Liberty Dell Inc: Improving the Flexibility of the Desktop PC Supply Chain

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Case Study 2 Instructions

Read the Dell Inc.: Improving the Flexibility of the Desktop PC Supply Chain Case Study in the Simchi-Levi et al. text. Submit a response to each of the end-of-case discussion questions. Each question must be answered thoroughly, and responses must be supported by the concepts introduced in the reading/study materials. Each question/answer must be delineated under a heading in current APA format. Include a title page and reference page also in current APA format. Incorporate a minimum of 5 peer-reviewed sources with at least 1 source per question.

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Case: Dell Inc.: Improving the Flexibility of the Desktop PC Supply Chain It was June 2005, seemingly a good time for Dell Inc. Since the dot-com bubble burst in 2001, the price of the company’s stock had roughly doubled. Both the company’s revenue and net income were reaching new heights. In spite of the confidence and optimism, however, Dell’s desktop PC manufacturing division found that its manufacturing costs had continued to surge. Tom Wilson, one of the division’s directors, revealed: “The recent increase in Level 5 manufacturing is alarming to us at Dell. From Dell’s perspective, this adds cost to our overall manufacturing process. We are not able to take as much advantage as we should of the lower cost structure of our contract manufacturers. Instead, we have to rely more heavily on the 3rdparty integrators (3PIs). Not only do we get lower-quality products because we currently don’t require 3PIs to perform integration unit testing, we also have difficulty forecasting for the 3PIs how much manufacturing capacity they should have available to support Dell’s demand.” History of the PC Industry In the 1960s, the first so-called personal computers (PCs)—non-mainframe computers—such as the LINC and the PDP-8 became available. They were expensive (around $50,000) and bulky (many were about the size of a refrigerator). However, they were called “personal computers” because they were small and cheap enough for individual laboratories and research projects. These computers also had their own operating systems so users could interact with them directly. The first microcomputers hit the market in the mid-1970s. Usually, computer enthusiasts purchased them in order to learn how to program, and used them to run simple office or productivity applications or play games. The emergence of the single-chip microprocessor led to substantially lower computer prices, and, for the first time, a broad spectrum of buyers from the general public. The first widely and successfully sold desktop computer was the Apple II introduced in 1977 by Apple Computer. In the 1980s, computers became increasingly cheaper and gained great popularity among home and business users. This trend was partly driven by the launch of the IBM PC and its associated software, which enabled the use of a spreadsheet, a word processor, presentation graphics, and a simple database application on a single relatively low-cost machine. In 1982, Time magazine named the personal computer its Man of the Year. Laptop computers truly the size of a notebook. also became available in the 1980s. The first commercially available portable computer was the Osborne 1 in 1981, which used the CP/M operating system. Although it was large and heavy by today’s standards, with a tiny CRT monitor, it had a near-revolutionary impact on business, as professionals were able to take their computer and data with them for the first time. However, it was not possible to run the Osborne on batteries; it had to be plugged in. Personal computers became more powerful and capable of handling more complex tasks in the 1990s. By this time, they were becoming more like multi-user computers or mainframes. During this decade, desktop computers were widely advertised for their ability to support graphics and multimedia, and this power led to increased usage of desktop computers by movie studios, universities, and governments. By the end of the 1980s, laptop computers, truly the size of a notebook, were becoming popular among business people. By 2005, high-end PCs focused more on greater reliability and more powerful multitasking capability. Dell’s Company Background and its Direct Model Dell was founded by Michael Dell in his University of Texas–Austin dorm room in 1984 based on a simple business model: eliminating the retailers from the sales channel and selling directly to customers. By using this model to deliver customized systems to customers with lower-thanmarket-average prices, Dell soon started to enjoy business success, joining the ranks of the topfive computer system makers worldwide in 1993, and became Number 1 in 2001. With three major manufacturing facilities in the United State (Austin, Texas; Nashville, Tennessee; Winston-Salem, North Carolina) and facilities in Brazil, China, Malaysia, and Ireland, Dell’s revenue for the last four quarters totaled $56 billion. Dell employs 65,200 people worldwide. 