Wednesday, April 28, 2010

Dell to ship by sea

This will be the fourth post of Dell on my blog. The first three are available at:
http://bit.ly/9S5nGz

Now, Dell is planning to actually use ships (water route) to move products. Read this article here:
http://bit.ly/bewrOV

Fundamentally using ships will increase the lead time. Direct affect of this is an increase of in transit inventory. With a higher lead time, the forecasts are also 'more' wrong. So to meet the same service levels, Dell would have to maintain a higher inventory of whatever they plan to send by sea. There would be an overall increase in inventory levels. On the other side, there would be a drastic reduction in the transportation costs. The catch is to compare the total cost and make the decision accordingly.

In the IT hardware industry, a major part of the cost of carrying inventory is the obsolete unsold stock. Thumb rule estimates say that a finished product is obsolete within a year. Dell could select some products - finished goods or components (raw material) that do not have such a high obsolescence rate and then ship them by sea. A DVD drive may not change in configuration as frequently as a microprocessor (an assumption, please correct if I am wrong). Thus they may have a good cost advantage.

Unfortunately, life is not as simple. Shipping by sea would mean that Dell would need an entire new set of people and processes to handle sea shipments. This would be a huge cost. When Dell had all the components coming by air, assembly planning would have been an easy operation. Everything for one order would have come individually. Now, there would be some components that would be ordered for every requirement and others (shipped by sea) that would have to be pulled from stock. This would surely contribute complexity and ensure faulty delivery.

There would be two drastically different supply chain processes. The packaging for air cargo and ships would be different. The documentation would be different. Ordering policies, reorder points, etc. will have to be different. Managing this difference in one company, and especially when the organisation does not have prior experience and expertise in managing this diversity would be very difficult. I have my own doubts of the success of this move.

Dell has had a drastic drop in their sales - to the tune of almost 20% in financial year 2009. The sales revenue has decreased from $ 61 billion in FY 2008 to $ 51 billion in FY 2009. Logistics is always and unfortunately the first target of companies facing such a downturn. The seek to maintain the bottom line (in spite of the reduction in top line) by reducing expenses. Again unfortunately for these companies, logistics cost has a direct bearing on service levels (and product availability). An 'unsmart' reduction in logistics cost would further decrease revenue and put more pressure on cost reduction. This would start a never ending cycle leading to destruction. Best of luck Dell.

3 comments:

Lajja Patel said...

I agree with you on this. One doubt would be that is the cost advantage so high that it will compensate for the increased lead time for shipments, final products delivery; & which will further lead to customer dissat if planning & delivery goes for a toss !!! Need to take a deepaer look into how the world's best supply chain adapts itself to its new style & sails the market tide ....

KrRahul said...

Very surprising. So it means Dell is about to change its built-to-order business model too! The article says HP already ships by sea and is successful. But that was for HP’s supply chain which was not as lean and efficient as Dell’s. All through the years, we used to hail Dell for its unique business model, and now it seems to be abandoning it?

I have my doubts that Dell would do that. I think Dell would be going ocean way only for some components, may be being procured in bulk from nations like China, and somehow it would pass the increased inventory cost to the supplier, rather than absorbing on its own. Without safeguarding itself, I see this strategy to go doom if it is implemented at a fast pace and in all over the globe…

Your observations in this post were very nice and elaborative… All students of Ops should read your blog…

SANJAY GOEL said...

Piyush,

One question that comes to my mind is : How are they shipping now? is it by road/air or ship but owned by someone else?

If currently they are shipping by ship and they only want to have benefits of economies of large scale, I would go by what their teams thinks.

Hurdles are there for all, winner is the one who crosses them before others.

It can be a good learning curve for Dell and for others also.