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SCM - Assignment 1

Dell has been able to achieve the lowest inventory levels in the industry through its supply chain strategy of "replacing inventories with information". This allows Dell to maintain only 3 days of inventory compared to 30-90 days for competitors. By sharing order and production information in real-time across its supply chain and building extensive IT systems, Dell is able to customize products only after receiving customer orders. This strategy reduces Dell's costs and risk of obsolescence, allowing it to undercut competitors' prices by 10-15% while converting sales to cash faster than rivals. Dell's supply chain strategy centers around procurement, manufacturing, cash management and overhead efficiency.

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66 views2 pages

SCM - Assignment 1

Dell has been able to achieve the lowest inventory levels in the industry through its supply chain strategy of "replacing inventories with information". This allows Dell to maintain only 3 days of inventory compared to 30-90 days for competitors. By sharing order and production information in real-time across its supply chain and building extensive IT systems, Dell is able to customize products only after receiving customer orders. This strategy reduces Dell's costs and risk of obsolescence, allowing it to undercut competitors' prices by 10-15% while converting sales to cash faster than rivals. Dell's supply chain strategy centers around procurement, manufacturing, cash management and overhead efficiency.

Uploaded by

Poorvi Khare
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Assignment 1 – SCM – SEM 3 -PGDM 2017-19.

Based on below given case, prepare you answer to the questions given at the end.

As Michael Dell has said: “Just as the internet increase customer intimacy, it can also be used
to enhance supplier intimacy”. And “The link between the day-to-day demand trend and the
incoming material is absolutely critical to your success- so the shorter you make that link, the
better off you are.” (Holzner, S., 2006)

Dell has been able to achieve the lowest inventory levels in the industry. In 2004, that was
only three days of inventory on hand, compared to 30, 45, or even 90 days’ worth at
competitors. This is a critical advantage in the computer inventory because it is estimated that
approximately 75% of the revenue is spent on the components. Suppose a machine gives
revenue of USD 500 to the firm; considering the disparity on the obsolescence between Dells
who keeps one week inventory versus other companies that holds four weeks inventory,
following can be observed.

Replacing inventory with information has contributed greatly to Dell’s business model; it is
the cornerstone of their cost structure. Reducing inventory also reduces the need for working
capital. Therefore replacing inventory with information boosts profitability.

The contributions of Dell’s IT investments to the firm’s performance are difficult to


disentangle systematically from the other inputs to production and from the many process
innovations continually made at all stages of the value chain. However, it is clear that IT and
the information it provides, along with process improvement, have contributed to Dell’s
exceptional performance.

Dell accordingly maintains a two percent advantage on the bottom line against competitors.
They neither take the risk of finding buyers after the manufacturing of PCs, nor buys
components before the order is placed by the customer. This concept permits it to be called as
“replacing inventories with information facilitating the cost advantage that may have resulted
through obsolescence.

Dell surpassed its industry peers as they offer its customers a better deal compared to the
deals available from its competitors using a lower cost structure.

According to Kraemer, K.L., Dedrick, J., Yamashiro, S. there are 4 main pillars to Dell
supply chain strategy - I.e., procurement and inventory, manufacturing, cash management,
and administrative overhead.

1. Procurement and inventory: Dell’s days of the inventory dropped from 32 in 1994 to just
6 end of 1998.This inventory level is the lowest in the industry.

This is made possible by the on-line, real-time sharing of information on orders and
production throughout Dell’s supply chain. This extensive and timely sharing of
information through linked computer systems for procurement, supply, and order
fulfilment essentially enables information to substitute for inventory.
2. Manufacturing: Dell’s production cycle time is 7 hours, on average, while its order
turnaround Time is 7 days, on average. The automation of production processes
contributes to the speeded-up cycle times.

3. Cash management: According to CFO Thomas Meredith, Dell has a cash conversion
cycle of - 8 days. This is because Dell often receives payment from a customer on an
order before it pays its suppliers for parts used to fulfill this order. On average, Dell
converts a sales transaction into cash in less than 24 hours (McWilliams, 1997). In con-
trast, indirect PC sellers must buy components to produce PCs, then push the PCs into the
channel and wait for payment.

4. Administrative overhead: While Dell has grown tremendously in revenues, it has


continually reduced its administrative overhead, de fined as SG&A, such that it is among
the most efficient firms in the industry.

Today, a custom order placed at 9 a.m. on a Monday can be on a delivery truck by 9 p.m.
Tuesday. What's more, this speed has allowed Dell to slash inventories and keep parts costs
down so low it can under price its rivals by 10% to 15%. How does the company’s just in
time system deliver lower costs? While machines from Compaq and IBM can languish on
dealer shelves for two months Dell does not start ordering components and assembling
computers until an order is booked. By ordering right before assembly, Dell figures it s parts,
on average, are 60 days newer than those in an IBM or Compaq machine. That can translate
into a 6% profit advantage in components alone. (Williams, G. M, 1997)

Therefore, the advantage will be secure as long as, the suppliers & vendors turn around parts
quickly, suppliers & vendors are in close proximity, and companies have Strong Purchasing
Power. Because parts must be available at very short notice, thus requires strong vendor
relationships with strong contractual agreements on supply. Companies running this system
must have strong purchasing power in order to remain their vendor’s number one priority.

Question –

Write a detailed note giving your perspective on DELLs Supply chain strategy.
(a) what are the important factors for success of Dells strategy ?
(b) what is the impact of Dells supply chain strategy on its business ?

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