DELL REENGINEERED THE PC MANUFACTORING SYSTEM

The Problem

Michael Dell started his business as a student, from his university dorm, by using a mail-order approach to selling PCs. This changed the manner by which PCs where sold. First, the customer did not have to come to a store to buy the computer, and second, Dell was able to customize the computer to the specifications of the customer, economically and in a very short time. The direct mail approach enabled Dell to underprice its rivals, who were using distributors and retailers, by 10 percent. For several years the business grew slowly, but Dell constantly captured market share. In 1993, Compaq, at the time the PC market leader, decided to cut prices to drive Dell out of the market. As a result of the price war, Dell computers Inc. had a $65 million loss from inventory write downs in the first six months of 1993. The company was on the verge of bankruptcy.

The Solution

Dell realized that the only way to win the price war was to introduce fundamental change in its own business, namely to reengineer it. In addition to competing on price and quality, Dell started competing on speed. In 1998 if you ordered a standard PC on Monday, the computer was on the delivery truck on the next day; a complex custom made PC is delivered in 5 days or less. Among the innovations used to achieve this speed, many of which are IT supported, were:

·        Dell builds many computers only after they are ordered. This is done by using Just-In-Time manufacturing which also enables quick deliveries at low cost.

·        Using an approach called mass customization, meaning producing large quantities of customized products, at a low cost.

·        Placing its component warehouses, which are maintained by its suppliers, within 15 minutes of Dell factory's. Not only you can get parts quickly, but also you get parts that are up to 60 days newer than those of the major competitors.

·        Shipment, which are done by UPS and other curriers, are all arranged by electronic mail.

·        Dell collaborates electronically with its major buyers to pick to pick customers' brains.

·        Most of Dell's customers are large corporations. While individual buyers want their units customized, large corporations may prefer standard computers. For example, Eastman Chemical Company needed 10,000 PC's all with exactly the same parts and software, regardless of when and where in the world they were needed. The standardization saved saved operation and training maintenance cost of about $5 million annually for Eastman. Dell was the only vendor that was able to fulfill this need.

·        Dell's new PC models are tested at the same time as the networks that they are on are tested. This cooperation with another vendor reduced the testing period from 60 to 90 days to 15.

·        Dell's employees are constantly monitoring productivity and rate of return on investments.

What Role Did Information Technology Play?

Most significant is the emergence of electronic commerce. In 1998, Dell was selling more than $1.5 million worth of computers each day on its website, and this amount was growing 20 per cent per month! As a matter of fact, Dell's aim was to sell most of their computers on the web (www.dell.com). Customers can create their own Dell home page and track their orders online, to see if they if they're in production or already on the shipping truck. Customers can access detailed diagrams of the computers and get information about troubleshooting. By view-approved configuration and pricing and by eliminating paperwork customers were able to save 15 per cent of administrative process expenses. In addition, Dell created home pages for their biggest buyers, such as Eastman Chemicals, Monsanto, and Wells Fargo. These sites enable their customers' employees to place orders quickly and easily. These employees can also order PCs for their homes and receive the corporate price! The electronic ordering makes customers happy, but it also enables Dell to collect payments very quickly.

Dell is using several other information technologies including e-mail, EDI, video teleconferencing, computerized faxes, an intranet, DSS, and more. Of special interest is a computerized manufacturing system introduced in 1997, which tightly link the entire demand supply chain from suppliers to buyers. This system is the foundation on which the "building-to-order" strategy rests.

Four years after its almost collapse, Dell became an unbelievable success story when its stock price zoomed more than 2000 per cent in about 2 years. Competing with world class names such as IBM, Compaq, HP, and Packard Bell-NEC, Dell consistently increased its market share and profitability simultaneously. Today, Dell is considered to be one of the mostwell managed and profitable corporations in the world, as a result of their IT based reengineering.