Kumar

The price of PCs is becomingdramatically cheaper because of global competition andadvancements in informationtechnologies. A weak economy andfewer sales have also forcedcomputer companies to lowerprices. Most firms have struggled inreducing product prices whileproviding greater level of customersatisfaction.

According to Langlois andRobertson (1995), open modularsystems form the backbone ofpersonal computer industry. Theopen modular product architectureallows customers to purchasestandardized PC components fromsuppliers to be able to build cloneproducts. This market tendencyhas generated intense pricecompetition (Latour, Hanna, Millerand Pitts, 2002). For example, Dellhas developed a business model ofselling PCs directly to ultimatecustomers at reduced prices.

The study introduces readers tochanging trends in supply chaininnovations and the impact ofacceleration principle on amanufacturing operation. It alsoreviews various supply chains in the personal computermanufacturing industry today thatuse innovative approaches andmitigate the impact of accelerationprinciple. The analysis focuses onidentifying why Dells supply chainis superior, and how competitors(Gateway and Hewlett Packard)have struggled to compete.Specifically, six questions will beaddressed, which are: 1) How dothe three firms differ in terms ofsupplier selection? 2) What aretheir supply bases and how do theyrationalize their supply bases? 3)Where are their assembly facilitieslocated? 4) What were theirlocation criteria that led to theirselection? 5) What is the length ofthe total supply chain, in terms oftotal number of nodes involved and

An Exploratory Analysisof Competing SupplyChains in the PersonalComputer Industry

16Supply Chain Forum An International Journal Vol. 6 - N1 - 2005 www.supplychain-forum.com

Sameer KumarProfessor and Qwest Endowed Chair in Global

Communications and TechnologyManagement, College of Business,

University of St. [email protected]

Major business trends in supply chain innovations are reviewed. Effects ofacceleration principle (also called bullwhip effect) in a manufacturingbusiness environment are explored. The success of three supply chainexamples from the personal computer industry are examined with anobjective to learn how well they have adapted innovative approaches andmitigated the effects of acceleration principle. The main focus is on DellComputer, since by the year 2002, its direct-to-customer, build-to-ordermodel had taken the lead in the industry, and was beginning to dominatethe market. The analysis provides a brief history of the personalcomputer industry, and a definition of the narrow focus being examinedin this work. The study also explores operations at Dell its beginningsand a description of its current supply chain model and then Gatewayand the new Hewlett-Packard (HP) shown in comparison and contrast toDell. A number of research questions arising from the study of threesupply chains are addressed. Predictions are made for the futuredirection of each company (Gateway and HP) versus Dell in market.

AcknowledgementAuthor wishes to acknowledge thecontribution of Teruyuki Yamaoka,

Douglas Rose and Robert Day who provided assistance

in this research effort.

order-to-fulfillment time? and 6)Where are the critical supplierswithin the supply chain across thethree firms?

This paper begins with majortrends in supply chain innovations.It then examines the effects ofacceleration principle in amanufacturing business environment.Next a brief history of the personalcomputer industry is presented,and a narrow focus being examinedin this work is defined. This isfollowed by a look at Dell itsbeginnings and a description of itscurrent supply chain and thenGateway and the new Hewlett-Packard shown in comparison andcontrast to Dell. Each comparisonsection concludes with predictionsfor the future direction of thecompany versus Dell in market.

MAJOR TRENDS IN SUPPLY CHAIN INNOVATIONS

New supply chain initiativesinundated the marketplace in thepast decade, starting with just-in-time inventory management tocollaborative product commerce(see Table 1). Supply chainprograms launched have beensuccessful saving billions of dollarsfor a large number of companies

though for some companies suchprograms failed to achieve optimalresults. Successful supply chaininitiatives can make it possible forcompanies to meet customer needsmore quickly, less expensively andthrough more channels. Betterquality and more reliable goods canreach the market sooner. Masscustomized products and servicescan become a reality (Ertek andGriffin, 2002; Iyer and Bergen,1997).

Essentially five major supply chainmanagement innovations trendsare currently taking shape (Poirierand Quinn, 2004):

The front end of the supply chain is becoming as important as theback end in maximizing totaleconomic yield.

