Managed Services in 2014: Pricing and Positioning - Dave Sobel
virtual integration
1. $2.0B
Presented by:
• Ashima(50801012)
• Alpa(50801007)
• Hina (50801030)
• Himanshu Watta(50801029)
““ Virtual Integration From DELLVirtual Integration From DELL
Strategy That Revolutionized an Industry ”Strategy That Revolutionized an Industry ”
2. www.dell.com 2
Background
Ten years ago , the companies that were the stars in the Digital
Equipment of this world, had to build massive structures to produce
everything a computer needed.
As a small start-up, Dell couldn’t afford to create every piece of the
value chain. But more to the point, why should we want to?
Dell concluded that they’d be better off leveraging the investments
others have made and focusing on delivering solutions and systems to
customers.
3. www.dell.com 3
As said by Michael Dell
• “If you’ve got a race with 20 players that are all vying to produce
the fastest graphics chip in the world, do you want to be the twenty-
first horse, or do you want to evaluate the field of 20 and pick the
best one”?
And that’s how Michael Dell coined Virtual Integration
4. www.dell.com 4
VIRTUAL INTEGRATION
“Virtual integration means you basically
stitch together a business with partners that
are treated as if they’re inside the company.”
Michael Dell
5. www.dell.com 5
VIRTUAL INTEGRATION
“A new form of value chain management.”
• Informal arrangements among suppliers and customers.
• Easy arrangement of the components through the Internet or
a networked computer system.
• To fully serve your customers in ordering, services, or any
other needs.
6. www.dell.com 6
THE POWER OF VIRTUAL
INTEGRATION
Allows:
Make your customers partners:
• Focus on groups you can serve with the largest gross margins (second/third time
buyers for consumers; enterprise customers with custom requirements).
Have a few suppliers as possible, and keep them only as long as they are technical and
quality leaders:
• E.g. Sony for monitors; Intel for motherboards
Focus on adding value via information:
• “We substitute information for inventory and ship only when we have real demand
from real end customers” (Michael Dell)
8. www.dell.com 8
Variables affecting virtual Integration
Variables Remarks
Strategic planning Enables a holistic approach for risk
management
Awareness about virtual integration Provides motivation for integration
Trust among supply chain partners Helps to exchange information
Revenue sharing & incentive alignment Provides incentives to partners to work
towards common goals
Information security Imperative for seamless flow
Financial support to all the partners Important for SMEs as they don’t have
necessary funds
Collaboration among supply chain
partners
Facilitate free exchange of information
Compatible IT infrastructure Assists integration of partners in a supply
chain
9. www.dell.com 9
Benefits of Virtual Integration
Better understand customer needs
Customers receive exactly what they want: not
standard solution
Minimized inventory
New technology delivered immediately
11. www.dell.com 11
Single dept. Single
location
Geographically
close dept. within
the firm
Global Access:
Multiple Systems &
logons
Trading partners &
Entire firm:Single
specified IT platform
Trading
partners,customers &
Entire firm:Multiple
specified IT platforms
Trading
partners,customers &
Entire firm:Any
device:Phone,fax.PC
Anyone,Anywhere Any
device:Phone,fax.PC
REACH
simple
msg
Lookup
static
data src
Lookup real
time sys
Simple trans
single static
data src
Simple trans
multiple static
data src
complex
trans single
real time sys
complex
trans multiple
real time sys
RANGE
Vertical integration
Outsourcing
Virtual Integration
13. www.dell.com 13
DELL Inc - TIMELINE
1983-- Michael Dell starts business of pre-formatting IBM PC HD’s on weekends
1985-- $6 million sales, upgrading IBM compatibles for local businesses
1986-- $70 million sales; focus on assembling own line of PC’s
1990-- $500 million sales; with an extensive line of products
1996-- Dell goes online; $1 million per day in online sales; $5.3B in annual sales
1997-- Dell online sales at $3 million per day; 50% growth rate for 3rd
consecutive year,
$7.8B in total annual sales.
