Living in Dell Time

By: Bill BreenWed Dec 19, 2007 at 7:50 AM

For most businesses, warehouses full of stuff are a kind of security blanket. But Dell has replaced inventory with information, and that has helped turn it into one of the fastest, most hyperefficient organizations on the planet. Here's how Dell uses speed as the ultimate competitive weapon, and why rivals may never be able to catch up.

Dell also works the other end of the supply chain -- the customer -- to eliminate the evil of inventory. Essentially, it's replacing inventory with information. The company keeps a massive database that tracks the purchasing patterns and budget cycles of its corporate customers, and predicts upgrade purchases by individual repeat consumers, which enables it to forecast demand with about 75% accuracy. Three times a day, Dell updates its demand forecast for key suppliers on its extranet portal. When Dell misses a forecast -- which it does from 5% to 25% of the time -- and finds itself running out of, say, 15-inch flat screens, it runs a one-week special for 17-inch screens. Its direct-to-the-customer model allows it to shift demand to match what its suppliers can deliver. Supply-chain experts call this "demand shaping," and Dell has mastered this competitive weapon, too. But while such tactics have helped Dell to almost eliminate inventory from its balance sheet, its suppliers cannot claim to have done the same.

The Thin White Line

Dell's clout with its suppliers is epitomized by a set of thin white lines on the floor of the TMC 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 doesn't pull the part until it has a customer order; it doesn't 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 a merge center in Reno, Nevada, 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 TMC. Factor in the whole of Dell's supply chain -- raw materials, work-in-process, and finished goods -- and Dell's suppliers hold anywhere from 20 to 80 days' worth of total inventory. "Dell would never tolerate that for itself," says Navi Radjou, a vice president at Forrester Research. "Inventory remains a problem for suppliers; the average supplier is not better off than it used to be."

Even Maxtor, which has modeled itself on Dell's build-to-order strategy, can suffer from missed forecasts and bloated inventory. Like Dell, Maxtor owns its factories and controls its supply chain; it is built for speed and flexibility. Yet Maxtor recently saw its inventory swell to nearly six weeks because of lower-than-expected shipments. This past July, it reported a second-quarter net loss of $26 million, in part due to lower sales to Dell because of problems with 40-gigabyte drives.

A look further up the supply chain at the suppliers of Dell's suppliers reveals that there's only so much inventory they can cut. MMC Technology supplies 65% of the disks for Maxtor's hard drives -- in all, some 50 million disks a year. MMC, too, has adopted parts of the Dell model. The company's factories, which are based in the United States, run full-out every day of the year, producing the least costly product in the industry. And yet, for all of its relentless focus on making itself more efficient, MMC is stuck with three weeks' worth of inventory, and there's nothing it can do to change that. It takes a week of performance testing before MMC can release its finished disks; it takes a week to ship the disks from California to Maxtor's Singapore factory; and Maxtor requires MMC to warehouse buffer stock for up to one week (just as Dell does with Maxtor). Ultimately, Maxtor carries inventory for Dell, MMC carries inventory for Maxtor, and raw-materials suppliers carry inventory for MMC. Dell, of course, carries next to nothing. "Dell does business with suppliers who are willing to hold its inventory," says IDC's Roger Kay. "And if they're not willing, Dell will find suppliers who are."

Dell disputes that notion. "We're not so naive as to think that if we pushed inventory off on a supplier that somehow we're not paying for that in the long run," says Stephen Cook, director of Dell's Nashville manufacturing center. "We only get the lowest total cost for our customers by achieving minimum inventory holding costs all the way up the chain. Inventory hasn't just moved from one bucket to another. It's left the supply chain."