Historically, supply chainmanagement dealt largely withvendors, making companies focuson improving logistics or the backend of the supply chain. Demandnow manifests itself in many more ways through onlinemarketplaces or partnerships causing companies to increasetheir emphasis on the supplychains front end. As a result, front-end supply chain management understanding and responding to

customer needs is becoming aninextricable part of supply chainstrategy. Companies with front-endcapabilities should be better ableeconomically to make the marketwants and sell what they have instock, thus enhancing top-line andmargin growth.

As companies migrate from internal-only to extended supplychains, collaboration is becomingthe most strategic capability.

Companies that manage theirbusinesses the old fashioned way by taking orders, buying supplies,building product and shipping itfrom the warehouse may lose outto businesses that focus theirenergies on design, brandmanagement, sales and marketing,and outsource the rest. Supplychains are becoming complex forany one entity to manage in acompetitively dominant way.

Assets and functions that are not core to value delivery may bedivested to specialists.

Usually companies have outsourcednon-core functions to the lowestbidder. This is becoming a riskier strategy, because vendorsoperating on slim margins are lessand less able to match the types orlevels of service offered by otheroperators.


Table 1A decade of Supply Chain Initiatives

Leading companies are finding newways to do business, perhapsthrough shared-profit arrangementsin which suppliers benefit fromtheir success. Companies cansubstitute new, variable costoutsourcing contracts for ownedfixed assets such as trucks andwarehouses, thus reducing capitalon the books and using only thecapacity that is needed rather thanowning the excess.

The greatest margin potential may occur after a product ships, asservice and support become asimportant as the product itself.

With more customers seekingsolutions instead of specificproducts or brands, a growingnumber of goods are becomingcommodities. Responding to thistrend, supply chain winners areworking harder to bundle greatproducts with strong serviceofferings, thereby maximizing long-term customer profitability andcatering to customers increasedemphasis on total cost ofownership.Customers increasingly arepurchasing those products that areconduits for content or servicesthat exceed the intrinsic value ofproduct itself (Dumond, 2000).Further, business customers arechanging their focus fromprocuring a product based on itsattributes alone to valuing the totalservice provided, such asmaintenance and operationalreliability. As a result, connectingproduct sales to the servicenetwork is becoming a prime valuedriver for many companies. Supplychain executives are needed todeliver not only the initial product,but also an ongoing stream ofproducts and services to theconsumer often through differentchannels and even differentlocations. These changes haveadded complexity to mostcompanies supply chainoperations, but they also havebecome a major source of revenueand profit growth.

The ability to integrate new and innovative capabilities withcorporate business models isdriving higher levels of valuecreation.

A companys ability to adapt andchange itself is becoming evenmore critical. Part of the reason iscollaboration: Companies positionedto work efficiently with multiplepartners are getting most of theaction, while those that are difficultto work with are being ignored.Rapid and virtual partnering also isthe key to new supply chainmanagement strategies, as the bestintegrators work together to attainthe biggest prizes.

INFLUENCINGTHE MANUFACTURINGENVIRONMENT

The following section describes theeffects of acceleration principle onthe manufacturing environment.

The Acceleration Principle

Jay Forester at MIT created amanagement training exercise inthe 1950s called The Beer Game(Sherman, 1997). It is designed tosimulate how product andinformation flow through multi-echelon supply chains. The resultof this simulation is what has beencalled the Foresters Effect, or theacceleration principle. Simplystated, a ten percent change in therate of sale at the retail level canresult in a forty percent change indemand for the manufacturer. Theacceleration principle results intwo side effects that are describednext.

Lead Time and InventoryReduction Syndromes

All business organizations involvetwo flows: material andinformation. The Beer Game onlyexposes the top layer of problemsmanufacturing firms face todaywith managing these flows.Functional silos within eachcompany affect the flow ofinformation and materials in thesame manner, as multi companiesdo in the supply chain. Batchprocessing of information createsacceleration principle within theorganization. Distorted demanddata and delayed informationbecome commonplace, creatingseveral other conditions. The firstis a reaction typical of purchasingpersonnel and productionplanners. This reaction is referredto as the Lead Time (or SafetyStock) Syndrome. This syndromeis illustrated in Figure 1. The effectcontinues to escalate and soonleads to the fatal mistake ofincreasing capacity based on thiscondition. This capacity increase isnot without a corresponding costincrease.

