Dell Desktop PC Supply Chain:

Case Study

Chapter 6

Optimizing the Flexibility of

the Desktop PC Supply Chain

Supply Chain
Integration

2006 Massachusetts Institute of Technology.

All rights reserved.
McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Critical Components of a Desktop PC

& Major Component Manufacturers

Agenda
L6 vs. L5 Value Comparison
Root Causes Analysis

Chipset
AMD
Intel

Project Methodology & Next Steps

Lessons Learned

Printed Circuit
Board
BTI Electronics
Compeq
GCE
Plato Electronic

L6 vs. L5

LAN Chip
Broadcom
Intel

Motherboard
ASUS
Foxconn
Intel
MiTAC
Desktop PC
Acer
Apple
Dell
Fujitsu Siemens
Gateway
HP
Lenovo/IBM

Desktop Chassis
ASUS
Flextronics
Foxconn
4
MiTAC
Company list is not comprehensive.
Lite-On Images used on this page belong to the respective companies.

Problem Statement

L6

Since July 2004, Dell and its contract manufacturers (CMs)

have had to adapt an increasing % of L5 manufacturing:

MB
China
Integration

5 Weeks

Chassis

Supplier
Logistics
Center

Dell

Customer

Manufacturing

2. Dell incurs motherboard expedite/air-freight cost and 3rdparty integration cost.

3rd Party Integrator

L5

(managed by Equipment
Manufacturers)

: L5 additional cost

MB

1. Empty chassis are shipped by ocean (L5) to Dell US &

Europe first. Motherboards are then air-freighted to Dell
US & Europe.

3. CMs incur cost for idle labor dedicated for MB-chassis

integration.

1 Week
Dell

Chassis
5 Weeks

Supplier
Logistics
Center

Manufacturing

Customer
6

L6 vs. L5: Value Comparison

L5 Driving Increasing Operational

Cost
Costs of air-freighting MBs and 3PI integration have been increasing.

Integrated offshore & outside a Dell facility

Integrated inside a Dell facility

Integrated motherboard-inside chassis

shipped on water

Chassis shipped on water

Motherboards shipped by air

+ Labor savings

+ Increased supply chain flexibility

+ MB air-freighting costs are eliminated

Increased motherboard airfreighting costs

+ Reduced motherboard packaging costs

Reduced supply chain flexibility

3rd-party integration cost in US

More motherboards need to be re-worked

in the event of an MB ECN

Separate logistical costs for

chassis and motherboards

MB-Airfreighting & 3PI Integration Costs

L5

L6

Q3FY05 Act

L6 is more cost-effective than L5.

L6 vs. L5 Shipments:
% Comparison
L5%
L6%

from a Typical Contract Manufacturer

11%

4%

5%

6%

14%

90%

Q1FY06 Act
EMF

Q2FY06 Act
APJ

Q3FY06 Act

MDS

Q4FY06 FCST

Total

AMF includes 3PI integration cost. EMF and APJ dont as integration is done in Dell factory.

Root Causes Analysis

Dell Worldwide L5 vs. L6 Shipments Received

7%

Q4FY05 Act

Americas
7

100%

Worldwide
Procurement
Expedite Council
established

9%

6%

4%

10%

Majority of expedites are caused by chipset supply

shortage.
3.8%

15%

8.3%

27%
80%

L5 shipped %
has been
increasing since
March 2005.

70%
60%
50%
89%

93%

96%

95%

94%

86%

40%

91%

94%

96%

90%

Chipset supplier decommit

or supply issues
Quality/Eng Issues

24.5%
85%
73%

Dell Forecast Accuracy

30%

63.5%
20%

NPI

10%
0%
Jul-04

Aug-04

Sep-04

Oct-04

Nov-04

Dec-04

Jan-05

Feb-05

Mar-05

Apr-05

May-05

Jun-05

AMF Expedite $ by Root Cause (January to June 05)

Project Scope
Is
Desktops

Project Methodology
BPI project team established to evaluate the
following 6 scenarios:

Is Not
Laptops, servers, storages,
peripherals
Outside DAO

1. Keep as current: 3rd-Party Integrator (3PI) managed by

Equipment Manufacturers

DAO (Dell America

Operation)
Constrained by chipset
To improve chipset supply
supply shortage
Focused on factory
To improve Dells demandoperational improvement forecasting ability
Motherboard-chassis
integration

10

Fans, power supply, SPAMS

(Speakers, Printers,
Advanced Port Replicators,
Monitors, Scanners), or
other components

2. DAO Cellular Integration: Enable the Dell factory work cells

to perform L5L10 mfg work
3. Offline Integration: Keep the current L6L10 mfg process
unchanged; add a separate facility to handle MB-chassis
integration work
a. At SLC (Supplier Logistics Center)
b. At a Dell-leased building
4. 3PI managed directly by Dell
11

5. L6 from Equipment Manufacturers Mexico plants

12

Factors to Considered

Complexity Analysis

For each of the 6 scenarios, BPI project team assessed the

following attributes:
1. Process smoothness & sustainability
2. Cost per box
3. Product quality
4. Capital investment
5. Material handling/cost-accounting
6. Logistics

Project Goal:

Option 2 vs. 4: Value Comparison

Option 4: Dell-managed 3PI
+ Dell has direct control over the 3PI

+ Less impact to business if chipset supply

reverts to 100% L6

+ More clear definition of quality issues

ownership

+ Fit the Dell Direct model better

+ Less manufacturing infrastructure

change required, less impact on
existing supply chain network

Factory thru-put rate is downgraded

+ Little additional capital expenditure

investment, little lead time change
Only an incremental change from the
original manufacturing design

Option 4 enables Dell to focus on the more valueadded portion of the MB-chassis integration.

Option 4
5
5
5
7
1
1
1

Option 5
10
10
5
5
1
1
1

1
5
1
5
57
$10.07

1
1
5
1
60
$7.00

1
1
5
1
60
$7.90

1
10
5
5
55
$7.54

1
10
7
5
57
$7.70

1
10
10
5
56
$7.61

10
1
1
10
62
$7.00

Option 2: Integration at DAO work cells

Option 3A: Integration at SLC/hub

Option 3B: Integration at Dell-leased bldg

Option 4: Dell-managed 3PI

Option 5: Integrated chassis from Mexico

14

Lessons Learned

+ Lower capital expenditure investment

More part numbers to manage

Option 3B
1
5
5
7
5
5
5

10

Option 1: EM-managed 3PI

13

Increased inbound & scheduling

complexity

Option 3A
1
5
5
7
5
5
5

The Cost per Box data has been modified to respect Dells data confidentiality.

based on these input attributes.

Builder headcount is more difficult to

scale

Option 2 Option 2
Option 1 (original) (revised)
10
1
1
8
5
5
5
5
5
5
10
10
1
10
10
5
10
10
1
10
10

Legend:

Identify the optimal scenario

Option 2: Integration at DAO Work Cells

Worldwide Procurement
Regional Procurement
Master Scheduler
Production Control
Operations
DAO Quality
Processing Engineering
Supplier Quality Eng
(Regional)
Supplier Quality Eng
(Global)
Cost Accounting
Inventory Control
Logistics
Total:
Cost per Box

15

1. Supply chain coordination requires involvement from all

partners in the chain (customer, supplier, sub-tier
suppliers).
2. A well-planned strategy complements strong operational
execution ability from supply chain partners.
3. Change management requires 3 key ingredients:
Top-down leadership
Bottom-up engagement
Cross-functional coordination

4. Qualitative judgment is just as important as or more

critical than quantitative analysis.
5. Working in a bi-lingual/bi-regional setting has its perks
and challenges.

16

Discussion and Q&A

Questions and Thoughts

Back-up

17

18

Pros & Cons of the 6 Options

Manufacturing Costs: L5 > L6.