2005-- $49.2B in sales
14. www.dell.com 14
Dell’s organizational structure:
The virtual company
Direct relationship with customer is strategic; rich
information flows
Outsource non-strategic functions
Information flows substitute for physical flows
Coordinate value network thru IT-enabled information
processes
System
integrators and
resellers
Dell Order
management
Customer
relations
Operations
and supply
chain
Component
Manufacturer
Component
suppliers
Third party
HW and SW
suppliers
Distributors
Logistics
companies
Repair and
support
providers
Customer
15. www.dell.com 15
Customer
Local Suppliers
Dell Factory
Lean Inventory Model
Logistics Hubs
Suppliers
Results: 3 days of inventory - Inventory turns of 122 per year
Delivery
Supplier Owned Dell Owned
16. www.dell.com 16
The BenefitsBenefits of Low Inventory
90
95
100
105
110
115
120
-14
-12
-10
-8
-6
-4
-2
0
Typical
Dell
Relative
Component
Cost
Weeks Relative to Delivery
With 3 Days
Inventory,
Dell Buys Here
With 90+ Day’s Manufacturer
and Reseller Inventory, Channel
Manufacturer Buys Here
10-12% Cost
Advantage
18. www.dell.com 18
Dell brings products to market faster than
its competitors
• Dell uses direct sales via Internet, whereas Traditional
PC manufacturers previously assemble PCs ready for
purchase at retail stores.
• PCs have life cycles of only a few months
• Thus, Dell enjoys early-to-market advantage.
19. www.dell.com 19
Customization and quick response
• Dell
• uses the Internet to sell its products
• offers a virtually unlimited variety of PC
configurations.
• Buyers can click through Dell and assemble a computer
system piece by piece, based on their budgets and needs
20. www.dell.com 20
Attract large business customers
• To facilitate B2B sales, the Dell site offers each corporate customer
an individualized interface called “Premier page”
• purchasing managers log on and order using an interface
customized for their company's needs
• While Dell’s consumer sales are highly visible, its business sales are
a much bigger revenue source
• “About 15 percent of our total revenue is consumer business and
the rest is B2B” says Bob Kaufman, Media Relations manager of
Dell.
21. www.dell.com 21
Reduce Bullwhip Effect
• Dell constracts special Web pages for suppliers, allowing
them to view orders for components they produce.
• This allows suppliers to plan based on customer demand
22. www.dell.com 22
Collecting the payments
• Because of direct sales, Dell can collect payments in
averagely 5 days after they are sold.
• However, Dell continues to pay their suppliers according to
the traditional billing schedules.
• Low level of inventory and negative working capital helps
Dell increase its performance.
23. www.dell.com 23
Pass cost
savings on
to customer
Competitive
pricing
ignites
demand
Lower cost
drives
Increased
demand
Industry's most
efficient
procurement,
manufacturing
and
distribution
process
How the Model drives Market Share
Competitive
Pricing
Efficient
Model with lowest
Cost Structure
Help
Drive
Supplier
Business
Drives
Market
Share
Improved
Customer
Experience
25. www.dell.com 25
Coordinating the virtual company with
IT and e-networks
Information Technology (IT) allows the effective and efficient
information exchange and coordination across the entire supply chain
Speed
• Order-driven processes linked by internal IT and external networks
allow only 7 hours of inventory in factory and orders to be filled in 5
days or less
• Entire value network linked by Internet, extranets
Quality
• Bar coding allows components to be tracked to suppliers when problems
occur, stop production and notify suppliers
• Cell assembly allows problems to be fixed on the spot without shutting
down production
Results
• Overhead 8% compared to 15% for others
•122 inventory turns annually minimizes depreciation
•New technologies can be introduced immediately
30. www.dell.com 30
Three golden rules at Dell :Three golden rules at Dell :
`Disdain inventory'`Disdain inventory'
`Listen to the customer'`Listen to the customer'
`Never sell indirect'`Never sell indirect'
Learnings
32. www.dell.com 32
Introduction
Founded by Henry Ford on June 16, 1903, in Dearborn, Michigan.
