~,,

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ty to
experience associated with the abili
I
.:.
configure the prod
cust ome r wan ts -
uct
was
to exac
not
tly
need
wha
ed in
t the
the
and
store as mos t retai l orde rs are large
focused on fewer configurations.
Adding to the challenge, the com pany
ts
faced corp orat e and publ ic sect or clien
asing ly look ing for a com -
who were incre
tion for thei r IT need s, and in
plete solu
ifi-
man y cases, a solu tion desi gned spec
for thei r orga niza tion . This agai n
cally
differ-
entails a supp ly chai n strat egy quite
ne
ent from the one emp loye d for onli
custo mers .
its
Clea rly, Dell need ed to tran sfor m
rs in
supp ly chai n to serv e new cust ome
with new type s of prod ucts .
new chan nels
was: how to do that effec -
The ques tion

I
tiple
[SUP PLY CHAI N MAN AGEM ENT] tively? Dell deci ded to crea te mul
cate d to a diffe r-

When One Size

supp ly chai ns, each dedi
the PC indu stry , but
ent segm ent of
com -
conf igur ed in such a way that the
I
I
Does N o t FitAII pany coul d take adva
redu ce com plex ity and
ntag e
bene
of
fit
syne
from
rgies
econ
to
-
re than one
I As a business diversifies, it may need mo omie s of scale.
that challenge.
supply chain. Here's how Dell addressed EN
for
We unde rstoo d that any fram ewo rk
CLAYTON AND BRUCE RAV mus t take into
I BY DAVID SIMCHI-LEVI, ANNETTE supp ly chai n segm enta tion
rs,
acco unt dem and unce rtain ty, cost drive
I rdati onsh ips with customers , the cust ome r
gy cloc k-
rs value prop ositi on and tech nolo
I r large st chan nel for pers onal com pute gy and
Most operations strategies focus on eithe er fit the need s of som e of its speed - the speed by which technolo
as a push sales no long indu stry.
efficiency, sometimes referred to prod uct chan ge in a part icula r
I strategy, or responsiveness, sometimes
called fastest-growing businesses: its new phys
i-
Earlier research by one of the auth ors, de-
nel, its ente rpris e sales or
op- cal retail chan s by
a pull strategy. Either the company seeks ucts . scrib ed in the book Operations Rule
dow n even its high -vol ume cons ume r prod
erational efficiency and tries to hold sure from eme rgin g Dav id Simchi-Lcvi, suggested that a
good
focus es Facing increased pres
costs across all functional areas, or it ors, Dell foun d first step is to focu s on dem and unce rtain ty
et up and revit alize d com petit
on responsiveness and tries to ratch no and cust ome r relat ions hips . Thes e dime n-
s. that its long -vau nted supp ly chai n was
speed, order fulfillment and service level its busin ess. sion s dete rmin e the vari ous cust
ome r
longer righ t for a!J aspects of
Alth ough seas oned oper atio ns and segments, each of whic h requ ires a diffe rent
d the In 2008, for example, when Dell ente red
supp ly chai n executives unde rstan to use supply chain strategy.
on- the retail channel, the com pany tried
difference between efficiency and resp ig- For example, the supp ly chai n strategy
y are conf used abou t when to the same supp ly chai n as its onli ne conf and
siveness, man
tion that Dell shou ld emp loy whe n dem
apply each strategy. In recent years,
mor e ure- to-o rder busi ness . But com peti ip with
retai l can be mor e price - uncertainty is high and the relationsh
e com pani es have been caug ht in in conv entio nal from
and mor ly the cust ome r is loose must be different
foun d itsel f in sensitive than it is onli ne, and the supp
the bind in whic h Dell Inc. whe n
op- the strat egy that it shou ld appl y
2008, whe n it reali zed that the high ly re- chain Dell designed for onlin e was not ion-
n cont rast, wha t dem and uncertainty is low and the relat
sponsive conf igure -to-o rder supp ly chai timized for lowest cost. By (Con tinue d on page 16)
the cust ome r ship is tight. By
that had mad e its onlin e store the world's was valued mos t onli ne -
ENT REVIEW 15
WINTER 2013 MIT SLOAN MANAGEM
COURTESY Of 0£Ll
 __... ---

