A good article on Dell in today's Investors Business Daily. Might be the viagra that Dell can use just like last Sunday's NYT article on AOL :
investors.com
Dealing Direct Just The Start Of Dell's Plan
Date: 7/7/99
Author: Nick Turner
The secret to Dell Computer Corp.'s success has a lot to do with selling
personal computers directly to customers. But there's more to it.
The way Dell has executed its direct model, especially its use of information
technology, has made all the difference. So says a new report from the
Center for Research on Information Technology and Organizations, part of
the University of California at Irvine.
Despite some recent stock skittishness, Dell's approach has helped it
outperform indirect PC sellers such as Compaq Computer Corp., IBM
Corp. and Hewlett-Packard Co. Those companies use a less efficient
network of distributors and resellers as their sales ''channel.''
But Dell has also bested other direct sellers, including Gateway Inc. and
Micron Electronics Inc. Kenneth Kraemer, a professor at the research
center, recently spoke with Investor's Business Daily about the findings.
IBD:
How much of Dell's success comes from the direct model, and how much
stems from how the company executes?
Kraemer:
It's the model plus execution. And that execution has at least three
dimensions. One involves reengineering a lot of Dell's processes. The
second is refining and extending the model. And the third is using IT
(information technology) to support those refinements.
I'll give you a couple of illustrations of what I mean by reengineering the
processes. Dell reduced the number of its suppliers from over 200 to about
15. The company developed long-term partnerships with those suppliers,
where it said: ''Look, we're going to do this much business over the next
year, and we're going to give you this much of that business. And we're
going to need you to work with us to reduce the costs of the products.''
Dell requires suppliers to meet very high standards. It monitors the quality
so that it can catch problems as much as possible during manufacturing.
The biggest weakness in any computer is in the disk drives, so Dell has a
lot of activity aimed at catching problems with disk drives. If there's a
problem, Dell immediately determines - through information technology -
who the supplier was, what batch the drive came from, at what time and
from what machine, and gets changes fed back as fast as possible.
Dell also requires suppliers to ''co-locate'' (have facilities nearby), so that
they can deliver parts within 15 minutes to the assembly plant.
Another thing Dell did was reengineer its production. Dell doesn't have to
spend a lot of money on product research and development because all the
real R&D's done by Microsoft and Intel. So Dell puts all of its R&D money
into process engineering - figuring out how to manufacture in a way that
reduces cost and time.
For instance, there are only three screws you need to fasten to put a whole
PC together. Everything else just locks in with catches. There's a lot of
room inside the machine, so it's easy to put in a new part or replace
something very fast. They've made cables and connectors only the length
that they need to be - down to millimeters. So you don't have a box that's
stuffed with all kinds of cables and connectors that just get in the way.
IBD:
Where does IT come into play?
Kraemer:
IT is used to track the order from the moment when it's placed to the
moment it's fulfilled. At every step in the process, Dell knows where a
particular order is. If a customer wants to know where their order is, they
can get on the Internet and find out. Even after the order is delivered to the
customer, Dell has information about who that customer is. I don't mean
just what company - I mean what individual and where that computer is
located. For big companies, Dell manages their inventory, so it may even
know when that computer gets moved or assigned to a different person.
That's only with big companies, but 70% of Dell's customers are corporate.
Dell also uses IT to share information with suppliers. It gives its orders for
products daily to suppliers. And Dell allows the suppliers to look into its
inventory of orders to see what might be coming down the pike. So the
suppliers can make their own estimates if they don't like the short orders
that they get from Dell. Dell is trying to do more and more to improve its
forecasting technology and to speed up the forecasting cycle. While the
PCs are built to order, Dell still has to have a certain amount of forecasting.
IBD:
What about Dell's relationship with its customers?
Kraemer:
Dell has a vast amount of information on its customers. Companies like
Compaq, IBM and HP don't, because they go through the channel for most
of their sales. The distributors and retailers don't want to tell them who their
customers are, because then the PC makers can bypass them.
Because Dell knows who its customers are, it can sell them complementary
products. Dell is now selling HP printers, printer ribbons and all kinds of
vendors' products. And it also sells software. Once Dell has a relationship
with a customer, if the customer is happy with that relationship, Dell can
expect to sell complementary products and services.
Through this direct relationship -and it's IT that helps it maintain this -Dell
achieves a kind of lock on its customers, especially corporate customers.
Boeing has somewhere between 140,000 and 180,000 PCs. It had a
contract with Dell that was recently up for renewal. Dell won the renewal,
even though IBM, HP and others were bidding. Why did Boeing stay with
Dell? I know Boeing was very satisfied.
But also the cost of switching from Dell to IBM or someone else is quite
considerable. One of the reasons Boeing went to Dell in the first place was
Dell agreed to sell it a standard set of machines and to install Boeing's own
software - including not just standard Microsoft software but
Boeing-written software - on every machine. So every machine that came
into Boeing was set up the same way. Once that's done, that reduces the
company's cost of PC ownership tremendously.
IBD:
Dell rivals are selling some products directly and some indirectly. Can that
work as efficiently?
Kraemer:
No. They'll never be able to achieve that high a level of efficiency and
turnover. As long as they're dealing with the distribution channel, they can
reduce the time, but not as much. Dell turns its inventory over every seven
days. Compaq turns it over every 28 days. Probably the best Compaq
could ever do is 14 days, and we don't believe it could even do that. Once
you've got the channel, there's inventory there, and you just can't reduce it
much. Compaq claims that it's going to match Dell, but we don't believe it
could ever do it. We believe that it's marketing hype.
Dell reduced its suppliers five to seven years ago. Compaq just started
doing that last year. Dell was the first PC company on the Internet. Most of
the other companies just got on last year. And they don't have anywhere
near the refinement and the level of detail (on their Web sites), because it
takes time to develop that stuff. Every major manufacturer is trying to do
this.
IBD:
What about Gateway and Micron, which both sell directly?
Kraemer:
It's a testament to Dell's execution and refinement (that Dell has
outperformed them). And it's also a testament to Dell's extension of the
direct model, including its use of the Internet. I don't know exactly what it
costs to complete a transaction on the Internet vs. through a call center or
vs. a retail sale. But I know that in banking, the cost of an electronic
transaction is 1 cent, the cost of an automated- teller-machine transaction is
25 cents and the cost of an over-the-counter transaction is $1.
IBD:
Can these lessons be applied to other industries?
Kraemer:
The Dell model has lessons for any industry where time and perishability
are big factors. The florist industry is a good example. Normally you pay
$50 for a dozen roses. By the time you get them, they're about two weeks
old, and they'll last about a week. There's a long chain between the florist
and the grower. There are growers, then wholesalers, then retailers and
then customers. And in between, there are truckers and airliners. There's a
lot of loss of product and damage to product and product being stolen.
A company called Calyx & Corolla Inc. (which Gerald Stevens Inc. is
buying) decided to eliminate that whole chain. It takes orders from
customers. It sends the order to some 50 growers around the world. The
growers get those flowers fresh from their fields, pack them in boxes and
Federal Express them directly to the customer. So you get flowers that are
seven days old and that last two weeks. And you pay $50, the same price.
The company has taken out the trucking companies and the wholesalers,
and it's given the customer a better product for the same amount of money.
It's IT that allows it to do that.
(C) Copyright 1999 Investors Business Daily, Inc.
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