Mike -
I have looked into this particular process very deeply. If a producer can set up large batch manufacturing runs, the component use model is very predictable. This applies to products which are produced virtually identically over the production run. Component suppliers then get long term contracts with fixed delivery dates, and usually with price protection both on the upside and downside.
Component costs using that model can be 10% or more below the cost for equivalent volume without the fixed delivery, since the component manufacturers can use contracts like this as a basis for setting manufacturing run rates etc. Most of those component producers see big economies if they can lock down enough production to go full bore over a period of time, especially semis but also disks etc.
I have actually discussed this with DELL executives about a year ago. They agreed, but said (at that time) that when component costs are falling, it comes out in the finished goods - since DELL does not carry finished goods inventory, they can pay a higher component cost and still have a lower cost of goods when it hits the customer.
But in the retail distribution world, that advantage goes away - the inventory goes off the dock to the retail vendors as soon as it is made in either case. Also we no longer have the same falling component costs.
That is, IMO, a big part of the reason DELL is now entering into more long term supply contracts - they need to develop the same efficiencies as their competition in the retail space if they are to compete effectively.
So in this particular market, it is not the other guys trying to get to DELL's efficiency, it is DELL trying to get efficient enough to compete. Remember this is not a market that DELL has been in, and the cost model has been a big part of the reason DELL has avoided that business. |
