $)
 Dell Corp.
 1983, Founded by 19-year-old
Michael Dell in a dorm
 University of Texas at Austin
 Upgraded IBM-compatible PCs
 Then he assembled entire PC with
15% discount to established brands
Dell : Birth & Childhood (1983 – 1990)

6. Birth &
Childhood
Profitless
Growth
Explosive
Growth
6
‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99‘83
Storytelling
Questions
Conclusions
Analysis
Net Income(in Million $)
Dell : Birth & Childhood (1983 – 1990)
 Support services such as 24-hour
hotline and guaranteed shipment
of replacement part
 Quality at a reasonable price
 Dell grew from nothing to $500M
sales in 1990
 Michael Dell became the richest
person in Texas
 International Expansion to serve to
European, middle eastern and
African markets
Simplicity
Efficiency
Agility
Simplicity
Efficiency
Agility

7. Birth &
Childhood
Profitless
Growth
Explosive
Growth
7
‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99‘83
Storytelling
Questions
Conclusions
Analysis
Net Income(in Million $)
 Dell’s model being
imitated by other
 Entering Retail
 Booked their first
loss in 93’
Dell : Profitless Growth (1990 – 1994)

8. Dell History
Birth &
Childhood
Profitless
Growth
Explosive
Growth
8
‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99‘83
Storytelling
Questions
Conclusions
Analysis
Net Income(in Million $)
 Launching www.dell.com
“We think about internet commerce as a
logical extensions of our direct
model…..Because we’re all about
shrinking the time and the resources it
needs to meet customer’s need….”
“We think about internet commerce as a
logical extensions of our direct
model…..Because we’re all about
shrinking the time and the resources it
needs to meet customer’s need….”
 Internet increased efficiency
of sales process and service
 Extranet to let supplier share
information with Dell

9. 9
Case Questions
 What does Dell do well and where does it struggle?
 What contributed to Dell’s success and rapid growth in the
late 1990’s?
 What is Dell? A computer manufacturer? A consumer
electronics company? An IT service partner? What is their
focus?
 What did Dell do to set itself apart from the competition in
the highly competitive and rapidly evolving personal
computer industry?
 How did Dell segment its customers? What types of
customers? What were they like?
 What are the advantages of this direct marketing and
direct manufacturing model?
Storytelling
Questions
Conclusions
Analysis

10. 10
Analysis : Who? & What problems?
 Who is Dell?
 Computer Manufacturer (Assembler) + IT service partner
 High technology, Short life cycle
 Fast Follower
Storytelling
Questions
Conclusions
Analysis
 Build trust with suppliers…
 Maintain latest technology
 Secure customers (quality, price, service,…)
What’s the issue?

11. 11
Analysis (MECE)
Storytelling
Questions
Conclusions
Analysis
External
Environment
When?
Where?
Why?
How?
Internal
Competence

12. 12
Analysis (MECE)
Storytelling
Questions
Conclusions
Analysis
When?
Where?
Why?
How?
SWOT Analysis

13. 13
External Analysis (PEST)
 When & Where : 1980s~1990s, in U.S.
Category Issue Threats/Opportunities
Political E-government (90s)
Opportunity – Increase in Govt.
spending on IT infra
Economic
U.S. Economic Recovery (80s)
U.S. Economic Boom (90s)
Opportunity – companies and
individuals spend more on IT
Social
Rising incomes and demand for
IT in Asia, Europe, Middle East
Opportunity - ½ of world’s
population, new market
Change from Industrial Society
to Information Society
Opportunity – increasing
demand for servers and network
gear
Technological
Explosion in data information
and content (1PC/1Person) Opportunity – increasing
demand
WWW era opened
Storytelling
Questions
Conclusions
Analysis
Lot’s of
Opportunities!!
Lot’s of
Opportunities!!

