Interesting article from TheStreet.com
Top Stories: Touring the Defect-Free Digs at Dell
By Eric Moskowitz
Staff Reporter / TheStreet.com
10/14/98 1:46 PM ET
AUSTIN, Texas -- You know you're in Austin as soon as you
step off the plane because instead of seeing advertising
for car-rental companies or Broadway shows, you are
surrounded by ads for information-technology
consulting, Samsung Semiconductor and the Dell
DELL:Nasdaq) factory outlet.
It is odd to discover that Dell also sells refurbished PCs
and peripherals in local outlets, because the company
has seemingly mastered selling direct by phone or on
its Web site. After all, CEO Michael Dell's direct
business model and hyperefficient manufacturing
method made him a multibillionaire and created
hundreds of Dell millionaires.
In the 1990s bull market, Dell is just about the
best-performing stock in America. Even after this
summer's technology-tinged collapse, the stock is up
131% year to date and an incredible 8,000% over the
last five years, according to Baseline. To get that kind
of performance, Dell has had to be one step ahead of
its PC rivals. Now Dell is applying its proven direct-sales
model for PCs to other products, including servers,
workstations and, most recently, storage equipment.
That can't be good news for its competitors, which are
counting on these higher-margin areas to insulate them
from the pricing war raging across the desktop
computer landscape.
To understand Dell's magic, take a look at its
Round Rock, Texas, compound, where the
company likes to show off its Metric 12
manufacturing facility, which produces 65% of
the PCs made for its corporate clients in the
Americas region. It's bright, squeaky clean and
so closely monitored that the temperature never
strays from 76 degrees, says Dell's senior
operations manager, Bill Wischmeyer. It takes Dell
just five hours to put together a PC for its mainly corporate customers, and five days to ship the final product out of the door. )
The standards at Metric 12, which will be replicated in
China and Brazil over the next year, are so high that it
has been declared a "defect-free zone." This means if
there are any malfunctioning components, vendors
such as Western Digital (WDC:NYSE), Quantum
(QNTM:Nasdaq) and Maxtor (MXTR:Nasdaq) will
replace them with no questions asked.
What about Dell's inventory? It's sitting outside Metric
12 in 35 nondescript trailers. When one of the trailers
gets light on inventory, one of Dell's vendors nearby
rolls up with another trailer, full of motherboards, PC
cards and all the other guts of the PC. No wonder the
company only has eight days of inventory -- the best in
the industry.
This translates into a huge cost advantage for Dell.
With component pricing falling at an average of 1% a
month this year, holding large inventory is a costly
business.
Dell is replicating its direct model to build servers,
storage equipment and workstations, three product
lines that should sport even better margins than its
desktops. In the next month, Dell is opening a plant that
will exclusively build servers and workstations near
Metric 12, says Wischmeyer. Already, its server
business -- using the same build-to-order model it uses
for its PCs -- has zoomed up the market-share chart.
Dell's Five-Day Manufacturing Model
Day 1 Call Center -- Order received
Day 2 Production Control -- Production unit makes sure all the
PC parts it needs for order.
Day 3 Accounting -- Order spends a day in company's accounting unit.
Day 4 Manufacturing -- PC is made
Step 1: Kitting -- Assembling all the parts needed per unit
into a box.
Step 2: Build -- Employees put together PC and quick-test each unit.
Step 3: Extended test -- If there's a problem in the PC quick-test, it goes here for more extended tests.
Step 4: Boxing the PC -- The box or tower gets boxed and then shipped to the distribution center. Manufaturing Time: Around 5 hours.
Day 5 Distr. center -- This is where Dell places all the
necessary peripherals in the box for shipment.
"We have gone from No. 9 in the server market, with a
less than 2% market share in 1996, to a No. 2 position
and a 20% share in the U.S.," boasts Scott Weinbrandt,
Dell's director of server brand marketing. Dell now is
fourth in worldwide server market sales, with 11.3%
share of unit shipments, according to International
Data. The company is now ramping up its storage
business, a strategy to give Dell a more comprehensive
package of hardware products for its enterprise clients,
says Weinbrandt, who counts EMC (EMC:NYSE), Storage Technology (STK:NYSE) and IBM (IBM:NYSE) as its biggest competitors in this space.
"We want to pass along storage models at lower price
points than our competitors who have been gouging
customers for years," says Weinbrandt, who confidently
added: "We will never be undersold on price."
This can-do confidence also can be found in Dell's
sales force, which resides in Building No. 3 at Round
Rock. This is where deals are done. The 200-strong
sales force is broken up into regional teams with very
specific performance goals tied to employee
compensation. Some more creative team names are
the New York Mobsters and the Mid-Atlantic Maniacs.
Why do you need a sales team if Dell's direct-order
model is wowing fans and rivals alike? To get the big
corporate accounts, Dell gives its larger enterprise
customers steep discounts that make Dell's prices
comparable to its top competitors', says Eric Brown,
Dell's national business development manager. "We
couldn't have our kind of revenue growth if we didn't do this," says Brown.
That might explain why, in its most recent quarter, Dell's
revenue was up 54%. Brown adds that employee
compensation is now also tied to selling higher-end
server and workstation products, perhaps another
reason why Dell's gross margins have remained stable
this year in the face of all this price competition from
Compaq (CPQ:NYSE) and Hewlett-Packard (HWP:NYSE). In its July quarter (Dell's fiscal year ends in January), gross margins edged up to 22.7% from 22.2% in the year-ago quarter.
The company also seems to be ahead of the pack in
Internet sales through Dell Online, which account for $6
million a day, or between 11% and 12% of the
company's revenue. But ever the taskmaster, Michael
Dell wants 50% of revenue to come from online sales
by January 2001.
To keep its best customers happy and loyal, Dell Online has
set up 7,000 personalized, password-protected intranet sites called
"Premier Pages" that can be used by companies to get prices,
company discounts and the latest product releases. "And we can put these up for a company in 24 hours," says Michael Swart, Dell Online's head of personalization and publishing.
Dell's move toward e-commerce and higher-end
products is no surprise: In fact, all of its competitors in
this space are moving that way as well. But when Dell
decides to go in a certain direction, it simply executes
better than its peers. Although it was a late entrant into
the server sweepstakes, for example, Dell showed
server sales growth last year of 208% over the year
before, by far the best in the industry. And it should be
able to make similar inroads in the storage market. How
can you be sure? It's the business model. |
