Dell is the largest computer-systems company based on estimates of global market share. It is also the fastest growing of the major computer-systems companies competing in the business, education government and consumer markets. Dell’s product line includes desktop computers, note book computers, network servers, work stations and storage products. Michael Dell founded the company based on the concept of bypassing retailers and selling personal computer systems directly to customers, thereby avoiding the delays and costs of an additional stage in the supply chain.Much of Dell’s superior financial performance can be attributed to its successful implementation of this direct-sales model. While the computer industry has grown tremendously over the past decade, firms in this industry face their own challenges.
First, Rapid changes in technology make holding inventory a huge liability. Many components lose 0. 5 to 2. 0 percent of their value per week and a supply chain packed with yesterday’s technology is nearly worthless. With its direct sales, however, Dell carries very little inventory, the whole organization concentrates on speeding components and products through its supply chain.
Dell delivers new products to market faster than its competitors and does not have to sell old products at a discount, because it has none. Second, the traditional model of vertical integration that the original equipment manufacturers follow to manufacture all of the major components of their products has almost disappeared in the computer industry. Research and development costs are too high and technology changes for one company to sustain leadership in every component of its product lines. Dell has close-relationship agreements with its suppliers that allow them to focus on their specific components.
At the same time, Dell concentrates its research that on customer-focused, collaborative efforts to leverage the collective R and D of its partners Dell management was concerned that, although the ? rm carried almost no inventory, its suppliers might be holding much more inventory than was needed to provide desired customer service. For this reason, Dell asked a team from the Tauber Manufacturing Institute (TMI), a partnership between the engineering and business schools at the University of Michigan, to study this issue.Dell sought recommendations for a sustainable process and decision-support tools for determining optimal levels of component inventory to support the final assembly process . Dell bases its business model on integrating ? ve key strategies: rapid time to volume, products built to order, elimination of reseller markups, superior service and support, and low inventory and capital investment.
We designed our project and the resulting tools to support Dell’s low-inventory and low-capital investment strategy and to extend its impact beyond the plant ? or into the preceding stage of its supply chain. Tom Meredith, at the time chief ? nancial officer, said in the May 18, 1999 earnings conference call:“Customers see no advantage in a manufacturer lowering inventory to six days if there are still 90 days in the supply line. ” Our project was the ? rst step takento combat the “90 days in the supply line.Dell’s supply chain works as follows.
After a customer places an order, either by phone or through the Internet on www. dell. com, Dell processes the order through ? nancial evaluation (credit checking) and con? uration evaluations (checking the feasibility of a speci? c technical con? guration), which takes two to three days, after which it sends the order to one of its manufacturing plants in Austin, Texas. These plants can build, test, and package the product in about eight hours.
The general rule for production and Dell typically plans to ship all orders no later than have days after receipt.There are, however, some exceptions. For example, Dell may manipulate the schedule when there is a need to replace defective units or when facing large customers with special service-level agreements (who have nonstandard quoted manufacturing lead times) for their orders. In most cases, Dell has signi? cantly less time to respond to customers than it takes to transport components from its suppliers to its assembly plants.
Many of the suppliers are located in Southeast Asia and their transportation times to Austin range from seven days for air shipments to upwards of 30 days by water and ground. To compensate for long lead times and buffer against demand variability, Dell requires its suppliers to keep inventory on hand in the Austin revolvers (for “revolving” inventory).Revolvers or supplier logistics centers (SLCs) are small warehouses located within a few miles of Dell’s assembly plants. Each of the revolvers is shared by several suppliers who pay rents for using their revolver. Dell does not own the inventory in its revolvers this inventory is owned by suppliers and charged to Dell indirectly through component pricing. The cost of maintaining inventory in the supply chain is, however, eventually included in the ? nal prices of the computers.
Therefore, any reduction in inventory bene? t Dell’s customers directly by reducing product prices.Low inventories also lead to higher product quality, because Dell detects any quality problems more quickly than it would with high inventories. Dell wishes to stay ahead of competitors who adopt a direct-sales approach, and it must be able to reduce supplier inventory to gain signi? cantly leverage. Although arguably supply-chain costs include all costs incurred from raw parts to assembly, Dell concentrates on Dell-special inventory (that is, parts designed to Dell’s speci? cations or stored in Dell speci? c locations, such as its revolvers and assembly plants).
