Dell in the news

The Economist has an article, Commoditize This, about Dell. In summary, it points out that Dell faces some challenges, it has lost its market leader status in PCs to HP, there are some regulatory investigations going on, and its market focus, direct sales to businesses, is growing slower than HP's retail to consumer business. Michael Dell is placing a bet on growing his services business, but the Economist rightly points out that the growth of IT service businesses in India may make that move less profitable than Dell would like. I used to be a big supporter of Dell when acquiring a "fleet" of desktop and laptop PCs for clients. The market has moved on, but Dell used to have a significant cost advantage over IBM and the rest of the firms competing in the business PC market, and they used that advantage to sell more PCs than anyone else. The standard analysis was that Dell's model of build-to-order and direct ship to customer was their cost advantage driver. Several teams I had take a look at this market for global firms all came to the same conclusion; a bigger advantage came from Dell's repair and warranty supply chain.

Standard practice, in many industries not just PC assemblers, is to develop highly analytical models using meantime to failure and other factors to determine how many of which parts are going to be needed to support the repair and warranty requirements for a product. The manfacturer will then run a production run to stock inventory to support this expected consumption. The Dell model changed the PC industry, what Dell realized was that the fleet of PCs they sold were themselves a supply chain of inventory for the repair and warranty business. They developed better models than their competitors, largely based on cannibalizing returned and broken PCs for good parts. The cost advantage from this model began at over 10% and slowly declined over several years.