1 1 Dell Company Web site, Company Facts. In addition to personal computers, Dell’s current product offerings include a variety of consumer electronics: workstations, servers, storage, monitors, printers, handhelds, LCD TVs, projectors, and so forth. Some of these products are manufactured by Dell factory associates; other products are manufactured by other companies but sold under the Dell brand. Throughout the company’s history, Dell’s fundamental business model has not changed: selling directly to customers has become Dell’s key strategy and strength. The direct business model includes no retailers and starts and ends with the customer: a customer orders online or via phone a computer system according to his preferred configuration, Dell manufacturers this computer system, and Dell ships directly to the customer. Dell has been able to keep manufacturing costs lower than competitors’ costs because it not only saves money by shipping directly to customers, but it also only builds to order, so raw material inventory is low. The direct model also reduces the time from customer order to receipt of the system. Moreover, the direct model provides a single point of accountability so Dell can more easily design its customer service model in order to provide the necessary resources to satisfy its customers. Contract Manufacturing By 2005, most PC makers utilized contract manufacturers to produce high-tech electronic products. The phenomenon of contract manufacturing began in the 1980s. To take advantage of labor cost differences, many original equipment manufacturers (OEMs) initiated business engagements with contract manufacturers (CMs). When the contract manufacturing business model was first implemented, CMs were responsible for producing materials or unassembled components in less expensive regions and shipping them to the OEMs’ factories in the United State or Europe for product assembly. By the late 1990s, however, more and more contract manufacturers began to perform some level of manufacturing/assembly for their customers. This helped fuel the growth of contract manufacturing. According to Alameda, California–based Technology Forecasters Inc., in 1998, the contract manufacturing industry was worth $90 billion. By 2001, this figure almost doubled to $178 billion. 2 OEMs chose to let contract manufacturers own and manage part of the manufacturing process for the following reasons: 3 Drew Wilson, “Contract Manufacturing Revs Up for 2000,” The Electronics Industry Yearbook/2000, p. 88. 2 Charles H. Fine and Dan Whitney, “Is the Make-Buy Decision Process a Core Competence?” MIT CTPID Working Paper, 1996. 3 1. Capability: The OEM cannot make the item or easily acquire this capability and must seek a supplier. 2. Manufacturing competitiveness: The supplier has a lower cost, faster availability, and so forth. 3. Technology: The supplier’s version of the item is better. By 2005, almost all the desktop PCs sold in the United States were initially produced by contract manufacturers in China. In a typical contract manufacturing transaction, the OEM approaches the contract manufacturer with a product design. The two negotiate and agree on the price, property of materials, subtier suppliers, and sometimes even the manufacturing process. The contract manufacturer then acts as the OEM’s factory. Most contract manufacturers for both desktop and laptop PC products have factories in China or other parts of Asia. Depending on the degree of manufacturing competency and cost, some contract manufacturers do everything from manufacturing all the way to shipping fully assembled products on behalf of the OEM. Therefore, by 2005, most American PC makers had become “fabless,” and Dell was one of the few American companies that still retained manufacturing facilities in the United States. In Dell’s case, because customers can customize some components of their PCs when placing an order, manufacturing a fully finished product and shipping it by ocean from the contract manufacturer’s facility in China to the customers in the United States would be time-prohibitive, and manufacturing a finished product and air-freighting it would be too cost-prohibitive if it is a heavy or bulky desktop product. Therefore, for Dell’s desktop products, contract manufacturers in China produce and ship (by ocean) half-assembled products to Dell’s factories in the United States. Once the supply arrives and the components preferred by a customer are known, Dell factory associates perform further product fulfillment: building in the customized components (including the processor, memory, hard drive, speaker, etc.), installing the necessary software application, performing final unit testing, and then delivering the fully assembled and functional product to the customer in a timely fashion. Critical Components of a Desktop PC Two major components of a desktop PC are the motherboard and the chassis. (See Figure 6-1 for an illustration of these components.) A motherboard is the “nervous system” of a computer: it contains the circuitry for the central processing unit (CPU), keyboard, and monitor and often has slots for accepting additional circuitry. A chassis is the enclosure or framework case that contains and protects all of the vital internal components from dust or moisture. Motherboards are typically screwed manually to the bottom of the chassis case, with the input/output (I/O) ports exposed on the side of the chassis. The chassis also contains the power supply unit. Figure 6-1 Critical