Because assembly plants hold inventories for only a few hours, Dell’s primary target, and ours in this project, was the inventory in revolvers. Dell has a special vendor-managed-inventory (VMI) arrangement with its suppliers: suppliers decide how much inventory to order and when to order while Dell sets target inventory levels and records suppliers’ deviations from the targets. Dell heuristically chose an inventory target of 10 days’ supply, and it uses a quarterly supplier scorecard to evaluate how well each supplier does in maintaining this target inventory in the revolver.Dell withdraws inventory from the revolvers as needed, on average every two hours.
If the commodity is multi sourced (that is, parts from different suppliers are completely interchangeable), Dell can withdraw (pull) those components from any subset of the suppliers. Dell often withdraws components from one supplier for a few days before switching to another. Suppliers decide when to send their goods to their revolvers. In practice, most suppliers deliver to their revolvers on average three times a week.
To help suppliers make good ordering decisions, Dell shares its forecasts with them once per month.These forecasts are generated by Dell’s line of business (LOB) marketing department. In addition to product-speci? c trends, they obviously re? ect the seasonality in sales. For home systems, Christmas is the top time of the year. Other high-demand periods include the back-to-school season, the end of the year when the government makes big purchases, and country-speci? c high seasons for foreign purchases (foreign language keyboards are especially in? uenced.
Dell sales also increase at the ends of quarters.After the center of competence (COC) checks a forecast for predicted availability of components, the forecast goes to Dell’s commodity teams and becomes the basis for a six-month rolling forecast that they update weekly. The commodity teams make generic forecasts for systems and components and break those forecasts down to a level of the speci? c parts that need to be ordered. If the forecast is not feasible, the LOB marketing department revises it, although such revisions are very rare. The buyer-planner for each commodity receives an updated rolling forecast weekly; suppliers receive forecasts monthly.The objectives of our project were to recommend target inventories for the revolvers to minimize inventory-related costs subject to a service-level constraint and to develop a process and tools for identifying and updating target levels for inventories of the items in the revolvers.
(Suppliers who make their replenishment decisions attempt to follow Dell’s targets and guidelines. ) Dell had been setting inventory targets based on empirical data and judgment with no clear reference to any desired service levels. Dell hypothesized that it could reduce revolver inventory markedly by using a more rigorous approach and gaining better isibility of the inventory throughout the supply chain. Once it determined an optimized inventory level, Dell could collaborate with its suppliers to eliminate excess inventory.
Dell emphasized that it wanted to sustain any changes over the long term, which would require integrating them into its informational infrastructure. Value Chain is a program intended to extend Dell’s successful direct-sales approach back into the supply chain with the goal of increasing the speed and quality of the information ? ow between Dell and its supply base.The corresponding Web sitevaluechain. dell. com is an extranet for sharing such information as points of contact, inventory in the supply chain, supply and demand data, component quality metrics, and new part transitions. Dell envisions using this site to exchange with suppliers current data, forecasted data, new product ideas, and other dynamic information that might help it to optimize the ? ow of information and materials in the supply chain.
By integrating the process and associated tools that we developed with valuechain. dell. om, we want to make the tools part of Dell’s and its suppliers’ Procurement-business processes.Dell and its suppliers through Value Chain can share such information as target inventory levels to support collaboration on future improvements. We concentrated on the last stage of Dell’s supply chain, the revolvers, where the inventories of all components are Dell special.
Dell believes that inventor savings at this level will produce comparable supply chain savings. Also, analysis of this stage is a necessary ? rst step to further improve the whole supply chain.We looked at the inventories of an important component, XDX, in the revolvers themselves and in transit to revolvers. XDX is one of the major components of PCs, supplied by a few suppliers, that is fully interchangeable (customers do not choose the manufacturer of this component when ordering the ? nal (product). In our analysis, we made several simplifying assumptions.
Because the supply chain provides a fairly high service level, simultaneous shortages of multiple components are very infrequent, and thus, we could ignore them without signi? cantly altering the results.Although Dell regularly updates its forecasts of demand and hence its desired inventory levels, we assumed stationary demand and inventory targets during a rolling forecast horizon of 10 business days. We realized that the behaviors of demand and inventories at the beginning and the end of a product’s life cycle differ from those mid life cycle; however, we handled them separately and do not describe them here. We call the inventory in the revolvers the revolver inventory and the revolver inventory plus any inventory ordered but not yet delivered the system inventory.Although revolver inventory determines the availability of parts, Dell can control it only by placing new orders (increasing the system inventory). Currently, Dell’s suppliers order in batches (to offset ? xed ordering costs incurred every time an order is placed) when inventory levels drop.
