Is Dell hitting the efficiency wall?
Published: 29 Jul 2002 16:57 BST
Dell Computer has developed an enviable reputation as a lean and mean PC manufacturer, but a debate is emerging over whether the company's efficiency engine can rev much higher.
Dell's penchant for making and selling products easily and inexpensively has allowed it to weather periodic slumps in information technology spending for years, enjoy higher profit margins during boom times and ultimately gain share at the expense of rivals such as Gateway and Hewlett-Packard.
Some investors and analysts, however, believe that Dell, which announces earnings next month, can't cut much more fat from its operation. Meanwhile, manufacturing improvements at HP also could erode Dell's comparative cost advantage.
"Dell can be more efficient, but the gains are likely to be marginal," said IDC analyst Roger Kay, who compares Dell's PC business to an oil well that's still producing but is bound to run dry. "Dell is probably getting about as much efficiency as it can out of the PC business."
That may explain why the company is looking to expand--or is at least rumored to be expanding--into new markets such as services and printers, Kay said.
Dell is proud of its record on efficiency, quoting benchmarks such as the following:
- 80 percent of annual spending on materials is spread among its top 25 suppliers
- Current inventory levels are 4 days
- About 90 percent of components are purchased onlineEach factory receives new components every two hours
- Component inventory in factories is measured in hours versus days
- The number of touches--or worker steps--in the manufacturing process has been cut in half in recent years.
But Dell says it isn't satisfied with its efficiency rate, and improvements still can be made in dozens of areas from shipping components to manufacturing and servicing customers.
"I believe we still have lots of room to improve," said Rosendo Parra, senior vice president of the Americas for Dell. "And it's more than just tweaks."
One possible frontier for Dell is tracking shipments to garner more services revenue. Daily, 5 percent to 10 percent of the products Dell ships are for orders placed the same day. The problem? Dell doesn't know which orders are getting same-day shipping -- it's largely luck for customers and a missed opportunity for Dell.
"If we can track that 10 percent that ships the same day and sell that ability to just half of the customers that want it, it adds up," Parra said.
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