Description

Costs Common to L5 and L6

Costs of doing either L5 or L6:
Raw material costs
China materials transportation costs
China assembler's cost (Foxconn performing L1-->L5)
Chassis ocean-shipping cost
Chassis US transportation cost (trucks, rail)
Chassis inventory holding cost at SLC
US assembler's cost at Dell (from L7-->L10)

Type
Materials
Logistics
Labor
Logistics
Logistics
Inventory Holding
Labor

Costs of doing L6, rather than L5:

China assembler's cost (Foxconn performing L6)

Costs of doing L5, rather than L6:

Motherboard packaging cost
Motherboard air-freight/expedite cost
Motherboard US transportation cost
Motherboard inventory holding cost at SLC
Chassis & motherboard US transportation cost
(from SLC to local/regional integrator and back)
Local/regional integration cost (Accurate, Saberex)
Motherboard rework cost at Dell
Dell L5 mgmt cost (e.g. Expedite Council)

Cons

Least impact for Ops & PE

Most expensive option

Dell does not own inventory during MBchassis integration at 3PI

WWP and Regional Procure. have more intense EM and

3PI mgmt/coordination

2 L6 at Dell
work cells

Less complex for WWP

Long ramp time of new builders

SQE mgmt is reduced

Difficult for PC to run deviations of both L5 and L6 in

one process simultaneously

Most difficult option for SQE

L5 and L6 parts are ordered and tracked

independently clear-cut Cost Accounting

L6 Only Costs
L5 Only Costs

Pros

1 Current
Process, EMmanaged 3PI

Type
Labor

Type
Materials
Logistics
Logistics
Inventory Holding
Logistics
Labor
Labor/Quality
Labor

19

Easiest option for Logistics

Work cells config need to change Greatest impact

for Ops and PE

3 L6 at Dell SLC
A

Less complex for WWP

Most complex for Cost Accounting

SQE mgmt is reduced

Extra PC and IC headcounts required

3 L6 at DellB leased
external
location

Less complex for WWP

Most complex for Cost Accounting and IC

SQE mgmt is reduced

Extra PC and IC headcounts required

4 Dell-managed
3PI

Easiest option for Ops & PE

5 L6 from EM
(China,
Mexico,
and/or
elsewhere)

Lowest possible cost compared to China L6

6.1 Introduction
z

Efficient integration of suppliers, manufacturers, warehouses,

and stores.
Coordinate activities across the supply chain

Most complex for Cost Accounting and IC difficult to

manage Parts Cost at a Dell-managed 3PI

Overall easiest option for Dell

Requires Regional Procure. to manage L6 out of EM

facilities from China, Mexico, and possibly other regions.

Most manageable for Master Sch./COC, PC,

IC, Ops, and DAO Quality

Multi-regional logistics coordination is a concern.

Increased SQE mgmt

20

Push and Pull traditional categories of

manufacturing operations
z More recent hybrid strategy of combining
the two, Push-Pull systems
z

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:
z

Requires additional lease commitment

DAO Quality expected to improve as Dell

directly manages 3PI

6.2 Push, Pull, Push-Pull

Systems

Effective SCM implies:

z

DAO Quality concern from an L5-L6 hybrid mfg model

the front-end, customer demand,

to the back-end, production and manufacturing portion of the
supply chain.

Various supply chain integration strategies:

z
z
z
z

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.
6-21

6-22

Push-Based Supply Chains

z
z
z

Bullwhip Effect in Push-Based

Supply Chains

Production 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:
z
z
z

z
z
z

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.

Leads to inefficient resource utilization

Planning and managing are much more difficult.
Not clear how a manufacturer should determine
production capacity? Transportation capacity?
z
z

Results:
z

Excessive inventories due to the need for large safety

stocks
z Larger and more variable production batches
z Unacceptable service levels
z Product obsolescence
z

z
z
6-23

Peak demand?
Average demand?
Higher transportation costs
Higher inventory levels and/or higher manufacturing
costs
more emergency production changeovers
6-24

Implementation of Pull-Based
Systems

Pull-Based Supply Chains

z

Production and distribution demand driven

z
z

Coordinated with true customer demand rather than

forecast demand
firm does not hold any inventory and only responds to
specific orders.

z
z
z

when lead times are long

more difficult to take advantage of economies of scale

Intuitively attractive:
z

Often difficult to implement

Reduced lead times through the ability to better

anticipate incoming orders from the retailers.
Reduced inventory since inventory levels increase
with lead times
Less variability in the system
Decreased inventory at the manufacturer due to the
reduction in variability.

impractical to react to demand information.

