VI2
So now you have Sony producing a level supply of monitors for you. What happens next?
We tell Airborne Express or UPS to come to Austin and pick up 10,000 computers a day and go over to the Sony factory in Mexico and pick up the corresponding number of monitors. Then while we're all sleeping, they match up the computers and the monitors, and deliver them to the customer.
Of course, this requires sophisticated data exchange. Most people are familiar with the way a company like Black & Decker uses information links with the thousands that sell its products. When a customer in Omaha buys a drill from his local hardware store, the system immediately tells black & Decker to send another unit of that particular drill to that particular store. so their system has to replenish supply, unit by unit, to thousands of outlets. From the supplier's point of view, Dell is dramatically simpler. Our orders are typically for thousands of units, and they need to go to only one of three manufacturing centers. Austin, Ireland, and Malaysia. It's almost ideal from a supplier standpoint because we have real-time information on what the demand is, and all the supplier has to do is get the product to us..
And because we build to our customers' order, typically, with just five or six days of lead time, suppliers don't have to worry about sell-through. We only maintain a few days -- in some cases a few hours -- of raw materials on hand. We communicate inventory levels and replenishment needs regularly -- with some vendors, hourly.
The typical case in our industry is the factory building 10,000 units a day, day in and day out. First the machines stack up in the warehouse, and they stack up in the channel. And all of a sudden, the guy at the end of the chain hollers, "Whoa, hey, we've got too many of these. Everybody stop!" And the order to stop flows back through the chain until it reaches every component supplier. It's literally stop and start, because if you have a 90-day lag between the point of demand and the point of supply, you're going to have a lot of inefficiency in the process. And the more inventory and time you have, the more variability, and the more problems.
In our industry, there's a lot of what I call bad hygiene. Companies stuff the channel to get rid of old inventory and to meet short-term financial objectives. We think our approach is better. We substitute information for inventory and ship only when we have real demand from real end customers.
How does the direct model benefit your suppliers?
We can go to Sony and say, "We're going to be pulling monitors from you in a very consistent, predictable way because the distance between the demand and the source of supply is totally shrunk." The longer that distance, the more intermediary channels you add, the less likely it is you will have good information about demand -- so you will end up with more variability, more inventory, higher costs, and more risk.
Another factor that helps keep our demand for computers level is the mix of customers we serve. We don't have any customer that represents more than 1% to 2% of our revenues. One week Exxon is buying, the next week Shell is buying, the next week Ford is buying. But all companies don't decide in unison, "Well this week we're going to buy, next week we're not."
You mention your customer mix. Does the direct model imply a particular customer strategy?
If you'd asked me that question 12 years ago, I would have said that we didn't differentiate much between our largest and our smallest customers. Today we do. Our customer strategy is one area where our model has evolved. We've become good at developing what we call "scalable" businesses -- that is, those in which we can grow revenues faster than expenses. We really look closely at financial measures like gross margins by customer segment-- and we focus segments we can serve profitably as we achieve scale. People are sometimes surprised to learn that 90% of our sales go to institutions -- business or government -- and 70% to very large customers that buy at least $1 million in PCs per year.
When you're trying to target profitable segments, averages obscure a lot, and aggregate financial statements are pretty meaningless. Our approach to segmentation is to take really big numbers and "de-average" them. Until you look inside and understand what's going on by business, by customer, by geography, you don't know anything. This is a lesson we learned the hard way. We incorrectly entered the retail business in 1989, thinking that our direct business wouldn't grow enough, and went into computer superstores and warehouse clubs. But when we really started to understand the segment's profitability, we realized we'd made a mistake and so we exited.
For years, we didn't actively pursue the consumer market because we couldn't reach our profit objectives. So we let our competitors introduce machines with rock-bottom prices and zero margins. We figured they could be the ones to teach consumers about PCs while we focused our efforts on more profitable segments. And then, because we're direct and can see who is buying what, we noticed something interesting. The industry's average selling price to consumers was gong down, but ours was going up. Consumers who were now buying their second or third machines -- who wanted the most powerful machines and needed less handholding -- were coming to us.. And without focusing on it in a significant way, we had a billion-dollar consumer business that was profitable. So we decided in 1997 that it was time to dedicate a group to serving that segment.
So, over time, you cut the market into finer and finer segments?
Yes, for a lot of reasons. One is to identify unique opportunities and economics. The other is purely a managerial issue: you can't possibly manage something well if it's too big. Segmentation gives us better attention and focus. [See the exhibit "Fast-Cycle Segmentation."]
