Since 1986 when the first Dell PC was introduced, it gradually grew into one of the top computer system companies. The unwavering commitment to deliver new and better solutions that directly address customer needs, says by Dell itself, remains the core of its innovation approach. Dell gathers requirements directly from the customers and partnerships with a wide variety ofsuppliers. They make the computers as what the customers required and directly deliver to the customers, which enables Dell to effectively and efficiently fulfill customer needs.
As the development of computer technology was so fast that many components devalued 0.5 to 2.0 percent per week, holding large amount of inventory became big potential liability. That’s why Dell decided to carry verylittle inventory itself with the help of its close-relationship agreements with its suppliers. From Figure_1 we can see that Dell’s supply chain is simple and clean, and its main focus is responsiveness towards demand.
Figure_1: Dell’s Supply Chain
However, as put by Tom Meredith in 1999, “Customer sees no advantage in a manufacturer lowering inventory to six days if there are still 90days in the supply line”, Dell began to think about the inventory held by its suppliers that needed for the desired service level. That is, even though Dell itself carries very little inventory, its suppliers might holding more inventories than desired. For this reason, Dell invited a team from the Tauber Manufacturing Institute (TMI) to develop an inventory model in order to decide the optimalinventory levels for its suppliers.
After 14 weeks’ hard work, the TMI team finally developed an inventory model to calculate the target levels of inventory in the final stage of Dell's supply chain. This model was based on two assumptions: Simultaneous shortages of multiple components are very infrequent so that they could be ignored; Stationary demand and inventory targets during a rollingforecast horizon of 10 business days. The implementation process of this model is: collect data – create a self-contained spreadsheet – analyze the collected data – develop the tools – conduct tutorials – result evaluation – collect data again.
From the calculations and the predictions of the model, the overall result of launching the model is beneficial to Dell as it fitted Dell’s business strategyquite well. Before implementing this model, Dell just set the target inventory level to 10 days’ supply based on empirical data and judgment without any systematical calculation. Thus this model gave Dell a better visibility of inventory control instead of just based on previous experience so that Dell can identify target inventory level more scientifically. Besides, a program named Value Chainand its corresponding website had been developed, which made it easier for Dell and its supplier to share their data and other information, increasing the reaction speed of the supply chain. The service level of Dell has also been improved by implementing this inventory model, which enabled Dell to build a better brand image and to provide better customer service.
“…lower supply-chain-inventorycosts by reducing revolver inventory by 40 percent. This reduction would raise the corresponding inventory turns by 67 percent. Net Present Value calculations for XDX alone suggest $43 million in potential savings.” “So far Dell has decreased inventories for its PowerConnect line of business from 20 days to between 10 and 15 days, which is close to the target of 10 days recommended by the model,and it expects estimated annual savings of $2.7 million.” All these data also showed the effect of the model by setting appropriate inventory level to reduce the unnecessary inventory cost for Dell’s suppliers. Although the revolver inventory cost was shared by Dell’s suppliers, it will indirectly charge to Dell and to customers finally through pricing, so the supply chain cares about not only the...