Module-6-Summative-6.3.docx

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Module 6

Summative Assessment 6.3

100 marks

This assessment covers:

Unit 13945 – Describe and apply the management of stock and fixed assets in a business unit

Please read the following case study and answer the 4 questions that follow.

http://www.mhhe.com/business/management/thompson/11e/case/dell5.html

Dell Computer Corporation

Dell Computer’s Strategy

Dell Computer’s strategy was built around a number of core elements: build-to-order manufacturing, mass customization, partnerships with suppliers, just-in-time components inventories, direct sales, market segmentation, customer service, and extensive data and information sharing with both supply partners and customers. Through this strategy, the company hoped to achieve what Michael Dell called “virtual integration”—a stitching together of Dell’s business with its supply partners and customers in real time such that all three appeared to be part of the same organizational team.5

Build-to-Order Manufacturing and Mass Customization

http://www.mhhe.com/business/management/thompson/11e/case/Images/Optiplex1.jpg Dell built its computers, workstations, and servers to order; none were produced for inventory. Dell customers could order custom-built servers and workstations based on the needs of their applications. Desktop and laptop customers ordered whatever configuration of microprocessor speed, random access memory (RAM), hard-disk capacity, CD-ROM drive, fax/modem, monitor size, speakers, and other accessories they preferred. The orders were directed to the nearest factory. Until recently Dell had operated its assembly lines in traditional fashion, with workers each performing a single operation. An order form accompanied each metal chassis across the production floor; drives, chips, and ancillary items were installed to match customer specifications. As a partly assembled PC arrived at a new workstation, the operator, standing beside a tall steel rack with drawers full of components, was instructed what to do by little red and green lights flashing beside the drawers. When the operator was finished, the components were automatically replenished from the other side of the drawers and the PC chassis glided down the line to the next workstation. However, Dell reorganized its plants in 1997, shifting to “cell manufacturing” techniques whereby a team of workers operating at a group workstation (or cell) assembled an entire PC according to customer specifications. The result had been to reduce assembly times by 75 percent and to double productivity per square foot of assembly space. Assembled computers were tested, then loaded with the desired software, shipped, and typically delivered within five to six business days of the initial order.

This sell-direct strategy meant, of course, that Dell had no in-house stock of finished goods inventories and that, unlike competitors using the traditional value chain model (Exhibit 6), it did not have to wait for resellers to clear out their own inventories before it could push new models into the marketplace. (Resellers typically operated with 60-70 days’ inventory.) Equally important was the fact that customers who bought from Dell got the satisfaction of having their computers customized to their particular liking and pocketbook.

Dell had three PC assembly plants—in Austin, Texas; Limerick, Ireland; and Penang, Malaysia. The company was constructing another plant in Ireland to serve the European market as well as a new plant in China (the company expected the market for PCs in China to soon be huge). Both of the new plants were expected to come into use at the end of 1998.

Partnerships with Suppliers

http://www.mhhe.com/business/management/thompson/11e/case/Images/Optiplex2.jpg Michael Dell believed it made much better sense for Dell Computer to partner with reputable suppliers of PC parts and components rather than to integrate backward and get into parts and components manufacturing on its own. He explained why:

If you’ve got a race with 20 players all vying to make the fastest graphics chip in the world, do you want to be the 21st horse, or do you want to evaluate the field of 20 and pick the best one?6

Management believed long-term partnerships with reputable suppliers yielded several advantages. First, using name-brand processors, disk drives, modems, speakers, and multimedia components enhanced the quality and performance of Dell’s PCs. Because of the varying performance of different brands of components, the brand of the components was as important or more important to some buyers than the brand of the overall system. Dell’s strategy was to partner with as few outside vendors as possible and to stay with those vendors as long as they maintained their leadership in technology, performance, and quality. Second, because Dell committed to purchase a specified percentage of its requirements from each of its long-term suppliers, Dell was assured of getting the volume of components it needed on a timely basis even when overall market demand for a particular component temporarily exceeded the overall market supply. Third, Dell’s formal partnerships with key suppliers made it feasible to have some of their engineers assigned to Dell’s product design teams and for them to be treated as part of Dell. When new products were launched, suppliers’ engineers were stationed in Dell’s plant. If early buyers called with a problem related to design, further assembly and shipments were halted while the supplier’s engineers and Dell personnel corrected the flaw on the spot.7 Fourth, Dell’s long-run commitment to its suppliers laid the basis for just-in-time delivery of suppliers’ products to Dell’s assembly plants in Texas, Ireland, and Malaysia. Some of Dell’s vendors had plants or distribution centers within a few miles of Dell’s Texas assembly plant and could deliver daily or even hourly if needed. To help suppliers meet its just-in-time delivery expectations, Dell openly shared its daily production schedules, sales forecasts, and new-model introduction plans with vendors.

