The direct sales model that helped Dell conquer the PC industry over the last decade wound up eating into its profit margins and competitiveness, but it now has a plan to reshape its supply chain and manufacturing operations to meet changing market needs, a Dell executive said Wednesday.
The direct model has served Dell for 20 years and helped it become the world's number one PC vendor, until it lost that spot to Hewlett-Packard. But after such a long run of success it was easy to ignore that distribution needs were changing, said Mike Cannon, Dell's president of global operations, during a Webcast from the company's financial analyst meeting in Round Rock, Texas.
The fast growing emerging markets, like India and Brazil, demand fixed and limited PC configurations, not the "build it yourself" style that Dell is used to. The company is now evolving its supply chain to meet those needs and keep the company competitive globally, Cannon said.
"To some degree it's part of human nature to fall in love" with your distribution model, Cannon said. But fixed configurations will account for most of the market in the future, and should help Dell manage costs in its supply chain and improve profit margins, he said.
Cannon said it was hard to say if the direct-sales model was flawed. It is the best way to serve customers who want highly customized PCs, so Dell will continue to offer that option, Cannon said. However, offering high levels customization puts a burden on the supply chain because it is hard for PC makers to manage the complexity, he said.
A typical desktop can be have 500,000 derivative configurations, but Dell doesn't sell that many configurations so it's better for it to reduce that cost, Cannon said. Cutting the number of configurations to specific designs targeted at different price bands makes distribution more efficient and helps save costs, Cannon said.
Cannon acknowledged that Dell is replicating the supply-chain strategies of competitors. The company will offer base configurations for various price points that include certain features, which customers can then modify if they choose. He said that is more efficient than offering a generic base system that customers can configure however they want, which can be more expensive for a vendor.
Dell is also taking additional steps to improve its bottom line, including cutting jobs and realigning its manufacturing strategy by shutting down some factories, while opening new operations in emerging markets.
In a U.S. regulatory filing Monday, Dell said it would cut more jobs after reviewing costs and procedures. The company currently employs 88,200 employees.
Earlier this week, Dell also announced plans to shut down a desktop assembly plant in Austin, Texas. The margins are low in the desktop PC business and the company is realigning its North America operations to make it more efficient, Cannon said. The desktop plant closure will be completed in the fourth quarter and will affect approximately 900 employees, a Dell spokesman said. Some employees may be reassigned to other assembly plants in the U.S.
"That site is being shifted to other sites in the North America network where we were underutilized," Cannon said. Dell is focused on restructuring its North American assembly operations, while opening new plants to meet customer needs in emerging markets.
Dell has opened manufacturing sites in Poland, Brazil and India, Cannon said. Dell is also looking to partner with PC makers for computer assembly in an effort to boost margins.