Designated Supply Management - Dell - Case Study Example

Designated supply chain (supply chain management) 1.0 Introduction Supply chain management forms the vital link between the supplier and the end-user. As the name suggests, the supply chain is a network of facilities and distribution options that helps in procurement of raw materials, processing this to semi and finished products, and through proper distribution, reach the customer at the desired time. Supply chains exist in just about every production, service and maintenance industry, although the complexity of the supply chain may vary greatly from industry to industry and firm to firm (Ganeshan & Harrison, 1995). The service industry of late has seen unlimited scope for professionalism in streamlined operations leading to better customer care and services. In the years gone by, retailers used electronic data interchange systems for communicating between manufacturers, suppliers, and tracking. The trend has given way to a more advanced and sophisticated brand of software that not only enhances performance and efficiency, but cuts costs, raises customer fulfillment, and controls long-term supply positioning (Valdero Corporation, 2002). Many innovative software packages have been introduced in the market lately to bridge the gap between planning and execution, the lifeline of the supply chain industry. Supply chain management looks at providing real-time visibility and control over changes occurring in the supply chain industry. The technological development in the software industry is such that, the supply chain industry today has the availability of solutions for Supply Chain Planning (SCP), Supplier Relationship Management (SRM), Enterprise Resource Planning (ERP), and Business Intelligence (BI). (Oracle Corporation, 2005). This paper takes a look at the prospect of a designated supply chain for Dell, and making appropriate recommendations to improve the existing functions available to them. 2.0 Executive Summary The purpose of a systematic supply chain management is to reduce inventory and process costs. The supply chain has many intermediate sectors that must function uniformly to elicit the desired result. This calls for a well-groomed, functional operative, which can manage and monitor divisions within a conglomerate such as Dell. With the advent of computers and computer software to run them, divisions such as Order Management, Warehouse Management, Transportation Management, and Replenishment Management are now well knit units that perform in a most professional manner. Earlier, these functions were handled manually, and the complexity of streamlining such departments caused hardship and frequent mistakes. This has now been replaced by a far more competent and precision software, that can elicit any information at the press of a key to counter any imbalance in the supply chain, critical in the face of competitiveness and sustenance. It is noted that most of the prominent software available for the supply chain managers today feature Inventory Control, Demand Control, Planning and Fulfillment Control, and Product Change Control. “These features allow the supply chain business houses to dramatically reduce inventory, production and process costs by giving them a single transparent view of the supply chain, proactive performance measurement, and management by exception, continuous supply demand balancing and guided resolution” (Valdero Corporation, 2002). The biggest challenge that Dell has faced in managing its supply chain management has been in the sourcing of raw materials for its development activities. Since Dell operates in many countries, it has found sourcing raw materials at component level the most challenging. This problem has been addressed in the past as well, and there has been a method to cut down on transportation and availability of raw materials at its development plants. This has been covered elaborately in this paper. Another challenge that the company faces in its quest for better operational methods is the use of alternative sources and new methodology. For a company that has been operational for so long on trusted methods, many would find it hard to adjust to sudden changes, and challenge these. These areas are covered in the subsequent chapters and a clear demarcation of what has been done to overcome these problems has also been addressed. 3.0 Literature Review Once a customer places an order, Dell processes the order through financial evaluation (credit checking) and configuration evaluations (checking the feasibility of a specific technical configuration), a process that covers close to two days. This is then followed by a request sent to one of their manufacturing plants in Austin, Texas, which then build, test, and package the product in about eight hours. Working on a priority basis, the manufacturing plant follows the rule of clearing the order requests on a first-come-first-served basis. Dell in all probability clears orders no later than five days after receipt of the order. There are some exceptions, however. In the interest of certain combinations and permutations, the plant may manipulate the schedule to replace defective units or when faced with customers with service-level agreements for their orders. In most cases, Dell has significantly less time to respond to their customers than it takes to transport components from their suppliers, many of whom are not surprisingly, located in Southeast Asia, to their manufacturing plant in Austin. Depending upon the delivery schedule, components are airlifted, or shipped by sea or surface, consuming between 7 (for air) to 30 days (by sea or surface). As mentioned, up to 30% of the manufacturing cost