WINTER 2013 VOL. 54 NO.2 MITSloan Management Review Intelligence When One Size Does Not Fit All A brief discussion about how Dell Inc. developed four supply chains to serve different customer segments more effectively, by David Simchi-Levi, Annette Clayton and Bruce Raven[SUPPLY CHAIN MANAGEMENT] Dlllilhlnlllwnhlon hmulminnhinur mmlntuehfownm tundra-Ireland\". When One Size Does Not FItAII As a business diversies, it may need more than one supply chain. Here's how Dell addressed that challenge. BY DAVID SlMCHI-LEVL AN NETI'E CLAYTON AND BRUCE RAVEN Most operations strategies focus on either efciency, sometimes referred to as a push strategy, or responsiveness,sometimes called a pull strategy. Either the company seeks op erational efciency and tries to hold down costs across all Emotional areas, or it focuses on responsiveness and tries to ratchet up speed, order fulllment and service levels. Although seasoned operations and supply chain executives understand the difference between efficiency and respon siveness, many are confused about when to apply each strategy. In recent years, more and more companies have been caught in the bind in which Dell Inc. found itself in 2008, when it realized that the highly re sponsive conguretoorder supply chain that had made its online store the world's CDUHTES'I' DF DELL largest channel for personal computers sales no longer t the needs of some of its fastestgrowing businesses: its new physi cal retail channel, its enterprise sales or even its highvolume consumer products. Facing increased pressure from emerging and revitalized competitors, Dell found that its longvaunted supply chain was no longer right for all aspects of its business. In 2008, for example, when Dell entered the retail channel, the company tried to use the same supply chain as its online cong ure-to-order business. But competition in conventional retail can be more price sensitive than it is online, and the supply chain Dell designed for online was not op timized for lowest cost. By contrast, what was valued most online the customer experience associated with the ability to congure the product to exactly what the customer wants was not needed in the store as most retail orders are large and focused on fewer congurations. Adding to the challenge, the company faced corporate and public sector clients who were increasingly looking for a com plete solution for their IT needs, and in many cases, a solution designed speci- cally for their organization. This again entails a supply chain strategy quite differ ent from the one employed for online customers. Clearly, Dell needed to transform its supply chain to serve new customers in new channels with new types of products. The question was: how to do that effec tively? Dell decided to create multiple supply chains, each dedicated to a differ ent segment of the PC industry, but configured in such a way that the com pany could take advantage of synergies to reduce complexity and benet from econ omies of scale. We understood that any framework for supply chain segmentation must take into account demand uncertainty, cost drivers, relationships with customers, the customer value proposition and technology dock speed the speedby which technology and product change in a particular industry. Earlier research by one of the authors, de scribed in the book Operations Rules by David SimchiLevi, suggested that a good rst step is to focus on demand uncertainty and customer relationships. These dimen sions determine the various customer segments, each ofwhich requires a different supply chain strategy. For example, the supply chain strategy that D ell should employ when demand uncertainty is high and the relationship with the customer is loose must be different from the strategy that it should apply when demand uncertainty is low and the relation ship is tight. By [Continued on page 16} WI NTEFl 2013 MIT SLOAN MNAGEMENT REVIEW 15 INTELLIGENCE When One Size Does Not Fi'IAII {Conrmed from page 15] reflecting on these two dimensions, we real- ized Dell needed to roll out all four of the most basic kinds of supply chains, which we'll call BuildtoOrder, Build to Plan, BuildtoStock and BuildtoSpec. [See \"Dell's Four Supply Grains\") When the relationship between a com pany and its customers is loose and demand uncertainty is high, the supply chain needs to be managed based on real ized demand, or a pull strategy. This is exactly the strategy that Dell employs in its traditional business. Online, Dell offers millions of possible congurations, and as a result, forecast accuracy by conguration is poor and volume by conguration is low. As Dell offers to satisfy consumers' in dividual needs, the focus is on higher margins, and thus the cost of a lost sale is high. Here Dell employs a BuildtoOrder strategy, where component inventory is managed based on forecast while actual customer requirements determine the final congurations. When Dell entered the retail business in early 2008, it realized this was a different type of business. The number of congurations sold is low, with few customization options, so forecast accuracy and volume bycongu- ration are much higher than for online sales. Finally,because competition in retail is more pricesensitive, the cost of a lost sale is lower than in the online channel. The retail segment, therefore, is associ- ated with low demand uncertainty and a loose customer relationship,malting a tradi tional push based strategy better because managing the supply chain based on long term forecast lowers cost through economies of scale [high volume) and forecast accuracy ( low demand uncertainty). In this Buildto Plah strategy, procurement, production and shipment decisions are all based on forecast. Interestingly, Dell identied another customer segmentwith low demand uncer tainty and loose customer rel atio nships'. popular products sold online. By nature, the volume and forecast accuracy are high for these products, and as a result, call for a push-based strategy, or what Dell refers to as a BuildtoStock strategy. In this supply chain, popular product congurations are prepositioned in the network, based on longterm forecasts, to provide a very ag gressive response time, such as nextday shipment. In this hybrid pushpull strategy, DELL'S FOUR SUPPLY CHAINS Dell Inc. created four supply chains. each dedicated to a different customer segment, but all configured in such a way that the company could take advantage of synergies across the different supply chains. _UILDTDDRD EFl BUILDTO-PLAN BUILD-TDSTOCK BUILDTOSPEC procurement, production and shipping to stocking points are all based on forecast, while shipment to customer locations is based on realized demand. Finally, we found another segment where demand uncertainty is low and the relationship with customers is tight: enter prise clients. ln this case, the design and pro duct variety are customized for indi vidual corporations. The menu of options offered to corporate clients has a longer product lifecycle, with more overlap across generations of technology. This enables corporate clients to order the same cong uration over a long period of time and lower their