Advantages and disadvantages of push and pull

supply chains:
z
z

new supply chain strategy that takes the best of both.

Pushpull supply chain strategy

6-25

Push-Pull Strategy
z

6-26

Supply Chain Timeline

Some stages of the supply chain operated

in a push-based manner
z

typically the initial stages

Remaining stages employ a pull-based

strategy.
z Interface between the push-based stages
and the pull-based stages is the push
pull boundary.
z

FIGURE 6-8: Push-pull supply chains

6-27

6-28

Identifying the Appropriate Supply

Chain Strategy

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

FIGURE 6-9: Push-pull supply chains

6-29

6-30

Impact of Demand Uncertainty and

Economies of Scale
z

Demand Uncertainty:
z
z

Implementing a PushPull Strategy

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.

product complexity
manufacturing lead times
z suppliermanufacturer relationships.
z
z

Economies of scale:
z

The higher the importance of economies of scale in

reducing cost
z

Many ways to implement a pushpull

strategy
z

The greater the value of aggregating demand

The greater the importance of managing the supply chain based
on long-term forecast, a push-based strategy.

Aggregation does not reduce cost

A pull-based strategy makes more sense.

locates the boundary at the assembly point

manufacturers locate the boundary at the
production point

z Furniture

6-31

Impact of the Push-Pull Strategy

6-32

Impact of the Push-Pull Strategy

Push portion

Low uncertainty
z Service level not an issue
z Focus on cost minimization.
z Long lead times
z Complex supply chain structures
z Cost minimization achieved by:
z

Pull portion
High uncertainty
z Simple supply chain structure
z Short cycle time
z Focus on service level.
z Achieved by deploying a flexible and
responsive supply chain
z Order-fulfillment processes are applied
z

z better

utilizing resources such as production and

distribution capacities
z minimizing inventory, transportation, and
production costs.
z

location of the pushpull boundary.

z Dell

Economies of scale are not important

z

Achieving the appropriate design depends

on many factors:

Supply Chain Planning processes are applied.

6-33

Characteristics of the Push and

Pull Portions of the Supply Chain

6-34

Interactions of the Two Portions

Portion

Push

Pull

Objective

Minimize cost

Maximize service level

z
z

Only at the push-pull boundary

Typically through buffer inventory
Different role for the inventory in each portion
z

Complexity

High

Low

Focus

Resource allocation

Responsiveness

Lead time

Long

Short

Processes

Supply chain planning

Order fulfillment

6-35

In the push portion, buffer inventory is part of the

output generated by the tactical planning process
In the pull system, it represents the input to the
fulfillment process.

Interface is forecast demand

Forecast based on historical data obtained from the
pull portion
Used to drive the supply chain planning process and
determine the buffer inventory.
6-36

6.3 The Impact of Lead Time

Impact of Lead Time

Longer the lead time, more important it is

to implement a push based strategy.
z Typically difficult to implement a pull
strategy when lead times are so long that
it is hard to react to demand information.
z

FIGURE 6-10: Matching supply chain strategies with products:

the impact of lead time and demand uncertainty
6-37

6-38

Impact of Lead Time

z

z
z

Requires integrating demand information

into the supply chain planning process
z

Items with long supply lead time and low demand uncertainty.
Appropriate supply chain strategy is push.

historical demand data to develop long-term

estimates of expected demand

items with short supply lead time and highly predictable demand.
Continuous replenishment strategy
z
z
z

Demand forecast:
z Use

Box C
z

Items with short lead time and high demand uncertainty

Pull strategy should be applied as much as possible.

Box B
z

6.4 Demand-Driven Strategies

Box A

Demand shaping:
z Firm

determines the impact of various marketing

plans such as promotion, pricing discounts,
rebates, new product introduction, and product
withdrawal on demand forecasts.

