June 2, 2003
As part of an ongoing series of online seminars for the LFM and SDM alumni community, Steve Cook, LFM ’98, gave a presentation on Friday, May 16, 2003. Cook is the director of supply chain engineering and demand/supply planning at Dell Computer Corporation, a leader in computer systems.
Dell’s innovative supply-chain strategy has won it accolades and acolytes. More important to Cook, it’s helped Dell as a business “to balance our liquidity, our profitability, and our growth…the three primary metrics.”
This balancing act is really a balance of supply and demand—starting with supply. Inventory reduction is a trend that Dell started but which has swept the computer industry. “Inventory in this industry is like groceries—they go down in value pretty quickly,” Cook explained. “So the less inventory you can hold, the less you’ll have to sell in the market as not the leading edge product. So Dell has obviously been pretty maniacal to reduce the excess and obsolete.”
“Excess and obsolete” are two words that computer industry personnel never want to hear—at least, not about their own products. Those words mean that the shelf-life of your product—and therefore its profit—has expired. To avoid it, Dell uses a three-phased approach:
- Strategy, focusing on 90 days out
- Planning, taking it from there to about three days out
- Execution, finishing the job
Execution is where Cook believes Dell differentiates itself: “There was a lot of non-value-added material handling going on, a lot of moving parts from one line to another, almost kind of stealing from each other, and it was clearly not a global optimum that we were hitting.” Instead, they’ve moved into a system that forms a team between Dell, its suppliers, and the manufacturers, using shared logistics centers (SLCs).
Shared Logistics Centers
SLCs are hubs that hold the inventory for Dell’s factories. Factories can pull in materials from the nearest SLC within minutes of receiving the request, allowing them to complete high-priority orders in just eight hours. Thus there is no need to keep inventory of finished goods. This is the key to Dell’s demand/supply balancing.
The advantages of SLCs are many, but the most obvious are efficiency, flexibility, dynamic processes, and cash flow optimization. The factories hold only about six hours of inventory, and Cook terms it a “push-pull system [in which] we use that inventory in the shared logistics center to buffer us against the actual demand.” Because there are inherent inaccuracies in any forecast, it is critical to have flexible systems that react well to variations.
Of course, managing supply alone doesn’t create a balancing act. Dell also keeps a careful hold on the demand side of the equation. “We have a bunch of levers available to us there,” Cook stated. “Because of the direct model, we’ve got a lot of ways that we can actually shape demand, and that’s a huge advantage that Dell has.”
Dell works hard to have accurate forecasts and the right inventory to deliver on those forecasts. Sandbagging, for Dell, is out of the question. An unreasonable forecast actually puts the sales team in a much more uncomfortable position—either trying to sell what no one wants, or trying to convince people to wait for what Dell doesn’t have.
This means teamwork is perhaps the most important part of the system. This is true internally and externally. Within Dell, the idea is simple: alignment is key between strategy, planning, and execution. When everyone is in agreement based on sound communication, they have the same goals and work toward a goal that helps all three teams.
And for suppliers, the logic is even more obvious, according to Cook: “Everybody is motivated to minimize the inventory holding cost because they know that in the end we’ll end up paying one way or the other.” Communication is crucial at this stage as well, which is why direct, realistic conversations are emphasized.
The Bottom Line
The advantages of Dell’s innovative supply-chain management translate directly to the consumer:
- Customers have immediate access to the latest most relevant technology
- Suppliers get their products to market quickly
- Quality is improved with fewer touches
- Communication is immediate and accurate
- Cost-savings and efficiencies are passed on to our customers
“Everything we can do to strengthen the linkage between our suppliers and our customers is basically the right thing for us to be doing…,” Cook said. “The bottom line is that the company is very customer-focused.”