Integration of Financial and Operational Management - Dell - Case Study Example

WK 12 - Integration of Financial and Operational Management WK 12 - INTEGRATION OF FINANCIAL AND OPERATIONAL MANAGEMENT Executive Summary: Dell is the leading technological multinational company which operates in all the continents of the world. Dell has been a market leader since its inception. The company experienced a period of difficulties in mid 90s where it faced numerous operational and financial issues which affected the profitability of the company. Changing customer’s demands and its inefficiency in stock management systems made the company face declining revenues and profitability, diminishing quality and negative cash flow position. Dell has committed itself to operate in a way that would not only achieve excellence in operations but also benefit the company financially and would result in satisfied customers. Because of its commitment to constant improvement the company installed the direct selling method where JIT system and lean production were adopted which improved company’s efficiency and effectiveness in many areas. On the other hand the company used the rapidly growing IT technology well by working on customer focused ordering system which enable them to design their own product, which resulted in much satisfied customers and zero inventory level. Zero inventory level was further implemented by changes in the supply chain and integration of the entire company’s operations into the supply chain. Through redesigning of systems and process, Dell is able to become the most efficient PC manufacturers in the world. However, it should be noted that although Dell has installed a system which serves as a benchmark for many manufacturing companies, Dell still needs to focus on few areas which if not attended can turn out to be bigger operational issues in the future. Introduction: Dell is one of the largest American multinational company which deals in selling and supporting computers and related products and services. The company is involved in selling, manufacturing and distribution of high technological products like PCs, servers, data storage devices, printers, cameras, HDTVs soft wares etc. Dell is the third largest IT Company of the world and faces close competition from its competitors HP (Hewlett Packard), Acer, Apple, and Lenovo etc. Managerial Challenges: Dell has been in business for over 28 years. Since its inception, Dell has faced many operational and financial difficulties and has adopted numerous strategies to overcome its challenges and restore its profitability. Dell’s operational strategy since its early days had been to use interchangeable parts to produce goods of mass-production at lowest possible prices. However, due to rapid increase in the demand of technology, globalization, new and evolving market trends and technological demands the company faced operational challenges in many fields. Excessive and Obsolete Inventory: Dell had faced numerous problems in the early stages; the company in its early stages expanded into traditional retail channels which it stopped later on due to heavy obsolete inventory and thin margins in the business. Later on in 1990 the company faced another operational issue of excess component inventory and abandonment of production line. This caused heavy losses to the company despite of doubling sales during the period. The major problem that Dell faced at that time was the excessive inventory along with the prevailing recession made it report a huge loss of $36 millions in 1994. (Ireland, Hoskisson & Hitt. 2012) Dell struggled with great difficulties in inventory management area as it used the traditional manufacturing ordering system by ordering components in advance on the forecast basis and if the forecast went wrong the company had major write-downs. (Ireland, Hoskisson & Hitt. 2012) Changing Customer’s Demands: The technological business is a rapidly changing business where the introduction of a new technology can cause heavy losses. Dell’s main concern was about the inventory in hand that became obsolete due to technological change and the changing demand of the customers. Since the gadgets tend to be expensive, the company had to write off millions of dollars due to the changing demands. (Ireland, Hoskisson & Hitt. 2012) Lowering Profitability and Negative Cash flow: Due to these circumstances, accompanied by recession and changing customers demands the company faced declining revenues, diminishing quality and cash flow problems too. The profitability was affected by never reducing costs of the company which was accompanied by working capital management issues caused by the capital stuck in the inventory in hand, which ultimately created great problems in the operations of the company. (Ireland, Hoskisson & Hitt. 2012) The Proposed Solution: The Direct Model: Dell was one of the companies which was most affected by its operational issues financially and has worked the most on the operational efficiency, process redesigning and reengineering. Dell has adopted ‘The Direct Model’ to overcome all its operational issues which integrates the entire company in one process. This model bypassed the dealer’s channel and focused on directly selling to the customer and being closer to the customer to understand their needs and demands. This even eliminated the costs of reseller’s markup but also helped company save costs of holding inventories and risks associated with it. (Schuster, Allen & Brock. 2007) The company has designed a system which integrates its key principles of customer satisfaction, immense coordination throughout supply chain, just-in-time (JIT) manufacturing and mass customization of products. Just-in-time (JIT) and Lean Production Systems: The adoption of just-in-time (JIT) and lean production method seemed to be the solution for all Dell’s operational problems that it faced. In the JIT system, Dell didn’t acquire the components until they were needed which avoided the costs and the risks of operating in the traditional system. On the other hand, the lean production system is a system which focuses on excellence of operations and processes, focuses on producing more goods in fewer resources and reduces waste by refinement of processes and practices. Both the systems were quite compatible with the Dell’s desktops standardized assembly line due to repetition and standardization of processes. (Ireland, Hoskisson & Hitt. 2012) Dell was successful in finding solutions to its operational issues in the systems implemented and worked for continuous improvements in the systems. As mentioned above, these systems were quite compatible to the needs of the assembly business that Dell operated in. Dell had a predicable customer base which made it easier to budget the component-purchase planning. On the other hand Dell had repeated customers who acquire new technologies as soon as possible, such customer base which values speed further supported the system and resulted in less obsolete inventory. (Ireland, Hoskisson & Hitt. 2012) Dell further focused to strengthen and integrate