Dell Erp
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How ERP implementation builds s world famous Supply Chain:
Virtual Integration: When ERP fits the Dells Direct model:
The introduction of enterprise resource planning (ERP) software improves the coordination between firms. Before ERP, the each function in value chain had separate organization with separate information system. Each function performed its own tasks thus not globally optimizing the whole value chain. ERP builds the “electronic nervous system” to links all units together and increases overall productivity.
In some cases, firms found that they could eliminate most inventories by shifting to faster but more expensive transportation alternatives (e.g. air cargo) that replenished supply just in time. Simply put, ERP allowed information to replace inventory.
The emergence of the Internet facilitated more and more information sharing between firms, extending the benefits of ERP from the value chain of an individual firm to the entire value system of firms and their suppliers and customers. ERP can be a vital component in controlling complex supply chains and in the fast developing world of e-business and B2B electronic exchanges. Dell Computers success in reducing inefficiencies establishes it as a model for many other companies.
The Dell Model
Dells success is based on realizing the strategic power of the supply chain. The core of the Dell model is to deal directly with and sell directly to the customer, and build products to order. Dell collapses the value chain and eliminates two significant cost components: the retailers mark-up and the costs and risks associated with carrying large inventories of finished goods.
Texas-based Dell is the worlds largest personal computer maker. Founded in the mid-1980s by a university student, Michael Dell, the company leads the sector with annual growth rates of 30 to 40 per cent. Dell has achieved its success in large part due to its highly efficient value chain integration approach, supported by ERP and – more recently – by the Internet. Dell produces custom-made computers “just in time” for orders received directly from the customer via telephone or the Internet. As Dell receives an order, it shares production requirement information electronically with its suppliers world-wide for immediate delivery to a Dell production facility, where the computer is assembled and shipped directly to the customer within a week. The Dell model relies on demand side pull rather than supply side push – no computer is produced unless there is corresponding demand in the marketplace. Thus the massive queues of inventory usually sitting idle within retail stores, distributors, and factories are virtually eliminated. The productivity advantages of this production model are profound. Dell is able operate with half the number of employees and one-tenth of inventory of its traditional computer competitors. Return on invested capital reached 195 per cent in 1999, compared to 10-20 per cent for traditional manufacturing firms. Companies from around the world have been flocking to Austin, Texas to understand the Dell production model, much as firms had flocked to Tokyo and River Rouge earlier in the century. The opportunity for productivity improvement was enormous; in the USA alone, the cost of goods in inventory of all value systems was nearly $1 trillion in 1997. As the 1990s closed, the Dell model began to spread from high technology to traditional manufacturing sectors such as automobile production. Recently, General Motors, Ford, and Daimler Chrysler announced they were moving to electronic supply chain management systems similar to Dell Computer. If successful, the Dell Model could be every bit as revolutionary to the production structure as Fords vertical integration and Toyotas lean production models were in earlier eras.
Dells originality lay in the approach that it adopted in implementing the direct business model. In particular, unlike other computer manufacturers, Dell sells directly to all of its customers and not just to large corporate clients. Through developing a direct relationship with all of their individual clients and building its computers to order, Dell was able to build a highly efficient just-in-time process, eliminating most of its inventory in the process. A further advantage to the Dell approach is the instant, current and continuous market research that it produces. In knowing exactly what individual customers want in a personal computer or computer network, Dell is able to anticipate market demand and shape the technological and competitive parameters of the computer industry. Dell argues that the direct model creates the most compressed PC supply chain by eliminating all intermediaries. Moreover, compared to a traditional supply chain structure, the direct model can reduce inventory investment by 50 to 70 per cent.
The concept behind Dells drive to reduce inventory inefficiencies “has nothing to do with stockpiling and everything to do with information”. Due to its made-to-order approach, Dell is able to see on a daily basis if, for instance, customer preference is shifting to larger PC monitors. The company can also discern whether this is happening for certain customer segments or across the market. Dell immediately relays its assessment of this information to its suppliers, allowing them to adjust their inventory accordingly and rapidly meet demand. It stands to reason that the more information a company has about what a customer wants and how much he/she requires, the fewer inventories the company needs to maintain. Less inventory means less inventory depreciation. In an industry such as computer manufacturing, component prices are constantly falling– typically 15-25 per cent per annum. Six days of inventory (Dells norm) compared with 34 days (standard at Compaq) can therefore result in significant cost savings on inputs. Furthermore, reduced stockpiles can offset the risk of being caught with large amounts of obsolete inventory if technology shifts and there is a transition to a next-generation product – as often happens in high technology sectors. It therefore comes as no surprise to learn that Dells competitors such as IBM and Compaq are constantly striving to cut their inventory levels but have yet to match Dells success in this area.
The Dell Direct Model and Virtual Value Chain Integration
The notion of linkages between supply chain participants is not new and was traditionally referred to as vertical integration. Unlike the Dell model, though, vertical integration implies ownership of both