The plot continues to get more interesting, as a memo from founder and recently re-installed CEO Michael Dell says major changes are underway at the supply chain icon.
In a memo to all employees last week that found its way to various media outlets, Michael Dell says that under the leadership of Michael Cannon, who was named head of global supply chain operations in February (see Dell Names New Supply Chain Chief), Dell will revamp its existing manufacturing, logistics and distribution strategies.
Dell also wrote that “The Direct Model has been a revolution, but is not a religion. We will continue to improve our business model, and go beyond it, to give our customers what they need.”
This statement is being taken as an indication that Dell will eschew sticking with its direct sales model, which accounts for nearly all of its computer sales to both businesses and consumers. In that model, Dell sells to customers directly without intermediaries such as retailers and wholesalers. Orders are placed primarily through Dell’s web site, and computers are built to order. Dell, in turn, uses “demand shaping” strategies and technologies to guide buyers towards models and options for which it has the parts and capacity to deliver immediately.
The model has served Dell extremely well, but the advantages it provides have dissipated in recent years, especially as the cost of components and machines has dropped, making the holding of inventory less costly. Major competitors such as IBM and Lenovo have also made substantial supply chain improvements in recent years to reduce gaps in cost and responsiveness.
What’s more, it is not clear in certain product and geographic markets, such as notebook computers and China, that the direct model is effective enough from a sales perspective. Customers are more concerned about seeing laptops before buying than traditional desktop machines, and cultural and other factors in emerging markets may also favor a retail distribution strategy.
In recent years, Dell has pushed its kiosk strategy in shopping malls, where consumers can see various models before ordering, and has made a few minor retail sales arrangements, such as a small deal with Costco to sell computers from the shelf.
Additionally, in every market there is some segment of consumers which prefers to buy through retail channels. Market observers note that for Dell to re-accelerate its growth, it may need to also tap into this market segment. HP especially has increased its market share versus Dell in the past 12-24 months, relying largely on retail sales.
Such a change would be far reaching for Dell, requiring it to manage inventories far differently than the direct model.