Wednesday, May 9, 2007

Dell may quit direct to consumer model

Michael Dell says that under the leadership of Michael Cannon (see Dell Names New Supply Chain Chief), Dell will revamp its existing manufacturing, logistics and distribution strategies. “The direct model has been a revolution, but it is not a religion,” Dell said in a leaked internal memo to staff. This statement is being taken as an indication that Dell will eschew sticking with its direct sales model, which accounts for nearly all of its computer sales to both businesses and consumers. In that model, Dell sells to customers directly without intermediaries such as retailers and wholesalers. Orders are placed primarily through Dell’s web site, and computers are built to order. Dell, in turn, uses “demand shaping” strategies and technologies to guide buyers towards models and options for which it has the parts and capacity to deliver immediately.

The direct model has served Dell extremely well, but commentators have noted with regularity that the advantages it provides have dissipated in recent years, especially as the cost of components and machines have dropped, making the holding of inventory less risky. The model has served Dell extremely well, but the advantages it provides have dissipated in recent years, especially as the cost of components and machines has dropped, making the holding of inventory less costly.

Major competitors such as IBM and Lenovo have also made substantial supply chain improvements in recent years to reduce gaps in cost and responsiveness. In certain market such as China , customers are believed to be more concerned about seeing laptops before buying; and cultural and other factors in emerging markets are thought to also favor a retail distribution over direct supply strategy.

I found an interesting post on this latest shift in Dell's strategy on Dwight Silverman 's Tech Blog thats says:

The New York Times has gotten hold of an e-mail sent to Dell employees by its CEO and co-founder, Michael Dell, that's essentially a warning of big changes coming -- something he's already signaled via previous statements and personnel changes.

Times reporter Damon Darlin says the e-mail (PDF) also hints that Dell may expand further into retail operations, significantly altering the direct model of sales that it pioneered -- and which upended the personal computer business:

It is the first time that Mr. Dell or any other senior executive has publicly conceded that the business model that was crucial to the company's success could -- and should -- be altered. Until now, the company responded with an adamant no when Wall Street analysts or customers asked whether the company would consider other ways of selling.

While Mr. Dell's memo was short on specifics, he also told employees, "We will continue to improve our business model, and go beyond it, to give our customers what they need."

As Dell faced slower sales and increased competition, it experimented with minor variations of the model. For example, late last year it opened a showroom in a Dallas mall that displays, but does not sell, computers, printers and TVs. The products still had to be ordered for delivery.

Business Model of Dell
Dell sells all its products both to end-use consumers and to corporate customers, using a direct-sales model via the Internet and the telephone network. Dell maintains a negative cash conversion cycle through use of this model: in other words, Dell Inc. receives payment for the products before it has to pay for the materials. Dell also practices |just-in-time (JIT) inventory management, profiting from its attendant benefits. Dell’s JIT approach utilizes the “pull” system by building computers only after customers place orders and by requesting materials from suppliers as needed. In this way Dell mirrors Toyota by following Toyota Way Principle #3 ("Use 'pull' systems to avoid overproduction"). Since the original dominance of telephone ordering, the Internet has significantly enhanced Dell’s business model, making it easier for customers and potential customers to contact Dell directly. Other computer manufacturers, including Gateway and Hewlett-Packard, have attempted to adapt this same business model, but due to timing and/or retail-channel pressures they have not achieved the same results as Dell.

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