Michael Dell explained one aspect of the information-sharing relationship with suppliers as follows:

We tell our suppliers exactly what our daily production requirements are. So it’s not, “Well, every two weeks deliver 5,000 to this warehouse, and we’ll put them on the shelf, and then we’ll take them off the shelf.” It’s, “Tomorrow morning we need 8,562, and deliver them to door number seven by 7 am.”8

Dell also did a three-year plan with each of its key suppliers and worked with suppliers to minimize the number of different stock-keeping units of parts and components in designing its products.

Why Dell Was Committed to Just-in-Time Inventory Practices

Dell’s just-in-time inventory emphasis yielded major cost advantages and shortened the time it took for Dell to get new generations of its computer models into the marketplace. New advances were coming so fast in certain computer parts and components (particularly microprocessors, disk drives, and modems) that any given item in inventory was obsolete in a matter of months, sometimes quicker. Having a couple of months of component inventories meant getting caught in the transition from one generation of components to the next. Moreover, there were rapid-fire reductions in the prices of components—most recently, component prices had been falling as much as 50 percent annually (an average of 1 percent a week). Intel, for example, regularly cut the prices on its older chips when it introduced newer chips, and it introduced new chip generations about every three months. And the prices of hard-disk drives with greater and greater memory capacity had dropped sharply as disk drive makers incorporated new technology that allowed them to add more gigabytes of hard-disk memory very inexpensively.

The economics of minimal component inventories were dramatic. Michael Dell explained:

If I’ve got 11 days of inventory and my competitor has 80 and Intel comes out with a new 450-megahertz chip, that means I’m going to get to market 69 days sooner.

In the computer industry, inventory can be a pretty massive risk because if the cost of materials is going down 50 percent a year and you have two or three months of inventory versus eleven days, you’ve got a big cost disadvantage. And you’re vulnerable to product transitions, when you can get stuck with obsolete inventory.9

Collaboration with suppliers was close enough to allow Dell to operate with only a few days of inventory for some components and a few hours of inventory for others. Dell supplied data on inventories and replenishment needs to its suppliers at least once a day—hourly in the case of components being delivered several times daily from nearby sources. In a couple of instances, Dell’s close partnership with vendors allowed it to operate with no inventories. Dell’s supplier of monitors was Sony. Because the monitors Sony supplied with the Dell name already imprinted were of dependably high quality (a defect rate of fewer than 1,000 per million), Dell didn’t even open up the monitor boxes to test them.10 Nor did it bother to have them shipped to Dell’s assembly plants to be warehoused for shipment to customers. Instead, utilizing sophisticated data exchange systems, Dell arranged for its shippers (Airborne Express and UPS) to pick up computers at its Austin plant, then pick up the accompanying monitors at the Sony plant in Mexico, match the customer’s computer order with the customer’s monitor order, and deliver both to the customer simultaneously. The savings in time, energy, and cost were significant.

The company had, over the years, refined and improved its inventory-tracking capabilities and its procedures for operating with small inventories. In 1993, Dell had $2.6 billion in sales and $342 million in inventory. In fiscal year 1998, it had $12.3 billion in sales and $233 million in inventory—an inventory turn ratio of seven days. By comparison, Gateway, which also pursued a build-to-order strategy, had 1997 sales of $6.3 billion and inventories of $249 million—an inventory turn ratio of 14 days. Compaq had inventories of $1.57 billion at year-end 1997, and 1997 sales of $24.6 billion (thus turning its inventories about every 23 days). Dell’s goal was to get its inventory turn down to three days before the year 2000.