Eventually the overload is relievedsince increased capacity floods thesupply chain causing the secondeffect from distorted demand data,The Inventory ReductionSyndrome as shown in Figure 2.This effect is the result of theorganization addressing excessinventory created by the firstsyndrome. Without process changethese two syndromes feed each


Figure 1The Lead Time/ Safety Stock Syndrome

other in a continuous loop.Eventually, another silo isestablished in the organizationspecifically chartered to runpromotions, targeted at reducingexcess inventory with the hope ofincreasing market share. Thisaction is equally as fatal asincreasing capacity. Theorganization has now combinedperpetual reductions in sales pricesfrom the Inventory ReductionSyndrome with increasingproduction costs from the LeadTime Syndrome (Plossl, 1991).

In a growing market, thecombination of these two effects isconsumed by the growth indemand. Companies can surviveand even flourish during thisgrowth period, in spite of theoscillating cycle to focus onreducing inventory during one timeperiod, then expedite productregardless of cost during the nextperiod. When the marketexperiences a plateau or drops offat this time, the organization canspiral themselves right out ofexistence.

HISTORICAL NOTES ON PERSONAL COMPUTERINDUSTRY

Many disputes may arise overdefining the beginning of when thefirst personal computer was eithermanufactured or put on the marketfor sale. It is beyond the scope ofthis article to attempt to settle thatquestion. However, in order toproceed, it is necessary to choose apoint of embarkation.

For this work, the point chosen isthe release of the IBM PC, in Augustof 1981, which became a watershedpoint that spurred rapid growth inthe industry. The reason for this isthe open modular architectureconcept that IBM used in theconstruction of the PC. This refersto an open box ready for expansion,reconfiguration, and continualupgrading. The IBM PC was not technologically sophisticatedthough it incorporated most of thebasic features users expected.

In PC industry, components chosenby the firms were not proprietaryin nature, but rather were readily available from componentsuppliers. Up to that time,manufacturers had largely relied ontheir own internal research for thedevelopment of components usedin computers. Since they were onlymaking components for their ownunits, the quantities were limited,and corresponding piece-cost washigh, resulting in a correspondinglyhigh cost of finished goods. Bysourcing components fromsuppliers who already made aquantity of parts, IBM was able torelease a unit that was moreaffordable to the end user, and itspopularity was immediate.

A corresponding result of therelease of a successful productbased on open architecture wasthat it became easier for upstarts inthe industry to make PC clones.Because virtually every componentcould be purchased from existingsuppliers, companies wishing tomanufacture personal computers

no longer had to make largeinvestments in the research anddevelopment of the technology ofthe components, and no longer hadto make large capital investmentsin manufacturing equipmentrequired to produce thosecomponents. For comparativelylow starting costs, a person couldset up shop and begin making andselling his own personal computersthat could run the same softwareused with the IBM PC.

Within just a few years, many newcompanies sprang into existencemaking PC clones. Three of thosenew companies came to surpassIBM in sales of personal computers(shown in Figures 3a and 3b), butthe path they traveled was notalways the same. Those three wereCompaq (now part of HewlettPackard), Gateway 2000, and DellComputer.

HISTORICAL NOTES ON DELL

When it comes to supply chainmanagement in the computerindustry today, Dell Computer setsthe standard. Dell is the largest PCCompany in the world; over $31billion in annual sales, and it is themost effective company atmanaging its supply chain. In orderto appreciate what Dell has done inthis industry, it is important tounderstand something about wherethings were prior to Dells existence(Information Technology Associationof Canada, 2001-2003).Dell was founded in 1984, whenMichael Dell hit on the idea ofselling PC's over the phone from hisdorm room. The simple differencethis entailed was not having a salesteam, and not having a middlemanor distributor to whom a share ofthe profits would go. Dell focused on cutting costs anddelivering quickly, and salessoared. Within three years, Dellwas offering next-day, on-siteservice for its products, and itmade its first foray intointernational markets by opening asubsidiary in the United Kingdom.The company continued to strive tocut its gross margin. On the face ofit, this seems counter-intuitive,since that step should decreaseprofits. But with no other


