Competitive Advantage of Manufacturing
Granola,
re btw, forgive me if this has been covered before, but has anyone considered cpq's competitive advantage of manufacturing?? haven't compared with dell's model and would like to at some point.
Yes, this has been covered, though not for a while. You cite "cpq's competitive advantage of manufacturing" as if it were a given.
IF the following conditions prevailed,
a) Component costs held stable over an extended time period
b) CPQ could accurately predict near term consumption of all models
c) Customers would take only those models and not request others or modifications...
then theoretically, CPQ could potentially realize some economies of scale. I do not have data to show that CPQ gets better component pricing than DELL, though it may. By building only selected models for a pre-determined output, CPQ should be able to produce a bit more economically than DELL. However, IMO, any cost savings achieved in assembly would be more than offset by the added expenses of doing business through the channel.
Furthermore, if one examines my conditions, it is obvious that none of them hold true today. Component costs are falling*; CPQ is unable to accurately predict consumption; and customers want modifications. Also, as long as CPQ continues to use the channel, I don't see an effective way for it to do comparable quality control on its product.
At this point DELL's model truly shines, since DELL is able to take instant advantage of component price cuts: at DELL's option, it can maintain pricing while passing greater margins along to its bottom line (and shareholders); or it can reduce pricing, passing the savings along to its customers. In this case, customer satisfaction results in long term benefits to the bottom line. If one goes back and observes the sequence of events in which a component supplier such as INTC lowers prices, followed by the PC industry lowering prices, I think you will find that DELL is always the first: essentially 'cracking the price whip'.
Also, since DELL maintains minimal 'shelf' inventory, the capital tied up in product inventory (goods which have been paid for and produced but not yet sold, stacked in the warehouse) is negligible. DELL can use the additional liquidity for its own purposes, stock buy-backs, construction, investment, etc.
* (Note on component costs: DELL uses only INTC chips, and CPQ has begun using AMD and Cyrix, so that CPQ's chip costs could be lower. I understand that AMD has had problems producing enough of the higher-end chips to satisfy demand; also that INTC has greatly reduced prices to keep itself competitive.)
Bottom line: I think that "CPQ's competitive manufacturing advantage" is mythical at best.
regards, bachman |
