Dell Inc.: A Leading Direct-Selling Model Computer Manufacturer with Global Presence and Financial Services

As one of the world's largest manufacturer of personal computers, Dell Inc. is engaged in direct-selling model computers. It designs, develops, manufactures, markets, and services a range of computer systems. The company primarily operates in the Americas; Europe, Middle East and Africa (EMEA); and Asia Pacific-Japan (APJ). It is headquartered in Round Rock, Texas and employs about 65,200 people.

The company also offers various financing alternatives, asset management services and other customer financial services for its business and consumer customers in the US through Dell Financial Services (DFS), a joint venture between Dell and CIT Group. The company sells its products directly to large corporate, government, healthcare, and education customers as well as small-to-medium businesses and individual consumers. Dell operates principally in the Americas, Europe, Middle East and Africa, and Asia Pacific-Japan.

The Americas segment is further segmented into business and US consumer segments. The Americas business segment includes sales to corporate, government, healthcare, and education customers, while the US consumer segment includes sales primarily to individual consumers. Dell offers its products in six categories: desktop computer systems, mobility products, software and peripherals, servers and networking products and storage products. The desktop computer systems offer three product lines: Optiplex, Dimension and XPS.

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The Optiplex product line focuses on business, government, and institutional customers; the Dimension product line focuses on small businesses and home users; and XPS product line focuses on gaming or entertainment needs of the customers. It also provides Dell Precision workstations for professional users to run sophisticated applications such as three-dimensional computer-aided design, digital content creation, geographic information systems, computer animation, software development and financial analysis. In 2006, the company recorded revenues of $55,908 million during the fiscal year ended January 2006, an increase of 13. 6% over 2005. For the fiscal year 2006, Americas, the company's largest geographic market, accounted for 65. 1% of the total revenues.

The company has six product lines: desktop PCs (accounted for 37. 8% of the total revenues), mobility products, software and peripheral products, servers and networking, enhanced services and storage products. During the fiscal year 2006, the Dell desktop PCs products line recorded revenues of $21,108 million, an increase of 1. 5% over 2005. The mobility products line recorded revenues of $14,100 million in fiscal year 2006, an increase of 19. 5% over 2005.

The software and peripherals products line recorded revenues of $8500 million in fiscal year 2006, an increase of 26. 8% over 2005. The servers and networking products line recorded revenues of $5400 million in fiscal year 2006, an increase of 10. 2% over 2005. The enhanced services products line recorded revenues of $4900 million in fiscal year 2006, an increase of 32. 4% over 2005. The storage products line recorded revenues of $1900 million in fiscal year 2006, an increase of 46. 2% over 2005 (Dell Annual Report, 03 February 2006).

The backbone of Dell’s seem to lie in its exceptional productivity, efficiency, and mass customization has been its company-wide coordination across businesses, customers, and suppliers. In maintaining real-time links with its suppliers, for instance, Dell could provide the kind of detailed data that would allow them to reduce inventory, enhance speed, and improve logistics. The sharing of information with the suppliers enhanced their incentives to collaborate.

And Dell's use of electronic logs rather than written forms reduced the cost for many functions ranging from order taking to quality inspection. The technology thus enabled Dell to benefit from a de facto vertical integration without the liabilities and inflexibilities of owning the supply chain. Dell Computer's virtual linkage with customers via Internet and voice channels also permitted Dell to circumvent traditional dealership channels and thereby create a sustainable competitive advantage of lower selling cost and higher customer responsiveness.

By the late 1990s, Dell had become the world's second largest computer maker, with 30,000 employees, annual revenues of $21 billion, and $30 million in daily Internet sales (Magretta, 1998). At the top of the corporate governance at Dell are Board and Management members that are jointly responsible for managing and operating Dell's business with the highest standards of responsibility, ethics and integrity.

In that regard, the Board expects each director, as well as each member of senior management, to lead by example in a culture that emphasizes trust, integrity, honesty, judgment, respect, managerial courage and responsibility. The senior vice president and chief financial officer, Mr. Jim Schneider is responsible for all controller functions, corporate planning, tax, treasury operations, investor relations, corporate development, real estate, risk management and development of internal audits.