(Graphic: Fast Cycle Segmentation) Dell's rapid growth in recent years has been accompanied by ever finer cuts at customer segmentation. this is an important element of Dell's virtual integration with customers. The finer the segmentation, the better able Dell is to forecast what its customers are going to need and when. Dell then coordinates the flow of that strategic information all the way back to it suppliers, effectively substituting information for inventory.
Each segment has its own issues. In education, for instance, how do you get tech support to a classroom when the teacher doesn't have a telephone? You need a totally different approach. Segmenting lets you tailor your programs to the customers' needs. If you just lump diverse customers together, you can be sure that some of them will come last on some manager's list, and he may never get around to solving their problems. That's why we make serving one segment the manager's only job.
Do you get other benefits from segmenting your customers?
Segmentation gets us closer to them. It allows us to understand their needs in a really deep way. This closeness gives us access to information that's absolutely critical to our strategy. It helps us forecast what they're going to need and when. And good forecasts are the key to keeping our costs down.
We turn our inventory over 30 times per year. If you look at the complexity and the diversity of our product line, there's no way we could do that unless we had credible information about what the customer is actually buying. It's a key part of why rivals have had great difficulty competing with Dell. It's not just that we sell direct, it's also our ability to forecast demand -- it's both the design of the product and the way the information from the customer flows all the way through manufacturing to our suppliers. If you don't have that tight linkage -- the kind of coordination of information that used to be possible only in vertically integrated companies-- then trying to manage to 11 days of inventory would be insane. we simply couldn't do it without customers who work with us as partners.
Could you describe how you forecast demand?
We see forecasting as a critical sales skill. We teach our sales-account mangers to lead customers through a discussion of their future PC needs. We'll walk a customer through every department of his company, asking him to designate which needs are certain and which are contingent. And when they're contingent on some event, the salesperson will know what that event is so he can follow up. We can do this with our large accounts, which make up the bulk of our business. With smaller customers, we have real time information about what they're buying from our direct telephone salespeople. And we can also steer them in real time, on the phone, toward configurations that are available, so this is another way we can fine-tune the balance between supply and demand.
Is that what you mean by virtual integration with your customers?
It's part of it. There are so many information links between us and our customers. For example, we can help large global customers manage their total purchase of PCs by selling them a standard product. Then when the guy whose computer isn't working calls in from Singapore, the IT people don't have to spend the first 30 minutes just figuring out what configuration of hardware and software he's using Selling direct allows us to keep track of the company's total PC purchases, country by country -- and that's valuable information we can feed back to them. We sometimes know more about a customer's operations than they do themselves.
Close customer relationships have allowed us to dramatically extend the value we deliver to our customers. Today we routinely load the customer's software in our factory. Eastman Chemical, for example, has their own unique mix of software, some of it licensed from Microsoft, some of it they've written themselves, some of it having to do with the way their network works. Normally, they would get their PCs, take them out of the box, and then some guy carrying a walkie-talkie and diskettes and CD-ROMs would come to each employee's desk to hook the system up and load all that software. typically, this takes an our or two--and costs $200 to $300--and it's a nuisance.
Our solution was to create a massive network in our factory with high-speed, 100-megabit Ethernet. Well load Eastman Chemical's software onto a huge Dell server. Then when a machine comes down the assembly line and says, "I'm an Eastman Chemical analyst workstation, configuration number 14,: all of a sudden a few hundred megabytes of data come rushing through the network and onto the workstation's hard disk, just as part of that progressive build through our factory. If the customer wants, we can put an asset tag with the company's logo on the machine and we can keep an electronic register of the customer's assets. That's a lot easier than the customer sending some guy around on a thankless mission, placing asset tags on computers when he can find them.
What happens to the money our customer is saving? They get to keep most of it. We could say, "Well, it costs you $300 to do it, so we'll charge you $250." But instead we charge $15 or $20, and we make our product and our service much more valuable. It also means we're not going to be just your PC vendor anymore. We're going to be your IT department for PCs.
Boeing, for example, has 100,00 Dell PCs and we have 30 people that live at Boeing, and if you look at the things we're doing for them or for other customers, we don't look like a supplier, we look more like Boeing's PC department. We come intimately involved in planning their PC needs and the configuration of their network. It's not that we make these decisions by ourselves. They're certainly using their own people to get the best answer for the company. But the people working on the Pcs together, both from Dell and Boeing, understand the needs in a very intimate way. They're right there living it and breathing it, as opposed to the typical vendor who says, "Here are you computers, See you later."
We've always visited clients, but now some of our accounts are large enough to justify a dedicated on-site team. Remember, a lot of companies have far more complex problems to deal with than PC purchasing and servicing. They can't wait to get somebody else to take care of that so they can worry about more strategic issues. |
