Q&A: How Dell Keeps from Stumbling

It's the supply chain, says its boss, Dick Hunter

In the high-tech universe, Dell Computer Corp. (DELL ) is a force of nature. In less than 20 years, company founder Michael S. Dell has amassed a personal fortune of $16 billion and built a $25 billion company, besting the likes of IBM (IBM ), Hewlett-Packard (HWP ), and Compaq Computer (CPQ ) in the process. Along the way, his build-to-order model has blossomed into a new manufacturing paradigm.

Impressively, the Austin (Tex.) company also has weathered the technology meltdown--at least so far. Rival Gateway Inc. (GTW ) just posted its second consecutive quarterly loss, and Hewlett-Packard Co. is planning to eliminate 3,000 management jobs. Outside the PC sector, things are far worse: Cisco Systems Inc. (CSCO ) is slashing up to 8,500 jobs after writing off $2.5 billion in unsold inventory.

What insulates Dell from these troubles? Says Dick L. Hunter, the vice-president overseeing supply-chain management, the difference comes from Dell's super-efficient supply chain. "Michael [Dell] focuses relentlessly on driving low-cost material from the supplier through the supply chain to our customers," he says. The low-cost producer, he adds, will be the ultimate winner, and that's reflected in Dell's steadily rising market share. According to IDC in Framingham, Mass, Dell nabbed top spot in global PC sales in the first quarter, with a 13.1% share.

Hunter brought 25 years of manufacturing experience to Dell. Before joining the company in 1998, he worked in operations and supply-chain management for General Electric, Texas Instruments (TXN ), and Ericsson (ERICY ). Today, in addition to his supply-chain responsibilities, he manages Dell's largest manufacturing site, a cluster of four factories in Austin that produces most of the systems sold in the Americas. Hunter recently spoke with BusinessWeek Industries Editor Adam Aston about the nuts and bolts--and chips and monitors--of Dell's supply-chain operations.

Q: How central to Dell's success is the efficiency of its supply chain?

A: It's absolutely critical. Materials costs account for about 74% of our revenues. We spent around $21 billion on materials last year. Shaving 0.1% off [that] can have a bigger impact than, say, improving manufacturing productivity by 10%.

Q: Dell is famously lean. How does that affect your performance?

A: We carry about five days' worth of inventory. Our competitors carry 30, 45, or even 90 days' worth. This is critical because in our industry, materials costs fall by about 1% per week. So if a competitor has four weeks' worth of inventory and we have one week's, right there we have 3% worth of materials cost advantage. That can mean a 2% or 3% advantage on the bottom line.

Q: Dell has been growing at double-digit rates for its entire life span. Does software play a big role in that?

A: A couple of years ago, realizing we couldn't grow to $75 billion with the tools we had in place, we selected i2 Technologies' software. Now, 10 months later, all our global manufacturing sites are operating on the same i2 resource-planning and execution systems.

Q: And the result?

A: We now schedule every line in every factory around the world every two hours--we only bring into the factory two hours' worth of materials. With i2, we typically run a factory with about five or six hours' worth of inventory on hand, including work in progress. This increased the cycle time at our factories and reduced warehouse space. We replaced this space with more manufacturing lines.

Q: It takes a tightly knit supplier base to deliver on a schedule like that. How many suppliers do you rely on?

A: Our top 30 suppliers represent about 75% of our total costs. Throw in the next 20, and that comes to about 95%. We deal with all of those top 50 daily, many of them many times a day.

Q: How do the new systems help you manage supply crises?

A: The software tells us where we are. We monitor practically every part, every day. If we're running out of a part, it might be because demand is outstripping supply. We'd try to solve the supply problem first. We'd call the supplier to see if he can increase the next shipment. If it's a generic part--like a hard drive--we might check alternate suppliers. Once we've exhausted our supply options, we go to the sales and marketing guys to help shift the demand to something else. This happens within a few hours.

Q: But isn't demand beyond your control?

A: One of coolest things about Dell is that we talk to 10,000-plus customers every day. That gives us 10,000 opportunities to balance supply and demand. If I'm running out of a part, then I know ahead of time. I'd communicate with our sales department and we'd move demand to material that we have.

For example, we can alter lead times. We might extend the lead time on a high-demand item from the standard 4 to 5 days to 10. In this case, we know statistically how much demand will move. Or we may do a promotion. If we're short on Sony 17-inch monitors, we could offer a 19-inch model at a lower price, or even at the 17-inch price. We know if we do this an awful lot of demand will move. We can alter pricing and product mixes in real time via Dell.com. Our competitors that are building to sell through retail channels can't do that.

Q: What effect does this have on excess inventory?

A: Perpetual balance of supply and demand is my main goal in life. If I'm in perpetual balance, I can always meet my customers' delivery expectations. It also helps to minimize excess and obsolete inventory. Dell writes off between 0.05% and 0.1% of total material costs in excess and obsolete inventory--that's about $21 million across our global business in a year. In other industries that figure is probably 4% to 5%. Our competitors probably have to write off 2% to 3% worth of excess and obsolete inventory.

There's no way we'd end up with months of inventory someplace. If we see two or three days of softening demand for a particular product, alarm bells go off. On an end-of-life product, we'll name a number--say 50,000 more of this computer model will be built. Then that's it--we will not build a 50,001st.

Q: At this volume of transactions, and at this speed, how do you coordinate your suppliers?

A: All of the data goes back and forth on the Internet. From the long-term planning data--volume expectations over the next 4 to 12 weeks--to the two-hourly execution systems, which are making automatic requests for replenishment, every supplier can view our order information via the Web.

Q: How far has automation gone--are even your smallest suppliers wired up?

A: The issue isn't how to get the last 5% online--that's easy, everyone can see our information via the Web. The real question is: How do I get true machine-to-machine connection between me and my supplier, because today there is still manual intervention by the supplier to get the data off the Web. We're fairly automated internally at Dell. Now we want to get the suppliers connected machine-to-machine.

Q: Are you advising the suppliers on particular technologies?

A: Yes. We have a lot of leverage with our suppliers. And all of them understand our model and supply-chain management systems. We constantly ask them, "How can you become more like Dell?" We're very loyal to these guys. I'd say just two or three of our top suppliers have changed in the past three years.

Q: So what's the next step?

A: Folks ask if five days of inventory is the best Dell can do. Heck no, we can get to two.

Q: How have Dell's operations been affected by the PC downturn?

A: We had 1,700 layoffs a couple of months ago. And our use of contract workers fluctuates depending on the cycle. As we have a downturn, we will have a smaller percentage of contract workers. As we increase production, we have a higher percent. But this recession could be a very good thing for Dell. We're able to pass on lower costs to our customers more quickly, which allows us to gain market share and put a hurt on our competitors.

Q: Some big names, such as Cisco, have been burned by excess inventory. Your thoughts?

A: Our goal is to replace inventory with information. The more information we get to our suppliers quickly, the faster we build product, the faster we receive materials from suppliers, the faster [we] alleviate a problem like Cisco is having. Cisco might have communication problems in the supply chain about what's real demand and what's real supply. It could be that they had bad high forecasting, and the suppliers never knew better.

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