McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 6

Supply Chain Integration

Dell Desktop PC Supply Chain:

Optimizing the Flexibility ofthe Desktop PC Supply Chain

Case Study

©2006 Massachusetts Institute of Technology.

All rights reserved.

3

AgendaAgenda

• L6 vs. L5 Value Comparison

• Root Causes Analysis

• Project Methodology & Next Steps

• Lessons Learned

4

Critical Components of a Desktop PC Critical Components of a Desktop PC & Major Component Manufacturers& Major Component Manufacturers

ChipsetAMDIntel

MotherboardASUS

FoxconnIntel

MiTAC

Desktop ChassisASUS

FlextronicsFoxconnMiTACLite-On

Desktop PCAcerAppleDell

Fujitsu SiemensGateway

HPLenovo/IBM

Company list is not comprehensive.

Images used on this page belong to the respective companies.

LAN ChipBroadcom

Intel

Printed Circuit Board

BTI ElectronicsCompeq

GCEPlato Electronic

L6 vs. L5L6 vs. L5

L5

MB

Chassis

5 Weeks

1 WeekDell

Manufacturing

Customer

Supplier Logistics

Center

3rd Party Integrator

(managed by Equipment

Manufacturers)

L6

MB

Chassis

5 WeeksChina

IntegrationDell

ManufacturingCustomerSupplier

Logistics Center

: L5 additional cost

6

Problem StatementProblem Statement

Since July 2004, Dell and its contract manufacturers (CMs) have had to adapt an increasing % of L5 manufacturing:

1. Empty chassis are shipped by ocean (L5) to Dell US & Europe first. Motherboards are then air-freighted to Dell US & Europe.

2. Dell incurs motherboard expedite/air-freight cost and 3rd-party integration cost.

3. CMs incur cost for idle labor dedicated for MB-chassis integration.

7

L6 vs. L5: Value ComparisonL6 vs. L5: Value Comparison

L5

• Integrated inside a Dell facility

• Chassis shipped on water

• Motherboards shipped by air

+ Increased supply chain flexibility

– Increased motherboard air-

freighting costs

– 3rd-party integration cost in US

– Separate logistical costs for

chassis and motherboards

L6

• Integrated offshore & outside a Dell facility

• Integrated motherboard-inside chassis

shipped on water

+ Labor savings

+ MB air-freighting costs are eliminated

+ Reduced motherboard packaging costs

– Reduced supply chain flexibility

– More motherboards need to be re-worked in

the event of an MB ECN

L6 is more cost-effective than L5.

8

Q3FY05 Act Q4FY05 Act Q1FY06 Act Q2FY06 Act Q3FY06 Act Q4FY06 FCST

MB

-Air

fre

igh

tin

g &

3P

I In

teg

rati

on

Co

sts

Americas EMF APJ MDS Total

L5 Driving Increasing Operational L5 Driving Increasing Operational CostCost

Costs of air-freighting MBs and 3PI integration have been increasing.

Worldwide Procurement

Expedite Council established

AMF includes 3PI integration cost. EMF and APJ don’t as integration is done in Dell factory.

9

Dell Worldwide L5 vs. L6 Shipments Received

from a Typical Contract Manufacturer

89%93% 94% 95% 96%

86%91% 94% 96%

90%85%

73%

11%7% 6% 5% 4%

14%9% 6% 4%

10%15%

27%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05

L5%

L6%

L6 vs. L5 Shipments:L6 vs. L5 Shipments:% Comparison% Comparison

L5 shipped % has been increasing

since March 2005.

10

Root Causes AnalysisRoot Causes Analysis

63.5%

24.5%

8.3%3.8%

Chipset supplier decommitor supply issues

Quality/Eng Issues

Dell Forecast Accuracy

NPI

Majority of expedites are caused by chipset supply shortage.