Figure 2Inventory Reduction Syndrome


companies in the chain taking a cut,Dell could reduce its margins andunder-price the competition whilestill making a profit, and thereforebegan to take sales away fromthem.During this time, large companieshad infrastructures consisting ofmultiple enterprise resourceplanning (ERP) systems that couldnot communicate effectivelyamongst themselves or withexternal systems. They were slowand unable to respond proactivelyto business changes as theyoccurred. As PC manufacturingcompanies began to increase theiroutsourcing from outside suppliers,the need for visibility across theextended supply chain grewtremendously and the ERPstructures of the large computer

companies proved to be ineffectiveat delivering on that need. Thissupply chain communicationproblem persisted for many years.While costs slowly came downthrough focusing on reducingoperating expenses, inefficienciescontinued to exist from thecommunication challenges thatresulted from the high level ofoutsourcing (Harrington, 2002). During this time, Dell wasnt muchdifferent from the rest. As late as1994 it was considered a second-tier PC maker. This didn't stopMichael Dell from making rashpredictions about increasing Dell'smarket share. In 1993 Dell held4.1% of the market, and MichaelDell proclaimed that it would reach18%. The company reached thismark in 1999, and continues to

grow (Pletz, 2002). At this time Dellstill faced the inefficiencies createdfrom ordering component partsfrom its suppliers in advance andthen building inventories for sales.Dell was at a disadvantage as thelarger PC companies benefited fromtheir size, i.e., lower fixed costs perunit. This forced Dell to completelyreevaluate its supply chain. Itneeded to do something radicallydifferent if it was going to survive inthe PC industry.

DELLS SUPPLY CHAIN MODEL

This is when Dell began tointroduce a new business model(Court, 1998). It converted itsoperations to a built-to-orderprocess, eliminated its inventoriesthrough a just-in-time system, andsold its products directly toconsumers as shown in Figure 4.

Dell attempted to develop a supplychain model that went beyond thepursuit of efficiency and assetproductivity. It was attempting todisplace the current model withone that made the supply chainmore efficient and delivered morevalue to consumers (Copacino andByrnes, 2002; Lawton and Michaels,2001). As we all know, Dell wassuccessful in this endeavor. Itachieved a high level of success bymaking supply chain capabilitiesthe core of its business model,which can be explained throughthese five key steps as shown inFigure 5 (Wasserman, 2002;Magretta, 2002; Copacino andByrnes, 2002):

Account Selection

Dell started by establishingtargeted accounts. It carefullydefined both target accounts andaccounts that did not fit with itssupply chain strategy. Specifically,Dell targeted corporate relationshipcustomers that had predictable,budgeted needs and that wanted apredetermined set of productmodels (Briody and Moskowitz,2001). It also selected individualcustomers that were high-end,repeat purchasers with a preferencefor early technology adoption. Bothaccount segments had the stable,predictable purchase patterns that

Figure 3aAttack of the clones in the world (20 years later) (Daoud, Loverde, Promisel and Kay, September 2004)

Figure 3bAttack of the clones in USA (20 years later)(Daoud, Loverde, Promisel and Kay, September 2004)


Dell needed to make its built-to-order system work.

In-Customer Operations

Dell determined that it was crucialto operate within its customersorganizations. This requirespowerful technical capabilities,deep customer knowledge, and theability to fit into the customersorganization and work processes.What ultimately differentiated itfrom the competition was its abilityto blend into its customers day-to-day operations and culture. Thisunique customer knowledge hashelped Dell create barriers to entrythat others have not yet been ableto penetrate.

