Dell's direct-to-consumer model and just-in-time inventory management

Dell Computer

Dell

Operations management: Dell Computer

This seems fitting, given that it was Dell who conceived of the unique business model that catapulted Dell to the forefront of the PC market for nearly a decade. What is so extraordinary about the Dell success story (and some would say, the Dell fall from grace) is that Dell achieved its success through its operations management rather than creating a new product like Apple or Microsoft. Dell, in fact, hardly spends any money at all on R&D. "It's a simple business model, but what makes it a success is doing it on that kind of scale and with that kind of complexity... Dell spends little on product research and development -- $440 million a year, vs. $4 billion a year at Hewlett-Packard" (Maney 2003).

The direct-to-consumer model

Dell pioneered the direct-to-consumer model of computer sales. By building computers customized to consumer needs, Dell was able to bypass the expenses of the 'middleman' or retailer, and pass savings on to consumers. The PC market was flagging in the post-2001 market, but Dell prospered, despite the recessionary atmosphere. In "one of the worst PC markets in history, Dell gained enough share...to become the number-one company in the business. At a time when every one of its major competitors is losing money in PCs, Dell is making it, keeping margins flat while waging a price war that's destroying its rivals. And the company's share price held up in the bleakest slump the industry has ever seen" wrote industry analysts soon after the recession took hold (Schrage 2002).

Building computers to suit customer's demands meant that Dell could keep inventories extremely low, much along the lines of the Toyota model of Just-in-Time (JIT) manufacturing. With technology, keeping inventories low is essential. Technologies so quickly become obsolete, unsold inventory becomes worthless. With JIT and building to consumer specifications, this risk is radically reduced and translates into cost savings for the consumer and for the vendor. Before Dell implemented its direct-to-consumer model, it was a struggling company with little to distinguish itself from its competitors in terms of its product, thus making it a "second-tier PC maker" to HP and Compaq (Byrnes 2004). "Like other PC makers, Dell ordered its components in advance and carried a large amount of component inventory. If its forecasts were wrong, Dell had major write-downs" (Byrnes 2004). Eliminating inventories with build-to-order computers eliminated the need for such write-downs.

Dell's model of management became more talked-about than the quality of its PCs. "Executives from all walks of industry have made pilgrimages to Austin, hoping to bring back a formula they could apply to their own companies. 'If this works for computers, it's going to work for automobiles, furniture, carpets, appliances, anything,'" (Schrage 2002). As American industry became increasingly service-focused, Dell staked its reputation upon selling a service, rather than a physical product, in a way that was unique in the PC industry and in a way which enabled it to use its operations model to keep prices low. "Coordinating a company's day-to-day activities through careful forethought and great management, was at the core of Dell's transformation in this critical period. Dell created a tightly-aligned business model that enabled it to manage away the need for its component inventories. Not only was capital not needed, but the change generated enormous amounts of cash that Dell used to fuel its growth" (Byrnes 2003). Dell saved money to pass onto consumers without slashing quality of service or product quality. It developed large cash reserves as a company and became one of the 'darlings' of Wall Street.

Declining PC demand

However, Dell's model of focusing on consumer needs in the here-and-now created tunnel vision about where the PC industry was heading in the future. Although Dell weathered the 2002 recession admirably, it did not fare so well after the 2008 recession. During the earlier half of the decade, "the company wanted to beef up areas such as data storage and tech services to better compete with IBM...Wind the clock forward a decade, and they've done almost none of that," resulting in a relatively stagnant business that had once been the flagship of out-of-the-box thinking (Ricadela 2009).

Consumer technology spending as a whole has been dropping, and Dell has been hurt as well by the fact that it has a less 'sexy' image than its rival Apple, and it is no longer able to compete solely on cost, given that its competitors with higher cash reserves like HP are also slashing prices. "In a tough consumer economy, companies such as HP can make up for weaker PC sales with better results from high-end servers or printers [but] Dell's business is so tied to PC sales that it has little choice but to cut prices" (Mintz 2008). Slashing prices has enabled Dell to boost sales and slashing employee payrolls has reduced operating costs, but has also resulted in a dramatically lower profit margin.

But the reasons for Dell's decline may also be structural as well as due to the economic downturn and inferior products. The fact is, quite simply, that Dell's business model rests upon PC sales, and consumers are buying fewer PCs and relying more on tablets and mobile phones for their computing needs. This is helpful for Apple and dire for Dell. As early as 2003, while Dell was prospering, there were warning signs of a weakening PC market, but Dell continued to rest upon its laurels and focused upon what it did best -- keeping inventory low and responsiveness to customers high (Maney 2003). Conventional wisdom suggests that a company 'sticking to its guns' and focusing on 'doing what it does best' is often the right strategy, but in the volatile technology industry, this can be problematic. In one recent survey: "77% of respondents said their PC use dropped after they got a tablet, and 43% said they spend more time with their slates than with desktops or laptops... A tablet was the primary computer for 28% of survey participants." (Moyer 2011).

Conclusion

The Dell business model was revolutionary for its time, and served the company well. However, given changes in consumer demand and changes in the way people interact with technology, it is unlikely to be viable in the future. People are using PCs far less than ever before, and Dell has been unable to adhere to its low-cost model and remain profitable as a company.

Dell has been striving to contain costs by once again reinvigorating its operations management: it has been closing down factories, streamlining the numbers of employees, and otherwise creating a leaner production line. But it used to be that the Dell business model was the unique, 'extra special something' that it could offer that distinguished it from its rivals, and that is no longer the case.