AMF Expedite $ by Root Cause (January to June ’05)

11

Project ScopeProject Scope

Is Is Not

Desktops Laptops, servers, storages, peripherals

DAO (Dell America Operation)

Outside DAO

Constrained by chipset supply shortage

To improve chipset supply

Focused on factory operational improvement

To improve Dell’s demand-forecasting ability

Motherboard-chassis integration

Fans, power supply, SPAMS (Speakers, Printers, Advanced Port Replicators, Monitors, Scanners), or other components

12

Project MethodologyProject Methodology

BPI project team established to evaluate the following 6 scenarios:

1. Keep as current: 3rd-Party Integrator (3PI) managed by Equipment Manufacturers

2. DAO Cellular Integration: Enable the Dell factory work cells to perform L5L10 mfg work

3. Offline Integration: Keep the current L6L10 mfg process unchanged; add a separate facility to handle MB-chassis integration worka. At SLC (Supplier Logistics Center)b. At a Dell-leased building

4. 3PI managed directly by Dell

5. L6 from Equipment Manufacturers’ Mexico plants

13

Factors to ConsideredFactors to Considered

For each of the 6 scenarios, BPI project team assessed the following attributes:

1. Process smoothness & sustainability

2. Cost per box

3. Product quality

4. Capital investment

5. Material handling/cost-accounting

6. LogisticsProject Goal:

Identify the optimal scenario

based on these input attributes.

14

Complexity AnalysisComplexity Analysis

Legend:

The “Cost per Box” data has been modified to respect Dell’s data confidentiality.

Option 1: EM-managed 3PI Option 2: Integration at DAO work cells

Option 3A: Integration at SLC/hub Option 3B: Integration at Dell-leased bldg

Option 4: Dell-managed 3PI Option 5: Integrated chassis from Mexico

Option 1Option 2(original)

Option 2(revised) Option 3A Option 3B Option 4 Option 5

Worldwide Procurement 10 1 1 1 1 5 10Regional Procurement 8 5 5 5 5 5 10Master Scheduler 5 5 5 5 5 5 5Production Control 5 10 10 7 7 7 5Operations 1 10 10 5 5 1 1DAO Quality 5 10 10 5 5 1 1Processing Engineering 1 10 10 5 5 1 1Supplier Quality Eng(Regional) 10 1 1 1 1 5 7Supplier Quality Eng(Global) 1 1 1 1 1 1 10Cost Accounting 5 1 1 10 10 10 1Inventory Control 1 5 5 5 7 10 1Logistics 5 1 1 5 5 5 10

Total: 57 60 60 55 57 56 62

Cost per Box $10.07 $7.00 $7.90 $7.54 $7.70 $7.61 $7.00

15

Option 2 vs. 4: Value ComparisonOption 2 vs. 4: Value Comparison

Option 4: Dell-managed 3PI

+ Dell has direct control over the 3PI

+ More clear definition of quality issues

ownership

+ Less manufacturing infrastructure

change required, less impact on

existing supply chain network

+ Little additional capital expenditure

investment, little lead time change

– Only an incremental change from the

original manufacturing design

Option 2: Integration at DAO Work Cells

+ Lower capital expenditure investment

+ Less impact to business if chipset supply

reverts to 100% L6

+ Fit the Dell Direct model better

– Builder headcount is more difficult to

scale

– Increased inbound & scheduling

complexity

– More part numbers to manage

– Factory thru-put rate is downgraded

Option 4 enables Dell to focus on the more value-added portion of the MB-chassis integration.

16

Lessons LearnedLessons Learned

1. Supply chain coordination requires involvement from all partners in the chain (customer, supplier, sub-tier suppliers).

2. A well-planned strategy complements strong operational execution ability from supply chain partners.

3. Change management requires 3 key ingredients:1. Top-down leadership2. Bottom-up engagement3. Cross-functional coordination

4. Qualitative judgment is just as important as or more critical than quantitative analysis.

5. Working in a bi-lingual/bi-regional setting has its perks and challenges.

17

Discussion and Q&ADiscussion and Q&A

Questions and Thoughts

18

Back-up

19

Manufacturing Costs: L5 > L6.Manufacturing Costs: L5 > L6.

