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First Thoughts
  By Dan Gilmore - Editor-in-Chief  
     
   
  April 10, 2008  
     
 

The New Supply Chain Lessons from Dell

 
 

Something quite extraordinary happened last week, and it has received relatively little attention from the supply chain world.

The headline news is that Dell is closing its world famous Topfer PC plant in Austin, TX, named for Mort Topfer, an ex-Motorola executive who in the mid-1990s became vice chairman and helped lead Dell out of an earlier slump.

Gilmore Says:
It’s “Back to the Future,” in a very real sense. Just a few years ago, Dell was positioned as the supply chain place where most of us needed to be.

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To put it simply, Dell is significantly revamping its entire supply chain strategy and, in large measure, abandoning its make-to-order model. In addition, it will begin to make much greater use of contract manufacturers for the first time.

The strategy was outlined in a presentation by Mike Cannon, President of Global Operations – what is, in essence, a chief supply chain officer role. Interestingly, Cannon was previously CEO of contract manufacturer Solectron. Also interesting is that Cannon’s presentation started the meeting off – a pretty good indication of how important and dramatic these changes are.

I must admit to feeling that I made a good call with my column Time for New Supply Chain Icons in 2006, which said for many reasons we needed to look beyond the always cited Wal-Mart and Dell.

As Cannon noted, the Dell build-to-order and “do it all ourselves” model served the company well for almost 20 years, but “the environment has changed.”

I was debating whether to save this for the end, but I’ll say it now. It’s “Back to the Future,” in a very real sense. Just a few years ago, Dell was positioned as the supply chain place where most of us needed to be: almost no finished goods or parts inventory; negative cash-to-cash cycle (paid by customers before paying suppliers); “have it your way” flexibility/the epitome of mass customization; sophisticated demand management techniques to drive buyers to what was most profitable or available in terms of PC configs; cut out the middleman.

Now, it appears, Dell itself doesn’t want to be there.

“Our supply chain needs to change dramatically,” Cannon said.

So I guess we can stop chasing the vision too, in part. Dell will still operate that model for the customers who value it, but obviously at very reduced levels (i.e., like a whole Austin plant’s worth), but its now more replicating the supply chains of its competitors, which just a few years ago were lambasted by most for being so far behind Dell: make-to-stock with some limited last minute config changes before shipping, often by distributors; use of contract manufacturers and low-cost country production; sales through retail channels.

Cannon certainly made a strong case.

Dell’s approach added a lot of complexity – and cost. He said, for example, that for many models, there were as many as 500,000 configuration options, though of course nowhere near that many were actually ordered.

Why do that? “Because we could,” Cannon said. “We had a very flexible supply chain that allowed us to offer that level of configuration choice.”

That approach, contrary to popular belief, in turn actually led to higher product costs in many cases. Here’s how. Base/entry models had to be built in a way that permitted all these add-ons to much higher end models. So, if/when customers configured their way up to a high-end unit, Dell made good money. But if a customer stayed with a basic offering, the company lost margin because the base unit versus the competition had extra costs to support the potential of high-end add-ons. And it certainly added to overall supply chain complexity.

One could say that the essence of Cannon’s comments and strategy is that now, in the computer world, cost trumps speed and flexibility. He said Dell is committed to leading the industry in delivering equipment “at the lowest total landed cost” anywhere on the globe. “That’s what drives our supply chain decisions,” Cannon stated.

That clearly means, in part, production in low-cost countries, not Austin. And the company believes there are a large segment of customers who just don’t need Dell’s traditional supply chain model.

“They are very happy with fixed configurations and extended cycle and delivery times,” Cannon said.

Dell has said it believes it can save $3 billion annually from various measures, and Cannon said most of that will come out of these changes to the supply chain over the next 2-3 years. It had sales of $61 billion last year, so that’s about a 5% reduction in total costs.

Like a growing parade of other companies, it also sees its future growth tied heavily to developing markets – where the price/cost structure must be radically different (See End of a Supply Chain Era).

When asked what his biggest insight was upon joining Dell about a year ago, Cannon said after a moment’s reflection that “I think we underestimated the capabilities of our supply chain partners.”

He said the company, understandably, in recent years kept trying to incrementally improve its existing model that had led it to market leadership. In reality, the model needed to be substantially transformed – or one might say blown up.

I have a number of other thoughts here, but am out of space. In next Tuesday’s SCDigest On-Target edition, we’ll run a transcript of Cannon’s full comments under our Manufacturing section. I’d love now or then to get your thoughts on this.

It’s another end of an era, though one we’ve seen coming for some time. It’s Back to the Future indeed. Dell is now like the rest of us.

What is your take on Dell’s dramatic supply chain strategy shift? What are the lessons for the broader supply chain? Are they making the right moves, given the times?

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