The man who rewrote the supply chain concept-Michael Dell

I got a new Laptop, as my earlier IBM Lenovo got screwed up. The new one is sleek, Dell made, D630; boots and works faster!

This new one really made me to think about Dell Inc and the man behind its remarkable success, Michael Dell. Michael Dell came up with an innovating idea of selling directly to customers and thus redefining the supply chain concept. Its very hard business plan to reproduce and I guess this was Dell's USP when it started its business, in the area where there were established players like IBM, HP, and Compaq.

In 1994, Dell was a struggling second-tier PC maker. Like other PC makers, Dell ordered its components in advance and carried a large amount of component inventory. If its forecasts were wrong, Dell had major write-downs. Then Dell began to implement a new business model. Its operations had always featured a build-to-order process with direct sales to customers, but Dell took a series of ingenious steps to eliminate its inventories. The results were spectacular.
Over a four-year period, Dell's revenues grew from $2 billion to $16 billion, a 50 percent annual growth rate.

Profitability management, coordinating a company's day-to-day activities through careful forethought and great management, was at the core of Dell's transformation in this critical period. Dell created a tightly aligned business model that enabled it to manage away the need for its component inventories.

However, at the heart of Dell's profitability management was a seemingly impossible dilemma: the company had adopted a build-to-order system, yet it had to commit to purchase key components sixty days in advance.

Profitability, not inventory

The inventory in a channel is determined by the variance in supply and the variance in demand. Unless these variances are reduced, channel inventory can only be moved around, not eliminated. I think of this as the "waterbed effect." When you sit on a waterbed, it sinks in one spot and bulges in another. The water is redistributed but the amount stays the same.
Through its use of profitability management, Dell matched supply and demand on a daily, weekly, and monthly basis. It sharply reduced the variance, and the need for inventories simply disappeared.

In many companies, inventory substitutes for profitability management, tying up valuable capital and preventing the company from focusing on day-to-day business alignment. In most companies, managers face a choice between managing inventory and managing away the need for it.

This principle can be implemented to any industry, even to Software industry. We also deal with inventory, supply and demand.

By the way, are we managing profitability or inventory in our group? If the answer is profitability, we can have our cake and eat it too! If not, how we can improve?