Costs Common to L5 and L6Costs of doing either L5 or L6: TypeRaw material costs MaterialsChina materials transportation costs LogisticsChina assembler's cost (Foxconn performing L1-->L5) LaborChassis ocean-shipping cost LogisticsChassis US transportation cost (trucks, rail) LogisticsChassis inventory holding cost at SLC Inventory HoldingUS assembler's cost at Dell (from L7-->L10) Labor

L6 Only CostsCosts of doing L6, rather than L5: TypeChina assembler's cost (Foxconn performing L6) Labor

L5 Only CostsCosts of doing L5, rather than L6: TypeMotherboard packaging cost MaterialsMotherboard air-freight/expedite cost LogisticsMotherboard US transportation cost LogisticsMotherboard inventory holding cost at SLC Inventory HoldingChassis & motherboard US transportation cost(from SLC to local/regional integrator and back) LogisticsLocal/regional integration cost (Accurate, Saberex) LaborMotherboard rework cost at Dell Labor/QualityDell L5 mgmt cost (e.g. Expedite Council) Labor

20

Pros & Cons of the 6 OptionsPros & Cons of the 6 Options

Description Pros Cons

1 Current Process, EM-managed 3PI

• Least impact for Ops & PE

• Dell does not own inventory during MB-chassis integration at 3PI

• Most expensive option

• WWP and Regional Procure. have more intense EM and 3PI mgmt/coordination

• Most difficult option for SQE

2 L6 at Dell work cells

• Less complex for WWP

• SQE mgmt is reduced

• L5 and L6 parts are ordered and tracked independently clear-cut Cost Accounting

• Easiest option for Logistics

• Long ramp time of new builders

• Difficult for PC to run deviations of both L5 and L6 in one process simultaneously

• Work cells config need to change Greatest impact for Ops and PE

• DAO Quality concern from an L5-L6 hybrid mfg model

3A

L6 at Dell SLC

• Less complex for WWP

• SQE mgmt is reduced

• Most complex for Cost Accounting

• Extra PC and IC headcounts required

3B

L6 at Dell-leased external location

• Less complex for WWP

• SQE mgmt is reduced

• Most complex for Cost Accounting and IC

• Extra PC and IC headcounts required

• Requires additional lease commitment

4 Dell-managed 3PI

• Easiest option for Ops & PE

• DAO Quality expected to improve as Dell directly manages 3PI

• Most complex for Cost Accounting and IC – difficult to manage Parts Cost at a Dell-managed 3PI

5 L6 from EM (China, Mexico, and/or elsewhere)

• Lowest possible cost compared to China L6

• Overall easiest option for Dell

• Most manageable for Master Sch./COC, PC, IC, Ops, and DAO Quality

• Requires Regional Procure. to manage L6 out of EM facilities from China, Mexico, and possibly other regions.

• Increased SQE mgmt

• Multi-regional logistics coordination is a concern.

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6.1 Introduction Effective SCM implies:

Efficient integration of suppliers, manufacturers, warehouses, and stores.

Coordinate activities across the supply chain Improve performance: reduce cost, increase service

level, reduce the bullwhip effect, better utilize resources, and effectively respond to changes in the market place.

Challenges can be met by integrating: the front-end, customer demand, to the back-end, production and manufacturing portion of the

supply chain. Various supply chain integration strategies:

Push, pull, push–pull strategy. Matching products and industries with supply chain

strategies. Demand-driven supply chain strategies. The impact of the Internet on supply chain integration.

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6.2 Push, Pull, Push-Pull Systems

Push and Pull traditional categories of manufacturing operations

More recent hybrid strategy of combining the two, Push-Pull systems

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Push-Based Supply Chains Production and distribution decisions based on

long-term forecasts. Manufacturer demand forecasts based on orders

received from the retailer’s warehouses. Longer reaction time to changing marketplace:

Inability to meet changing demand patterns. Obsolescence of supply chain inventory as demand

for certain products disappears. Variability of orders received much larger than the

variability in customer demand due to the bullwhip effect.

Excessive inventories due to the need for large safety stocks

Larger and more variable production batchesUnacceptable service levelsProduct obsolescence

1-24

Bullwhip Effect in Push-Based Supply Chains

Leads to inefficient resource utilization Planning and managing are much more difficult. Not clear how a manufacturer should determine

production capacity? Transportation capacity? Peak demand? Average demand?

Results: Higher transportation costs Higher inventory levels and/or higher manufacturing

costs more emergency production changeovers

1-25

Pull-Based Supply Chains Production and distribution demand driven

Coordinated with true customer demand rather than forecast demand

firm does not hold any inventory and only responds to specific orders.

