Question

Dell Computer

Please answer the question based on the below Dell case:

Q- Conduct Value Chain "Primary activities and Support activities" analysis of Dell ?

Dell Computer is one of the most extraordinary success stories in business history. Started in 1984 by Michael Dell in his dorm room when he was an undergraduate student at the University of Texas in Austin, Dell has become the world’s largest producer of computer systems. The company sells notebooks and desktop computers, network servers, storage products, workstations, and peripheral hardware. In 2002, its sales are projected to exceed $30 billion. Dell is a highly profitable company and is the highest performer in its industry. The figure shows that its profit rate has exceeded that of all its competitors in every year since 1995. this superior performance persisted through 2001, a difficult and dismal year for the computer industry: slumping demand from corporate customers led to excess and substantial price competition. In 2001, Dell’s return on invested capital was 26% compared to 1.5% at Compaq, and 0% at Apple and Gateway. How did Dell achieve its high performance? What explains the company’s persistently high profitability?

The answer can be found in Dell’s business model: selling directly to customers. Michael Dell reasoned that by cutting out wholesalers and retailers, he would obtain the profit they would otherwise receive and could give part of the profit back to customers in the form of lower prices. Initially, Dell did its direct selling through mailings and telephone contacts, but since the mid-1990s, most of its sales have been made through its web site. By 2001, 85% of Dell’s Sales were made through the Internet. Dell’s sophisticated interactive web site allows customers to mix and match product features such as microprocessors, memory, monitors, internal hard drives, CD and DVD drives, keyboard and mouse format, and so on to customize their own computer system.

Another major reason for Dell’s high performance is the way it manages its supply chain to minimize its cost structure, in particular, the costs of holding inventory yet with the ability to build a computer to individual customer specifications within three days. Dell has about 200 suppliers, over half of them located outside the United States. Dell uses the Internet to feed real-time information about order flow to its suppliers so they have up-to-the-minute information about demand trends for the components they produce, along with volume expectations for the upcoming four to twelve weeks. Dell’s suppliers use this information to adjust their own production schedules, manufacturing just enough components for Dell’s needs and shipping them by the most appropriate mode so that they arrive just in time for production. this tight coordination is pushed back even further down the supply chain because Dell shares this information with its suppliers’ biggest suppliers. For example, Selectron builds motherboards for Dell that incorporate digital signal processing chips from Texas Instruments. To coordinate the supply chain, Dell passes information to both Texas Instruments and Selectron. Texas Instruments then adjusts its schedules to Selectron’s needs, and Selectron adjusts its schedule to fit the order data it receives from Dell. All of this coordination results in lower costs along the supply chain.

Dell’s ultimate goal is to drive all inventories out of the supply chain apart from those actually in transit between suppliers and Dell, effectively replacing inventory with information. Although it has not yet achieved this goal, it has succeeded in driving down inventory to the lowest level in the industry. Dell has about five days of inventory on hand, compared to thirty, forty five, or even ninety days at competitors such as Compaq Computer and Gateway. This is a major source of competitive advantage in the computer industry, where components costs account for 75% of revenues and typically fall by 1% per week due to rapid obsolescence. Thus, lowering its cost structure by streamlining its inventory management systems is a critical reason for Dell’s high profitability.

90 Dell Gateway Industry Average Compaq Apple 80 70 60 Return on Investment Capital 50 40 30 20 10 0 1995 2000 Profitability in the Personal Computer Industry

Q- Conduct Value Chain "Primary activities and Support activities" analysis of Dell ?

Answer 1

Please refer to the solution below.

The value chain Analysis developed by PORTER is shown as below: MARGIN SUNDAY 20 Juodons Firm Infrastructure Human Resource Management Technology Development Procurement Inbound Outbound Marketing Service Logistics Operations Logistis & Sales MARGIN PRIMARY ACTIVITIES Diversifying portfolio Enhanced value! CScanned

The value chain analysis of Dell is shown as below:

PRIMARY ACTIVITIES:

1. Marketing and Sales

• Dell sells directly to customers cutting out wholesalers and retailers in the supply chain
• The profit received by cutting middlemen margins (wholesalers and retailers) is shared with the customers in the form of lower product prices

2. Operations

• Dell leverages technology to implement high transparency in information sharing with its suppliers and sub-suppliers
• Information parity helps to remove unnecessary inventory at Dell warehouse significantly cutting down inventory holding costs
• Dell even manages its suppliers by providing them tentative forecasts for 4-12 weeks to ensure timely production and delivery
• Reduced inventory and Just-in-time production and delivery help reduce product obsolescence costs and operating expenses

3. Inbound Logistics

• Dell enforces its suppliers to follow Just-in-time production and delivery to reduce inventory stockage throughout the supply chain
• Dell stores only 5 days of inventory compared to 30/45/90 days at competitors

4. Service

• Dell offers a unique customization service to its customers where they can choose product specifications while Dell assembles and delivers the product.
• Even with custom offerings, Dell maintains high service levels with regards to timely delivery

SUPPORT ACTIVITIES

1. Technology Development

• Dell uses sophisticated interactive website to allow customers to customize their product
• Dell uses advanced software to share their inventory stock with suppliers and vice-versa
• The forecasting software helps predict estimated demand and is shared with suppliers to support JIT
• Dell uses Internet to feed real-time information about order flow and demand trends of components

2. Procurement

• Just-in-time methodology is followed
• Inventory is replaced by information
• Huge cost benefits are derived due to reduced inventory

3. Firm Infrastructure

• All the systems work in collaboration to smoothly support all activities
• Data servers store real-time information which is shared with suppliers

All these factors have led to gigantic success of Dell in the industry.