Question

Use the Internet and/or Strayer Learning Resource Center to research a U.S.-based company that manufactures technology products. Recommend one (1) approach that your selected company can take in order to lower the direct labor costs of technology products while remaining competitive with global markets. Provide a rationale for your recommended approach. Imagine that you are a Chief Financial Officer (CFO) of a company. Recommend two (2) actions that you could take regarding the company’s supply chain to reduce manufacturing costs of direct materials.

Answer 1

In 2013, Dell was ranked 165th in Fortune’s “Global 500”, a list of the largest multinational corporations in the world. Since its incorporation, it has grown steadily and become one of the largest MNEs in the world. As the market leader, it fell from the top spot to the third place behind Hewlett Packard and Lenovo in 2012. This article seeks to detail how it was able to achieve this initial success in the early 2000s and why it eventually declined towards the end of the decade.

The report describes Dell’s successful direct sales business model, superior supply chain management, and other sources of its initial competitive advantage. Dell’s choice in the location of its manufacturing plants operations and decisions in its outsourcing operations are also discussed.

Finally, the reasons behind Dell’s slump as a leading PC maker and loss of its competitive advantage are explained. The report concludes with the possible strategies that Dell could take to restore its competitive advantage.

Replacing Inventory with Information

Replacing inventory with information is a supply chain management concept that seeks to manage and reduce inventory through the use of information. The key is to have the right amount of inventory to satisfy supply and demand without compromising the level of service.

Replacing inventories with information allows for a lean and agile supply: a minimal inventory level that is still flexible enough to adapt to changes in supply and demand. This contributes to cost reduction.

Having a large inventory on hand acts as a buffer and protects against uncertainties in the supply chain. This is because supply and demand is difficult to predict and subjected to variation. However, excess inventory is not an asset and it is in fact considered a liability. Such uncertainties take up 60% of the supply chain cost due to a lack of available information.

Thus, having access to vital information (e.g. market trends, sales data, etc.) can improve forecasting and planning. For example, 3M Canada’s implementation of the i2 Factory Planner and Supply Chain Planner software solutions has reaped rewards. The software solutions provide valuable real-time information about changes in demand and the market. Since then, planning and scheduling productivity has increased by 20% and inventory has decreased by 23%.

With its strategic use of information, such as its internet-based ordering system that updates suppliers with the latest demand trends, Dell was able to perfect the balance between demand and supply. Its inventory was reduced to only three days’ worth, which was the lowest in the industry.

Dell’s Initial Competitive Advantage

As a multinational enterprise, Dell is very competent in executing its global strategy, giving the company a competitive advantage that was unrivaled in the first half of the 2000s.

One of the sources of Dell’s initial competitive advantage can be attributed to its famous direct selling and build-to-order approach. This just-in-time (JIT) strategy allowed it to operate with the lowest inventory level in the industry. Reducing excess inventory provided Dell with a significant cost advantage as component costs depreciate as much as 1% weekly in the electronics industry. Direct selling has also allowed Dell to bypass intermediaries such as wholesalers and retailers, reducing costs even further. In addition, Dell offered customizable options that proved to be customer-centric and attractive.

Dell’s global force of 200 suppliers had access to automated and real-time information such as demand trends and volume expectations for different components. This close relationship with suppliers and the direct selling model has allowed Dell to balance demand and supply remarkably well.

Dell conducts its business operations worldwide in many different foreign markets. One of Dell’s motivations to internationalize was to secure supplies and gain access to low-cost factors. Dell situated manufacturing plants across the world, seeking out location-specific advantages such as low labour costs and highly productive workforces. The manufacturing operations are also in close proximity to important regional markets to minimize delay between purchase and delivery. Dell’s choice of locations had indeed armed it with an initial competitive advantage.

Dell’s Global Manufacturing Plants

Why did Dell choose to locate its manufacturing plants in certain geographic locations?

Bartlett and Beamish (2011) identify three conditions that must be fulfilled for an MNE to internationalise its operations successfully. One of the conditions is that a foreign market must offer location-specific advantages. Dell operates manufacturing plants in Brazil, China, India, Ireland, Malaysia, and Poland which offer Dell such advantages.

Some advantages are lower labour costs and a highly productive workforce. For example, labour costs in Malaysia are lower than in neighbouring Singapore, but the quality of labour remains comparatively high. When Dell established its manufacturing operations in Malaysia, it received a 100% tax exemption for five years, an initiative by the Malaysian government to attract investments.

The next advantage is proximity to important markets. Dell chose to locate its manufacturing plants close to such regional markets for better market access, lower shipping costs, and improved responsiveness in delivery. The success of Dell in India was attributed to having a manufacturing plant in the country, which cuts delivery time by 50% and improved its sales dramatically. In the past, customers in India would have to wait for up to a month for their computers, which were manufactured in Malaysia.