components of a desktop PC and major component manufacturers. A motherboard contains three critical components: chipset, printed circuit board (PCB), and local area network (LAN) chip. A PCB is the base of a motherboard; it consists of etched conductors attached to a sheet of insulator. Various components are soldered to the circuit board. A chipset is a group of integrated circuits that contains the northbridge and southbridge. The northbridge communicates with the CPU and memory; the southbridge communicates with the slower devices, such as the Peripheral Component Interconnect (PCI) bus, real-time clock, power management, and so forth. A LAN chip enables a computer to communicate with the Internet via Ethernet or Wi-Fi technology. Level 5 Versus Level 6 Manufacturing In desktop PC manufacturing, the degree of assembly can be broken down into 10 levels. The higher the level, the more fully integrated it is. Figures 6-2 and 6-3 depict the 10 levels of desktop PC assembly. This scale also can apply to the manufacturing of servers and storage. Figure 6-2 Levels 1–5 of desktop PC assembly. Figure 6-3 Levels 6–10 of desktop PC assembly. Source: Foxconn Company presentation. Level 5 (L5) includes the assembly of desktop PC chassis, floppy disk drive, and fan. Depending on the chassis configuration, it also can include the power supply in some cases. In Level 6 (L6), along with these components, the motherboard is also installed into the chassis. In other words, when a supplier performs Level 6 manufacturing, the supplier installs the motherboard in the chassis—an activity not performed in Level 5 manufacturing. When a contract manufacturer in China produces an L6 desktop PC chassis, the chassis is not a functional unit yet and still requires customized parts such as the processor, memory, hard drive, speaker, and so forth. The contract manufacturer ships the L6 chassis from China to Dell’s factories in the United States and Ireland, and then Dell factory associates install these customized parts to make the unit “Level 10.” A Level 10 product is a fully assembled and functional product that can be shipped to the customer. Figure 6-4 shows the similarities and differences between the L5 and L6 value chains. Figure 6-4 L6 versus L5 value comparison. Some of Dell’s products, such as handhelds and printers, are manufactured to Level 10 by the contract manufacturers. This means that Dell does not have dedicated manufacturing resources or capability to manufacture these products. Rather, the contract manufacturers produce these products, include the user manuals in the packaging, and ship the products to Dell’s merge centers. These products are then “merged” with PCs manufactured by Dell factory associates into the same shipment, so the customer can receive a single shipment with all of the items in the order. Dell uses this shipping strategy to create a more satisfying customer experience. Root Causes of Increasing L5 Manufacturing L5 manufacturing has higher overall manufacturing and logistics cost than L6. Dell’s rising manufacturing cost, caused by an increase in the utilization of L5 manufacturing, can be seen in Figure 6-5. Furthermore, as can be seen in Figure 6-6, the level of L5 manufacturing (relative to L6) started to increase quite significantly in March 2005. The L5 percent in June (27 percent) was more than six times the L5 percent in March (4 percent). Figure 6-5 Motherboard air-freighting and 3PI integration costs (Q3FY05–Q4FY06). Note: Data from Dell’s Worldwide Procurement (WWP) organization. AMF includes 3PI integration cost. EMF (European Manufacturing Facility) and APJ (Asia Pacific Japan) don’t as intergration is done in Dell factory. In Dell’s financial year Q1FY05 is February–April 2004; Q4FY06 is November 2005–January 2006. Figure 6-6 Percentage of L5 versus L6 production from July 2004 to June 2005. Most of the root causes of the rise of L5 manufacturing have to do with Dell’s inability to provide motherboards in a timely fashion to contract manufacturers. These causes can be summarized as follows: 1. Chipset supplier decommit or supply issues. When a chipset supplier is unable to deliver the previously agreed quantity of chipsets, it creates a disruption in the desktop PC supply chain. According to the data gathered in the first half of 2005, this accounted for more than 60 percent of the L5 manufacturing, as motherboards were not available for L6 manufacturing. 2. Quality/engineering issues. These issues lead to dysfunctional or problematic motherboards that need to be repaired or replaced by a new supply, which can subsequently create an additional unexpected demand of motherboards that were not part of the forecast agreed to by Dell’s chipset supplier. 3. Dell forecast accuracy. When the actual demand surpasses the forecast, Dell needs to source extra chipsets or risk the possibility of not meeting customer demand. Since the lead time for manufacturing, assembling, testing, and delivering a chipset is on average 13 weeks, such a long lead time makes it difficult for the chipset supplier to provide the additional chipsets in order to meet Dell’s demand schedule. 