INTELL IGENC E

When One Size Does Not Rt All (Continued from page I 5)

reflecting on these two dimensions, we real- so forecast accuracy and volume by configu- procureme nt, production and shipping to
ized Dell needed to roll out all four of the ration are much higher than for online sales. stocking points are all based on forecast,
most basic kinds of supply chains, which Finally, because competition in retail is more while shipment to customer locations is
we'll call Build-to-Order, Build-to-P lan, price-sensitive, the cost of a lost sale is lower based on realized demand.
Build-to-S tock and Build-to-S pec. (See than in the online channel. Finally, we found another segment
"Dell's Four Supply Chains.") The retail segment, therefore, is associ- where demand uncertaint y is low and the
When the relationship between a com- ated with low demand uncertaint y and a relationship with customers is tight: enter-
pany and its customers is loose and loose customer relationship, making a tradi- prise clients. In this case, the design and
demand uncertaint y is high, the supply tional push-based strategy better because product variety are customize d for indi-
chain needs to be managed based on real- managing the supply chain based on long- vidual corporatio ns. The menu of options
ized demand, or a pull strategy. This is term forecast lowers cost through economies offered to corporate clients has a longer
exactly the strategy that Dell employs in its of scale (high volume) and forecast accuracy product lifecycle, with more overlap across
traditional business. Online, Dell offers (low demand uncertainty). In this Build-to- generation s of technolog y. This enables
millions of possible configurations, and as Plan strategy, procurement, production and corporate clients to order the same config-
a result, forecast accuracy by configuration shipment decisions are all based on forecast. uration over a long period of time and
is poor and volume by configurat ion is Interestingly, Dell identified another lower their total cost of ownership . Be-
low. As Dell offers to satisfy consumers' in- customer segment with low demand uncer- cause the relationship between Dell and its
dividual needs, the focus is on higher tainty and loose customer relationships: corporate clients is tight, forecast accuracy
margins, and thus the cost of a lost sale is popular products sold online. By nature, and volume are high. This is quite different
high. Here Dell employs a Build-to-O rder the volume and forecast accuracy are high from the characteristics of individual con-
strategy, where componen t inventory is for these products, and as a result, call for a sumers. Thus, for corporate clients, Dell
managed based on forecast while actual push-based strategy, or what Dell refers to applies a strategy referred to as Build-to-
customer requireme nts determine the as a Build-to-Stock strategy. In this supply Spec. Dell commits to a short response
final configurations. chain, popular product configurations are time and high menu configura tions and
When Dell entered the retail business in prepositio ned in the network, based on does not keep finished goods inventory.
early 2008, it realized this was a different type long-term forecasts, to provide a very ag- Products are assembled to order using
of business. The number of configurations gressive response time, such as next-day componen ts ordered well ahead of time,
sold is low, with few customization options, shipment. In this hybrid push-pull strategy, based on forecast.

DELl:S FOUR SUPPLY CHAINS

Dell Inc. created four supply chains. each dedicated to a different customer segment,
but all configured in such a way that the company could
take advantage of synergies across the different supply chains.

1h•·ii·i-hMi;-
i:Jonune,Low BUILD-TO-PLAN BUILD-TO-STOCK BUILD-TO-SPEC
Customer Segment -vo1ume Retail Online/Popular Corporate Clients
_____ _____ __ _____ _____ _____ __
Configurati
....:.,_ ons Configurations
Products Configuration defined Small number of Small number of Designed for customer
by customers configurations configurations
designed for market designed for market
Production Batch Size One Large Large Large
Production Strategy Assembly is driven by Smooth production to Smooth production to Quantity and schedule de-
individual order cut cost cut cost fined by customer order
Finished Goods Inventory No
Yes (at retailer)
----------=------------ Yes (at Dell) No
LeadTime
----------
Short (air) to achieve Long (ocean) to reduce Long (ocean) from manu- Long(ocean )toreduce
responsiveness shipping cost facturing to stocking shipping cost
locations and short (par-
----------------------------- cel) to customer locations
Planning Horizon
----------
Short Long Medium Long

16 MIT SLOAN MANAGEME NT REVIEW WINTER 2013 SLOANREVIEW.MIT.EDU

I
;

