The Strategy adopted by DELL: Just-in-Time manufacturing
JIT, Just-In-Time is a term usually thought of as describing inventory arriving or being produced just in time for the shipment or next process. Just-In-Time inventory systems depend upon logistics that include transportation, warehousing and several strategies for handling the potential supply chain uncertainties. Just-in-time is easy to grasp conceptually, everything happens just-in-time. Conceptually there is no problem about this; however achieving it in practice is likely to be difficult!
Many corporations have adopted JIT since its inception but no one has gone as far as Dell. It is well known, of course, for nearly eliminating finished-goods inventory by cutting out resellers and connecting directly to customers. What is less known is how it has transformed the back end of its operations -- its assembly lines and supply chain -- into one of the fastest, most hyper efficient organizations on the planet. Eleven years ago, Dell carried 20 to 25 days of inventory in a sprawling network of warehouses. Today, it has no warehouses. Though it assembles nearly 80,000 computers every 24 hours, it carries no more than two hours of inventory in its factories and a maximum of just 72 hours across its entire operation. The key to this robust production system is a solid process that monitors demand and supply on a real-time, continuing basis. "But when you have basically zero inventory, it's like draining a swamp -- all of the stumps start to show," Dell says. "The problems reveal themselves, and you can take immediate corrective action to fix them."
The New Finance Model in place
The implications of working in this kind of hyper drive are profound. Dell changes the finance model, and it is an enormous competitive weapon. On average, computer makers pay their suppliers 30 days before a PC is shipped to market, bought by a customer, and paid for. However, Dell's build to-order model lets it receive payments from its customers immediately -- through credit cards, either online or over the phone. It pulls the parts directly from its suppliers; builds and ships the product within four days. Yet the company does not pay those suppliers until 36 days after it receives payment from the customer. So Dell has achieved a cash-conversion cycle of negative 36 days. That means it operates with negative working capital, eliminating the need to finance its operations. Dell turns its inventory 107 times per year -- an astounding advantage over HP and IBM, which flip their inventories 8.5 and 17.5 times per year, respectively. It's a fundamental law of manufacturing that the faster you turn inventory the lower are your costs. To get a slice of its lavish procurement pie, Dell's legions of suppliers must do things its way. They must be flexible enough, cost-competitive enough -- and above all, fast enough -- to compete on Dell's terms.
The Constant drive for development
Dell is every bit as hard on itself as it is on the folks who make its disk drives and batteries. Dell has brought a maniacal focus to shaving minutes off the time it takes to assemble and ship a computer. By studying videotapes of "the build," as they call it, factory managers have slashed in half the number of times a computer is touched by workers. They have counted the screws in a PC and redesigned it so that the major components -- hard drive, graphics card, CD player – simply snap in place. In a blur of synchronized movements, a veteran builder can piece together a Dell PC in three minutes. The software burn and testing, which is powered by Dell servers with enough bandwidth to download the entire Encyclopedia Britannica in eight seconds, takes several hours, depending on the amount of customization that is required. The entire process, from the time the order is taken to when the finished PC exits the factory, is wrapped up in four to eight hours. Dell is always on a mission to outdo itself, and the factory is expected to increase its production by 30% every year.
The Thin White Line: Kanban Analogy
Dell's clout with its suppliers is epitomized by a set of thin white lines on the floor of the manufacturing plant. The lines form a rectangle that fronts each of the 110 cargo bays encircling the factory. Tractor-trailers loaded with parts line up at the bays. When an assembly line runs low on disk drives, a signal goes out. A forklift wheels onto a trailer bed, snatches a pallet of disks, and pulls out onto the floor. When the forklift crosses the white line, a scanner records the shipment's bar code and the parts move from the supplier's books to Dell's. Dell does not pull the part until it has a customer order; it does not take ownership until it pulls the part.
In effect, that thin white line demarcates Dell's entire supply chain. Dell holds inventory only for the six to eight hours it travels across the assembly line and for the 18 hours it takes for the completed CPU to be trucked to merge center, where the unit is bundled with a monitor and shipped to the customer. Total inventory time: two to three days. Most suppliers, however, are required to stage anywhere from 8 to 10 days' worth of buffer stock in those multivendor warehouses located within 90 minutes of the plant
The constant Pressure on vendors
Dell is hardly coy about pressuring its suppliers to do better. A metrics-obsessed organization measures everything, not least its suppliers' performance. It rates all of its vendors on their ability to compete on cost, technology, supply predictability, and service, and posts their scores daily on a password-protected Web site. Every quarter, the suppliers' executive team meets in Round Rock, Texas, where Dell is headquartered, for a formal feedback session. In these meetings, dubbed QBRs (quarterly business reviews), suppliers are ranked against their competitors. Based on that comparison, they are awarded a percentage of Dell's purchases for the upcoming quarter. Dell is cold-eyed in these assessments, unflinching and unsentimental.
Despite being one of the market leaders, Dell is still relentlessly striving to get better faster; Dell intends to slash $2 billion in costs which will come from manufacturing operations and the supply chain. That will put even more pressure on Dell's component makers. As Michael Dell aptly says, ‘In the high-tech business, you either grow or die’.
Praneet Gourav Mishra (PGP 24151)