Platt Perspective on Business and Technology

Dell and the complexity of managing a global supply network in a competitive marketplace

Posted in in the News, strategy and planning by Timothy Platt on July 12, 2010

Dell has found itself in the news lately and in ways that it would probably prefer not to see. My goal in this posting is not, however, to recapitulate the details of this news story and how Dell found itself shipping millions of computers and primarily its OptiPlex desktop models that had defective capacitors on their motherboards. There has been a lot of excellent coverage of that, and I cite Ashlee Vance’s June 29, 2010 New York Times piece: Suit Over Computers Highlights Dell’s Decline (Business Section, page B-1) as an overview. Instead, I want to look at some of the business model and supply chain issues that made this development possible, and with time perhaps even inevitable.

Dell was a poster child model for how to do things right in business school case studies with its focus on lean and agile processes with strategically planned outsourcing and tight inventories. With a new technology generation coming out every 18 months and new computer models in development all of the time, any other approach would strongly and adversely impact on any business in the computer hardware industry.

Dell responded to the challenges of its marketplace by developing adaptable approaches for building its machines as quickly and as cost-effectively as possible, and with minimal risk exposure to finding itself holding significant levels of capital invested in inventory that would at best qualify as obsolete technology as new models flow out into the marketplace. Then they made those 11 to 12 million OptiPlex computers with all of those faulty capacitors that they had purchased through their supply chain, presumably manufactured by Nichicon. And Nichicon is claiming that it is being blamed for producing what are actually counterfeit capacitors that were manufactured by others using their brand name. And this problem really exploded when Dell tried to cover up what was happening to limit its losses, as has come to light in revealed internal emails and other documents.

Dell diligently managed its own business model and its own operational and strategic practices. It, however, failed to carry through on a due diligence that looked into the actual practices of its key supply chain partners, and it failed to do its own quality control and risk remediation reviews of components and subsystems purchased from them. And when it found its lean inventory and lean manufacturing system had left it so short in supply of crucial components that it could not meet its production needs and still address its emerging crisis for having shipped millions of computers with defective parts, its system started to unravel.

Quality testing batches of components takes time and builds in delays, and validating internal quality control and sourcing of supply chain partners raises costs for doing business with them. Twenty-twenty vision hindsight may suggest these should have been done more consistently and diligently but it is easy to view this type of due diligence as poison in a marketplace as fast-paced as computer manufacturing where ongoing change in customer-demanded state of the art is the only constant and where low cost competition drives narrow profit margins for any and all units sold.

Dell found itself facing a challenge of having to decide on an ongoing basis where to simply move quickly so as to give its products as large a window of effective sales opportunity as possible, and both to recoup development and manufacturing set-up costs and to make a profit, before their computer models became discount store seconds.

So the problems it is facing started with its supply chain and with its efforts to cut its costs and to limit delays to manufacturing and shipping its products to maximize its opportunity to recoup costs and generate a profit. And when problems arose in its manufacturing from use of defective parts it only found out after shipping millions of defective computers which it realized too late would experience as high as a 97% failure rate for its end user customers. And this growing cascade of problems simply continued as Dell reacted by not being forthcoming to those consumers, and that is where this became truly their problem as they could not pass on responsibility for their customer service the way they might have been able to pass on responsibility for parts purchased and used in good faith, that their suppliers claimed to be of high quality and reliability. That is where this became a matter uniquely impacting on Dell and its reputation.

A lot of press coverage of this story is going to look at Michael Dell and his company, and at their responsibility for what has happened, and I do not contest that they hold a great deal of responsibility there. I choose, however, to step back and take a look at the trade-offs in a marketplace such as Dell faces with its pressures to choose between quality control and due diligence, and speed to market. There are no easy, facile answers here as to precisely were to make a due diligence versus speed decision point.

Ultimately any business has to be aware of the quality and reliability of everything it obtains through its supply chain, and it has to be responsible for that, just as it is responsible for the products and services it sends out its doors, and whether carrying its name or the branding of a customer business. Yes, this imposes certain costs, and both directly in monetary terms, and in delays and other indirect costs that also create very real monetary impact on top and bottom lines. And consequences of failure for not carrying out effective due diligence has to be taken into account and for both probability that systems and product failures may happen and for costs if they do happen.

And here is where twenty-twenty vision hindsight has its crystal clear vision, but a vision with a blind spot. There can be no absolute certainty in any due diligence and even with the best systems, risk may be reduced but it can never be reduced to zero. So I end this posting focusing on the response that Dell appears to have mounted as it became aware that a disaster was unfolding. When it knew that it had shipped millions of computers that were essentially certain to fail within a short statistically determinate period of time and when their end user customers would reasonably expect to be able to rely on them to work, they faced a real responsibility to those customers. The real problem is not that they made and shipped a lot of defective hardware using parts that were not up to spec. It is in what they did in response to that, and what they failed to do about it as they became aware of this problem and as their lean manufacturing system began to unravel in the face of this challenge.

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