Living in Dell Time

But no one has gone as far as Dell. It's well known, of course, for nearly eliminating finished-goods inventory by cutting out resellers and connecting directly to customers. What's 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 hyperefficient 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. And 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. Dell's vast, global supply chain is in constant overdrive. Says Hunter: "Speed is at the core of everything we do."

That's why inventory is a four-letter word at Dell. To Kevin Rollins, who succeeded Michael Dell as CEO this past July (Dell continues as chairman), inventory is like fish. "The longer you keep it the faster it deteriorates -- you can literally see the stuff rot," he says. "Because of their short product lifecycles, computer components depreciate anywhere from a half to a full point a week. Cutting inventory is not just a nice thing to do. It's a financial imperative."

Hunter regards inventory as a kind of ignorance. In his view, companies keep inventory as a hedge against poor demand forecasts and an inability to see into their supply chains. "Most companies love a big order backlog; when the semiconductor industry has six months' worth of orders, they're happy," he says. "If I've got more than three days' backlog, Michael is calling me."

Dell has ripped away the psychological safety net that lots of inventory provides. Instead, it lives in a state of constant, self-imposed paranoia: It must meet demand, which is always in flux, with just the right amount of supply. If it fails, its manufacturing operations will crash within a matter of hours. But Hunter sees no other way to go. "It's a real misconception that more inventory means less shortages," he says. "Even if you flood your warehouses with thousands of components, it's almost a given that you won't have that one-cent screw when you need it most. Then you're in the worst of all worlds: You've got a ton of inventory, but you still can't do the build. If you don't have solid processes that monitor demand and supply on a real-time, continuing basis, then I don't care how much inventory you've got. Invariably you'll have a lot of the wrong stuff and none of the right stuff.

"But when you have basically zero inventory, it's like draining a swamp -- all of the stumps start to show," he says. "The problems reveal themselves, and you can take immediate corrective action to fix them."

A New Finance Model

The implications of working in this kind of hyperdrive -- in Dell time -- are profound. It changes the finance model, and it's 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. But Dell's build-to-order model lets it receive payment from its customers immediately -- through credit cards, either online or over the phone. It pulls the parts directly from its suppliers and builds and ships the product within four days. Yet the company doesn't pay those suppliers until 36 days after it receives payment from the customer. So Dell has achieved a cash-conversion cycle (that's the time between an outlay of cash for parts and the collection of payment for goods made from them) of negative 36 days. That means it operates with negative working capital, eliminating the need to finance its operations. "By collecting money for products from customers before it owes money to its suppliers, Dell has made it so its suppliers finance the cost of Dell's operations," says Tom Mentzer, executive director of the integrated-value chain forums at the University of Tennessee at Knoxville.

Hewlett-Packard doesn't disclose its cash-conversion cycle, but with its average of six weeks of inventory, the number is sure to be positive. Meanwhile, with just a few days' worth of parts on hand, 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 your costs. That's why Rollins will say, with a twinkle in his eye, that Dell has a built-in structural advantage over its competitors. Roger Kay, vice president of client computing at market researcher IDC, says he's right: "Various industry assessments report that Dell's cost advantage through close-to-zero inventory is as high as eight points, which in a commodity business is huge. HP's net margin on PCs is so tiny -- barely 1% -- that Dell, by forgoing a point or two of margin, can put HP's PC division under water."