Geoff -
1. direct-channel distribution which eliminates the costs of using resellers.
But the costs of using resellers don't impact GM since it is before any channel markup. The channel IS CPQ's customer. GM is a pretty reliable indicator of component costs in a MFG business. Channel related contra-revenue is important in looking at net income but not GM or component cost.
Dell has a number of advantages inherent in their business model. but lowest component costs are not among them. They may have the highest base component cost of the big 4 (IBM, HP, CPQ and Dell). Not only does Dell buy with lower block volume, but they put a lot of the inventory burden on their suppliers. That's not a formula for getting the best price. I am basing this on discussions with Dell executives themselves, so I don't think I'm too far off base.
2. lower inventory costs
I have pretty good evidence that CPQ's component costs are 9-10% lower than Dells. You're right, they then give up 6-7% of that in inventory carrying costs, but that still leaves them with 2-3% advantage at the component cost level.
3. More efficient cash management.
No argument there, Dell is the best in the business at managing cash
4. Dell does not engage in costly, Rube Goldberg price-protection schemes. CPQ does
CPQ used to give up on the order of 9% to the channels just in price protection. But they have decreased price protection from an average of 6 months in 97 down to 2-4 weeks, so the price protection contra-revenue should be between 1 and 2 percent now. Return policy is also much more restrictive today, pretty much limited to out-of-box failures.
We'll have to see how this stuff pans out in 3Q and 4Q when the new policies start to impact the financials, but I don't believe that Dell has an advantage in the basic manufacturing model. BTO gives them an advantage in customer satisfaction and inventory carrying costs but works against them in other ways. These are business model tradeoffs, each has advantages and disadvantages depending on market conditions. |