Direct Sales

Selling direct to customers gave Dell firsthand intelligence about customer preferences and needs, as well as immediate feedback on design problems and quality glitches. With thousands of phone and fax orders daily, $5 million in daily Internet sales, and daily contacts between the field sales force and customers of all types, the company kept its finger on the market pulse, quickly detecting shifts in sales trends and getting prompt feedback on any problems with its products. If the company got more than a few similar complaints, the information was relayed immediately to design engineers. When design flaws or components defects were found, the factory was notified and the problem corrected within a matter of days. Management believed Dell’s ability to respond quickly gave it a significant advantage over rivals, particularly over PC makers in Asia, that made large production runs and sold standardized products through retail channels. Dell saw its direct sales approach as a totally customer-driven system that allowed quick transitions to new generations of components and PC models.

Despite Dell’s emphasis on direct sales, industry analysts noted that the company sold 10-15 percent of its PCs through a small, select group of resellers.11 Most of these resellers were systems integrators. It was standard for Dell not to allow returns on orders from resellers or to provide price protection in the event of subsequent declines in market prices. From time to time, Dell offered its resellers incentive promotions at up to a 20 percent discount from its advertised prices on end-of-life models. Dell was said to have no plans to expand its reseller network, which consisted of about 50-60 dealers.

Market Segmentation

To make sure that each type of customer was well served, Dell had made a speco finer, more homogeneous categories (see Exhibit 7).

In 1998, 90 percent of Dell’s sales were to business or government institutions and of those 70 percent were to large corporate customers who bought at least $1 million in PCs annually. Many of these large customers typically ordered thousands of units at a time. Dell had hundreds of sales representatives calling on large corporate and institutional accounts. Its customer list included Shell Oil, Exxon, MCI, Ford Motor, Toyota, Eastman Chemical, Boeing, Goldman Sachs, Oracle, Microsoft, Woolwich (a British bank with $64 billion in assets), Michelin, Unilever, Deutsche Bank, Sony, Wal-Mart, and First Union (one of the 10 largest U.S. banks). However, no one customer represented more than 2 percent of total sales. Because corporate customers tended to buy the most expensive computers, Dell commanded the highest average selling prices in the industry—over $1,600 versus an industry average under $1,400.

Dell’s sales to individuals and small businesses were made by telephone, fax, and the Internet. It had a call center in the United States with toll-free lines; customers could talk with a sales representative about specific models, get information faxed or mailed to them, place an order, and pay by credit card. Internationally, Dell had set up six call centers in Europe and Asia that customers could dial toll free.12 The call centers were equipped with technology that routed calls from a particular country to a particular call center. Thus, for example, a customer calling from Lisbon, Portugal, was automatically directed to the call center in Montpelier, France, and connected to a Portuguese-speaking sales representative. Dell began Internet sales at its Web site (www.dell.com) in 1995, almost overnight achieving sales of $1 million per day. In 1997 Internet sales reached an average of $3 million daily, hitting $6 million some days during the Christmas shopping period. In the first quarter of 1997, Dell’s Internet sales averaged nearly $4 million daily; and the company expected that 1998 sales at its Web site would reach $1.5 billion. The fastest growing segment of Dell’s international segment was on the Internet in Europe, where sales were running at a weekly volume of $5 million in early 1998. Internet sales were ramping up rapidly from Asian buyers. In early 1998, Dell’s Internet sales were about equally divided between sales to individuals and sales to business customers. Nearly 1.5 million people visited Dell’s Web site weekly to view information and place orders, about 20 times more than called to talk with sales representatives over the telephone.

In 1997, 31 percent, or $3.8 billion, of Dell’s sales came from foreign customers. Europe, where resellers were strongly entrenched and Dell’s direct sales approach was novel, was Dell’s biggest foreign market. Dell’s European sales were growing at 50 percent annually. The market leader in Europe was Compaq, with a 14.8 percent market share, followed by IBM with 8.3 percent, Dell with 7.8 percent, Hewlett-Packard with 7.6 percent, and Siemens Nixdorf (Germany) with 5.6 percent. In Britain, which Dell had entered in the late 1980s, Dell had a 12 percent share, trailing only Compaq. Sales of PCs in Europe were expected to reach 22-24 million in 1998 and 28.5 million in 1999. Total European sales in 1997 were 19.7 million units.