However, the actual order (batch) sizes and points (levels) at which the suppliers reorder are quite inconsistent. Our task was to develop a tool that would bring consistency to suppliers’ ordering decisions.While many people at Dell understand inventory replenishment concepts, we found that they had no knowledge of formal operations-management theories. To explain these ideas, we used an analogy from golf, employing terms from the sport to describe the expressions and conditions commonly found in basic inventory equations. A golf course provides many physical obstacles, such as sand traps, water hazards, and the long distances to the hole.
All of these elements are completely out of the control of the golfer, and they must accommodate these perils throughout the game.Like water hazards and sand traps, several factors can hinder a smooth delivery of components in a supply chain, such as road construction or congested highways. The distance between the tee and the hole is analogous to the distance from suppliers to the OEM. In golf, each hole has a standard, or par that the course designer sets based on a variety of factors.
This par will not change unless the designers of the course return and make fundamental alterations to the layout. The interesting thing about par is that it gives golfers a target to strive for. They have constant feedback on how they are doing, compared to a set standard.With no variability in the system, the inventory necessary to maintain steady production depends on only three factors: demand, replenishment time, and shipping frequency (or the size of shipments). We dubbed this level of inventory as par, based on the notion that a problem-free manufacturing environment should run efficiently with a certain natural level of inventory just as an average, problem-free golfer should achieve an expected score on a course.
We calculated the par level of inventory for several points in the supply Chain total system par = forecasted demand for time period replenishment time for the supplierSafety stock insures against potential variations on both Dell’s side and the supplier’s side of the supply chain.To gauge improvement, and to determine causes of variation, we separated the sources of variance. We referred to the safety stock required to cover problems and variance within Dell’s portion of the supply chain as Dell’s handicap, and we referred to the remaining inventory needed to guard against the supplier’s failures to deliver quality goods consistently on time as the supplier’s handicap.For the project, Dell and its suppliers agreed to outline the elements that would constitute the supplier’s handicap.
We planned to make the supplier’s handicap part of the supplier scorecard. Important elements of Dell’s handicap are forecast error and pull variance. We use variance in the statistical sense as the expected value of the square of deviations from target values. Dell forecasts its need for individual components in two stages.
In the ? rst stage, it forecasts an aggregate number of ? nal products; in the second, it estimates the mix of components (corresponding to different features).An error is associated with each of the two stages. The absolute difference between the number of units actually sold on the aggregate level and the number forecasted is called the aggregate deviation. The difference between the actual units and the forecasted units that incorporate a special component (feature) is another forecast error, labeled the attach deviation.
Both are absolute differences, not fractions. Outside of the forecasting process, a deviation also exists between what Dell pulls out of the revolver daily and what the supplier expected Dell would pull based on the production Schedule.This is the pull deviation. While aggregate demand is generally predictable and not a major contributor to the safety stock, the attach rate varies noticeably. Customer preferences change every day, sometimes drastically; despite Dell’s amplifying or reducing demand through sales and price reductions or increases for various components.
The attach deviation is the difference between the expected demand for a component and the actual number of components Dell uses, assuming that Dell pulls at the predetermined percentage and has made no aggregate-level error.For example, suppose that Dell forecasts an aggregate demand for 4000 units, 2000 of which would have XDXs attached, representing a 50 percent attach rate. If the actual demand turns out to be 3200 units, then the forecasted demand at the aggregate level deviates from the actual by 800 units. Safety stock is driven by variances (in the square root formula for safety stock), and therefore, we translate all of the deviations into corresponding variances . Our objective is to examine the total variance and to attribute it to speci? c causes.Because it is more difficult to forecast on the component level than on the aggregate level, we expect that the attach variance will be greater than or equal to the aggregate-level variance.
By subtracting the aggregate-level variance from the attach variance, we can estimate the incremental contribution of attach rates to the variance, even though these effects are obviously not independent. The model provides Dell with a scienti? c tool to determine the revolver inventory levels and hence to manage its supply chain in a systematic way.The model can also create a reference point for future improvements and estimate the savings Dell can obtain by changing its current manufacturing system. Speci? cally, buyer-planners can use the model to manage their inventory at a desired service level, and commodity managers can use it to measure improvements in the supply chain.
To implement the model, we needed to gather historical data and create a self contained, user-friendly spreadsheet template buyer planners can use daily.