goes into logistics. However, in order to compensate for long overhauls from their suppliers in Southeast Asia, Dell has managed their supply chain, by creating a buffer against demand variability, by insisting their suppliers to keep inventory on hand in their Austin ‘revolvers’ (for “revolving” inventory). Revolvers or Supplier Logistics Centers (SLC), are small warehouses located within a few miles of Dell’s assembly plants. The arrangement is quite simple. Dell allots certain space to each of their suppliers, who pay a nominal rent for using this revolver. When a specific spare is requisitioned, the concerned supplier raises an invoice on the component(s) requested. This is then billed directly to Dell. The cost of maintaining inventory in the supply chain is, however, eventually included in the final prices of the computers. Therefore, in the event of any reduction in inventory pricing, the benefit is directly given to Dell’s customers in the form of reduced product price. Low inventories help the quality assurance team assess the quality of the spares, which lead to higher product quality. This may not be possible when there is an offshoot of high inventory and pressure to produce a high volume of products in a short time. Dell, with their revolutionary online virtual office, allows customers to interact with any department of choice, be it billing, service, or sales. This is quite different from others, who adopt a direct-sales approach. This way, many human errors that occur during a one-to-one interaction is eliminated, and the customer has the choice of sitting in the comfort of his/her office/residence, interacting with qualified Dell personnel, to find a solution to their product predicament. Another plus in the Dell initiative of their virtual office is that a customer gets to benefit from price fluctuations that occur from time-to-time. This is possible by reducing supplier inventory to gain significant leverage on certain products. Although supply-chain costs include all costs incurred from raw materials to the final assembly, the company concentrates on Dell-specific inventory (parts designed to Dell’s hardware specifications or stored in Dell-specific locations, such as its revolvers and assembly plants). This way, a major part of their transportation cost is reduced, and this is carried on to the customer. Dell’s assembly plants hold minimum inventory for operational reasons and because of this, Dell manages its stores through its revolvers, wherein Dell has a special vendor-managed-inventory (VMI) arrangement with its suppliers: suppliers decide how much inventory to order and when to order while Dell sets target inventory levels and records suppliers’ deviations from the targets. Dell heuristically chooses an inventory target of 10 days supply, and it maintains a record on supplier scorecard to evaluate supply position and maintenance of each of their target inventory in the revolver. Dell draw spares from the revolver in most cases, on an average of every second hour. Another plus in the Dell inventory strategy is to draw from multi-sources (spares from different suppliers can be interchanged), to proceed with its product, not having to wait for a spare in case of contingency. Dell often withdraws components from one supplier for a few days before switching to another. Suppliers who have been with Dell for a reasonable time, are familiar with Dell’s inventory control and see that no such problems occur, and contribute their stock to the revolver systematically. In practice, most suppliers deliver their spares to the revolvers thrice a week. Their work is also mitigated by Dell’s monthly forecast which is circulated to them every month. This forecast, generated by Dell’s Line of Business (LOB) marketing department, ensures that the suppliers have sufficient time to prepare for any eventualities and that production is not derailed due to a spur in orders. Product- specific trends are reflected by seasonal sales, like in the case of home systems, which normally shoot up during Christmas. Other seasonal demands arise during the back-to-school season, year-ends, when the government goes on a shopping spree, and finally when country-specific foreign purchases take place. In the case of foreign purchases, suppliers are recommended to concentrate more of foreign language keyboards, which are Dell product-specific. There is also the quarterly sale that takes place in the United States, which is often referred to as the ‘hockey stick’ period. Once the Center of Competence (COC) checks the forecast of predicted availability of stocks, the forecast is then sent to Dell’s commodity team, which becomes the basis for a six-month rolling forecast that is updated weekly. The commodity team makes generic forecasts for systems and components and breaks the forecasts down to a level that caters to specific parts needed to be ordered. If for some reason, the commodity team evaluates the forecast as unacceptable, the process is then repeated; the LOB sits down to revise it, although such revisions are very rare. The buyer-planner for each product receives an updated rolling forecast weekly; suppliers receive forecasts monthly. The objective of such practices is to recommend target inventories for the revolvers to minimize inventory-related costs subject to a service-level constraint. It was also used to develop a process and tools for identifying and updating target levels for inventories of items in the revolvers. Dell sets inventory targets based on empirical data and judgment, with no clear reference to any desired service levels. Dell believes that such practices can also help reduce revolver inventory markedly by using a more rigorous approach