Customer Service

Service became a feature of Dell’s strategy in 1986 when the company began providing a guarantee of free on-site service for a year with most of its PCs after users complained about having to ship their PCs back to Austin for repairs. Dell contracted with local service providers to handle customer requests for repairs; on-site service was provided on a next-day basis. Dell also provided its customers with technical support via a toll-free number, fax, and e-mail. Dell received close to 40,000 e-mail messages monthly requesting service and support and had 25 technicians to process the requests. Bundled service policies were a major selling point for winning corporate accounts. If a customer preferred to work with his or her own service provider, Dell gave that provider the training and spare parts needed to service the customer’s equipment.

Selling direct allowed Dell to keep close track of the purchases of its large global customers, country by country and department by department—information that customers found valuable. Maintaining its close customer relationships allowed Dell to become quite knowledgeable about its customers’ needs and how their PC network functioned. Aside from using this information to help customers plan their PC needs and configure their PC networks, Dell used its knowledge to add to the value it delivered to its customers. For example, Dell recognized that when it delivered a new PC to a corporate customer, the customer’s PC personnel had to place asset tags on it and then load the software from an assortment of CD-ROMs and diskettes—a process that could take several hours and cost $200-$300.13 Dell’s solution was to load the customer’s software onto one of its own very large Dell servers at the factory and, when a particular version of a customer’s PC came off the assembly line, to use its high-speed server network to load that customer’s software onto the PC’s hard disk in a few seconds. If the customer so desired, Dell would place asset tags on the PC at the factory. Since Dell charged customers only an extra $15 or $20 for the software-loading and asset-tagging services, the savings to customers were considerable. One large customer reported savings of $500,000 annually from having Dell load its software and place asset tags on its PCs at the factory.14 In 1997, about 2 million of the 7 million PCs Dell sold were shipped with customer-specific software already loaded on the PCs.

Corporate customers paid Dell fees to provide support and service. Dell then contracted with third-party providers to make the necessary service calls. When a customer with PC problems called Dell, the call triggered two electronic dispatches—one to ship the needed parts from Dell’s factory to the customer sites and one to notify the contract service providers to prepare to make the needed repairs as soon as the parts arrived.15 The service providers sent the bad parts back to Dell. Dell then endeavored to diagnose what went wrong and what could be done to see that the problem wouldn’t happen again. Problems relating to faulty components or flawed components design were promptly passed along to the relevant supplier, who was expected to improve quality control procedures or redesign the component. Dell’s strategy was to manage the flow of information gleaned from customer service activities both to improve product quality and speed execution.

Dell had plans in place to build Application Solutions Centers in both Europe and North America to assist its customers and independent software providers in migrating their systems and applications to Intel’s new next-generation, 64-bit computing technology. Dell was partnering with Intel, Microsoft, Computer Associates, and other prominent PC technology providers to help customers make more effective use of the Internet and the latest computing technologies. Dell, which used Intel microprocessors exclusively in its computers, had been a consistent proponent of standardized Intel-based platforms because the company believed those platforms provided customers with the best total value and performance. Dell management considered both Intel and Microsoft as long-term strategic partners in mapping out its future.

In recent months Dell, following Compaq’s lead, had created a capital services group to assist customers with financing their PC networks.

Virtual Integration and Information-Sharing

But what was unique about Dell’s latest incarnation of its strategy was how the company was using technology and information-sharing with both supply partners and customers to blur the traditional arm’s-length boundaries in the supplier- manufacturer-customer value chain that characterized Dell’s earlier business model and other direct-sell competitors. Michael Dell referred to this feature of Dell’s strategy as “virtual integration.”16 On-line communications technology made it easy for Dell to communicate inventory levels and replenishment needs to vendors daily or even hourly.