Second largest industrial corporation in the world
With revenues of more than 144 billion and about 370,000 employees,
operation spanned 200 countries
World's second largest motor vehicle manufacturer.
Produces cars and trucks, and many of the vehicles plastic, glass and
electronic components, and replacement parts.
Core business: design & manufacture auto for sales
33. www.dell.com 33
Factors need to be considered for VI
Cultural resistance of staff and management 68%
Poor state of current systems and data 54%
Complexity of new supply chain technology 38%
High cost and resource constraints 32%
Coordination with supply chain partners 26%
Source: Forester Research ,Inc
Percentage of 500 top US companies Interviewed
35. www.dell.com 35
Problems
change to Ford's supply chain structure could also be very costly if
not properly managed.
Ford has a complex network of suppliers and does not have the IT
knowledge
cars require more components to build than a computer does
Ford sells most of its cars through traditional dealerships, the
selling process is not as efficient as Dell's direct sales model.
Significant changes to Ford's factories, vehicle design, logistics,
forecasting methods and other processes would have to be made.
re-train employees to handle the new procedures and information
technology.
37. www.dell.com 37
Results of VI in ford
loose affiliations of companies organized as a supply network
physical assets are replaced by information
manufacturing continues to be controlled by the company’s planning
department
provides logistics management and forecasts for demand and
receipts
no longer delivers finished goods to the customers
allows partners to be located far apart from each other
38. www.dell.com 38
Alternative solutions
The first possibility is to keep its existing supply chain as it is and not
make any major changes.
To extend Ford's E-business strategy with customers and suppliers and
make a partial jump towards virtual integration.
To have a total jump to a virtually integrated supply chain based
completely on Dell's model.
39. www.dell.com 39
Benefits to ford
Strategic partnerships
Decreased holding costs,
Increased flexibility
Less inventory
Opening up new ways to get vehicles to the market more quickly
To compete with the smaller, more agile, players in the automobile
market.
Convenience for customers, and developing relationships with customers
Ensures a continuous flow of materials and reduced buffer stock
requirements.
40. www.dell.com 40
RECOMMENDATIONS FOR TRANSITION
TO VIRTUAL ORGANIZATION
Develop strong Demand Chain to meet & exceed customer
satisfactions
Better Relationship Management through out the value chain
Drive the organization for more efficiency
Supply Chain Management briefly described:
Our planning processes “push” components into a supplier logistics center (SLC) awaiting a “pull” signal generated by the replenishment processes in our manufacturing plants.
The SLCs are managed by a third party logistics provider.
Inventory in the SLC’s is owned by our suppliers - there is an average of 8 or 9 days worth of inventory in the SLC.
Local suppliers provide support through Vendor Managed Inventory programs.
The results of this simple yet effective supply chain model is inventory turns of 91.25 (or over 90 times a year). In addition we incur an error and omission expense of only 5 hundredths of one percent, and we have experienced 8X productivity improvements over the last three years.
The benefits to you of this case studied model is high quality, fast to market with new features, we build-to-order and don’t have two or three months of inventory in the channel which we’re trying to pawn off when new features are introduced into the market by our suppliers, and lower cost operations means lower priced products.
Looking to the future, we see many catalysts on the horizon that will fuel our growth.
Although there is an intense focus on current economic environment and potential near-term implications…
What truly drives value in our industry is the relentless pursuit of productivity enhancing technology ---
This fundamental driver has not changed and it all starts with a low cost supply chain…..
Industry's most efficient procurement, manufacturing and distribution process
Allows us to pass on cost savings to customer through competitive pricing which in turn will drive demand
Allowing Dell to drive market share profitably
Thereby assisting our suppliers by driving their business and keeping you whole
So as Marty indicated in his opening comments, we all need to work together to find innovative ideas on how to push the envelope and find ways to lower costs to make us all more successful.
Thank you very much for your commitment to Dell.