and gaining better visibility of the inventory throughout the supply chain. Once this exercise produced the desired result in optimizing the inventory level, the team of COC collaborates with the suppliers to eliminate excess inventory. Dell believes in optimizing their operations to sustain any changes over long term; it required integrating all players in the supply chain to form an inter-informational infrastructure. Dell’s Value Chain is a program intended to extend its successful direct-sales approach into the supply chain to improve performance through faster and quality information flow between Dell and its supply base. The official Website, www.valuechain.dell.com is an extranet used to share information such as, points of contact, inventory, supply and demand data, component quality metrics, and new part transitions. This site allows for virtual interaction between Dell and its suppliers on their (suppliers) current data, forecasted data, new product ideas, and other dynamic information that keeps the team on their toes, and in the bargain, optimizes the flow of information and materials in the supply chain. By integrating the process and associated tools that Dell develops with www.valuechain.dell.com, it becomes a part of Dell’s and its suppliers’ Procurement -business processes. Dell and its suppliers through Value Chain share such information as target inventory levels to support collaboration on future improvements (Kapuscinski et al, p.192-193, 2004). 4.0 Key Elements of a Supply Chain There are six key elements to a supply chain: 1. Production 2. Supply 3. Inventory 4. Location 5. Transportation 6. Information Production Production focuses on customers’ needs and market demands. This includes the consideration of what and how much of a product to produce, and the level of spares required sustaining its market presence. Another important factor to consider would be to identify where to produce this product at their plant, or outsource. In production, stress on production capacity, quality and turnover must be kept in mind to meet customer demand and satisfaction. Operational decisions need to focus on scheduling workloads, maintenance of equipment and meeting immediate client/market demands. Supply Supplies are paramount to production. Every production unit strives to produce a product with maximum economy and efficiency. Therefore, an organization must be able to recognize their strengths and weaknesses to stay in contention. An analysis of facilities is mandatory to ascertain the capability to produce both economically and efficiently, without compromising on quality. Many conglomerates with supply difficulties look elsewhere for supplies, as they find it difficult to provide sufficient spares to run their sold products. They turn to outsourcing, an excellent alternative to compensate for their inability to produce to market demands. Companies need to make careful assessment, before finalizing a vendor. Likewise, selection of raw material suppliers must also be chosen with due consideration of their financial and market status. A supplier should be in a position to deliver at the call for supplies instantly. Ultimately, speed, quality and flexibility are a must for success. This helps reduce production costs considerably. Inventory Balancing of inventory is important in the development of business. Inventory refers to the incoming, stock piling, and outward movement of a product. Unless there is proper analysis, business houses can end up damaging their credibility due to improper product planning. A delicate balance exists between too much inventory, which can cost anywhere between 20 and 40 percent of their value, and insufficient stock to meet market demands. This is a critical issue in effective supply chain management. Operational decisions require optimal levels of stock at all times to meet contingencies. Assuming that in the course of a combat, infantry requires spares to activate their artillery, and these were in short supply, the outcome could be catastrophic. Similarly, if a Dell customer required a spare to run his hardware, and it was unavailable, the consequence could be irreparable. Thus, inventory plays a vital link in the supply chain. Control policies must be looked at to determine correct levels of supplies at order and reorder points. These levels are critical for day-to-day operations within an organizations to keep customer satisfaction levels high. Location Location identifies with customer’s access. Organizations must be able to target the needs of their customers by offering easily accessible locations. Similarly, production units must be set up near locations easily accessible by road, air, and sea. This will cut transportation costs and delivery time. The same principle can be applied to stocks and distribution centers. Industries which manufacture lightweight components are market driven and should be within easy access to end-users. Heavy industries on the other hand, need to identify locations that are close to raw material source. With globalization, many production units have set up plants in third world countries to take advantage of local government subsidies and tax relief. Cheap labor and easy access to air and sea ports are also available, giving considerable to the organization in the international market. Transportation Transportation eats into profits considerably. As in the case of location, transportation costs can be minimized by having the distribution centers close to customer’s access. The same can be said in terms of production and spares as well. Air transport is quick, but at the same time expensive, in comparison to shipping by boat or rail. Yet using sea or rail often