Dell likely to shrink its network of factories

For years, Dell has been show-cased for its operational excellence. Because of its make-to-order production, the computer maker managed to work with very low inventory. And, because of its market power and close supply chain integration, it had an extremely short cash conversion cycle – in fact, for many of its products, Dell collected the money from its customers before paying its suppliers.

But, times are changing. In the computer industry, the make-to-order model works brilliantly for corporate customers who want their PCs built according to a very specific configuration. But the recent growth in the industry was fueled by consumers, who want cool notebook computers as part of their mobile lifestyle, most of them do not care if they run processor x123 or x124. In response to this change, Dell now sells a significant part of its computers through BestBuy and Wal-Mart.

However, if you purchase 500,000 computers to then ship them to Wal-Mart, the benefits of a flexible, US-based make-to-order production disappear. Cost is critical – customization is not. Hence, you might as well source the lap-tops in big batches from Taiwan.

Dell’s story reminds us that there exists no one-size-fits-all operation. As firms adjust their strategy in response to a changing world, the constantly have to rethink their operations. That’s what makes Operations Management interesting!

For more on Dell’s recent cost cutting, see: New York Times “Dell likely to shrink its network of factories” September 5, 2008

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