Dell Desktop PC Supply Chain:Optimizing the Flexibility ofthe Desktop PC Supply ChainCase Study2006 Massachusetts Institute of Technology. All rights reserved.

Student Presentation - LFM June 2004 Workshop - v6

*AgendaL6 vs. L5 Value ComparisonRoot Causes AnalysisProject Methodology & Next StepsLessons Learned

Student Presentation - LFM June 2004 Workshop - v6

*Critical Components of a Desktop PC & Major Component ManufacturersChipsetAMDIntelMotherboardASUSFoxconnIntelMiTACDesktop ChassisASUSFlextronicsFoxconnMiTACLite-OnDesktop PCAcerAppleDellFujitsu SiemensGatewayHPLenovo/IBMCompany list is not comprehensive.Images used on this page belong to the respective companies.LAN ChipBroadcomIntelPrinted Circuit BoardBTI ElectronicsCompeqGCEPlato Electronic

Student Presentation - LFM June 2004 Workshop - v6

L6 vs. L5: L5 additional cost

Student Presentation - LFM June 2004 Workshop - v6

*Problem StatementSince July 2004, Dell and its contract manufacturers (CMs) have had to adapt an increasing % of L5 manufacturing:Empty chassis are shipped by ocean (L5) to Dell US & Europe first. Motherboards are then air-freighted to Dell US & Europe. Dell incurs motherboard expedite/air-freight cost and 3rd-party integration cost.CMs incur cost for idle labor dedicated for MB-chassis integration.

Student Presentation - LFM June 2004 Workshop - v6

*L6 vs. L5: Value ComparisonL5Integrated inside a Dell facilityChassis shipped on waterMotherboards shipped by airIncreased supply chain flexibilityIncreased motherboard air-freighting costs3rd-party integration cost in US Separate logistical costs for chassis and motherboardsL6Integrated offshore & outside a Dell facilityIntegrated motherboard-inside chassis shipped on waterLabor savingsMB air-freighting costs are eliminatedReduced motherboard packaging costsReduced supply chain flexibilityMore motherboards need to be re-worked in the event of an MB ECNL6 is more cost-effective than L5.

Student Presentation - LFM June 2004 Workshop - v6

*L5 Driving Increasing Operational CostCosts of air-freighting MBs and 3PI integration have been increasing.AMF includes 3PI integration cost. EMF and APJ dont as integration is done in Dell factory.

Student Presentation - LFM June 2004 Workshop - v6

*L6 vs. L5 Shipments:% ComparisonL5 shipped % has been increasing since March 2005.

Student Presentation - LFM June 2004 Workshop - v6

*Root Causes AnalysisMajority of expedites are caused by chipset supply shortage.AMF Expedite $ by Root Cause (January to June 05)

Student Presentation - LFM June 2004 Workshop - v6

*Project Scope

IsIs NotDesktopsLaptops, servers, storages, peripheralsDAO (Dell America Operation)Outside DAOConstrained by chipset supply shortageTo improve chipset supplyFocused on factory operational improvementTo improve Dells demand-forecasting abilityMotherboard-chassis integrationFans, power supply, SPAMS (Speakers, Printers, Advanced Port Replicators, Monitors, Scanners), or other components

Student Presentation - LFM June 2004 Workshop - v6

*Project MethodologyBPI project team established to evaluate the following 6 scenarios:Keep as current: 3rd-Party Integrator (3PI) managed by Equipment ManufacturersDAO Cellular Integration: Enable the Dell factory work cells to perform L5L10 mfg workOffline Integration: Keep the current L6L10 mfg process unchanged; add a separate facility to handle MB-chassis integration workAt SLC (Supplier Logistics Center)At a Dell-leased building3PI managed directly by DellL6 from Equipment Manufacturers Mexico plants

Student Presentation - LFM June 2004 Workshop - v6

*Factors to ConsideredFor each of the 6 scenarios, BPI project team assessed the following attributes:Process smoothness & sustainabilityCost per boxProduct qualityCapital investmentMaterial handling/cost-accountingLogisticsProject Goal: Identify the optimal scenario based on these input attributes.

