Managing velocity
Joan Magretta, Editor at Large, the Harvard Business Review.
This article is based on the author’s interview with Michael Dell, “The Power of
Virtual Integration”, which appeared in Harvard Business Review, March-April
1998)
Dell’s Internet sales run
to $6 million a day.
|
The Law of Increasing Returns: the value of a product explodes with the number of its users, and this value explosion sucks in even more users, compounding the result. Adapted from “New Rules for the New Economy”, by Kevin Kelly, Wired magazine, United States, September 1997 |
‘I’m only half joking when I say
that the only thing better than the Internet would be mental telepathy’
Michael Dell
How do you create an $18 billion company in just 14 years? Michael Dell
began in 1984 with a simple business insight. He could bypass the dealer channel
through which personal computers were then sold. Instead, he would sell directly
to customers and build customized products to order. In one swoop, Dell eliminated
the reseller’s markup and the costs and risks associated with carrying large inventories
of finished goods. The formula became known as the direct business model, and it
gave Dell a substantial cost advantage.Dell’s product line has expanded over the years. In additon to desktop personal computers, the company now sells a broader range of hardware—laptops, servers, and workstations. But make no mistake, Dell sells physical things, manufactured goods that must be assembled and transported and delivered and serviced with a staff of about 22,000 world-wide and a base in Round Rock, Texas. It sounds a lot like the old, tangible economy.
Is Dell, then, stuck in the past of material goods and physical flows? Or is it part of the so-called “new economy”, creating wealth through “intangible streams of data, images and symbols”. In fact, Dell is both.
Companies have always thrived by offering customers superior value, giving them more for less. For the most part, they offer better value by shrinking the time and the resources consumed in meeting customers’ needs. The fundamental economic rules of business haven’t changed. But like many other companies today, Dell is harnessing the tools of the knowledge economy—information and technology—to bring new levels of efficiency and productivity to the old world of tangible goods.
Supplier partnerships
Consider all the activities and resources that go into making and selling a computer. As a small start-up, Dell simply couldn’t afford to create every piece of that value chain. Instead, its strategy has been to build systems from components made by other companies. Let them invest in R&D and in factories. For each component, Dell evaluates the field and picks the best to be its suppliers.
Dell then works so closely with them that they become, in Dell’s words, “virtually integrated”. While they remain independent companies, each free to focus on what it does best, they share information and co-ordinate their activities as if they were part of one vertically integrated company.
Real-time information sharing with suppliers is the key to just-in-time assembly. Instead of having suppliers make periodic deliveries to a warehouse, Dell tells them the exact number of components it needs, at what hour of the day, delivered to which loading dock at its factory. This is precisely the kind of information a company would freely share with an internal supplier.
Dell’s rule in working with partners is to have as few as possible, and to keep them as long as they maintain their technological and quality leadership. As Michael Dell notes, “This isn’t like the automobile business, where you find a tire supplier that you will probably stick with forever.” Managed this way, supplier partnerships give Dell the flexibility to respond to changes in the market.
Supplier partnerships aren’t new to the knowledge economy, nor is just-in-time manufacturing. However, today’s technology enhances the economic incentives to collaborate. Companies can share design databases and methodologies in ways that weren’t possible just five to ten years ago. Doing so can dramatically speed time to market, thus creating substantial value which the buyer and supplier can share.
Why time is money
“In our industry,” Michael Dell explains, “if you can get people to think about how fast inventory is moving, then you create real value. The key challenge—and the biggest change from business as usual—is changing the focus from how much inventory there is to how fast it’s moving.”
Speed is critical for two reasons. First, in the computer business the cost of components goes down as much as 50 per cent a year. The company with two or three months of inventory will be at a significant cost disadvantage to the company with eleven days because its products were built with more expensive parts. Second, in technology markets with frequent product transitions, it’s easy to get stuck holding obsolete inventory, or to be late to market with the hottest new products.
Co-ordination between companies is not new to the knowledge economy. However, such tight co-ordination would not be possible without sophisticated data exchange. Managing velocity is about managing information, using a constant flow of information to drive operating practices. In essence, Dell substitutes information for inventory.
The result is that Dell turns its inventory over thirty times per year, an extraordinary feat given the complexity of its product line. But without credible information about what customers are actually buying, says Dell, “trying to manage eleven days of inventory would be insane. We couldn’t do it without customers who work with us as partners.”
Forecasting customer needs
Working closely with customers is critical to the Dell strategy. With the direct model, Michael Dell explains, “You actually get to have a relationship with the customer. And that creates valuable information.”
Ninety per cent of Dell’s sales go to institutions—business or government—and 70 per cent to very large customers that buy at least $1 million in PCs a year. With those large customers, Dell maintains an on-site team that functions less as a vendor and more as the customer’s information technology department for PCs. The team will typically be involved in planning the customer’s PC needs and the configuration of their network. Thus Dell’s sales account managers have unusually good information on what each customer intends to buy.
Smaller customers buy direct from Dell over the telephone. Not only can Dell compile real-time data about what’s selling, but its salespeople can also steer customers, while they’re on the phone, toward product configurations that are available—further using information to fine-tune the balance between supply and demand.
In short, by eliminating the middleman, Dell captures valuable information from customers—which it uses to lower its inventory, its costs, and its risks. Information from the customer flows all the way through manufacturing to Dell’s suppliers, making the whole an efficient and flexible system. In this way, the direct model allows Dell to build computers to meet real demand from real end customers.
Beyond substituting information for inventory, Dell combines technology and information to blur the traditional boundaries that separate a company from its customers.
Consider technical support. Dell has made it possible for its customers to access its internal support tools on-line in the same way as Dell’s own technical support teams do. In effect, Dell is enabling the customer to service itself, saving time and money on both sides.
New roles for customers
Dell has done something analogous with its selling function. It has developed customized Intranet sites called Premier Pages for well over 400 of its largest global customers, giving them direct access to purchasing and technical information. A customer can allow its thousands of employees to use the Premier Page as a kind of interactive catalogue of all the model configurations that the company authorizes; employees can then price and order the PC they want. Employees are happy to have some choice, and Dell and the customer both eliminate all the paperwork and sales time normally associated with corporate purchasing.
Beyond Dell’s mechanisms for sales and support, the company has set up a number of forums to exchange information with the customer. Platinum Councils, for example, are regional meetings—in Asia-Pacific, Japan, the US, and Europe—of Dell’s largest customers. In these meetings, Dell’s senior technologists share their views on where the technology is heading over the next two years and listen to customers talking about their needs. Helping the customer anticipate the flow of new technology helps Dell, as well, in thinking about new product offerings and in forecasting demand.
Most of the managerial challenges at Dell Computer have to do with speeding the pace of every element of its business. Life cycles are measured in months, not years, and companies must move fast to stay in the game. In a world where customer needs and technologies change quickly, managers must sense and respond to rapid shifts, process new information very quickly and make decisions in real time.
In that context, Internet commerce has been a logical extension of Dell’s direct model. Dell began selling direct on the Net in 1996. Within the first year, Dell reached a run rate of $2 million a day, a figure that has grown to roughly $6 million a day in 1998. “Because what we’re all about is shrinking the time and the resources it takes to meet customers’ needs,” explains Michael Dell, “I’m only half joking when I say that the only thing better than the Internet would be mental telepathy.”