its sales, purchase and marketing functions. It introduced “selling what you have” where weekly meetings were held and unused and surplus inventory was forced to sell by the sales team and the incentives were provided to do so. If the company found itself short of components the purchase would look for alternate sources of supply. (Ireland, Hoskisson & Hitt. 2012) Another significant problem the company faced in its traditional operating system was the lack of cash. When the company operated JIT and lean productions mostly sales took place over internet or phone calls which were paid through cards and the company received cash within 4 days. However, the company paid its suppliers not before 45 days which left the company with huge surplus cash resources, unlike the traditional system. After the implementation of these systems tremendous improvements were seen and the company’s forecast accuracy was around 70% to 75%. Dell’s average inventory days which were 70 days, reduced down to zero after the implementation of the system. (Ireland, Hoskisson & Hitt. 2012) Cost Systems: Dell is one of the players of the technological market which is famous for its low costs products. Early in 1990s, the company faced difficulties in being profitable though increased revenues and sales due to its inability to control costs. Now with the adoption of new systems the company is not only profitable but also sells its products at lowest price as compared to its competitors. (Holzner. 2006) Dell has focused to provide low costs products but not at the expense of its profits, rather it has designed its systems in such a way that will benefit the company to the fullest. Dell saves cost every where; reasons for being in a better position to offer low priced products is the elimination of middlemen through direct selling model, inventory holding minimization through JIT system, working with standard components through lean system and integration and excellent coordination throughout the supply chain. (Holzner. 2006) Customer Focus and the Supply Chain: Dell realized that the key to success in the technological industry is in working closely with the customer and knowing what the customer wants. Unlike in the traditional system in which it operated, where standardized PCs were made and were supplied to the middlemen to further sell them in the market. The new system allows the company to know its customers closely. (Magretta.2001) Dell has made advantageous use of the new technology and has provided the customers to design their own products on the section offered on Dell’s website. Through this section the customer designs it own products providing its own specifications and then places the order. An installed manufacturing system downloads this order and schedules it in sequence, where later the system generates inventory requisition after every 2 hours for the in-process orders which are delivered by the suppliers to the assembly plant. The company doesn’t have a warehouse facility so the inventory is rolled out in the form of system as soon as possible; the inventory usually contains the hardware and the software that are to be used for assembling the product. The supplier’s warehouses are located close to the assembly plants. (Magretta.2001) Dell has designed its system in such a way that the suppliers have 11 days inventory in stock only, which when compared to that of the competitors of 80 days leaves Dell at a much beneficial position. There are two benefits of this situation to Dell, first being the low holding costs. Dell saves 69 days of costs of holding inventory and risks associated with it which are the technological changes or risk of inventory becoming obsolete. Similarly, if the technology changed the company will be 69 days ahead to introduce it as compared to its competitors which will give Dell a competitive edge over it competitors. (Magretta.2001) This focus in the supply chain on customers has helped Dell overcome its biggest operational problem of obsolete and wasted inventory by JIT implementation along with the online ordering system and designing of customer specified products. On the other hand it has also allowed the company to only work on placed orders which also results in guaranteed sales and cash inflow with no loss of inventory. In this way the company was able to control both its upstream and downstream supply chain. (Schniederjans & Cao. 2002) Foreseeable Operational Challenges: Though Dell has established a supply chain that serves as a bench mark for many manufacturing companies that are struggling to deal with their operational difficulties effectively, however the systems and supply chain at Dell have few deficiency which could affect the company adversely. For e.g. the biggest drawback for such an operational strategy is the lack of manufacturing facility and over dependence on a single supplier for multiple products. If the vendor failed to supply the components on time, the company has to face delays in production or maybe has to stop production, resulting in unsatisfied customers and negative impression of the company. For this the company needs to consider setting up an in-house manufacturing facility as well. Secondly, information sharing is critical in a supply chain. In Dell’s case, the suppliers manage the inventory warehouse and have all the information (even confidential) with them. This deficiency in the system causes a great threat to the privacy and confidentiality of the information of the company. Dell needs to install a robust system which ensures the supply of only relevant data to the suppliers. Thirdly, in order to minimize costs Dell eliminated the manual retail business from its operations and catered customers online through website only. This being an advantage can turn into a major problem for Dell if things go wrong. The company has no alternate means of taking orders if the company’s system goes down. Dell needs to consider re-entering the retail business sector, even though they do it on a small scale. Conclusion: Dell has faced many challenges throughout its life of 28 years. The company went through many ups and downs and has learned from its difficulties. The company owns an integrated supply chain which is one of its kinds in the manufacturing sector, integrating not only the upper stream and lower stream supply chain but also all the functions of the company along with a special focus on its customers, which has helped Dell to be the market leader in all aspects. References Magretta, J. (2001). The power of virtual integration: An interview with Dell Computers Michael Dell. Boston, MA: Harvard Business Review. Schuster, E. W., Allen, S. J., & Brock, D. L. (2007). Global RFID: The value of the EPCglobal Network for supply chain management. Berlin: Springer. Schniederjans, M. J., & Cao, Q. (2002). E-Commerce operations management. Singapore: World Scientific. Ireland, R. D., Hoskisson, R. E., & Hitt, M. A. (2012). Understanding business strategy: Concepts plus. Mason, OH: South-Western Cengage Learning. Holzner, S. (2006). How Dell does it. New York: McGraw-Hill. Read More