Introduction
Dell is known worldwide as a top personal computer producer and one of the most successful organizations in the world. Much of Dell’s success is attributed to its quality products and strategic management. The company realized that its products depreciate in time and keeping them in warehouses will cause them tremendous loses. In order to avoid this, the company established a revolutionary supply chain strategy which targets very minimal (almost close to zero) inventory. This paper analyzes the inventory management strategy of Dell Computers.
How is Inventory organized in the organization?
Dell’s management principles as well as its supply chain (including inventory) is founded in “Build-to-Order” philosophy. This philosophy is aligns Dell’s business units and people. At the heart of the success at Dell was their strategy of exchanging inventory for information. This meant that instead of keeping inventory in hand at Dell, or on hand in a warehouse, or on hand at a retail outlet, Dell kept information about customer orders, needs and forecasts. Manufacturing predicted what orders would come in, alerted suppliers of anticipated needed parts, and staffed up to meet demands. This gave Dell an advantage in the marketplace for several reasons.
- Information was easier to store than inventory
- Information was easier to move than inventory
- Information was easier to discard than inventory
- Information was less expensive to have than inventory
Build to Order
Dell’s business has been built on a direct sales, build-to-order strategy for producing and selling PCs. Dell capitalized in the inherent advantages of its business model to grow rapidly and profitably. A key advantage of direct sales and build-to-order production is that expensive inventory does not build up in the channel and lose value before it can be sold, and new products can be introduced without having to clear out old inventory in the channel. Dell’s inventory turnover rate of 60 tines per year to 12-15 times for most indirect vendors. The build-to-order process has been carefully honed for years, and involves the entire production cycle and supply chain. Thus, a Dell PC is designed to minimize human touches in production, suppliers are selected to ensure high product quality, suppliers are physically integrated into production, and the entire order fulfillment process is managed by a sophisticated combination of internal and external information systems.
Lean Manufacturing
The goal of lean manufacturing is to create a manufacturing environment that is driven by demand and that holds only small amount of inventory and product at any given time (Bacheldor 2004 cited in Ndahi 2006). Lean manufacturing uses less of everything – half the human effort in the factory, half the manufacturing space, half the investment in tools, half the engineering hours to develop a new product in half the times. Also, it requires keeping far less than half the inventory on site, and results in many fewer defects, and produces a greater and ever growing variety of products. Proponents of lean manufacturing believed that the system eliminates waste, reduces inventory, and increases value throughout the supply chain (Kumar and Yin 2004 cited in Ndahi 2006). Lean manufacturing, improves quality and reduce inventory, making production more effective and efficient.
In order to support the build-to-order inventory strategy of Dell, the company developed a lean manufacturing operation. By working closely with suppliers, inventories of components and materials are minimized. Dell’s close relationships with its suppliers have allowed the company to operate with nearly no work-in-process inventory. Suppliers are required to maintain inventory near or in Dell plants to support Dell’s build-to-order production. They can produce elsewhere and ship to supply hubs or they can set up production nearby. In some plants, components are actually kept in trucks backed up to shipping docks, and are pulled off as needed. Suppliers are required to maintain ownership of that inventory until it is actually pulled off the truck and onto the assembly line.
How can Inventory be reduced?
The supply chain and inventory system at Dell is well-designed and is very successful in minimizing (or even eliminating) inventory. In this section recommendations are presented in order to the company to further develop its inventory management system.
1. Total Quality Management
Total Quality Management is built on a philosophy where individuals, teams and organizations can improve their performance at all times (Kanji 2002).
The first assumption of TQM is about quality. A fundamental premise of TQM is that the costs of poor quality are far greater than the costs of developing processes that produce high-quality products and services (Hackman and Wageman 1995). The second assumption is about people. TQM call for a change in the corporate culture, where the new work climate is open, is participatory, encourages trust among all employees, encourages a sense of ownership and responsibility for goal achievement and problems solving and everyone is self-motivated (Clinton et al 1994).