Student Presentation - LFM June 2004 Workshop - v6

*Complexity AnalysisLegend: The Cost per Box data has been modified to respect Dells data confidentiality.Option 1: EM-managed 3PIOption 2: Integration at DAO work cellsOption 3A: Integration at SLC/hubOption 3B: Integration at Dell-leased bldgOption 4: Dell-managed 3PIOption 5: Integrated chassis from Mexico

Student Presentation - LFM June 2004 Workshop - v6

*Option 2 vs. 4: Value ComparisonOption 4: Dell-managed 3PIDell has direct control over the 3PIMore clear definition of quality issues ownershipLess manufacturing infrastructure change required, less impact on existing supply chain networkLittle additional capital expenditure investment, little lead time changeOnly an incremental change from the original manufacturing designOption 2: Integration at DAO Work Cells Lower capital expenditure investmentLess impact to business if chipset supply reverts to 100% L6Fit the Dell Direct model betterBuilder headcount is more difficult to scaleIncreased inbound & scheduling complexityMore part numbers to manageFactory thru-put rate is downgradedOption 4 enables Dell to focus on the more value-added portion of the MB-chassis integration.

Student Presentation - LFM June 2004 Workshop - v6

*Lessons LearnedSupply chain coordination requires involvement from all partners in the chain (customer, supplier, sub-tier suppliers).A well-planned strategy complements strong operational execution ability from supply chain partners.Change management requires 3 key ingredients:Top-down leadershipBottom-up engagementCross-functional coordinationQualitative judgment is just as important as or more critical than quantitative analysis.Working in a bi-lingual/bi-regional setting has its perks and challenges.

Student Presentation - LFM June 2004 Workshop - v6

*Discussion and Q&AQuestions and Thoughts

Student Presentation - LFM June 2004 Workshop - v6

*Back-up

Student Presentation - LFM June 2004 Workshop - v6

*Manufacturing Costs: L5 > L6.Costs Common to L5 and L6L6 Only CostsL5 Only Costs

Student Presentation - LFM June 2004 Workshop - v6

*Pros & Cons of the 6 Options

DescriptionProsCons1Current Process, EM-managed 3PI Least impact for Ops & PE Dell does not own inventory during MB-chassis integration at 3PI Most expensive option WWP and Regional Procure. have more intense EM and 3PI mgmt/coordination Most difficult option for SQE2L6 at Dell work cells Less complex for WWP SQE mgmt is reduced L5 and L6 parts are ordered and tracked independently clear-cut Cost Accounting Easiest option for Logistics Long ramp time of new builders Difficult for PC to run deviations of both L5 and L6 in one process simultaneously Work cells config need to change Greatest impact for Ops and PE DAO Quality concern from an L5-L6 hybrid mfg model3AL6 at Dell SLC Less complex for WWP SQE mgmt is reduced Most complex for Cost Accounting Extra PC and IC headcounts required3BL6 at Dell-leased external location Less complex for WWP SQE mgmt is reduced Most complex for Cost Accounting and IC Extra PC and IC headcounts required Requires additional lease commitment4Dell-managed 3PI Easiest option for Ops & PE DAO Quality expected to improve as Dell directly manages 3PI Most complex for Cost Accounting and IC difficult to manage Parts Cost at a Dell-managed 3PI

5L6 from EM (China, Mexico, and/or elsewhere) Lowest possible cost compared to China L6 Overall easiest option for Dell Most manageable for Master Sch./COC, PC, IC, Ops, and DAO Quality Requires Regional Procure. to manage L6 out of EM facilities from China, Mexico, and possibly other regions. Increased SQE mgmt Multi-regional logistics coordination is a concern.

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6.1 IntroductionEffective SCM implies:Efficient integration of suppliers, manufacturers, warehouses, and stores. Coordinate activities across the supply chain Improve performance: reduce cost, increase service level, reduce the bullwhip effect, better utilize resources, and effectively respond to changes in the market place. Challenges can be met by integrating: the front-end, customer demand, to the back-end, production and manufacturing portion of the supply chain. Various supply chain integration strategies: Push, pull, pushpull strategy.Matching products and industries with supply chain strategies.Demand-driven supply chain strategies.The impact of the Internet on supply chain integration.

