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April 10, 2008 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

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.

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."

What do you say?

Send us your comments here

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.

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? Let us know your thoughts at the Feedback button below.

Let us know your thoughts.

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Dan Gilmore


Inventory Optimization Videocast Series

Session 1
of the 3-Part
Videocast Series

April 29, 2008

Supply Chain Research - PLEASE HELP

How 3PL/LSP Technology Enablement (or Weakness)
Impacts Outsourcing Decisions/Partnerships

Take the Brief Survey Now.

Receive full report in early May


This Week’s Supply Chain News Bites – Only from SCDigest

April 10, 2008
Supply Chain Graphic of the Week - Impact of Fuel Costs on Manufacturing Decisions

April 10, 2008
Supply Chain by the Numbers: April 10, 2008


It was a fairly bullish week on Wall Street and as a result, our Supply Chain and Logistics stock index had a pretty good week.

SAP led the software group (up 6.7%), followed by Oracle (up 5.1%).  The hardware group met with mixed results with Intermec down 5.9% and Zebra up 3.3%. In the transportation and logistics group, Yellow Roadway was up 9.7% for the week and 11.3% for the quarter.        

See stock report.


Each Week:

-Global Supply Chain
-Distribution/Material Handling
-Trends and Issues

Weekly On-Target Newsletter
April 8, 2008

The Executive View
by Gene Tyndall

Siemens Global Move Points to the Supply Chain Future

World Is More Than Flat, It Is Fast, Cheap, and Out of Control; Bold New Supply Chain Strategies Required

by Gary Girotti

Getting Freight Rate Reductions is Easy - Keeping them is Tougher

Follow These Steps to Ensure You Don’t Encounter Too Much Leakage Between Bids and Reality; Chasing Pennies Instead of Customer Service?


Q. What is the gap in dollars between the value of autos imported into the US versus exported?

A. Click to find the answer below


Reader Question: Can Bucket Brigades Work with Mechanized Order Picking?

Reader Question: Is there a True Global RFID Standard?

See our expert answers at the links above. Share your knowledge or perspective.

Or, ask your question



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New feature - feedback is also published right on the story page, in near real-time. Take a look! Add your comments!

The Feedback continues to come in at high levels and we're really behind again - bear with us. But keep the letters coming!

You’ll find two great letters on our piece on The On-Going Battle over CPFR. That includes our Feedback of the Week from Jeff Harrop of Demand Clarity, who says that CPFR has probably not achieved its initial vision, but that its not the fault of the CPFR model itself. Samsung’s Steven Daugherty agrees, saying don’t blame the tool, look to how trading partner’s are failing to use it well. Both of these are excellent letters.

Richard Murphy of TCLogic adds his comments about the differences between Network Optimization, Simulation, and Inventory Optimization Tools.

Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the Week - On the On-Going Battle over CPFR:

I just noticed your piece on, which included a quote by me from Supply Chain Quarterly. The quote you included was accurate and set in the proper context, which I very much appreciate. However, I just want to elaborate on my position on the whole CPFR issue, as I really don't see it as an "on-going battle" but rather an evolution.

I think the quote by Robert Nardone - "a large part of the problem is simply definitional" - also applies to the word "scaleable." It is my view that the retail supply chain can only become truly demand driven if it is planned in whole from the ultimate customer demand point - item by item, store by store, day by day. When I was commenting on the scalability of CPFR, I was merely trying to say that it does not - as it is currently designed -address this level of operational planning detail. (By another definition of the word scaleable, such as "widespread acceptance and adoption within the CPG industry," my comments really aren't relevant).

However, I don't think it would be appropriate to criticize CPFR for that reason, because it was never designed to go to that level of detail in the first place. It would be like criticizing a submarine because it doesn't fly.

While the operational planning of the consumer products supply chain will continue to reach further toward true demand at the retail shelf, it will ultimately only succeed through close collaboration up and down the supply chain. To that end, I think that collaborative processes like CPFR will ultimately adapt (and scale) to meet the needs of manufacturers, retailers and ultimately customers in the future.

I believe it is possible to acknowledge CPFR's limitations and also be a proponent of supplier-retailer collaboration (which I am). I know from experience that many CPFR "hard liners" don't accept that viewpoint - either you fully accept CPFR, or you're with the terrorists.

My view is that the fundamentals of ECR and CPFR are sound. It's just that when you try to extend those principles to the retail store, it's a whole new ball game - not in terms of complexity, but just the overall size of the planning problem. I think ECR in particular has always been heading toward planning the supply chain from a forecast of true demand at the point of sale - it's just that the computing horsepower wasn't there in the 1990s to make it feasible to implement. But that's starting to change.

If you consider the retail store to be the end of the product flow and the beginning of the information flow in the closed-loop supply chain, the opportunity exists to model the end-to-end movement of goods and share information that is actionable by all partiesin the supply chain (as opposed to just sharing the POS information itself, which is completely useless to a P&G production scheduler, for example). This would make collaboration (via CPFR or any other approach) much simpler, more exception driven and of higher value to the customer.

We're calling the approach Flowcasting, and there are a few companies working on it as we speak - but it's a marathon, not a sprint.

Jeff Harrop
Demand Clarity Inc.

More on CPFR:

I agree with Joe. At its basic level, CPFR is a discussion between vendor and retailer about their collective business performance. It is good sales management and many CPFR tenets can be implemented across nearly all vendor-retailer relationships. Concurrent with Mr. Nardone’s comment, CPFR also can and should be virtuously reinforced through executive-level S&OP.

Problems at the DC or store level are not the fault of the CPFR process; it’s the fault of the trading partners to not examine data exceptions at a granular level. If the data is available, there is no reason to not analyze at the store, item or day level.

The point is utilizing effective exception management to direct the collaboration; many issues are not impactful enough on the business to bring up, and some are serious execution matters that need to be collectively addressed.

Finally, in its original 9-step form, CPFR is scalable beyond the strategic partnership level and should encompass all major trading partners. CPFR can be approached as a spectrum of collaboration levels reliant on each partner’s ability. It absolutely does take customers who are willing to partner and vendors who understand that the supply chain doesn’t end when the truck leaves the dock door.

Steven Daugherty
Director, Supply Chain
Samsung Electronics America

On Network Planning, Simulation, and Network Optimization:

As a provider of an inventory optimization solution, I have a clarification to make regarding how an inventory optimization solution is used, based on the table provided in the article titled, “Supply Chain Network Tools Classification.” The most effective inventory optimization solutions take more into account than being “based on forecast demand,” when determining a stocking strategy. An effective solution should take into account any and all attributes and variables that impact the performance of inventory.

These could include supplier lead-times, variances, trends, business objectives, service level targets, item characteristics, freight policies, minimum order requirements, inventory segmentation, historical demand, etc., etc. Only when a solution can incorporate a more “holistic approach” other than forecast demand, can it be effective in driving the business results that are expected.

Richard Murphy


Q. What is the gap in dollars between the value of autos imported into the US versus exported?

A. About 100 million - imports in 2007 were valued at about $150 billion, versus exports of $50 billion. However, that gap is shrinking, with flat imports and rising exports, as the falling US dollar make imports more expensive and exports less expensive.

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