Synergies Across Supply locations, Los Angeles and Nashville, for to consumers, thus enabling Dell to respond
Chain Segments shipping to individual consumers. The re- quickly to consumer demand.
An important challenge in supply chain seg- sult is a simple logistics network that still The second step in this phase involved
mentation is using synergies across different meets the needs of a complex business. implementing the four different manufac-
supply chains to reduce complexity and ex- As simple as it sounds, executing this turing and operations strategies. Each is
ploit economies of scale. In general, there are design was not easy. The first step was cre- associated with a different segment: Build-
five possible areas that can yield synergies: ating an organization to manage the entire to-Order is the strategy Dell still employs for
procurement, product design, manufactur- transformation. This organization focused the low-volume configurations in the online
ing, planning and order fulfillment. on every aspect of Dell's business, from business. Build-to-Plan is a strategy the
Synergies in procurement imply lever- product design through manufacturing company is now using for the retail channel.
aging volume across the various segments and transportation all the way to customer Build-to-Stock is used for the popular prod-
to reduce purchasing costs. Strategies for care, warranty and technical support. ucts sold online. Finally, Build-to-Spec is
product design synergies emphasize using Very quickly the team made a critical applied for corporate clients.
standard components across all the supply decision: to shift more manufacturing Since this project started three years ago,
chains and reducing product portfolio. activities from internal operations to the the transformation in Dell's business has
Manufacturing synergies demand the con- supply base, thus utilizing the manufactur- been substantial. Product availability has
solidation of as much manufacturing ing capabilities of its partners across its improved 37%, and order-to-delivery times
infrastructure as possible. As a result, there global manufacturing network. This was a are 33% shorter. Dell now offers signifi-
is a need for a single process to allocate huge change in cost structure, from fixed cantly fewer configurations, and as a result,
manufacturing capacity to the different cost to variable cost, resulting in a signifi- forecast accuracy has improved dramati-
segments. This is sales and operations cant savings to the bottom line. cally, by a factor of three. The effective
planning (S&OP) - one process applied Next, the team undertook a compre- matching of transportation mode with sup-
across all supply chain segments to align hensive transformation of the legacy IT ply chain segment led to a staggering 30%
demand, supply and inventory and to allo- infrastructure that supported Dell's con- reduction in freight cost for notebooks and
cate production capacity to the various figure-to-order strategy, in which lot sizes slashed manufacturing cost by 30%.
supply chains based on actual and forecast do not exist. With the implementation of Dell's situation is not unique. Indeed,
demand. customer segmentation, some segments, many global companies underperform be-
Dell takes advantage of synergies in for example retail, require the technology ca use of a mismatch between business
order fulfillment for the North American to support large lot sizes and imply the
supply chain by using one infrastructure needs and supply chain configuration. But
existence of finished goods inventory,
for all four supply chains. For example, the not for long. Customer-driven supply
something Dell had never considered be-
company has U.S. fulfillment nodes in cities chain segmentation is increasingly neces-
fore. As a result, the company needed to
such as Los Angeles and Chicago-and em- sary to compete in today's global economy.
rethink its IT infrastructure so it could
plo:'5 some of them in more than one supply In coming years, more and more compa-
support multiple channels. •
~ - ~ the online business, where speed is nies will need to create flexible supply chain
The_ final phase was the customer seg-
cntical, Items are air shipped from manufac- strategies to deliver competitive value
turmg• m• As"ia to four locations in the u s . mentation. Dell mined billions of customer propositions.
Atl ••• transactions to segment different customer
ant~, Chicago, Los Angeles and New David Simchi-Levi is a professor ofengi-
t~es based on their customer value propo-
York, and from there by parcel to customer neering systems at the Massachusetts
locations•Retail·JS diffierent. s~ t10 n~. This allowed the company to Institute ofTechnology. Annette Clayton is a
Because cost is
simplify its product lines and market former vice president of global supply chain
the focus of the Build-to-Plan supply chain and operations at Dell Inc., and Broce Raven
the moSt popular configurations. This sim-
strategy, products are shipped by ocean to is the director of supply chain tools at Dell.
plification reduced costs and improved Comment on this article at http://sloanre-
Los Angeles and Chicago, and from there, by
responsiveness through improved forecast view.mit.edu/x/54210, or contact the authors
truck to the retailers. Then, in the Build-to- at smrfeedback@mit.edu.
Stock strategy aPPlied ~ccu~acy. It also enabled the company to
to popular products
sold onlin e, items
• are shipped by ocean to identify popular products which are good
Reprint 54210.
NorthAmenca • and then trucked to ca~~idates to be produced in advance, prep-
two key Copyright© Massachusetts Institute of Technology,
ositioned in the network and offered online 2013. All rights reserved.
SLOANREVIEW.MIT.EDU
WINTER 2013 MIT SLOAN MANAGEMENT REVIEW 17
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