Business Management Article
Dell’s new retail business and supply chain approach
Dell is taking steps to turnaround its business and recovering from losses and decline in its profit margins. Dell had first announced cost-cutting measures as early as May last year. In 2007, Dell changed its direct-sales model to offer computers in retail outlets, after losing the title of top PC maker to Hewlett-Packard Co (HP). Dell is now beginning to supply similar products to retailers like Wal-Mart, but as a smaller percentage of its business. Dell is currently the second largest computer retailer in the world behind HP.
Dell’s well-established direct-sales model allowed buyers to custom-build and purchase computers online or by phone. Customers could choose custom PCs (almost 500,000 configuration options or combinations that were assembled) direct from its factory. On the other hand, competitor HP also sold configure-to-order models but also supplied fixed-configuration PCs direct to retail.
Dell’s new retail business is not profitable as of now. So Dell aims to make its retail computer business cost-effective by aligning (reducing) manufacturing costs (cost of goods sold) with its competitors. But this will be challenging since Dell does not have the same volume in retail globally (as competitors), and therefore a smaller fixed base to spread costs. Secondly, Dell’s supply chain had not exactly been designed for mass distribution. HP uses a diversified supply chain unlike Dell’s one supply chain approach. [Download Case Study on Dell’s Supply Chain Management Strategy
The return of Michael Dell and the Turnaround Plan
Michael Dell, the founder of Dell returned as the CEO in January 2007, and the company has a turnaround plan which it promises will yield $3 billion in annual savings over the next three or four years. Dell’s plans include depending more on resellers and contract manufacturers to cut costs and boost sales of which the consumer personal computer business is expected to contribute more than the current 15 percent of total revenue. (At HP, consumer sales of PCs and printers account for about one-third of revenue. Industry-wide sales of consumer PCs are growing at about twice the rate of PCs for businesses.) Contract manufacturers who manage large volumes of orders for big PC makers like HP will be given more work. But apart from concentrating on designing and manufacturing to cut costs, supply chain and logistics (distributing PCs for retailers) are key focus areas as scale is less of an issue. The cost-cutting exercise would also include restructuring of its logistics network and outsourcing more of its manufacturing operations. Dell also announced its intentions to install a logistics hub in Dubai to cater to the emerging market regions and also into the east African regions. Developed economies like the US (though the biggest) are the slow in growth. Last year, the EMEA region made up less that 25 per cent of its total revenues (70 per cent growth) and is estimated to be $61 billion in 2008.
Dell’s Turnaround Plan:
Cutting costs: Cutting costs is very important because competitors like HP use the money from profitable printers operations and take more market risk with designing innovative products. Moreover the prices of computers keep going down. One can buy a Dell laptop now for less than $500.
Moving away from computers internally and outsourcing more of its manufacturing operations: Dell has manufacturing facilities in Texas, North Carolina, Tennessee, and in Malaysia, Penang, China and Poland. Its manufacturing operation in Austin, Texas will shut down. Also HP, IBM and Sun Microsystems already have long-standing partnerships with outside manufacturing partners. These partners offer customers bundles of computer hardware, software and services. Dell on the other hand is relatively a new player in this field and has traditionally depended on its own businesses to design and make computers.
Moving into indirect sales channels like computer resellers and retailers.
Introducing more products: New product introduction is vital since major PC manufacturers realistically only make money in the first three months (or six in some cases) of a new product.
Analysts predict that it will take Dell one more year for its PCs to be as cost-effective as its competitors and stage a recovery.