In addition to his finance responsibilities, Mr. Schneider served as Dell's chief information officer on an interim basis from 1999 to early 2000. Dell’s strategic plan in the use of technology including financial and management information systems, with thousands of employees spread out across several US offices, Dell's high-tech professionals are supplied with everything from software to security services. Completing purchase orders at Dell used to be a very time and labor-intensive process.

Employees were required to fill out a 3-part paper form, hand-coding information about suppliers, part numbers and costs every time they ordered an item, and then collecting from between four and ten approval signatures. Also, buyers were saddled with reentering that same data into two different systems, the legacy purchasing system and a homegrown Access database used for metrics reporting. Dell finance officials assessed that the basic procurement process was ripe for e-Change. The solution: a cross-functional team from Dell's finance, information technology and business organizations gave Ariba® Buyer the highest marks overall.

According to Dell’s finance manager, Ariba ran best on Dell servers and Ariba also scaled very well on Windows NT and SQL Server, our target platform. In the implementation of Ariba, the Dell team spent seven months creating nearly 20 interfaces from Ariba Buyer to Dell's legacy systems. To capture the full spectrum of Dell's needs, the implementation team built links between Ariba and Dell's purchase order system, its cost center system, catalog data, employee data, accounting code validation, and more.

The goal was to make the system airtight in terms of checks and balances - ensuring that only fully validated orders went through. Dell calls its resulting online purchasing system the Dell Internet Requisition Tool (DIREQT). DIREQT Project Manager Stephanie Debar averred that normally, companies can take a few months to do a proof of concept with a system like Ariba because they get the system up and running on one or two commodities, then over the next few months they gradually add commodities.

Dell did not put in any transactions for seven months, but when they did come up, everything was in place and working at once. This "big tent" approach - raising the whole system at once rather than one stick at a time - allowed Dell to fully transition all purchase orders to the new system much more quickly, eliminating the need to maintain two purchasing systems and avoiding employee confusion.

Currently, the requisition moves out to the Ariba Commerce Services Network (ACSN), a shared network infrastructure that enables connectivity between buyers, suppliers, marketplaces, and service providers on the Ariba B2B Commerce Platform. Through the ACSN, Ariba, rather than Dell, takes responsibility for communicating orders to suppliers, including shipping orders via XML, email, faxes, EDI, or whatever the supplier requires.

With Ariba, Dell believed it will see a 62 percent reduction in the time it takes to complete a requisition, and a 61 percent reduction in the cost. Even bigger than the process savings, though, are savings that Dell reaps from sourcing consolidation. Dell’s strategic manager Julie Reed reasoned out that with Ariba fully deployed, Dell is now getting the data they need to analyze our supply base and re-bid key business for consulting, marcom services, MRO, office products, and other significant categories of expenditures, resulting in significant volume discounts.

With regards to Dell’s internal control, Dell Audit Committee charter indicated that it is one of their tasks are to review the disclosures made by the Chief Executive Officer and the Chief Financial Officer in connection with their required certifications accompanying the Company's periodic reports to be filed with the Securities and Exchange Commission, including disclosures to the Committee of significant deficiencies in the design or operation of internal controls, significant changes in internal controls and any fraud involving management or other employees who have a significant role in the Company's internal controls.

The Audit Committee’s internal control involved three main objectives:

1. Reviewing with management, the Vice President of Corporate Audit and the independent auditors the adequacy of the Company's internal controls, including computerized information system controls and security.
2. Reviewing with management the scope and results of management's evaluation of disclosure controls and assessment of internal controls over financial reporting, including the related certifications to be included in the Company's periodic reports filed with the Securities and Exchange Commission.
3. Reviewing with the independent auditors the scope and results of their review of management's assessment of internal controls over financial reporting (Dell Website). Translating the technical requirements of activity based cost (ABC) and activity based management (ABM) into a feasible project for Dell had been done on a small scale first, exemplified by their intentions to fast-track transactions. Dell management also anticipated the linkages across departments, groups, and processes as well as the data-gathering and reporting requirements of the full-scale implementation.

