Week 7 : Interorganizational systems

HOW DELL IS USING WEB SERVICES TO IMPROVE ITS SUPPLY CHAIN

THE PROBLEM

Dell Inc. (dell.com) has many assembly plants. In these plants, located in various countries and locations, Dell makes PCs, servers, printers, and other computer hardware. The assembly plants rely on third-party logistics companies (3PLs), called “vendor-managed hubs,” whose mission is to collect and maintain inventory of components from all of Dell’s component manufacturers (suppliers).

In the past Dell submitted a weekly demand schedule to the 3PLs, who prepared shipments of specific components to the plants based on expected demand. Components management is critical to Dell’s success for various reasons: Components become obsolete quickly, and their prices are constantly declining (by an average of 0.6 percent a week). So the fewer components a company keeps in inventory, the lower its costs. In addition, lack of components prevents Dell from delivering its build-to-order computers on time. Finally, the costs of components make up about 70 percent of a computer’s cost, so managing components cost can have a major impact on the bottom line. Because it is expensive to carry, maintain, and handle inventories, it is tempting to reduce inventory levels as low as possible. However, some inventories are necessary, both at the assembly plants and at the 3PLs’ premises. Without such inventories Dell cannot meet its “five-day ship to target” goal (computer must be on a shipper’s truck no later than five days after an order is received).

To minimize inventories, it is necessary to have considerable collaboration and coordination among all parties of the supply chain. For Dell, the supply chain includes hundreds of suppliers that are in many remote countries, speak different languages, and use different hardware and software platforms. Many have incompatible information systems that do not “talk” to each other.

In the past Dell suppliers operated with 45 days of lead time. (That is, the suppliers had 45 days to ship an order after it was received.) To keep production lines running, Dell had to carry 26 to 30 hours of buffer inventory at the assembly plants, and the 3PLs had to carry 6 to 10 days of inventory. To meet its delivery target, Dell created a 52-week demand forecast that was updated every week as a guide to its suppliers.

All of these inventory items amount to large costs (due to the millions of computers produced annually). Also, the lead time was too long.

THE SOLUTION

Dell started to issue updated manufacturing schedules for each assembly plant, every 2 hours. These schedules reflected the actual orders received during the previous two hours. The schedules list all the required components, and they specify exactly when components need to be delivered, to which plant, and to what location of the plant (building number and exact door dock). These manufacturing schedules are published as Web Services and can be accessed by suppliers via Dell’s extranet. Then, the 3PLs have 90 minutes to pick, pack, and ship the required parts to the assembly plants.

Dell introduced another Web Services system that facilitates checking the reliability of the suppliers’ delivery schedules early enough in the process so that corrective actions can take place. Dell can, if necessary, temporarily change production plans to accommodate delivery difficulties of components.

THE RESULTS

As a result of the new systems, inventory levels at Dell’s assembly plants have been reduced from 30 hours to between 3 and 5 hours. This improvement represents a reduction of about 90 percent in the cost of keeping inventory. The ability to lower inventories also resulted in freeing up floor space that previously was used for storage. This space is now used for additional production lines, increasing factory utilization (capacity) by a third.

The inventory levels at the 3PLs have also been reduced, by 10 to 40 percent, increasing profitability for all. The more effective coordination of supply-chain processes across enterprises has also resulted in cost reduction, more satisfied Dell customers (who get computers as promised), and less obsolescence of components (due to lower inventories). As a result, Dell and its partners have achieved a more accelerated rate of innovations, which provides competitive advantage. Dell’s partners are also happy that the use of Web Services has required only minimal investment in new information systems.

CONCLUSIONS ABOUT THE CASE:

Dell’s success depends in large part on the information systems that connect its manufacturing plants with its suppliers and logistics providers. The construction and operation of interorganizational information systems (IOSs) that serve two or more organizations is the subject of this case study. In today’s economy, such IOSs may also be global. A new information technology, Web Services, has been successfully applied to improve the information systems that connect Dell and its vendors and the vendors and their parts and components manufacturers. To achieve efficient and effective communication of information, companies may also select from technologies such as EDI, XML and extranets which are the other major IOS support technologies.