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6.2 Push, Pull, Push-Pull SystemsPush and Pull traditional categories of manufacturing operationsMore recent hybrid strategy of combining the two, Push-Pull systems

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Push-Based Supply ChainsProduction and distribution decisions based on long-term forecasts. Manufacturer demand forecasts based on orders received from the retailers warehouses. Longer reaction time to changing marketplace:Inability to meet changing demand patterns.Obsolescence of supply chain inventory as demand for certain products disappears.Variability of orders received much larger than the variability in customer demand due to the bullwhip effect. Excessive inventories due to the need for large safety stocksLarger and more variable production batchesUnacceptable service levelsProduct obsolescence

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Bullwhip Effect in Push-Based Supply ChainsLeads to inefficient resource utilizationPlanning and managing are much more difficult. Not clear how a manufacturer should determine production capacity? Transportation capacity? Peak demand? Average demand? Results: Higher transportation costsHigher inventory levels and/or higher manufacturing costsmore emergency production changeovers

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Pull-Based Supply ChainsProduction and distribution demand driven Coordinated with true customer demand rather than forecast demand firm does not hold any inventory and only responds to specific orders. Intuitively attractive:Reduced lead times through the ability to better anticipate incoming orders from the retailers.Reduced inventory since inventory levels increase with lead timesLess variability in the systemDecreased inventory at the manufacturer due to the reduction in variability.

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Implementation of Pull-Based SystemsOften difficult to implement when lead times are long impractical to react to demand information. more difficult to take advantage of economies of scale Advantages and disadvantages of push and pull supply chains:new supply chain strategy that takes the best of both.Pushpull supply chain strategy

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Push-Pull StrategySome stages of the supply chain operated in a push-based mannertypically the initial stagesRemaining stages employ a pull-based strategy. Interface between the push-based stages and the pull-based stages is the pushpull boundary.

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Supply Chain TimelineFIGURE 6-8: Push-pull supply chains

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General StrategyMake a part of the product to stock generic product The point where differentiation has to be introduced is the push-pull boundaryBased on extent of customization, the position of the boundary on the timeline is decided

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Identifying the Appropriate Supply Chain Strategy FIGURE 6-9: Push-pull supply chains

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Impact of Demand Uncertainty and Economies of ScaleDemand Uncertainty:Higher demand uncertainty leads to a preference for pull strategy.Lower demand uncertainty leads to an interest in managing the supply chain based on a long-term forecast: push strategy.Economies of scale:The higher the importance of economies of scale in reducing costThe greater the value of aggregating demandThe greater the importance of managing the supply chain based on long-term forecast, a push-based strategy. Economies of scale are not importantAggregation does not reduce costA pull-based strategy makes more sense.

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Implementing a PushPull Strategy Achieving the appropriate design depends on many factors:product complexitymanufacturing lead timessuppliermanufacturer relationships. Many ways to implement a pushpull strategylocation of the pushpull boundary. Dell locates the boundary at the assembly pointFurniture manufacturers locate the boundary at the production point

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Impact of the Push-Pull StrategyPush portionLow uncertaintyService level not an issueFocus on cost minimization. Long lead timesComplex supply chain structuresCost minimization achieved by: better utilizing resources such as production and distribution capacities minimizing inventory, transportation, and production costs.Supply Chain Planning processes are applied.

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Pull portionHigh uncertaintySimple supply chain structureShort cycle timeFocus on service level. Achieved by deploying a flexible and responsive supply chainOrder-fulfillment processes are applied

Impact of the Push-Pull Strategy

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Characteristics of the Push and Pull Portions of the Supply Chain

PortionPushPullObjectiveMinimize costMaximize service levelComplexityHighLowFocusResource allocationResponsivenessLead time LongShortProcessesSupply chain planningOrder fulfillment

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Interactions of the Two PortionsOnly at the push-pull boundaryTypically through buffer inventoryDifferent role for the inventory in each portionIn the push portion, buffer inventory is part of the output generated by the tactical planning processIn the pull system, it represents the input to the fulfillment process.Interface is forecast demandForecast based on historical data obtained from the pull portion Used to drive the supply chain planning process and determine the buffer inventory.

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6.3 The Impact of Lead TimeLonger the lead time, more important it is to implement a push based strategy. Typically difficult to implement a pull strategy when lead times are so long that it is hard to react to demand information.