Virtually, all observers of activity-based methods agree that any ABC or ABM project is a significant undertaking that requires sufficient management commitment, personnel and time, and technology resources. Unless management is committed to the effort and to implementing the pilot project recommendations, ABC or ABM is unlikely to have a significant impact on the organization. Gaining this commitment might mean that management analysts must educate top managers to appreciate the benefits and costs of the approach.

In the case of Dell, they utilized seven months to make Ariba fully operational. The challenge for cost management is to communicate clearly and effectively what ABC/ABM can and cannot be expected to do. Overselling ABC or ABM as the cure for all of an organization's business problems is sure to lead to disappointment. These techniques can be valuable diagnostic and decision-making aids, but they do not replace careful decision making. Dell estimated that significant ABC/ABM projects require a three- to four-person cross-functional team and at least four to six months of full-time effort.

Unless the ABC/ABM project is intended only as a demonstration or for a very small company, it most likely cannot be completed successfully by one or two people on a part-time basis. As ABC provides important information about the uses of resources given current processes, Dell did not stop short of identifying opportunities for decreasing costs and increasing value. Activity-based management (ABM) uses ABC information and perceived customer values to improve the organization's efficiency and consequently create more value at lower cost.

Organizations should redesign processes to reduce or eliminate activities that add no value and either save those resources or reapply them to value-added activities. Implementing ABM (and ABC) could be difficult, but prior planning is essential to doing so effectively. Factors to be considered include the project's scope, necessary resources, resistance to change, information to be gathered, and the analysis team's responsibilities for information analysis and decision making.

Progressive organizations, like Dell, prevent or minimize resistance to change by education and training, widespread sponsorship and participation, and incentives to encourage and reward change. Therefore, advance work is necessary to prepare personnel at all of the organization's levels for the analysis and changes that probably will result. Michael Dell, Dell’s CEO, informed that his company is allergic to hierarchy. He said that if he has a problem, he won't handle it through middle management.

He'll go to the person who's directly responsible. At the same time employees are encouraged to ask him questions, either at meetings or via e-mail. Staying on the cutting edge makes it necessary for employees to embrace new technology, Dell says. That's required some creative approaches at his corporation. This is why Dell realized in the mid 1990s that the Internet would be key to his business, that is why he had to get his employees behind the idea (O’Neil, 2004).

As a fact, one of Dell’s strength is dependent on its strong business strategy combined in its direct to customer model with an efficient manufacturing and supply chain management organization and an emphasis on standards-based technologies. As a result, Dell is able to offer superior value by avoiding expenditures associated with the retail channel such as higher inventory carrying costs, obsolescence associated with technology products, and retail mark-ups.

In addition, Dell's flexible, build-to-order manufacturing process enables Dell to turn over inventory every four days on an average, and keep the lowest inventory levels in the industry. This allows Dell to rapidly introduce the latest technology faster than companies with slow-moving, indirect distribution channels, as well as pass on component cost savings directly to customers. Currently, Dell is ranked number one, both in the US, and worldwide, in terms of desktop and notebook computer shipments in 2005.

It is ranked number one in the US and number two worldwide in shipments of x86 servers. Dell has a 29% market share in the US PC market. The company holds top positions in other markets worldwide. Dell is the number three vendor in the Chinese PC market (which is one of the fastest growing markets) with 9. 5% market share and number one server vendor with 23. 9% market share (Datamonitor, 17 June 2006). Their CEO attributes their success because of their enhanced services, which help customers plan, implement and manage their information-technology infrastructures.

When combined with our enterprise products, Dell services helped enable even more success and customer satisfaction in the data center. Customers continued to shift from desktops to mobility products, a move driven by the increasing flexibility of wireless Internet access. As Dell visualized, their company remained at the vanguard of the internet phenomenon, leading the industry in worldwide notebook shipments, which increased 43 percent.

Although the company has been able to gain market share in the low-end segments, it has lost share in the high-end segments (more than $1000) in 2005 (Datamonitor, 17 June 2006). A weak performance in this segment could indicate that the company's products are not perceived to be as high quality as its competitors. A lost share of the high-end market has caused a drop in the company's margins. Consequently, the company's operating profit increased only by 2. 2% in 2005 over 2004. Thus, it is highly recommended that they focus more on their high end segments.

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