An example of this is how Delldeveloped a set of effectivecustomer-specific intranet Websites. Each Web site is highlytailored to the customersindividual station. Dell works witheach customer to specify aparticular set of productconfigurations that work best in thecustomers network. Tailoredofferings are specific anddeveloped for each customer(Bearden, 1999). At the same time,Dell uses its direct links with bothcorporate and individual customersto get immediate, real-time insightsabout uncovered customer needsand identifies new generations ofproducts and services. Thisenables Dell to deliver reliablecustomer service and innovation atthe same time! (McSpadden, 2001)

Channel Strategy

There are many different ways inwhich a company can approachstrategy. Some move along thePorter line, pursuing either lowcost of production or highlyspecialized products. Otherspursue a solutions approach,integrating their business systemswith those of their customers,enabling them to co-create valueand share in the gains (Kucharvy,1997; Ojo, 2002). While othersattempt to become the de-factostandard in the industry, effectivelyowning their link in the valuechain. By developing its direct-to-consumer strategy, Dell created a

channel that had never existedbefore (Burke, 2002). It combinedits deep integration of itscustomers businesses with itsunique position in this new direct-to-consumer channel as shown inFigure 6 p 22.

By distinguishing a set of high-endcustomers that were ready fordirect distribution and customersupport from help lines, Dellbecame the only viable alternativefor PC sales through its newchannel (Fisher, 2002). As a resultof this, Dell now has access toseveral crucial elements that helppropel its business model (Teresko,2001): Real-time customer feedback and

market insights The ability to sell what they had,

i.e., using day-to-day pricing andsales incentives to shift demandtoward products that arecurrently marketable

Crisp product life cycle transitions Elimination of the obsolete and

excess dealer stock that plaguesthe non-direct competitors

The ability to control pricing on a real-time basis

Core Operations Capabilities

Before a company can be great atanything, it must be good at manythings. It is necessary forcompanies to develop a set of corecapabilities they can leverage toaccomplish truly outstandingthings. Early in Dells rise tosuccess, it developed a set ofoperations capabilities in five keyareas:1. It created the flawless make-to-

order system mentioned before2. It worked at length to build an

effective supplier managementfunction in order to shortencomponent lead times andmaintain the absolute qualitystandards required by the just-in-time operation

3. It developed the system needed to be able to sell what it has thatis needed to match consumerdemand

4. It instituted an extraordinarily crisp set of product life cyclemanagement capabilities thatyield great cost reductions andstrategic advantages

5. It worked with its suppliers to shorten their product life cycles,extending its business model tothe whole channel

Figure 4The Dell Model

Figure 5Dells Five Steps Approach to Attain Supply Chain Excellence


Management/OrganizationStructure

Dell had to find a way to operatewith no inventories in order to raisethe cash needed to continueinvesting and developing thismodel. This required a completechange in management style and itssuccess depended upon totalcommitment from the managementteam (McAfee, Glassman andHoneycutt, 2002). There weremany issues that surfaced andmost of them revolved around twophilosophical changes to the oldway of conducting businessoperations: Built-to-order vs. Built-to-stock.

Integrated with direct-to-consumer, Dell introduced a wayfor consumers to decide whatfeatures they want in theircomputer before manufacturingof the product was complete.This way, products were neverbuilt for stock; rather, they werebuilt for the individual consumerand never gathered dust asinventory. This significantlylowered financing costs andincreased customer satisfactionfor Dells chosen marketsegments (Economist, 2001a).

Configured-to-order vs. Built-to-forecast. To manage its built-to-order system effectively, Dellpioneered the concept ofconfigured-to-order (Bearden,1999). It began using real-timeinformation to make adjustmentsin the production cycle.Products were started based onwhat the market was saying itwould need. In the past decisions

about when and how much toproduce had always been madeusing demand forecasting andplanning. This was the answerthe Just-in-time concept waslooking for in this industry, but itwas the most difficult formanagement to get comfortablewith.

Due to the complexity of the built-to-forecast concept, it is necessaryto break it down to effectivelyexplain how it works (Harrison,2002). There are four key pointsthat must be understood:1. Demand is managed at the

supplier level. With noinventories to manage demandfrom, this model requiresdemand to be managed throughcapacity at the productionfacilities. Dells supply chaindepends upon the number ofPCs produced being equal toPCs sold. Therefore, thesupplier must know how manyparts to produce and ship to theassembly line so that inventorieswill not be created.

2. Demand forecasts determine capacity, not production. Forsuppliers to be able to produceonly the number of componentsneeded for actual sales, theyneed to know in real-time whatthe demand is for their products.The traditional method offorecasting what demand will beand then producing that numberof products is far too inefficientto be used in this type of supplychain. That is not to say,however, that there is no value inforecasting. Forecasting is used

to determine the capacity ofcomponents needed so thatsupplies are available as demandcalls for them. This allowssuppliers to prepare foranticipated changes in demandby increasing capacity or sellinga certain percent of theirproducts through anotherchannel.

