Dell Computer Corp.

1. Dell Computer Corp. Disdain inventory Never sell indirect Always listen to the customer

2. Inventory Concerns • Bad Spell in 1994 left Dell with • 2nd quarter operating loss of $76 million • 55 days of inventory • $154 million deficit in cash from business operations Dell execs swore at that time that changes would be made and they would never put the company in that position again.

3. Inventory p-2 • Supply Chain had to be revamped • Dell had made promise to ship customer their order within 5 days of order being received • BUT • There was a 45 day average lead time necessary for purchasing parts. • SO

4. Inventory p-3 • Dell developed valuechain.Dell.Com • A novel idea • Use the Internet in a B2B format to control inventory levels at suppliers businesses • Basically, it was a you do this or else • This proved to be very effective • WHY?

5. Inventory p-4 • Suppliers were truly world-wide (26B/yr) • By becoming a mandatory member of valuechain.dell.com, they exhibited something to other computer manufacturers, that being that they were serious about being a leader in their respective area of expertise.

6. Inventory p-5 • Initially run by Dell but in time is was turned over to the suppliers to run • This targeted the supply issue of the partnering companies • Within 1 year the Inventory was 4 days of sales in amount, of course which is less than the guarantee that the order will be shipped within 5 days of receiving

7. Inventory p-6 • This was 1999 • Daily sales averaged approximately $15,000,000.00 (70% in direct materials) • Gross profit margin of 21% = $3,000,000 • Making the daily cost of sales $12,000,000 • The difference in days of inventory 55 – 4 = 51 • Lets say that money is worth 6% • This equates to a savings of $720,000 per day • Or $36,720,000 for the 51 day change in inventory

8. Inventory p-7 • Daily sales in 1999 around 15,000,000 • Daily sales in 2001 in excess of 50,000,000 (more than 3 times the amount from 2 years prior) • By 2001, the inventory carry was under 1 day • Think about those savings based on reworking the value chain

9. Direct Sales • In order to handle • $ 1,000,000 per day in sales in 1996 • $15,000,000 per day in sales in 1999 • $50,000,000 per day in sales in 2001 • $31 billion annual sales in 2002 (82M/day) It takes speed. Something that cannot be attained without direct control over the marketing and sales function

10. Sales p-2 • Michael Dell designed the company business model to be a build-to-order business • It would survive if it was built on speed, speed to change based on industry demands. • Demands had to be constantly gathered and measured

11. Sales p-3 • With sales of over 7 billion per quarter in 2001, there was a lot of data to synthesize • Dell works on the slimmest margin in the industry (21% in 1999) and becoming smaller all the time • They are the price leader • This could not be accomplished if they were selling at wholesale prices to retailers

12. Sales p-4 • Top PC Makers –1999 • Compaq 16.10% • Dell14.80% • Gateway 9.30% • Hewlett-Packard 8.60% • IBM 8.00% • Others 43.20%

13. Sales p-5 • Sales by Price • 1998 – Actual 2003 – Projected • $0 to $599 3.00% 27.00% • $600 to $999 31.00% 38.00% • $1,000 to $1,999 51.00% 34.00% • $2,000 and over 15.00% 1.00%

14. Sales p-6 • Sales of this magnitude are made possible with the supply chain that runs the Inventory control area, • AND • Running their business in Real Time • They understand on Monday afternoon if PC sales are slowing down, and they can adjust prices accordingly

15. The Customer • Direct Sale – Made to order • 40% buy non name brand computers • Dell owns $3 billion dollars of these sales as of now • Taking away market from Foreign companies that have long had the “white box” market niche

16. Customers p-2 • Dell has the lowest transaction costs in the market • What does this mean??? • As a stockholder? • As an employee?? • As a Customer??

17. Customer p-3 • Proof of transaction costs • Figure 4Profit Margins for Dell and major competitors • Company Gross Margin % Operating Margin %Profit Margin % • Dell 20.62 8.97 7.46 • IBM 36.38 12.39 8.64 • Hewlett-Packard 28.53 7.97 7.30 • Compaq 23.18 5.50 3.86 • Gateway 22.81 7.97 5.67

18. Concluding comments • Dell has two main philosophies • Supply and Demand are never in balance, company strategy is to manage when they deviate • “Always have enough, and have nothing left over.”

19. Concluding comments • Executing those philosophies takes • Huge dollars invested in training employees • Huge dollars invested in technology to enable the processes to work

20. Concluding comments • Michael Dell agrees that the Internet gives customers unprecedented power to seek out the lowest prices, but he argues that it can also be used to deepen relationships and ultimately build far greater customer loyalty than before.

21. Resources • Shah, J. (October 2001), Dell Makes Good on Inventory Vow: Creation of three SCM Organizations has helped boost efficiency. EBN. 1286,PG52 • Shah, J. (December, 2001), Dell writes the book on efficiency: Processes focus on understanding where supply, demand diverge. EBN. 1293, PG32 • Anonymous, (June 1999), Survey: Business and the Internet: You’ll never walk alone. The Economist. 351, B11-B21 • Shah, J & Serant, C. (August 2002), IS supply chain prowess enough?: Dell confident time is right to enter white-box market. EBN. 1327, 3 • Souza, C. (November 2001), Real-Time business may be the real ticket: Technology enablers seen as a good investment. EBN. 1289, PG4 • Sabatini, J. (August 2000) Direct to Dell: I hunt for Michaels supply chain secrets. Automotive Manufacturing and Production. 112, 74-76 • Lewis, N. (February 2001), Dell Portal Adds ‘Value’” Valuechain.dell.com provides pipeline to info exchange. EBN. 1251, PG62 • Teresko, J. (October, 2001), The value of velocity. Industry Week. 250, 43-44