Suppliers receive POS data

They use these data to prepare shipments at previously agreedupon intervals
A pull strategy at the production and distribution stages and push at
the retail outlets.

Box D
z

Items with long lead times are long and unpredictable demand
z
z

Inventory is critical in this type of environment

Requires positioning inventory strategically in the supply chain
6-39

6-40

6.5 The Impact of the Internet on

Supply Chain Strategies

Forecast Errors Are Always Present!

z
z

High demand forecast error has a detrimental impact on

supply chain performance
Approaches to improve accuracy
z

z
z

z
z

Select the pushpull boundary so that demand is aggregated over

one or more of the following dimensions:
Across products/geography/time

Use market analysis and demographic and economic trends

to improve forecast accuracy (see Chapter 2 for details).
Determine the optimal assortment of products by store
z

Expectation that increasing use of the

internet would solve a lot of the business
problems
z Reality was very different
z Many of the problems in the internetbased businesses were related to
logistics strategies
z

Aggregate forecasts are more accurate,

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 chain
z
z

Interaction of demand planning and tactical supply planning

Iterative process
6-41

6-42

E-Business

Successes and Failures

z

Notable Failures

E-business: a collection of business

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

Furniture.com
z Peapod.com
z

Notable Successes

Hybrid of successes and failures

Amazon.com
Cisco
z $2.2B

inventory write-off in 2001

been successful in leveraging the internet
subsequently

z Has

6-43

6-44

Key Observations
z
z
z

Grocery Industry

e-commerce is only part of e-business.

Internet technology is the force behind the
business change.
Focus on the extended enterprise
z

direct to customer,
Retail activities over the Internet, and includes products,
insurance, banking, and so forth.

Conducted over the Internet predominantly between

businesses.
Includes:
z
z
z

Significant service problems with high stockout rates

Changed to a pushpull strategy by setting up a number of
warehouses
Warehouse covers a large geographical area
z

Business-to-business (B2B)
z

Typical supermarket employs a push-based strategy

Peapod was built on pure pull strategy with no inventory
and no facilities.
z

Business-to-consumer (B2C)
z

z
z
z

electronic sourcing (the so-called eSourcing)

reverse auctions
collaboration with suppliers and vendors to achieve
common goals.

Aggregated demand

Other challenges:
Reducing transportation costs
Short response time
Low customer density

Products have low demand uncertainty

z
z

high economies of scale in transportation cost

push-based strategy is more appropriate.

6-45

6-46

Book Industry
z

Initial model of Amazon.com a pure pull system with no

warehouses and no stock.
z

Amazon.coms service level was affected by Ingram Books

distribution capacity
Using Ingram Book in the first few years allowed Amazon.com to
avoid inventory costs but significantly reduced profit margins.
z

z
z

As demand increased distributor no longer required.

Several warehouses around the country where most of the titles

are stocked.
Inventory at the warehouses is managed using a push strategy
Demand satisfied based on individual requests, a pull strategy.

Already have the distribution and warehousing

infrastructure

Click-and-mortar firms
z

High-volume, fast-moving products stocked in stores

Low-volume, slow-moving products are stocked

centrally

Slow moving low volume books and CDs are not stocked
at Amazon distribution centers
z

Late 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.
z

Current Amazon.com:
z

Ingram Book Group supplied most of Amazons customer

demand.

As volume and demand increased:

z

General Retail Industry

Push strategy

Push-Pull strategy

Amazon orders those when demand arrives.

6-47

6-48

Summary

Traditional Fulfillment Versus eFulfillment

Traditional fulfillment

E-fulfillment

Supply chain strategy

Push

Pushpull

Shipment

Bulk

Parcel

Reverse logistics

Small part of the business

Important and highly complex

Delivery destination

Small number of stores

Large number of geographically

dispersed customers

Lead times

Relatively long

Relatively short

z
z

Implementation 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:
z
z
z

Identify the appropriate supply chain strategy for

individual products.
Case for no physical infrastructure or inventory is
tenuous
Pushpull strategy
z
z

6-49

advocates holding inventory

although it pushes the inventory upstream in the supply chain.

6-50