means maintaining higher levels of inventory in-house to meet quick demands by the customer (Rockford Consulting, 1999). Some 30% of the cost of a product is encompassed by transportation; therefore it is imperative to use the correct transport mode. 5.0 Recommendations Wireless technology, such as the one used by @Par combines with existing ERP and WMS systems are also quite popular. This technology enables clients for pick-up, put away, receive, deliver, dispatch, cycle count, and cart management functions, the lifeline of the supply chain business. It is built on a robust platform that integrates through XML. It has advanced features like instant messaging, speech recognition; RFID tags, and uses a wireless LAN to transmit data in real time. IristaWare system prioritizes, directs and confirms activities based upon the real-time conditions and constraints of space, equipment, and inventory. This software enables companies to automate their inbound order processes, inventory control, and outbound distribution activities using RF, barcode, and auto-ID technology. From advanced ship notice (ASN) processing to lot and serial number maintenance, iristaWarehouse tracks and controls the movement of both raw materials and finished goods through your distribution network. Advanced functionality including yard and dock management, value added processing, cross-dock fulfillment, and wave planning provide the tools to increase throughput while reducing operating costs (irista.com). Monitoring and analyzing daily demand signals creates an accurate forecast in inventory and transportation. Real–Time Forecasting (RTF) helps reduce forecast errors substantially leading to reduced and expedited shipments and transportation costs. In can also be noted that how today’s standards-based modeling, monitoring, connectivity, and process integration tools that comprise IBM's Process Integration suite are allowing companies to implement process automation components with greater speed and agility than ever before.(Noel, Supply Chain Management). Deploying of commercially-available technology that can collaborate with carriers, suppliers, and customers to improve service levels, and technology that allows one to centralize the procurement and management of Transportation can help businesses stream-line their operations leading to greater efficiency and lower operation costs. Logistics includes all the processes required to go from raw materials to end customer delivery, including purchasing, inventory management, warehousing, shipping and even customer returns (Ashcroft, 2006). Having said these, there seems to be a sense of incompleteness in defining supply chain management. “Supply chain management is unique and, to some degree, represents a paradox because it is concerned with both one of the oldest activity of business: logistics, and the most newly discovered business paradigm: Supply Chain Management. As the global economy gets more competitive and information is exchanged widely and instantaneously, effective logistics and supply chain management are being recognized as the last frontier in which organizations can achieve significant improvements” (Dahel, 2004). Supply Chain Management (SCM) is the planning and integration of raw material supplies, production forecast and planning, inventory control, distribution of the completed product in a most efficient and cost-effective manner to meet one’s service requirements and personal growth (Dahel, 2004). 6.0 Conclusion While there have been attempts to improve supply chain management over the past decade, companies like Dell and IBM have evolved strategies that have been quite remarkable. Though the designated supply chain has proved to be successful in meeting the global market demands, there is still room for improvement. 7.0 Appendices About.com: Logistics/Supply Chain, What is Logistics & Supply Chain Management? http://logistics.about.com/od/whatislogisticsscm/a/what_is_scm.htm Jasmine Noel, BPM and SOA: Better Together, IBM-sponsored white paper by analyst, a founding member of Ptak, Noel & Associates, http://all-free-info.com/supply-chain-management Muthukrishnan V, McDonalds Business Analysis, Ezine articles, http://ezinearticles.com/?McDonalds-Business-Analysis&id=687438 Oracle Corporation, Measuring Supply Chain Excellence, March 2005 AMR Research report "How Best to Measure Your Supply Chain Today, http://www.oracle.com/newsletters/updates/2005-10-21/supply-chain-management/measure-supply-chain-effectiveness.html accessed on 10.22.2007 Ram Ganeshan & Terry P. Harrison, An Introduction to Supply Chain Management, May 1995, http://lcm.csa.iisc.ernet.in/scm/supply_chain_intro.html Accessed on 10.22.2007 Rockford Consulting Group Ltd, RCG University, Supply Chain Management, 1999, http://rockfordconsulting.com/scm.htm Roman Kapuscinski, Rachel Q. Zhang, Paul Carbonneau, Robert Moore and Bill Reeves, Inventory Decisions in Dell’s Supply Chain, Interfaces, 2004, Vol. 34, No. 3, May–June 2004, pp. 191–205, ISSN 0092-2102 _EISSN 1526-551X _04 _3403 _0191 Valdero Corporation, Monday, September 30, 2002, Valdero's Intelligent Supply Chain Control Selected by Extreme Networks, http://supplychain.ittoolbox.com/press/display.asp?i=81772, accessed on 10.22.2007 Discuss existing problems and weaknesses in the current process. What additional capabilities does the process need to develop? 8. How should the process be restructured to develop these capabilities? Discuss why the changes suggested by you will have the desired effect along the key dimensions identified by you. 9. Discuss how the suggested changes should be implemented with a time line. Explain any resistance you may face in implementing the changes. Read More