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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Chuzzlewit who wrote (50050)	7/8/1998 1:12:00 AM
From: rudedog	Respond to of 176387

chuz - Why didn't Compaq simply drop ship orders to the customer instead. That way the reseller never has to take physical possession of the merchandise and inventory is kept down. I think that's exactly the plan. 3 companies are setting up shop in the houston plant areas being vacated by the consolidation of mfg facilities, and rumor is that they will be doing bto assembly and drop-shipping to fulfill channel bto requests. So the parts are just over the wall and the channel never touches the inventory. Better than the old CPQ model but not on a par with Dell - CPQ still has to give the channel a cut and also somebody pays the assembler...

To: Chuzzlewit who wrote (50050)	7/8/1998 10:43:00 AM
From: Geoff Nunn	Respond to of 176387

Hi Chuz, It really is remarkable, isn't it, how much CPQ's production system seemingly is a throwback to the Soviet era. The Soviet coordinaion problem was impossible to solve because production was divorced from market demand. Instead of profits, output was the main measure of success for Soviet managers. The more a firm or manager produced the better. What was missing - and what seems to be missing from CPQ's model - was a central role for price. The Soviets seemingly were never to grasp the fact that prices are the key to solving the coordination problem. In the Soviet model, prices seldom changed over time. Often they were arbitrarily set, with only a tenuous relationship to costs of production. ( a real no no if efficiency is a goal, but that's another story). Anyway the price of, say, a pair of shoes would be stenciled on the box as if that was to be the price today, the price tomorrow, the price 5 years from now. They problem, of course, is that demand or supply shift over time, and so you don't get market clearing with fixed prices. You get shortages or surpluses - mostly shortages in the Soviet case because prices usually were set too low. Occasionally though, there would be surpluses (e.g., too many size #4 shoes). When this happened production would go on merrily as if nothing were wrong, with surpluses #4 shoes piling up in a warehouse. In a market economy this wouldn't happen, because the price of size #4 shoes would drop, which would send a signal to manufacturers to cut production. Is it really fair to compare CPQ with the Soviets? I think so. The hallmark of CPQ's pricing model is price rigidity, and also price uniformity across geographical regions. The prices of CPQ products are decided by CPQ executives in Houston, not by each reseller. This is a key to understanding why the CPQ model crashed last spring IMO. I ask you, who knows better what price a particular CPQ computer should fetch up there in Seattle, the local reseller in Seattle or CPQ authorities in Houston? I think we both know the answer. Because of this centralized pricing model - i.e., one price fits all markets, and price rigidity, you have a recipe for chaos. The prices of CPQ products frequently bear little relationship to supply and demand. This explains the inventory glut last spring. If CPQ had a more rational pricing approach (i.e., prices set by individual resellers, not dictated in Houston) that would be a major step to solving their coordination problem. One more thought, how is it that Dell is able to solve its coordination problem apparently in such wizard like fashion? After all, Dell's plants seem to hum along at full capacity month after month with output matching sell orders. There seems to be an ongoing balancing of production with demand, so that layoffs because of slumping sales are unheard of. You also don't observe periods in which Dell's products are in short supply. If you want a Dell product, order it and expect to receive it in ~8 days. What's Dell's secret? Mostly it lies in the extraordinary skills of Dell's management team. Yet I don't think I'm revealing any trade secret to say that price also has something to do with it. Dell evaluates the market constantly, and adjusts prices frequently - perhaps daily - in order to equate sales and production. Without price playing a central role, even a group of managers as talented as Dell's would be unable to maintain sales and production coordination. I suspect CPQ authorities will soon realize their pricing approach is flawed. How many more managers though will Comrade Pfeiffer sack in the meantime? <gg> Geoff