Boeing offers an example of how the lines were becoming blurred between Dell and its customers. Boeing, which had 100,000 Dell PCs, was served by a staff of 30 Dell employees who resided on-site at Boeing facilities and were intimately involved in planning Boeing’s PC needs and the configuration of Boeing’s network. While Boeing had its own people working on what the company’s best answers for using PCs were, Dell and Boeing personnel worked closely together to understand Boeing’s needs in depth and to figure out the best ways to meet those needs.

A number of Dell’s corporate accounts were large enough to justify dedicated on-site teams of Dell employees. Customers usually welcomed such teams, preferring to focus their time and energy on the core business rather than being distracted by PC purchasing and servicing issues.

In addition to using its sales and support mechanisms to stay close to customers, Dell had set up a number of regional forums to stimulate the flow of information back and forth with customers. The company formed Platinum Councils composed of its largest customers in the United States, Europe, Japan, and the Asia-Pacific region; regional meetings were held every six to nine months.17 In the larger regions, there were two meetings—one for chief information officers and one for technical personnel. As many as 100 customers and 100 Dell executives and representatives, including Michael Dell himself, attended the three-day meetings, at which Dell’s senior technologists shared their views on the direction of the latest technological developments, what the flow of technology really meant for customers, and Dell’s plans for introducing new and upgraded products over the next two years. There were also breakout sessions on such topics as managing the transition to Windows NT, managing the use of notebooks by people out in the field, and determining whether leasing was better than buying. Customers were provided opportunities to share information and learn from one another (many had similar problems) as well as exchange ideas with Dell personnel. Dell found that the information gleaned from customers at these meetings assisted in forecasting demand for the company’s products.

Dell had developed customized intranet sites (called Premier Pages) for its 3,000 largest global customers; these sites gave customer personnel immediate on-line access to purchasing and technical information about the specific configurations of products that their company had purchased from Dell or that were currently authorized for purchase.18 The Premier Pages contained all of the elements of Dell’s relationship with the customer—who the Dell sales and support contacts were in every country where the customer had operations, detailed product descriptions, what software Dell loaded on each of the various types of PCs the customer purchased, service and warranty records, pricing, and the available technical support.19 Dell was readying Premier Page software improvements for introduction in the second half of 1998 with even greater functionality. One new feature made it easy for a customer to specify what types of machines and options their personnel should be authorized to purchase. Other features included allowing customer personnel to access detailed information about Dell products on-line, view all the different machines and options the customer had authorized for its personnel, obtain the price of the particular PC they wanted, place an order, and have the order automatically routed to higher-level managers for approval. These features eliminated paper invoices, cut ordering time, and reduced the internal labor needed to staff corporate purchasing functions. Dell was said to have the most comprehensive Web-based PC commerce capability of any PC vendor. The company’s goal was to generate 50 percent of its sales on the Internet within the next two or three years by setting up Premier Pages for virtually all of its large customers and adding more features to further improve functionality. So far, customer use of Premier Pages had boosted the productivity of salespeople assigned to these accounts by 50 percent.

The company also gave its large customers access to Dell’s own on-line internal technical support tools, allowing them to go to www.dell.com, enter some information about their system, and gain immediate access to the same database and problem-solving information that Dell’s support personnel used to assist call-in customers.20 This tool was particularly useful to the internal help-desk groups at large companies.

Demand Forecasting

Management believed that accurate sales forecasts were key to keeping costs down and minimizing inventories, given the complexity and diversity of the company’s product line. Because Dell worked diligently to maintain a close relationship with its large corporate and institutional customers, and because it sold direct to small customers via telephone and the Internet, it was possible for the company to keep a finger on the pulse of demand—what was selling and what was not. Moreover, the company’s market segmentation strategy paved the way for in-depth understanding of its customers’ evolving requirements and expectations. Having credible real-time information about what customers were actually buying and having first hand knowledge of large customers’ buying intentions gave Dell strong capability to forecast demand. Furthermore, Dell passed that knowledge on to suppliers so they could plan their production accordingly. The company worked hard at managing the flow of information it got from the marketplace and seeing that it got to both internal groups and vendors in timely fashion.