2. Just-In-Time Management
Just in time (JIT) is a philosophy of operation that seeks to utilize all sources in the most efficient manner by eliminating anything that does not contribute value for the customer. There are three basic stages of what JIT is and how JIT works. These stages are:
1. Kanban – kanban is the simplest form of JIT. During this stage, JIT is used as a shop floor-control that allows the scheduling of inventory movement through the shop floor with the use of a kanban, a materials movement tracking device. The kanban can take the form of a card, a box, or a marked off area on the floor. These kanbans are used as an authorization to move materials or to produce new product. The initial stage of JIT is expected to generate reductions in work-in-process inventory because of the direct uninterrupted movement of materials between work stations.
2. Production Planning – production planning is the second stage of JIT. The focus of this stage is on the principle of production parts as needed, rather than building up inventories of these components. Using the JIT production planning approach, managers reduce inventory to a minimum level, keeping on hand only the amount needed in production until the next order arrives. This approach eliminates the double handling of products which occurs when storage is relocated to the work area or shipping area. The JIT production stage is driven by having continuous delivery of items.
3. Global Management Philosophy – global management philosophy is the third basic stage of JIT. Global management affects every aspect of a manufacturing environment. Costing through the use of standards have been eliminated; only actual costs are required. Inventory tracking has been eliminated; inventory should be kept to a minimum (Epps 1995).
Does the Organization use outsourcing or contract?
The organization use outsourcing. Dell outsources all its component manufacturing including sub-assemblies like motherboards and nearly the entire production chain for notebook PCs. However, it does not outsource the final configuration and keeps control over the production and supply chains. In the initial years, the company shipped parts and components mostly form Asia. More recently, regional components manufacturers from Asia, Europe and America are increasingly supplying to Dell. Typically, components like disk drives, CD-ROM drives, power systems, cables and connectors are shipped from Asia whole motherboards are largely procured locally.
Unlike other PC makers, Dell has avoided outsourcing assembly of its products. It outsources subassemblies, such as motherboards and bare-bones PCs, and outsources nearly complete assembly notebook PCs, doing only limited final configuration in its own assembly plants. In 2001, Dell outsourced production of a standard, non-configurable PC called the SmartStep to Taiwan’s Mitac, which is manufacturing the product in its plants in China. But in general, Dell prefers to keep control over the key final assembly and configuration processes for the bulk of its products. One reason is a concern that by outsourcing its manufacturing completely, Dell might be creating its own competitors.
Dell also uses contracts. A network of suppliers and contract manufacturers support each production facility of Dell. Sourcing decisions are made by worldwide procurement and product development in Austin with input from the regions. Most sourcing is global, which means that Dell sources major components for all locations from their headquarters.
Conclusion
Dell has a strategic management philosophy that supports a well-designed supply chain management strategy. Dell’s management philosophy is the corner stone of its success. As Dell endeavors to produce quality products in real time and to reach their customers as fast and as efficient as possible, it will continue to aim for zero inventory.
References
Bacheldor, B 2004, ‘Never Too Lean’, Information Week, pp. 36-44.
Clinton, R J, Williamson, S and Bethke, A L 1994, ‘Implementing Total Quality Management: The Role of Human Resource Management’, SAM Advanced Management Journal, vol. 59, no. 2, pp. 10+.
Epps, R W 1995, ‘Just-in-Time Inventory Management: Implementation of a Successful Program’, Review of Business, vol. 17, no. 1, pp. 40+.
Hackman, J R and Wageman, R 1995, ‘Total Quality Management: Empirical, Conceptual, and Practical Issues’, Administrative Science Quarterly, vol. 40, no. 2, pp. 309+.
Kanji. G 2002, Measuring Business Excellence, Routledge, London.
Kumar, A and Yin, C K 2004, ‘Lean Brings Results’, Tech, vol. 51, no. 9, pp. 52-54.
Ndahi, H B 2006, ‘Lean Manufacturing in a Global and Competitive Market’, The Technology Teacher, vol. 66, no. 3, pp. 14+.
Credit:ivythesis.typepad.com
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