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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

Agenda

L6 vs. L5 Value Comparison

Root Causes Analysis

Project Methodology & Next Steps

Lessons Learned

4

Critical Components of a Desktop PC & 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. L5

L5

MB

Chassis

5 Weeks

1 WeekDell

ManufacturingCustomer

Supplier Logistics

Center

3rd Party Integrator

(managed by Equipment

Manufacturers)

L6

MB

Chassis

5 WeeksChina

IntegrationDell

ManufacturingCustomerSupplier

Logistics Center

: L5 additional cost

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Problem 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.

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L6 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

-Airf

reig

htin

g &

3PI

Inte

grat

ion

Cos

ts

Americas EMF APJ MDS Total

L5 Driving Increasing Operational Cost

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

Worldwide Procurement

Expedite Council established

AMF includes 3PI integration cost. EMF and APJ dont as integration is done in Dell factory.

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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:% Comparison

L5 shipped % has been

increasing since March 2005.

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Root 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)

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Project Scope

To improve Dells demand-forecasting ability

Focused on factory operational improvement

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

Motherboard-chassis integration

To improve chipset supplyConstrained by chipset supply shortage

Outside DAODAO (Dell America Operation)

Laptops, servers, storages, peripherals

DesktopsIs NotIs

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Project 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 L5 L10 mfg work

3. Offline Integration: Keep the current L6 L10 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

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Factors 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 Analysis

Legend:

The Cost per Box data has been modified to respect Dells 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 62Cost per Box $10.07 $7.00 $7.90 $7.54 $7.70 $7.61 $7.00

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Option 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 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: Top-down leadership Bottom-up engagement 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.

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Discussion and Q&A

Questions and Thoughts

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Back-up

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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

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Pros & Cons of the 6 Options

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.

Lowest possible cost compared to China L6

Overall easiest option for Dell

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

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

5

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

Easiest option for Ops & PE

DAO Quality expected to improve as Dell directly manages 3PI

Dell-managed 3PI

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Most complex for Cost Accounting and IC

Extra PC and IC headcounts required

Requires additional lease commitment

Less complex for WWP

SQE mgmt is reduced

L6 at Dell-leased external location

3B

Most complex for Cost Accounting

Extra PC and IC headcounts required

Less complex for WWP

SQE mgmt is reduced

L6 at Dell SLC3A

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

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

L6 at Dell work cells

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Most expensive option

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

Most difficult option for SQE

Least impact for Ops & PE

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

Current Process, EM-managed 3PI

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ConsProsDescription

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6.1 IntroductionEffective 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, pushpull 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 operationsMore recent hybrid strategy of combining the two, Push-Pull systems

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Push-Based Supply ChainsProduction and distribution decisions based on long-term forecasts. Manufacturer demand forecasts based on orders received from the retailers 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 stocksLarger and more variable production batchesUnacceptable service levelsProduct obsolescence

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Bullwhip Effect in Push-Based Supply Chains

Leads to inefficient resource utilizationPlanning and managing are much more difficult. Not clear how a manufacturer should determine production capacity? Transportation capacity?

Peak demand? Average demand?

Results: Higher transportation costsHigher inventory levels and/or higher manufacturing costsmore emergency production changeovers

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Pull-Based Supply ChainsProduction 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 timesLess variability in the systemDecreased inventory at the manufacturer due to the reduction in variability.

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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.Pushpull supply chain strategy

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Push-Pull StrategySome stages of the supply chain operated in a push-based manner

typically the initial stagesRemaining stages employ a pull-based strategy. Interface between the push-based stages and the pull-based stages is the pushpull boundary.

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Supply Chain Timeline

FIGURE 6-8: Push-pull supply chains

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General StrategyMake a part of the product to stock generic product The point where differentiation has to be introduced is the push-pull boundaryBased on extent of customization, the position of the boundary on the timeline is decided

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Identifying the Appropriate Supply Chain Strategy

FIGURE 6-9: Push-pull supply chains

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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 demandThe greater the importance of managing the supply chain based on long-term forecast, a push-based strategy.

Economies of scale are not importantAggregation does not reduce costA pull-based strategy makes more sense. 6-32

Implementing a PushPull Strategy Achieving the appropriate design depends on many factors:

product complexitymanufacturing lead timessuppliermanufacturer relationships.

Many ways to implement a pushpull strategy

location of the pushpull boundary. Dell locates the boundary at the assembly pointFurniture manufacturers locate the boundary at the production point

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Impact of the Push-Pull StrategyPush portion

Low 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.

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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

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Characteristics of the Push and Pull Portions of the Supply Chain

Order fulfillmentSupply chain planningProcesses

ShortLongLead time

ResponsivenessResource allocationFocus

LowHighComplexity

Maximize service levelMinimize costObjective

PullPushPortion

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Interactions of the Two Portions

Only at the push-pull boundaryTypically through buffer inventoryDifferent role for the inventory in each portion

In the push portion, buffer inventory is part of the output generated by the tactical planning processIn the pull system, it represents the input to the fulfillment process.

Interface is forecast demandForecast 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

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Impact of Lead TimeBox 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 dataThey use these data to prepare shipments at previously agreed-upon intervalsA 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

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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.

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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 pushpull 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 planningIterative 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 problemsReality 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-BusinessE-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 Observationse-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.

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Grocery IndustryTypical 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 pushpull strategy by setting up a number of warehousesWarehouse covers a large geographical area

Aggregated demand

Other challenges: Reducing transportation costs Short response timeLow customer density

Products have low demand uncertaintyhigh economies of scale in transportation costpush-based strategy is more appropriate.

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Book IndustryInitial model of Amazon.com a pure pull system with no warehouses and no stock.

Ingram Book Group supplied most of Amazons customer demand.

As volume and demand increased:Amazon.coms service level was affected by Ingram Books distribution capacityUsing 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 strategyDemand 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.

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General Retail IndustryLate 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 strategyLow-volume, slow-moving products are stocked centrally

Push-Pull strategy

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Traditional Fulfillment Versus e-Fulfillment

Relatively shortRelatively longLead times

Large number of geographically dispersed customers

Small number of storesDelivery destination

Important and highly complexSmall part of the businessReverse logistics

ParcelBulkShipment

PushpullPushSupply chain strategy

E-fulfillmentTraditional fulfillment

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SummaryImplementation 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 Pushpull strategy

advocates holding inventoryalthough it pushes the inventory upstream in the supply chain.