4. New product introduction (NPI). Since the actual demand of a newly released PC product can be especially volatile, the forecast uncertainty can create a need to air-freight extra motherboards normally not required when the product is in a mature stage with a stable level of demand and a constant level of L6 manufacturing. The volatile demand can lead to an increase of L5 manufacturing (motherboard-chassis assembly in the United State in order to reduce the time to market for a newly launched product). However, as Figure 6-7 indicates, the amount Dell spends on expediting motherboards under this particular circumstance is rather small—only 3.8 percent. Figure 6-7 Dell AMF expedite expenses by root cause (January to June 2005) Source: Data from Dell’s Worldwide Procurement (WWP) organization. Figure 6-7 shows the breakdown of motherboard air-freight costs by root cause from Dell AMF (America Manufacturing Facility). Dell BPI Team’s Methodology: Focusing on Complexity Management In order to solve the problem of continuously rising manufacturing cost induced by an increasing level of L5, a task force was assembled at Dell. The cross-functional business process improvement (BPI) team consisted of employees from a variety of organizations at Dell: manufacturing/operations, worldwide procurement, regional procurement, production master schedulers, production control, quality, process engineering, supplier quality engineering, cost accounting, inventory control, and logistics. The team, consisting of members from the different organizations affected by the chipset supply shortage, jointly identified six manufacturing options for managing the assembly work in the United State: 1. Keep as current. Motherboard-chassis integration performed by a 3rd party integrator (3PI) managed by the contract manufacturers. 2. Dell America Operations (DAO) cellular integration. Enable the Dell factory work cells to perform L5 to L10 manufacturing work. 3. Offline integration at the supplier logistics center (SLC). Keep the current L6 to L10 manufacturing process unchanged; handle motherboard-chassis integration work at an SLC. 4. Offline integration at a Dell-leased building. Keep the current L6 to L10 manufacturing process unchanged; handle motherboard-chassis integration work at a separate building leased by Dell. 5. 3PI managed directly by Dell. 6. L6 from equipment manufacturers’ Mexico plants. Many CMs have manufacturing facilities in which they produce for their other customers. Dell can potentially negotiate with the CMs to dedicate a portion of the CM’s manufacturing capacity to support Dell’s business. The BPI team determined that it would survey of the various departments impacted at Dell to quantify the complexity and cost of managing each of the six manufacturing options. The categories of the survey were established by the team based on the attributes or business processes that would be impacted by the change of manufacturing method. The survey was sent to the content expert within each affected department. These experts were involved in the day-to-day business processes and planning and would be the best source of information regarding the impact on their departments of each manufacturing option. Table 6-1 illustrates the result of the survey. Table 6-1 Complexity and Cost Analysis of the Six Potential Manufacturing Options Option 2 (origina (revise l) d) Option 1 Worldwide Option 2 Option 3A Option 3B Option 4 Option 5 10 1 1 1 1 5 10 8 5 5 5 5 5 10 Master scheduler 5 5 5 5 5 5 5 Production control 5 10 10 7 7 7 5 Operations 1 10 10 5 5 1 1 DAO quality 5 10 10 5 5 1 1 Processing 1 10 10 5 5 1 1 10 1 1 1 1 5 7 (global) 1 1 1 1 1 1 10 Cost accounting 5 1 1 10 10 10 1 procureme nt Regional procureme nt engineering Supplier quality Engineering (regional) Supplier quality Engineering Option 2 Option 2 (origina (revise l) d) Option 1 Option 3A Option 3B Option 4 Option 5 Inventory control 1 5 5 5 7 10 1 Logistics 5 1 1 5 5 5 10 57 60 60 55 57 56 62 $7.00 $7.90 $7.54 $7.70 $7.61 $7.00 Total: Cost per box $10.07 Notes: The “cost per box” data has been modified to respect Dell’s data confidentiality. Option 1: CM-managed 3PI (original baseline). Option 2: Integration at DAO work cells. Option 3A: Integration at SLC/hub. Option 3B: Integration at Dell-leased building. Option 4: Dell-managed 3PI. Option 5: Integrated chassis from CM factories in Mexico. On the basis of manufacturing complexity, the original option (1) of having the contract manufacturers manage the 3PI had a medium complexity score. Option 3A receiv ...
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Dell case study outline


Reasons why L5 incur higher manufacturing and logistics costs than L6
Manufacturing solutions Dell should implement based on the survey result




Methodology employed by the BPI team to determine the optimal manufacturing option
for Dell


Effective ways of addressing the root causes contributing to the increase of L5


Dell case study questions
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Case Question 1:


L5 incurs higher manufacturing and logistics costs than L6 because of a long inventory
process which involve the contract manufacturers, SLC, 3PI production and the engineers
at the factory. As it is explained in the case study, there are too many cooks in the kitchen
in L5 which makes it a more complex process lead to confusions that affect the quality of
MB (Simchi-Levi et al., 200...

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