Intuitively attractive: Reduced lead times through the ability to better

anticipate incoming orders from the retailers. Reduced inventory since inventory levels increase

with lead times Less variability in the system Decreased inventory at the manufacturer due to the

reduction in variability.

1-26

Implementation of Pull-Based Systems

Often difficult to implement when lead times are long

impractical to react to demand information.

more difficult to take advantage of economies of scale

Advantages and disadvantages of push and pull supply chains: new supply chain strategy that takes the best of both. Push–pull supply chain strategy

1-27

Push-Pull StrategySome stages of the supply chain operated

in a push-based mannertypically the initial stages

Remaining stages employ a pull-based strategy.

Interface between the push-based stages and the pull-based stages is the push–pull boundary.

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Supply Chain Timeline

FIGURE 6-8: Push-pull supply chains

1-29

General Strategy

Make a part of the product to stock – generic product

The point where differentiation has to be introduced is the push-pull boundary

Based on extent of customization, the position of the boundary on the timeline is decided

1-30

Identifying the Appropriate Supply Chain Strategy

FIGURE 6-9: Push-pull supply chains

1-31

Impact of Demand Uncertainty and Economies of Scale

Demand Uncertainty: Higher demand uncertainty leads to a preference for pull

strategy. Lower demand uncertainty leads to an interest in

managing the supply chain based on a long-term forecast: push strategy.

Economies of scale: The higher the importance of economies of scale in

reducing cost The greater the value of aggregating demand The greater the importance of managing the supply chain

based on long-term forecast, a push-based strategy. Economies of scale are not important

Aggregation does not reduce cost A pull-based strategy makes more sense.

1-32

Implementing a Push–Pull Strategy Achieving the appropriate design depends

on many factors:product complexitymanufacturing lead timessupplier–manufacturer relationships.

Many ways to implement a push–pull strategylocation of the push–pull boundary.

Dell locates the boundary at the assembly pointFurniture manufacturers locate the boundary at the

production point

1-33

Impact of the Push-Pull Strategy

Push portionLow uncertaintyService level not an issueFocus on cost minimization. Long lead timesComplex supply chain structuresCost minimization achieved by:

better utilizing resources such as production and distribution capacities

minimizing inventory, transportation, and production costs.

Supply Chain Planning processes are applied.

1-34

Pull portionHigh uncertaintySimple supply chain structureShort cycle timeFocus on service level. Achieved by deploying a flexible and

responsive supply chainOrder-fulfillment processes are applied

Impact of the Push-Pull Strategy

1-35

Characteristics of the Push and Pull Portions of the Supply Chain

Portion Push Pull

Objective Minimize cost Maximize service level

Complexity High Low

Focus Resource allocation Responsiveness

Lead time Long Short

Processes Supply chain planning Order fulfillment

1-36

Interactions of the Two Portions

Only at the push-pull boundary Typically through buffer inventory Different role for the inventory in each portion

In the push portion, buffer inventory is part of the output generated by the tactical planning process

In the pull system, it represents the input to the fulfillment process.

Interface is forecast demand Forecast based on historical data obtained from the

pull portion Used to drive the supply chain planning process and

determine the buffer inventory.

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6.3 The Impact of Lead Time

Longer the lead time, more important it is to implement a push based strategy.

Typically difficult to implement a pull strategy when lead times are so long that it is hard to react to demand information.

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Impact of Lead Time

FIGURE 6-10: Matching supply chain strategies with products: the impact of lead time and demand uncertainty

1-39

Impact of Lead Time Box A

Items with short lead time and high demand uncertainty Pull strategy should be applied as much as possible.

Box B Items with long supply lead time and low demand uncertainty. Appropriate supply chain strategy is push.

Box C items with short supply lead time and highly predictable demand. Continuous replenishment strategy

Suppliers receive POS data They use these data to prepare shipments at previously agreed-

upon intervals A pull strategy at the production and distribution stages and push at

the retail outlets. Box D

Items with long lead times are long and unpredictable demand Inventory is critical in this type of environment Requires positioning inventory strategically in the supply chain

1-40

6.4 Demand-Driven Strategies Requires integrating demand information

into the supply chain planning process Demand forecast:

Use historical demand data to develop long-term estimates of expected demand

Demand shaping: Firm determines the impact of various marketing

plans such as promotion, pricing discounts, rebates, new product introduction, and product withdrawal on demand forecasts.