total cost of ownership. Be cause the relationship between Dell and its corporate clients is tight, forecast accuracy and volume are high. This is quite different from the characteristics of individual con sumers. Thus, for corporate clients, Dell applies a strategy referred to as Build-to- Spec. Dell commits to a short response time and high menu congurations and does not keep finished goods inventory. Products are assembled to order using components ordered well ahead of time, based on forecast. Customer Segment Onlinei'LowVolume Retail Onlinei'Popular Corporate Clients Congurations Congurations Products Configuration defined Small number of Small number of Designed for customer by customers configurations configurations designed for market designed for market Production Batch Size One Large Large Large Production Strategy Assembly is driven by individual order Smooth production to cut cost Smooth production to cut cost Quantity and schedule de fined by customer order nished Goods Inventory No Yes [at retaileri Yes lat DeIIII No Short Iairi to achieve respon siyeness Lead Time Long [ocean] to reduce shipping cost Long iooeani from manu- facturing to stocking locations and short {par- celi to customer location 5 Long Iocean] to reduce shipping cost Planning Horizon Short 15 MIT SLOAI'II MQNRGEMENT REVIEW lWIINITEFI 2013 Long Medium Long S LOAN REVIEW.MIT. EDU Synergies Across Supply locations, Los Angeles and Nashville, for to consumers, thus enabling Dell to respond Chain Segments shipping to individual consumers. The re- quickly to consumer demand. An important challenge in supply chain seg- sult is a simple logistics network that still The second step in this phase involved mentation is using synergies across different meets the needs of a complex business implementing the four different manufac supply chains to reduce complexity and ex- As simple as it sounds, executing this turing and operations strategies. Each is ploit economies of scale. In general, there are design was not easy. The first step was cre- associated with a different segment: Build- five possible areas that can yield synergies: ating an organization to manage the entire to-Order is the strategy Dell still employs for procurement, product design, manufacture transformation. This organization focused the low-volume configurations in the online ing, planning and order fulfillment. on every aspect of Dell's business, from business. Build-to-Plan is a strategy the Synergies in procurement imply lever- product design through manufacturing company is now using for the retail channel. aging volume across the various segments and transportation all the way to customer Build-to-Stock is used for the popular prod- to reduce purchasing costs. Strategies for care, warranty and technical support ucts sold online. Finally, Build-to-Spec is product design synergies emphasize using Very quickly the team made a critical applied for corporate clients. standard components across all the supply decision: to shift more manufacturing Since this project started three years ago, chains and reducing product portfolio. activities from internal operations to the the transformation in Dell's business has Manufacturing synergies demand the con- supply base, thus utilizing the manufacture been substantial. Product availability has solidation of as much manufacturing ing capabilities of its partners across its improved 37%, and order-to-delivery times infrastructure as possible. As a result, there global manufacturing network. This was a are 33% shorter. Dell now offers signifi- is a need for a single process to allocate huge change in cost structure, from fixed cantly fewer configurations, and as a result, manufacturing capacity to the different cost to variable cost, resulting in a signifi- forecast accuracy has improved dramati- segments. This is sales and operations cant savings to the bottom line. cally, by a factor of three. The effective planning (S&OP) - one process applied Next, the team undertook a compre- matching of transportation mode with sup- across all supply chain segments to align hensive transformation of the legacy IT ply chain segment led to a staggering 30% demand, supply and inventory and to allo- infrastructure that supported Dell's con- reduction in freight cost for notebooks and cate production capacity to the various figure-to-order strategy, in which lot sizes slashed manufacturing cost by 30%. supply chains based on actual and forecast do not exist. With the implementation of Dell's situation is not unique. Indeed, demand. customer segmentation, some segments, many global companies underperform be- Dell takes advantage of synergies in for example retail, require the technology cause of a mismatch between business order fulfillment for the North American to support large lot sizes and imply the needs and supply chain configuration. But supply chain by using one infrastructure existence of finished goods inventory, not for long. Customer-driven supply for all four supply chains. For example, the something Dell had never considered be- chain segmentation is increasingly neces- company has U.S. fulfillment nodes in cities fore. As a result, the company needed to sary to compete in today's global economy. such as Los Angeles and Chicago - and em- rethink its IT infrastructure so it could In coming years, more and more compa- ploys some of them in more than one supply support multiple channels. nies will need to create flexible supply chain chain. In the online business, where speed is The final phase was the customer seg- strategies to deliver competitive value critical, items are air shipped from manufac mentation. Dell mined billions of customer propositions. turing in Asia to four locations in the U.S.: transactions to segment different customer David Simchi-Levi is a professor of engi- Atlanta, Chicago, Los Angeles and New types based on their customer value propo- neering systems at the Massachusetts York, and from there by parcel to customer sitions. This allowed the company to Institute of Technology. Annette Clayton is a locations. Retail is different. Because cost is simplify its product lines and market former vice president of global supply chain and operations at Dell Inc., and Bruce Raven the focus of the Build-to-Plan supply chain the most popular configurations. This sim- is the director of supply chain tools at Dell. strategy, products are shipped by ocean to plification reduced costs and improved Comment on this article at http://sloanre- Los Angeles and Chicago, and from there, by responsiveness through improved forecast view.mit.edu/x/54210, or contact the authors at smrfeedback @ mit.edu. truck to the retailers. Then, in the Build-to- accuracy. It also enabled the company to Stock strategy applied to popular products identify popular products which are good Reprint 54210. sold online, items are shipped by ocean to candidates to be produced in advance, prep- Copyright @ Massachusetts Institute of Technology, North America and then trucked to two key ositioned in the network and offered online 2013. All rights reserved. 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