Build-To-Order
Model For Success (Part-II)
Dell’s
strategy for balancing demand and supply
Dell
Computer Corp. Texas, USA, owes its success to its famous
build-to-order model. Dell’s focus on driving down
material costs and maintaining a lean inventory has given
it a clear competitive advantage over its competitors. This
article discusses Dell’s supplier base and the strategy
it follows for maintaining the balance between demand and
supply.
Tight
supplier base
Dell
has a tightly knit supplier base, which actively participates
in inventory management. The portal, valuechain.dell.com
(valuechain.dell.com acts a secure extranet for Dell suppliers
to collaborate in managing the supply chain) provides suppliers
a customised view of their materials at Dell. It also shows
reports on material quality, performance management scorecards,
negotiated and forecasted cost reports, engineering change
orders, supply/demand forecasting tools and views of material
demand. About 50% of Dell’s suppliers contribute
to 95% of its total material costs. Dell transacts business
several times everyday with almost of these 50 top suppliers.
Only two or three top suppliers have changed in the last
three years. Dell is also encouraging its suppliers to automate
their systems to enhance the speed of real-time transactions.
Automation
Almost
all Dell’s internal processes are automated. Its transactional
data moves back and forth over the Internet. From the long
term planning data (demand forecast over the next 4 to 12
weeks) to the two-hourly order executions, which make automatic
replenishment requests, every supplier can access the order
information through the web.
Managing
supply
i2 technologies
software enables Dell to monitor the supply position of
every part. If any part is in short supply due to greater
demand, first it tries to solve the supply problem first.
Dell checks with its supplier to find out if he can increase
supply of this part in the next shipment. If the part in
short supply is a generic one - example a hard drive,
it checks with alternate suppliers. Once the supply options
are exhausted Dell approaches its sales and marketing team
to check if the demand can be moved to some other products.
Since
Dell has access to real time information it carries out
these strategic moves within a few hours.
Dell communicates with at least 10,000 plus customers every
day. This gives 10,000 opportunities to balance the
demand and supply. Dell has a website Dell.com which enables
customers to place their orders online. If Dell is running
short on a particular product it informs its sales department
to move the demand to the products that are available. This
is done by altering lead times or carrying out promotional
sales.
Example,
if Dell is short on 17-inch monitors it could offer 19-inch
model at a lower price or even at the 17- inch price. The
ability to alter pricing and product mixes in real time
gives Dell a clear competitive advantage. Dell’s competitors
who depend on retail channels cannot manage the demand as
it does.
Excess
inventory
Dell’s
build-to-order model ensures that a system hardwired computer
is built only after an order is placed. Its relentless focus
on maintaining a continuous balance between supply and demand
helps minimising excess and obsolete inventory. Dell incurs
a loss between 0.05% to 1% worth of total material costs
while its competitors are estimated to write off 2% to 3%
worth of total material costs in excess and obsolete inventory.
Dell’s system ensures that it never has months of inventory
anywhere. If it observes a slacking of demand even over
2 days it pro-activates corrective measures to balance the
demand and supply. On products, which have reached an end-of-life
stage, Dell fixes a number and builds only that number of
a particular model, thereby ensuring minimum loss due to
obsolete parts inventory.
Dell’s
strategy of focusing on low material costs, lean inventory,
real-time transactions, balancing demand and supply and
minimising excess and obsolete inventory has enabled it
to emerge as a clear winner. It is however, still looking
at further methods of reducing inventory and refining its
supply chain processes.
Related
Reading:
- Dell.com
- i2.com
- Business Week
