SCDigest editorial staff

The News: In a very interesting quarterly conference call last week, Dell executives cited in part challenges in balancing supply and demand and other supply chain issues in results that disappointed investors.

The Impact: Dell’s challenges show just how hard it is to get demand-supply management right, even for a company almost universally cited for supply chain excellence. It also highlights how difficult it is to remove sales optimism and pressure to meet financial goals from the forecasting process.

The Story: In an extremely interesting quarterly earnings conference call last week, Dell executives, notably CEO Kevin Rollins, cited a number of supply chain related issues as leading to financial results that disappointed Wall Street. (See Dell 2nd quarter earnings call 2006 to listen for yourself. The open question session is where all the interesting discussion takes place.)

It needs to be remember that Dell is still growing nicely and highly profitable. The conference call included some debate about whether or not Dell is losing market share, and if so how much of it is by choice (the statement was made in the call that Dell may be intentionally losing some U.S. consumer market share).

Also true is that Dell’s profit levels have deceased, and the stock has taken a pounding, which always puts tremendous pressure on company execs. Some of this is probably due to a general reduction in the growth of the computer market, but as Rollins stated, “[Dell] can do better. We know that.”

Dell’s CEO then stated that there were problems both on the demand management and supplier/procurement sides.

Specifically, it appears Dell overestimated either market growth or market “elasticity,” leading it to setting lower prices in the quarter to a level that was not made up by a balancing increase in unit growth. Margins took a hit as a result.

We’ve heard Dell executive Dick Hunter several times state that “Sales and Operations Planning [S&OP] is like a religion at Dell.”  Undoubtedly true, but the second quarter shows that even the best S&OP process are subject to challenges. It wasn’t explicitly stated, but the implication was that Dell was over optimistic about unit volume forecasts.

“We don’t think we did a good job on this,” said Rollins. “We were overly aggressive on our pricing in a period of decelerating demand.”

Perhaps more surprisingly, Rollins said Dell has work to do on the procurement side, and has been paying more for key components that it needed to.

Dell is “Not doing a good enough job” in managing component procurement, Rollins said. Specifically cited were opportunities flat panel displays, storage, and memory, as well as challenges in visibility of future component pricing.

He added that the company was undertaking a full review of all Supply Chain and Procurement processes. While he said these processes have historically been very good at Dell, the company may “have reached a point of share and critical mass” that can lead to cost improvements from re-looking at those functions.

In total, Dell executives said they will soon implement changes that will reduce costs be $3 billion annually.