1-41

Forecast Errors Are Always Present! High demand forecast error has a detrimental impact on

supply chain performance Approaches to improve accuracy

Aggregate forecasts are more accurate, Select the push–pull boundary so that demand is aggregated over

one or more of the following dimensions: Across products/geography/time

Use market analysis and demographic and economic trends to improve forecast accuracy (see Chapter 2 for details).

Determine the optimal assortment of products by store Reduce the number of SKUs competing in the same market.

Incorporate collaborative planning and forecasting processes with your customers

Demand forecast by SKU by location has to be supported by the supply chain Interaction of demand planning and tactical supply planning Iterative process

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6.5 The Impact of the Internet on Supply Chain Strategies

Expectation that increasing use of the internet would solve a lot of the business problems

Reality was very differentMany of the problems in the internet-

based businesses were related to logistics strategies

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Successes and FailuresNotable Failures

Furniture.comPeapod.com

Notable SuccessesAmazon.com

Hybrid of successes and failuresCisco

$2.2B inventory write-off in 2001Has been successful in leveraging the internet

subsequently

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E-Business

E-business: a collection of business models and processes motivated by Internet technology and focusing on improvement of extended enterprise performance.

E-commerce: ability to perform major commerce transactions electronically.

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Key Observations e-commerce is only part of e-business. Internet technology is the force behind the

business change. Focus on the extended enterprise

Business-to-consumer (B2C)“direct to customer,” Retail activities over the Internet, and includes

products, insurance, banking, and so forth. Business-to-business (B2B)

Conducted over the Internet predominantly between businesses.

Includes: electronic sourcing (the so-called eSourcing) reverse auctions collaboration with suppliers and vendors to achieve

common goals.

1-46

Grocery Industry Typical supermarket employs a push-based strategy Peapod was built on pure pull strategy with no inventory

and no facilities. Significant service problems with high stockout rates Changed to a push–pull strategy by setting up a number of

warehouses Warehouse covers a large geographical area

Aggregated demand

Other challenges: Reducing transportation costs Short response time Low customer density

Products have low demand uncertainty high economies of scale in transportation cost push-based strategy is more appropriate.

1-47

Book Industry Initial model of Amazon.com a pure pull system with no

warehouses and no stock. Ingram Book Group supplied most of Amazon’s customer

demand. As volume and demand increased:

Amazon.com’s service level was affected by Ingram Book’s distribution capacity

Using Ingram Book in the first few years allowed Amazon.com to avoid inventory costs but significantly reduced profit margins.

As demand increased distributor no longer required. Current Amazon.com:

Several warehouses around the country where most of the titles are stocked.

Inventory at the warehouses is managed using a push strategy Demand satisfied based on individual requests, a pull strategy.

Slow moving low volume books and CDs are not stocked at Amazon distribution centers Amazon orders those when demand arrives.

1-48

General Retail Industry Late to respond to competition from virtual

stores and to recognize the opportunities provided by the Internet.

Brick-and-mortar companies are adding an Internet shopping component to their offering. Already have the distribution and warehousing

infrastructure Click-and-mortar firms

High-volume, fast-moving products stocked in stores Push strategy

Low-volume, slow-moving products are stocked centrally

Push-Pull strategy

1-49

Traditional Fulfillment Versus e-Fulfillment

Traditional fulfillment E-fulfillment

Supply chain strategy Push Push–pull

Shipment Bulk Parcel

Reverse logistics Small part of the business Important and highly complex

Delivery destination Small number of stores Large number of geographically dispersed customers

Lead times Relatively long Relatively short

1-50

Summary Implementation of push-pull strategies and

demand-driven strategies have helped many companies to improve performance, reduce costs, increase service levels.

Collapse of many Internet companies shows that e-business has great challenges.

Companies need to: Identify the appropriate supply chain strategy for

individual products. Case for no physical infrastructure or inventory is

tenuous Push–pull strategy

advocates holding inventory although it pushes the inventory upstream in the supply

chain.