Silos & Supply Chains - Part 2

Dell's strategy hinges on having visibility into the latest supply and demand trends. The company posts its hub-level inventory on the Web, enabling suppliers to check their inventory levels at the hubs, since materials suppliers aren't necessarily the same set of companies as those at the hub. Dell issues forecasts through its supplier extranet, and suppliers commit back to Dell, based on those forecasts. Dell then works from that information, covering any deviations from what it asks for against what a supplier or a set of suppliers can promise.

Suppliers maintain inventory in their hub facilities located near Dell's assembly plants. Dell sends orders to the suppliers on a rolling basis, and factory-scheduling software generates material requirements every two hours per facility. Those requirements get posted to Dell's supplier Web site, and the hubs then pick, pack, and ship the materials to Dell for the next two hours of production. The result is a built-to-order computer.

"The more we know about the capabilities of the supply chain and our suppliers, the better decisions we're going to make for our customers," Hunter observes. In practice, that sometimes means that Dell makes a better choice for a customer than it does for itself, at least for the short term. Lean manufacturing experts James P. Womack and Daniel T Jones have observed that there is "a logical disconnect" between what Dell does for its customers and what it ought to be doing for them based on cost effectiveness.

"Because the short-term spikes in demand can be several times long-term demand and extra capacity is very costly, it is not practical for Dell to maintain enough capacity to respond instantly to every swing in the market," Womack and Jones explain. To be able to respond to individual consumers who want their own customized computer at a good price, then, Dell tries to create customer demand by changing the prices on optional features or even entire systems based on how many or few of any given item the company has.

What sometimes happens, though, is a consumer will request a system that includes components Dell doesn't have readily on hand. Rather than requisitioning a part that might have to be shipped via air freight (by far the most expensive transportation mode), the computer maker will instead substitute an upgraded component it has in stock. The consumer gets a better computer, though the wait for the system will be longer than originally expected. In effect, Dell will take a loss on the cost of the components if it can save on transportation costs and in the process keep a customer happy. And it's been Dell's ability to "cost-effectively supply exactly what its customers want" that has made its supply chain best-in-class.

IBM Corp., another computer industry leader, spends roughly 50 cents of every dollar of revenue on its supply chain, which based on 2005 sales of $91 billion, represents a supply chain spend of $45.5 billion. Big Blue refers to its on-demand supply chain, which Nick Donofrio, executive vice president of innovation and technology, explains is one that can sense and respond to customers' demands and to changes in the marketplace—no matter how frequent and sudden.

"In the past, manufacturing was a rather isolated activity," Donofrio says. "It was located at or near the end of the supply chain. The manufacturing team didn't get involved in anything until after the product had been designed and developed, the planning and forecasting had been done, and the customer had placed the order. That model is history. It will never suffice for today's customers who demand instantaneous response to their inquiries. What's required now is the complete integration of manufacturing into the overall supply chain, as well as the integration of the overall supply chain itself."

IBM's transformation to an on-demand model didn't happen overnight. A key factor in its integration was a razor-close examination of how an order moves throughout its system. "We looked at how we could integrate logistics and inventory, and what we needed to purchase from suppliers," Donofrio explains. "By embracing the e-business model, we were able to deploy capabilities that would increase efficiency of our supply chain, and strengthen our relationships with our suppliers and customers. We were able to link customer-facing systems, such as order entry, order scheduling, and confirmation, to the supply-facing systems that drive procurement, warehousing, manufacturing, distribution, and invoicing." In short, IBM now ties together all of the relevant "plan, source, make, deliver, and return" elements of its supply chain.