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Impact of Lead TimeFIGURE 6-10: Matching supply chain strategies with products: the impact of lead time and demand uncertainty

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Impact of Lead TimeBox A Items with short lead time and high demand uncertainty Pull strategy should be applied as much as possible. Box B Items with long supply lead time and low demand uncertainty. Appropriate supply chain strategy is push.Box C items with short supply lead time and highly predictable demand. Continuous replenishment strategySuppliers receive POS dataThey use these data to prepare shipments at previously agreed-upon intervalsA pull strategy at the production and distribution stages and push at the retail outlets.Box D Items with long lead times are long and unpredictable demand Inventory is critical in this type of environment Requires positioning inventory strategically in the supply chain

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6.4 Demand-Driven Strategies Requires integrating demand information into the supply chain planning process Demand forecast: Use historical demand data to develop long-term estimates of expected demandDemand shaping: Firm determines the impact of various marketing plans such as promotion, pricing discounts, rebates, new product introduction, and product withdrawal on demand forecasts.

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Forecast Errors Are Always Present!High demand forecast error has a detrimental impact on supply chain performance Approaches to improve accuracy Aggregate forecasts are more accurate,Select the pushpull boundary so that demand is aggregated over one or more of the following dimensions:Across products/geography/timeUse market analysis and demographic and economic trends to improve forecast accuracy (see Chapter 2 for details).Determine the optimal assortment of products by store Reduce the number of SKUs competing in the same market.Incorporate collaborative planning and forecasting processes with your customers Demand forecast by SKU by location has to be supported by the supply chainInteraction of demand planning and tactical supply planningIterative process

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6.5 The Impact of the Internet on Supply Chain StrategiesExpectation that increasing use of the internet would solve a lot of the business problemsReality was very differentMany of the problems in the internet-based businesses were related to logistics strategies

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Successes and FailuresNotable FailuresFurniture.comPeapod.comNotable SuccessesAmazon.comHybrid of successes and failuresCisco$2.2B inventory write-off in 2001Has been successful in leveraging the internet subsequently

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E-BusinessE-business: a collection of business models and processes motivated by Internet technology and focusing on improvement of extended enterprise performance.E-commerce: ability to perform major commerce transactions electronically.

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Key Observationse-commerce is only part of e-business. Internet technology is the force behind the business change. Focus on the extended enterpriseBusiness-to-consumer (B2C)direct to customer, Retail activities over the Internet, and includes products, insurance, banking, and so forth.Business-to-business (B2B) Conducted over the Internet predominantly between businesses. Includes: electronic sourcing (the so-called eSourcing) reverse auctions collaboration with suppliers and vendors to achieve common goals.

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Grocery IndustryTypical supermarket employs a push-based strategy Peapod was built on pure pull strategy with no inventory and no facilities. Significant service problems with high stockout rates Changed to a pushpull strategy by setting up a number of warehousesWarehouse covers a large geographical areaAggregated demand Other challenges: Reducing transportation costs Short response timeLow customer density Products have low demand uncertaintyhigh economies of scale in transportation costpush-based strategy is more appropriate.

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Book IndustryInitial model of Amazon.com a pure pull system with no warehouses and no stock. Ingram Book Group supplied most of Amazons customer demand.As volume and demand increased:Amazon.coms service level was affected by Ingram Books distribution capacityUsing Ingram Book in the first few years allowed Amazon.com to avoid inventory costs but significantly reduced profit margins. As demand increased distributor no longer required.Current Amazon.com: Several warehouses around the country where most of the titles are stocked. Inventory at the warehouses is managed using a push strategyDemand satisfied based on individual requests, a pull strategy. Slow moving low volume books and CDs are not stocked at Amazon distribution centersAmazon orders those when demand arrives.

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General Retail IndustryLate to respond to competition from virtual stores and to recognize the opportunities provided by the Internet. Brick-and-mortar companies are adding an Internet shopping component to their offering. Already have the distribution and warehousing infrastructure Click-and-mortar firms High-volume, fast-moving products stocked in storesPush strategyLow-volume, slow-moving products are stocked centrallyPush-Pull strategy

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Traditional Fulfillment Versus e-Fulfillment

Traditional fulfillmentE-fulfillmentSupply chain strategyPushPushpullShipmentBulkParcelReverse logisticsSmall part of the businessImportant and highly complexDelivery destinationSmall number of storesLarge number of geographically dispersed customersLead timesRelatively longRelatively short

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SummaryImplementation of push-pull strategies and demand-driven strategies have helped many companies to improve performance, reduce costs, increase service levels. Collapse of many Internet companies shows that e-business has great challenges. Companies need to:Identify the appropriate supply chain strategy for individual products. Case for no physical infrastructure or inventory is tenuous Pushpull strategy advocates holding inventoryalthough it pushes the inventory upstream in the supply chain.

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