Direct Sales and Build-to-Order Model

Direct Sales and Build-to-Order Model: Dell’s computers, workstations, and servers are built-to-order and none are produced for inventory purposes which clearly cuts Dell’s cost on inventory. Dell customers could order through their website or even via phone, custom-made servers and workstations based on the needs of their applications. For desktop and laptop, customers are able to order whatever configuration of microprocessor speed, random access memory (RAM), hard-disk capacity, CD-ROM drive, fax/modem, monitor size, speakers, and other accessories they favored.

The orders will then be directed to the nearest factory. Dell has proven to be successful in minimizing inventory and bringing new products in the market quickly enabling them to increase market share and achieve high returns on investment in a highly competitive industry by implementing the direct sales as well as build-to-order model. Dell’s Supply Chain Management: Dell's supply chain generally consists of only three stages which are the suppliers, the manufacturer which is DELL themselves, and most importantly the end users which could be either for personal use or even business use.

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Dell is able to match supply and demand because their customers order computer configurations over the phone or through the internet via Dell’s website. These computer configurations are built up from components that are available. Dell’s strategy is to provide their customer’s customized, low cost, and quality computers that are delivered on time. Dell successfully implemented this strategy through their efficient manufacturing operations, better supply chain management and direct sales model.

Since Dell takes orders directly from their customers, either through the phone or online through their website, Dell manage to reduce the cost of intermediaries that would otherwise add up to the total cost of PC for the customer. Time is also being saved on processing orders that other companies normally incur in their sales and distribution system. Furthermore, by dealing directly with the customer, Dell gets a clearer indication of the current market trends. This helps Dell to plan for the future besides better managing its supply chain.

By implementing the direct sales and build-to-order model, Dell has a very close relationship with their customers as well as their suppliers. They are also able to get accurate and exact customer feedbacks as well as being able to have and compile database of customers making it easy to analyze the current market. The impact on the industry of Dell’s achievement is also seen in the efforts of other leading PC makers and distributors to try develop their own direct sales and/or build-to-order model. Dell’s Competitors Value Chain DELL’s Direct Sales Value Chain

Q2. How has Dell exploited the direct sales model to improve operations performance? The internet has made it possible for Dell to make use of their direct sales model. Without the internet, it would be a totally different approach for Dell. The internet has made it possible for Dell to build their website where customers can make their orders from and also, through the internet, Dell has also recognized a unique e-commerce model by embracing internet in its suppliers which would, at the end of the day, make it more feasible and easier for all in the supply chain.

Via the internet, Dell is able to bring products to the market faster than any competitors. Other competitors usually go through a much longer process of assembling as well as bringing/shipping stock to retail stores. This would give an advantage to Dell as they have early-to-market advantage as they are able to offer their new products and services via the internet through their website. Via the internet, Dell makes it possible for customers to customize their pc by clicking on whatever they want to add on to their order.

This is an added advantage for customers as they can build their pc based on their current needs as well as their budget. Dell could also quickly response to their customers order. In Dell’s website, there is also an interface called the ‘premier page’ for corporate customers to facilitate B2B or Business to Business sales and to separate them from the personal use customers. The interface is designed for purchasing manager or whoever is in charge to log on and place an order. This interface is also customized according to the company’s needs.

The bullwhip effect is also being reduced as a result of Dell’s direct sales model. Dell contracts special web pages for suppliers, allowing them to view orders for components they produce when a customer orders them through Dell’s website. This will give suppliers the advantage and the possibility to plan based on customers demand. This also allows Dell to achieve substantial unit cost advantage. Dell is able to minimize rapid depreciation and inventory write-off costs by its direct sales model. Through Dell’s direct sales model, Dell is able to collect payment in 5 days on average after a product is being sold.

However, Dell still continues to pay their supplier according to the traditional billing schedule as when it comes to money, the traditional way of billing, invoicing and etc is still preferable. Inventory is low and is negative in Dell’s working capital, thus, making able for Dell to concentrate on increasing its performance. Q3. What are the main disadvantages of Dell’s direct sales model? The most remarkable thing about Dell is its direct sales model. A lot of competitors of Dell is trying to adapt and build a direct sales model similar to Dell.

There are a lot of advantages in applying this model of business, however, there are also disadvantages in Dell’s direst sales model. The biggest factor of the disadvantage of Dell’s direct sales model is the shipping phase. It is very costly. Since Dell is handing all aspects of the computer building process directly and sending it to the customer, they have to pay for the cost of shipping which is very high since Dell has customers from all around the world. Other companies mass produce the computer and send them in bulk but Dell adapts to their build-to-order model.