Forecasting was viewed as a critical sales skill. Sales-account managers were coached on how to lead large customers through a discussion of their future needs for PCs, workstations, servers, and peripheral equipment. Distinctions were made between purchases that were virtually certain and those that were contingent on some event. Salespeople made note of the contingent events so they could follow up at the appropriate time. With smaller customers, there was real-time information about sales, and direct telephone sales personnel often were able to steer customers toward configurations that were immediately available to help fine-tune the balance between demand and supply.

Research and Development

Company management believed that it was Dell’s job to sort out all the new technology coming into the marketplace and help steer customers to options and solutions most relevant to their needs. The company talked to its customers frequently about “relevant technology,” listening carefully to customers’ needs and problems and endeavoring to identify the most cost-effective solutions. Dell had about 1,600 engineers working on product development and spent about $250 million annually to improve users’ experience with its products—including incorporating the latest and best technologies, making its products easy to use, and devising ways to keep costs down. The company’s R&D unit also studied and implemented ways to control quality and to streamline the assembly process. Much time went into tracking all the new developments in components and software to ascertain how they would prove useful to computer users. For instance, it was critical to track vendor progress in making longer-lasting batteries because battery life was important to the buyers of portable computers. Dell was the first company to put lithium ion batteries with a life of 5.5 to 6 hours in all of its laptop models.

Advertising

Michael Dell was a strong believer in the power of advertising and frequently espoused its importance in the company’s strategy. Thus, Dell was the first computer company to use comparative ads, throwing barbs at Compaq’s higher prices. Although Compaq won a lawsuit against Dell for making false comparisons, Michael Dell was unapologetic, arguing that “[the ads were] very effective. We were able to increase customer awareness about value.”21 Dell insisted that the company’s ads be communicative and forceful, not soft and fuzzy.

The company regularly had prominent ads in such leading computer publications as PC Magazine and PC World, as well as in USA Today, The Wall Street Journal, and other business publications. In the spring of 1998, the company debuted a multi-year worldwide TV campaign to strengthen its brand image.

Entry into Servers

Dell entered the market for low-end PC servers (those priced under $25,000) in the second half of 1996. The company had opened a 23,000-square-foot plant dedicated to server production, trained 1,300 telemarketers to sell servers, assigned 160 sales reps with systems know-how to big customer accounts, and recruited a staff of systems experts to help the sales reps. It had contracted with companies such as Electronic Data Systems, which had in-depth systems and networking expertise, to help provide service to large customers with extensive server networks. Dell’s server plant used “cell” manufacturing instead of an assembly line to permit faster product updates and keep costs low; there were 30 cells at the plant, each with a self-contained work team that performed the entire assembly process from a kit of components and a customized motherboard.

Dell’s entry into servers had several purposes. The use of servers by corporate customers was growing rapidly. The margins on servers were large. Moreover, purchase price was not as significant a factor in selecting which brand of server to buy because servers required far more in the way of service, support, and software. Several of Dell’s rivals, most notably Compaq, were using their big margins on server sales to subsidize price cuts on desktops and notebooks in an attempt to win corporate PC accounts away from Dell. According to Michael Dell, “To neutralize that, Dell needs to be in the server market.” The company expected that sales of servers would grow to about 50 percent of corporate revenues by 2001.

Dell’s build-to-order and sell-direct strategies gave it a significant pricing advantage over rivals. Servers from such competitors as Compaq, IBM, and Hewlett-Packard, all of which relied on networks of resellers, were estimated to cost 15 to 20 percent more than Dell servers. However, analysts were skeptical about whether Dell could provide the same quality of service and support to server customers that resellers could. To counter that perception, Dell had bolstered its field sales and support staff to 600 employees and created an in-house consulting group to assist customers. For customers that required extensive system support and integration, Dell partnered with systems experts that were not resellers, such as Electronic Data Systems and Arthur Andersen.

Please answer the following 4 questions:

1. How can you differentiate between fixed assets and stock in a business unit with specific reference to the case study above? (20 marks)

2. How would you explain the influence that stock management can have on the profitability of a business with specific reference to the case study above? (30 marks)

3. How would you explain the management of fixed assets in a business unit with specific reference to the case study above? (20 marks)

4. How can you apply the basic principles of stock and fixed asset management to a business unit with specific reference to the case study above? (30 marks)

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