14. 14
External Analysis (Porter’s 5 Forces)
Storytelling
Questions
Conclusions
Analysis
 Computer Industry

15. 15
Analysis (MECE)
Storytelling
Questions
Conclusions
Analysis
When?
Where?
Why?
How?
SWOT Analysis

16. 16
Analysis : Internal Analysis (AHP)
Reduce
Channel
Costs
Why?
How?
Minimize
Inventory
Speed of
Execution
(JIT)
Direct
Customer
Relation
Close
Relation
w.
Suppliers
Initiatives
1)Direct Model
2)Customers &
Segmentation
3) WWW
Simplicity, Efficiency, AgilityStorytelling
Questions
Conclusions
Analysis
New Sales
Secure
Customers
Increase
Efficiency
Build Tight
Relations

17. 17
Initiative 1. Dell Direct Model
 Indirect Channels
 Reseller Customized the PC to customer
requirements, installed components and provided
additional service and support
Fig. Corporate PC Sales through Indirect Channels
Based on Forecasting
Storytelling
Questions
Conclusions
Analysis

18. 18
Initiative 1. Dell Direct Model
 Direct Model
 Bypassing the dealer channel, selling directly to
consumer
 Focus on Speed of Execution and Minimum Inventory
 Characteristics of Direct Model
 Eliminate costs & risks of carrying large inventories
 JITM : high velocity, reduced channel costs from 15% to 2% of
production revenue
 Direct customer relationship
 Latest tech. introduced faster than indirect channels
 Use IT to control value chain and achieve a high deg. of
coordination
 Build-to-order
Build-to-Order
Storytelling
Questions
Conclusions
Analysis

19. 19
Initiative 1. Dell Direct Model
Storytelling
Questions
Conclusions
Analysis
Days of supply in Dell’s Inventory

20. 20
Initiative 1. Dell Direct Model
 Manufacturing Process
 No Warehouse Space
 No inventory other than work in process (WIP)
 Components arrive from suppliers just in time for
manufacturing through the factory’s cargo doors
 Manufacturing is synchronized to avoid storing parts or
finished systems
 This needs close relationship with suppliers
 Dell has small number of suppliers
- even reduced number from 204 in 1992 to 47 in 1997
 Trust Manufactures like Sony, Logistics like UPS
• No test time
SS CCMMStorytelling
Questions
Conclusions
Analysis

21. 21
Initiative 1. Dell Direct Model
 Customer Service
 First on-site service for PC’s “We’ll be out tomorrow to fix it”
 1,300 technicians, accessible by phone 24 hours a day
 90% solved by standard troubleshooting procedures
 Employs Third-party maintenance providers like Unisys,
Wang, Decision one consulting and Digital Equipment
 Tight coordination with maintenance providers feels like
Just one large company
 In Computerworld’s 1998 survey Dell ranked first in user
satisfaction followed by Gateway
SS CCMMStorytelling
Questions
Conclusions
Analysis

22. 22
Initiative 1. Dell Direct Model
 Build-to-Order : Pros & Cons
Advantages Disadvantages
Selling direct to customers cuts out
the middleman, which increases
Dell’s margins.
Customers not able to touch and
feel the product, which is a large
ticket purchase
Mass customization using
standard parts allows Dell to
control their costs and enables them
to pass savings to customer.
Build to order requires innovation
and investment in manufacturing
technologies and facilities.
Build to order allows for JIT,
reducing costly inventories of
components, which may quickly
become obsolete.
Competitors are able to outsource
to third party manufactures,
pushing the burden of component
inventory costs onto suppliers.
This strategy can be applied to other competitors?
Does it still work well NOW?
Storytelling
Questions
Conclusions
Analysis

23. 23
Build-to-Order (Now and Then)
Storytelling
Questions
Conclusions
Analysis

24. 24
Analysis : Internal Analysis (AHP)
Reduce
Channel
Costs
Why?
How?
Minimize
Inventory
Speed of
Execution
(JIT)
Direct
Customer
Relation
Close
Relation
w.
Suppliers
Initiatives
1)Direct Model
2)Customers &
Segmentation
3) WWW
Simplicity, Efficiency, AgilityStorytelling
Questions
Conclusions
Analysis
New Sales
Secure
Customers
Increase
Efficiency
Build Tight
Relations

