A Dell-ightful Distribution Model

Like other great companies in the world (Apple, HP, Harley Davidson, Amazon), Dell Computers started from humble beginnings in a residential garage and has since gone on to become one of the biggest personal computer companies in the world.
In 1993, Michael Dell sold hard drive upgrades to corporate customers, in 1995 he expanded his offering to built-to-order computers and from that point on, revenues continued to grow from $70 million in 1985 to a high of  $62.1 billion in 2012.
This amazing growth can be attributed to an innovative supply chain, manufacturing strategy and distribution strategy.

dells-distribution-model

Dell has two distribution strategies. The original direct distribution model on the left and the retail distribution strategy on the right. They have been using both strategies since 2007. 

Cutting Out The Middleman

By removing retailers from the supply chain, Dell were able to increase margins while reducing the retail price of their products. By not having to sacrifice margin to big box retailers or bend to their demands, Dell was able to keep profits high while keeping prices lower than the competition.
Selectivity in channels offers additional benefits to the manufacturer. By definition, there are fewer relationships to manage, which means that the manufacturer has somewhat more control (Iacobucci. D, 2014). Dell were able to use a pull strategy to get consumers to purchase their PC’s, while other PC manufacturers were using a costlier push strategy with sales forces fighting for shelf space at retailers.
Removing channel members and implementing a direct to customer model also allowed for personalisation – giving the customer the ability to configure a machine to their required specifications.

Built-To-Order

By offering consumers the ability to customise their own machine, Dell could offer thousands of different configurations options that could not be matched by off the shelf PC companies selling through retailers. Dell implemented this customised solution at a time when other companies offered a single product line to suit all consumers.
Dell had the ability to offer this unique service because of the supply chain, manufacturing strategy and distribution strategy they implemented. Dell’s supply chain is often used as the benchmark for other supply chain designs. Its main innovation efforts are geared towards its supply chain management (Kumar. S and Craig. S; 2007).

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Michael Dell in 1987

Just In Time

Today, Dell has no warehouses for stocking components even though they assemble nearly 80,000 computers every 24 hours. They also never carry more than two hours of inventory in their factories. How can a company that builds 80,0000 computers every 24 hours not have stock you ask? Because of a supply system called ‘Vertical Integration’. Because Dell is one of the biggest PC manufacturers in the world, they’ve required their component suppliers to have warehouses close to its manufacturing facilities. Dell doesn’t take possession of any components, instead the components remain the property of the supplier until the components are required at the manufacturing facility. CEO of Dell Kevin Rollins says the reason for this is “Because of their short product lifecycles, computer components depreciate anywhere from a half to a full point a week”. With such a fast changing industry, having so many components stacked in warehouses would actually be more costly and the company would be financially worse off if they get stuck with unusable obsolete components.

A vendor managed inventory system helps Dell to maintain lean inventory levels while focusing its efforts on the assembly of the product rather than inventory management. Close relationships with their suppliers and logistics providers allow Dell to integrate information systems to share customer information and ensure that the entire supply chain runs smoothly (Kumar. S and Craig. S; 2007).

 

Sometimes You Need the middleman

With falling sales numbers and consumers less interested in customised computer solutions, Dell couldn’t just rely on the direct to customer distribution channel anymore, only one in four customers using the direct model. Dell needed a way to touch consumers in person. Much like Apple have had huge success with their stores, Dell needed a similar solution. In 2007 they started selling a limited number of their pre-configured models through retailers. Today they offer almost the full range of products via multiple retailers internationally.

An article quoting Professor Sunil Chopra from Kellogg School of Management at Northwestern University points out today’s customers are happy with a smaller selection to choose from, they expect to be told what they want. This shift in attitude dramatically reduced the value of the direct sales channel built around centralised inventory storage and PC customisability. “Just think about how many different products [consumers] can buy at an Apple store. It’s only a handful. We’re talking a very limited variety”.

In today’s fast changing technological world consumers need options, channels are supposed to make it easier for customers (Iacobucci. D, 2014). With a direct distribution model and a retailer distribution model, Dell has the best of both worlds.

 

Luke O’Meara ID:216363618

References

Kumar, Sameer and Sarah Craig. “Dell, Inc.’S Closed Loop Supply Chain For Computer Assembly Plants”. Information Knowledge Systems Management 6 (2007): 197-214. Print.

Iacobucci, D. (2014). MM4. Mason, Ohio: South-Western, p.130.

 

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