While Dell spent the past 28 years benefiting from scaling low operating margins, it sees close competitors pursuing higher margin opportunities in enterprise computing and has decided to follow suit.
Notorious for its lean inventory and just-in-time manufacturing methods, Dell recently announced that it would be altering its operating model as part of a three year $2 billion cost-cutting initiative. While the made-to-order PC vendor spent the past 28 years benefitting from scaling low operating margins, it sees close competitors pursuing higher margin opportunities in enterprise computing and has decided to follow suit.
Although Dell may have spearheaded the lean manufacturing initiative in the personal computing realm, methodologies that worked decades ago will always need to be updated. LNS Research believes that Dell’s shift in strategy is part of a larger concern of manufacturers today: aligning strategic objectives with both internal resources and changing markets.
Redefining Manufacturing Processes
With the initial idea of offering cost-effective, made-to-order PCs, Dell has traditionally been known as a pioneer in lean manufacturing. The use of JIT and leveraging strong supplier networks allowed the company to operate on a direct-to-consumer model. Because it could produce with incredibly low inventory costs, this created a competitive advantage. However, today, the technology market is more dynamic and consolidated than ever, and product demand along with the business models of high tech companies are changing rapidly.
Recently, HP made a similar cost-cutting and strategy shift announcement. It seems that Dell is trying to keep pace by moving toward a service-based business model, focusing on clients such as large enterprises and governments. With the approach of now being a service provider, in addition to selling personal computers, Dell's client-base changes to internal services and large IT organizations. This means that those highly configurable manufacturing processes that enabled direct-to-consumer sales don’t make as much sense anymore.
Applying the Operational Excellence Framework
In this case, we believe that Dell’s change in strategy to adapt to the market is a great example of how lean production and manufacturing efficiency do not exist in a vacuum. Leveraging data and processes across the organization is imperative for operational success, and we’ve noted on topics similar to this in our recent OEE report. As always, LNS Research advocates for companies to ensure that manufacturing processes are viewed in the context of the firm’s financial and operational objectives, and that these objectives are aligned with the broader market and competitive pressures.
Applying the LNS Research operational excellence framework, this means two things. First, Dell has an operational objective to move from a product to services-based business model. And second, the company has a financial objective of reducing operating costs to remain competitive. The challenge for manufacturing will be in balancing these objectives, while also producing low cost products within the context of reliable, scalable, and cost-effective services for large enterprises.
From Dell, we can learn that companies need to have a supportive framework and strategy for collaboration and communication between product development, sales, and services. To gain market share in the services area, it's likely that Dell will have to rearchitect its processes to facilitate and promote this adaptable model for the future.