25. 25
Initiative2 : Customer Segmentation
Storytelling
Questions
Conclusions
Analysis

26. 26
Initiative2 : Customer Segmentation
Storytelling
Questions
Conclusions
Analysis
• Dell Focuses on Computer-literate customers
• Targeted segments where revenues could grow faster
than expense
We figured they (competitors) could be the ones to teach
consumers about PCs,while we focused our efforts on more
profitable segments
We figured they (competitors) could be the ones to teach
consumers about PCs,while we focused our efforts on more
profitable segments
• Gold Accounts (sales of $5-$10million) ; Platinum accounts
(sales >$10million)
• Platinum Councils to listen their
customer opinions

27. 27
Initiative3 : WWW
Storytelling
Questions
Conclusions
Analysis
Increased Efficiency of Customer Service
Build Relationship with Supplier (Extranet)
“We think about internet commerce as a logical
extensions of our direct model…..Because we’re all
about shrinking the time and the resources it needs to
meet customer’s need….”
“We think about internet commerce as a logical
extensions of our direct model…..Because we’re all
about shrinking the time and the resources it needs to
meet customer’s need….”
The real potential of internet is its ability to transform
relationships within traditional supply chain and to create
value that can be shared…..
The real potential of internet is its ability to transform
relationships within traditional supply chain and to create
value that can be shared…..
It’s more valuable to be in front with
imperfect internet implementation
rather than to be a late comer with
the perfect website..
It’s more valuable to be in front with
imperfect internet implementation
rather than to be a late comer with
the perfect website..

28. 28
Analysis (MECE)
Storytelling
Questions
Conclusions
Analysis
When?
Where?
Why?
How?
SWOT Analysis

29. 29

30. 30
Summary : Core Competence
Competency Description
Build to order
• Allows for JIT, keeping inventory costs down
• Keeping manufacturing in-house enables control
of quality and faster new product releases
Direct to Sales
• Cuts out retail markup
• Maintain higher profit margins and lower price
Value added
services
• Do not just sell product, sell values
• Proactive in solving clients pain
• Customer services like software downloading
differentiate Dell from competitors in B2B market
Internet Coupled
Biz. Model
• Sell directly to end customers
• Dell was much less mature compare to IBM/HP
when Internal took off, less efforts to adapt system
Storytelling
Questions
Conclusions
Analysis
 IBM and HP’s: product innovation & development
 Dell’s: expertise in assembling and catering business needs
•Yellow: Possible for competitors
•Green: Very difficult

31. 31
Conclusion
Storytelling
Questions
Conclusions
Analysis
• Dell’s Focus on Customer Segmentation
“Behind the simple proposition of direct selling is a complex
infrastructure that dell has developed over 15 years”
“Dell’s service advantage may be a greater differentiator than its
10-15% cost advantage, Dell has everything we want in a tech
company, especially Focus, Dell does nothing but PCs
“Behind the simple proposition of direct selling is a complex
infrastructure that dell has developed over 15 years”
“Dell’s service advantage may be a greater differentiator than its
10-15% cost advantage, Dell has everything we want in a tech
company, especially Focus, Dell does nothing but PCs
“DELL eliminated the need for inventory or middlemen and gave
itself a built-in price advantage, which it in part keeps as
profit and in part passes on to customers.”Fortune 2005
“DELL eliminated the need for inventory or middlemen and gave
itself a built-in price advantage, which it in part keeps as
profit and in part passes on to customers.”Fortune 2005
• Perfected the credo— “Cut out the middleman.”
• Internet as Natural Extension of Business Model

32. 32
Thank You!
“The only constant thing about business is that everything is changing.
We have to take advantage of change and
not let it take advantage of us.”
-Michael Dell-