However, this choice of location is not without its disadvantages. Locating manufacturing operations beyond the United States comes with certain disadvantages. Bartlett & Beamish (2011) identify the distance and the liability of foreignness as two of these disadvantages. Generally, the greater the distance from the home market, the more difficult it will be to conduct operations.

To elaborate, there may be differences in culture, beliefs, language, political landscape, and infrastructure that can affect Dell’s global supply chain. The geographical distance makes control over the manufacturing operations even more difficult. In February 2007, a major fire broke out at one of the plants in Aisin Seiki, one of Toyota’s main suppliers. The crisis caused Toyota the loss of 70,000 vehicles and ¥160 billion in revenue. However, due to similar culture, beliefs and proximity of manufacturing operations, the recovery effort was incredibly fast with the aid of local firms. If such an accident were to happen to Dell’s global manufacturing plants and caused disruptions in its supply chain, the consequences would be disastrous. Recovery would also be difficult due to the distance and liability of foreignness.

Outsourcing Manufacturing

One of the main reasons for outsourcing the manufacture of PC components is the ability to choose good components and suppliers rather than having to produce them oneself. Michael Dell once said in an interview, “If you’ve got a race with 20 players all vying to make the fastest graphics chip in the world, do you want to be the twenty-first horse, or do you want to evaluate the field of 20 and pick the best one?” Dell’s strategy was to build good relationships with its global network of suppliers rather than manufacture components of their own.

Outsourcing would allow Dell to focus on its own competencies, such as managing its efficient supply chain, customer service, research and development of new products, etc.

Louise O’Brien, former Vice President of Dell, emphasized that Dell’s main business is personal computers, and it should not give up its capabilities in production. Since the incorporation of Dell, it has been outsourcing the manufacturing of components manufacture but not the final assembly itself. Dell does not want to outsource its manufacturing operations entirely so as to prevent the unintended creation of competitors. Outsourcing is often described as easy to replicate and the competitive advantage that it provides is not sustainable. Outsourcing is only feasible if it is separated from other supply chain activities, which is what Dell is trying to achieve.

2 Actions

Supply chain strategy
Objectives should drive strategy, and strategy should drive tactics—not the reverse.

Once you have a clear understanding of your customers' needs, you can move on to defining a supply chain strategy that will achieve your business objectives while delivering on your customer service promise.

If you’re wondering whether your own company has taken the right approach, then ask yourself if any of the following problems have been occurring:

• You have no documented or generally understood supply chain strategy.
• Your company thinks of “supply chain” as being restricted to one or two functional departments (for example, purchasing and manufacturing) instead of involving the company in general (including logistics, marketing, sales, research and development, and so on).
• There is internal and external customer dissatisfaction relative to costs and services.
• Many supply chain projects are managed in “silos,” meaning individual functional departments.

A supply chain strategy is a living thing. It must be adaptable and change to meet evolving business and customer needs, and it needs to be flexible enough (or at least encourage sufficient flexibility) to drive optimal tactical and operational decisions. Yet whatever phase it is in, a supply chain strategy also needs to be clear and precise. If it is, then you can immediately decide whether to take a particular action by asking yourself, “does this fit with our strategic imperatives?”

When your strategic imperatives are correctly defined and your tactics and operations fit these imperatives, then you avoid wasting money on actions that do not make a relevant contribution to your bottom line.

Sales and operations planning (S&OP)

Get your process right first, and define your systems after.

S&OP is a process that shares information and brings people together in a structured, single plan that is defined across the functional departments. People often confuse S&OP with complex, expensive software tools, but the process comes first, not the system. If you haven’t thought out your process properly, then even the most expensive software in the world won’t save you.

S&OP is a straightforward concept but it is not an easy one to carry out. Signs that you might have a problem with your S&OP process include:

• High levels of “SLOB” (SLow moving OBsolete) stock
• Frequent changes to your demand plan and master production schedule
• Wild proliferation of SKUs (stock-keeping units)
• Excessive stockouts
• Poor forecast accuracy—or no forecasting at all

Improving the situation can sometimes be surprisingly simple. For one auto parts distributor, for example, a small change in its forecasting algorithm turned out to be a major step forward, even though it was still using a plethora of spreadsheets to predict demand for more than 20,000 stock-keeping units (SKUs).

For other companies, the solution may be more complex, starting with developing longer-term planning horizons, categorizing products by sales volume, and setting up “time fences” for production (rolling deadlines to determine whether changes can still be made to sales forecasts or if the purchasing and production plans can no longer be altered).

What kind of cost-related benefits can you expect when you achieve success with your S&OP process? The benefits include improved availability and stock turns; less “fire-fighting” and expediting; and, of course, improved sales and profits.