SCDigest Editorial Staff

Cannon Says:

Another major area we are working on is the design of our supply chain in terms of where we manufacture products. Once again, the governing principle on how we make those decisions - what’s the supply chain that will deliver total lowest landed cost and will delight the customer. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

The following is a continuation of the complete transcript of a presentation Michael Cannon, Dell’s President of Global Operations, made to kick-off a company meeting with stock market analysts two weeks ago. In it, he describes the company’s plan for significant supply chain transformation. Last week, SCDigest Editor Dan Gilmore wrote in his First Thoughts column that these planned changes really do represent the end of an era – Dell is now just like the rest of us (See The New Supply Chain Lessons from Dell).

Michael Cannon’s Presentation (Continued):

That is what drives our supply chain decisions. Where can we go to a supply chain that will deliver total lowest landed cost in every geography and delight the customer while we are doing it. That is how we are making supply chain decisions going forward. 

Let me take you through some of the major initiatives we are working on across the company. You’ve heard us talk about we believe we have a $3 billion a year cost opportunity that on an annualized basis, that we will take out over a period of 2-3 years and you’ll hear those words repeated I’m sure by Don [Carty – CFO] and Michael [Dell – CEO]. 

Here are the major areas where that opportunity is. It starts out with product design. I always keep in mind that in the class of products we manufacture, the building material cost is 80% of the total product cost, in some cases more and in some cases a little less.  So you have the get that absolutely right.  When you look at how the company kind of evolved the product strategy, we had a product strategy where we would design a product for an entry price point and then we would enable that design to be featured up through a very broad range of price bands.  Meaning we would embed a lot of costs in the design for a product at entry level and that basic product could be configured let’s say from a range of $750 all the way up to $2000.  When we are up-selling, that works great.  When we are selling products in the higher price bands, that strategy works great.  Where there is a high degree of customization, it works great. 

Where that model isn’t very efficient is where the customer wants to buy the product at the entry price band, because we had extra cost in the design -thermals, mechanicals, a variety of aspects of the design, so it could be featured up.  So what you will hear going forward - I think you will hear it from the product group guys tomorrow – is our design approach is very fundamentally changed.  We now have specific designs for specific price bands.  We need to make acceptable margin at every price band we offer a product. And that starts out with design.  In some regards that has increased complexity because we have more platforms now. I think that is good complexity, because it helps us make more money.  Consistent with this, we are taking massive amounts of configuration complexity out of the product design and product manufacturing.

(Supply Chain Trends and Issues Article - Continued Below)

I’ll give you an example – a typical desktop program for Dell can have over half a million derivative configurations – half a million.  It’s a staggering number.  We don’t sell half a million configurations. Why did we do that?  Because we could – we had a very flexible supply chain that would allow us to offer that incredible level of configuration complexity and choice. But if customers don’t need that and they are quite happy with fixed configuration and limited configuration, we have to go rip that cost out.  And that is exactly what you are doing. 

While the number of platforms is increasing, in some cases you will see us take configuration complexity from a number like half a million configurations down to something like maybe 20,000, maybe even down 5000. Dramatically different, while we are satisfying the needs of the customer. So that is an opportunity for us to take enormous cost out through that process of more efficient and more targeted designs for the price band and removing complexity that just is a burden to us – it is a burden in [supplier] qualification, it’s a burden in just running the supply chain to handle that level of complexity. 

Another major area of course we are working on is the design of our supply chain in terms of where we manufacture products. Once again, the governing principle on how we make those decisions - what’s the supply chain that will deliver total lowest landed cost and will delight the customer. And you’ve seen us take a painful action on Monday this week where we announced closing our desktop manufacturing operation in Austin, Texas. Very tough decision. And that’s got nothing to do with those people weren’t productive – those people had amazing productivity.  It’s just that for those desktop products, a lower cost supply chain will satisfy the needs of the customer and we need to be migrating in that direction, and I think there is a great deal of opportunity for greater efficiency in how we configure our supply chain. 

You’ll see us partner more. The Dell manufacturing model in the past has been everything pretty much winds up going through a Dell factory.  While we have partners who do various levels of some assemblies for us, it’s all gone through a Dell factory and in some cases it goes through two Dell factories in the supply chain – maybe a factory and maybe a merge center. It’s inefficient. It’s inefficient where customers don’t need that level of customization. So what you will see going forward is we will have more and deeper partnerships with ODMs and EMS companies, where they can satisfy the needs of our customers with the total lowest landed cost, it allows us to be price competitive while we are making satisfactory margins. So we make those decisions very agnostically. 

So now you might ask, well it sounds like you are copying the supply chain of your competitors.  To some degree that is true.  Where there is a low cost supply chain that has been in place and our competitors are enjoying it – I want that supply chain, if that is the best way to satisfy the needs of the customers.

But keep in mind we are still going to keep the capability to do things for our customers that our competitors can’t do, in terms of cycle time, customization.  So we are looking at making these changes without giving up performance that our customers have enjoyed from Dell and capabilities they expect from Dell, but doing it just with a more efficient approach, much more cost-optimized, much more competitive. 

It’s critical this company participates in emerging market growth. All of you know the numbers. That is staggering volume, those people in emerging markets, those average selling prices are not going to be 12-15 hundred dollars, they are going to be lower price units. So it is extraordinarily important that we are able to compete in those emerging markets with the right efficient designs and with a supply chain that is as competitive as anyone’s and hopefully more competitive relative to total cost. That opens up enormous growth opportunity for the company. 

So that is a quick overview of the initiatives. As I say, it is painful work but it is hugely rewarding for shareholders, it enhances our competitiveness and it is absolutely required that we do it.  And I am delighted to lead the organization that I am leading, I think it is going to make us better and more competitive, it will enable us to do more for our customers and we are happy to push on and make a lot of progress in those areas. 

Question from audience: “What were some of the biggest surprises you found when you came, perceptions or misperceptions that you had around our manufacturing and logistics?

I think that we underestimated the capability of our supply chain partners and again what is interesting is I was in the EMS industry for 4 years running Selectron, and that is in kind of the same ecosystem as the ODMs, so I’ve been in that business and I know the capabilities of these companies and what they can do.

I think because we were so inwardly focused on our own model that we didn’t fully appreciate the fact that those industries made tremendous progress over the years in scale and capability and to be terrific partners that we should rely on to do more for us.  And I think that would be probably the biggest thing. 

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