It is a disadvantage to Dell since they are sending individual or very small orders directly to many consumers. The other issue of the direct sales model is that you have to bear all the related support costs, from handling information requests before the sale to taking and tracking orders to handling after sales inquiries. Dell does not have the ability to pass any of those costs onto retailers because they are handling every aspect of the transaction. In addition, because Dell sends its PC directly to the customers from their factories, Dell is not able to benefit from the economies of scale in shipping.

Most of Dell’s competitors sell their products through distributors and middlemen therefore, they are able to ship their products with economies of scale using large transportation shipments to warehouses as well as retailers. Dell is very dependent on its suppliers. However, their suppliers come from various countries from around the world, thus, making it difficult for Dell to control the consistency of quality. Dell’s reliance on suppliers as well as not being able to produce computers by itself does not give Dell the flexibility to switch suppliers. This will commit Dell to certain core suppliers for a period of time.

Looking at the aspect of foreign exchange rate (forex), Dell is exposed to fluctuations in world currency exchange since they sell their products globally and through their direct sales model i. e. selling their products on their website. Because of the world exchange rate being unstable, it may lead Dell to a potential loss in part of the supply chain. Q4. How does Dell compete with a retailer who already has stock? By capitalizing in its area of strengths in its SCM, VCM, CRM concepts as well as its direct selling and build-to-order processes, Dell has been effective in competing with a retailer who has stock.

Dell has been able to sell its computers online at cheaper price. By its direct selling and build-to-order concepts, this has been made possible. From the elimination of the middleman, no inventory and staffing positions to handle inventory processes in direct selling, this can result in cost savings. Dell has the edge over a retailer with tock which are prices higher due to higher processing costs because of such savings have been passed on to the customer. Build-to-order means that Dell builds the computer according to he customer’s specifications and delivers it within 5-7 days, only when the customer orders his computer online. Delivery may take a few more days than getting ready stock from a retailer. However, the customer gets the satisfaction of his choice of the products and delivery made to wherever the customer wants the end product to be delivered. Rather than having long waits, backlogs and excess stock which a retailer might be having kept in its stores waiting to be sold, Dell eliminates and practices just-in-time manufacturing.

Dell does not have a warehouse full of computers which may become obsolete so quickly. In the computer business, it is about how fast it is moving through the cycle, not about how much inventory you have. This is an advantage for Dell over a retailer with stock. Dell has also been well known for its technology being current. The Website created by Dell instills satisfaction and trust in its customers because it enables interaction with customers and allowing the customer to customize his own product.

Customers will feel more confident that the products which they are buying are genuine, as compared to pre-assembled ready stock which a retailer may have, as the customer does not know the originality of the components used to manufacture the computer. Having a long standing history of its creditability and reliability of its direct selling and build-to-order concepts, Dell has the reputation of producing the best for its customers at a more competitive price although competition may be stiff. Q5. How does Dell’s supply chain deal with the Bullwhip effect?

Bullwhip effect in the supply chain can best and simply be defined as the changes in consumer demand causing the companies in a supply chain to order more goods to meet the new demand. The bullwhip effect usually flow up the supply chain. This starts with the retailer, wholesaler, distributor, manufacturer and then the raw materials supplier. This effect can be observed through most supply chains across several industries. In Dell’s supply chain, the build-to-order concept does not allow them to keep any inventory and it is a paperless ordering process since everything is done online.

Dell’s direct sales model allows them to communicate with its customers without going through the retailer and distribution channels. This would give Dell an added advantage since it allows Dell to see demand patterns for their products and allows them to not make any forecasting errors and not having to go through any panic ordering. This avoids repetitive processing of data in the supply chain. Dell’s build-to-order model eliminates the middleman, bringing in more cost savings and increased revenue. This is another way of avoiding or minimizing the Bullwhip effect.

In addition, Dell’s concept of direct selling through their website via the internet makes communication easy thus, having less delay as well as having a smooth flow in producing materials. Dell is able to manage effectively in producing the best results at the end of its supply chain. Dell also shares data with suppliers. This will enable suppliers to know what the demands are and supply accordingly and it will also allow suppliers to be more flexible. Suppliers are also save from over producing thus, eliminating the bullwhip effect.

Without realizing, Dell is also teaching their suppliers to be more like them. This will also lead to a long term relationship between Dell and its suppliers. Dell’s just-in-time manufacturing process can also effectively alleviate the Bullwhip effect. When an order has been made and paid for, Dell takes the order directly from the customer and starts to manufacture instantaneously, thus, time is saved and Dell receives payment from the customer before they have to pay their suppliers for the components of the computer.