3. Operations are started based on expected rates of demand vs.manufacturing orders. Underthe conventional method,manufacturing orders arereleased to produce specificitems due on specific dates.When this is for make-to-stock,where finished products are sentto inventory, this works just fine.However, when this is for aspecific customer order, which isneeded to satisfy customers inthe PC industry, problems oftenarise (Souza, 2000):

Missing components delay the entire process

Changes in customer requests require changes in the timing ofthe entire process

Swapping of parts to satisfy orders complicates the entireprocess

Rate-based planning establishes arate of demand for finishedproducts and the componentsuppliers build and assemble tomatch that rate. By doing this, Dellhas computers half made whencustomer orders are taken, and itcan deliver the final product veryquickly: The average amount oftime a customer has to wait for aDell PC is only 5 days (McSpadden,2001). 4. Rates are determined through

real-time demand information.This method of production isextremely risky. If rates are notaccurately estimated, Dell couldfind itself short of neededinventories or full of unneededsupplies. To ensure that rateplanning is done effectively, Dellrelies on real-time demandinformation and communicatesthat back through the supplychain. Every two hours newinformation is passed throughthe system that can alter themanufacturing schedule, asneeded, to adapt to changes indemand.

Figure 6Dell Direct-To-Consumer Supply Chain


To accomplish this complicatedreal-time demand information,Dells Texas factory takes six toeight hours to make a computerfrom its inception to the finishedgood. Dell compares all of its sixfactories (Texas, Tennessee, Brazil,Malaysia, Ireland, and China)performance with an index whichdetermines production efficiencyand payment by the hour in each ofthese factories (Holmberg, 2000).For instance, a notebook computergoes through fifty-seven nodes inDells factories where time spent ineach node is closely monitored(Nikkei, 2004). Many firms through effectivesupply chain management are ableto reduce inventory and lead time.However in a Dells supply chainanother important factor is alsocontrolled. It is called demandshaping. Typically with higherproduct demand, the price goesup. In the event of increaseddemand for a computer modelcausing strain in supply chain, Dellresponds by reducing the price ofdifferent model in the same productline. Consequently, a customer whowished to purchase specificcomputer model changes itsintention and decides to buydifferent computer model in thesame product family. In this wayDell manages to prevent productshortage and shows how Dell isable to control prices of its productlines (Nikkei, 2004).

DELLS Suppliers

Although Dell has excellent internalmanagement, it also maintainscloser cooperation with itssuppliers. Dells approach to globalsupplier management is builtaround four key areas: (1) Corporate philosophy based on

global responsibilities to theirstake holders;

(2) Companys obligation to supporting environment,human rights, employeeshealth and safety;

(3) High ethical standards expected from its suppliers who are toensure their employees rights,safety and environment; and

(4) Dells global supplier management program closelytied to market demand whichsupports number of core

requirements such ascertification and standards,training and communication,review and compliance,correction and enforcement. (Supplier Selection andManagement Report, 2002).

Technology greatly enables masscustomization for Dell. Forinstance, Dell has completelyautomated its ability to takethousands of orders, translate theminto millions of componentrequirements, and work directlywith its suppliers to build anddeliver products to meet individualcustomer requirements. In fact,more than 90 percent of Dellscomponent purchases now arehandled online: Suppliers use anInternet portal to view Dellsrequirements and changes toforecasts based on marketplaceactivity, and to confirm their ability to meet Dells deliveryrequirements. Then, as Dellfactories receive orders andschedule assemblies, a pull signalto the supplier triggers theshipment of only the materialsrequired to build current orders.Dell also provides its customerswith accurate delivery dates. Flexible and cost-efficient supplychains begin with improvements tosupply-management processes.This, in turn, starts withconsolidating suppliers. Dellconsolidated its supply base,investing heavily in the R&D andmake-to-order manufacturingcapability of a select group ofsuppliers. It then implemented ademand-fulfillment system thatallows it to schedule assemblyoperations with real-time orderdata, and to pull components fromsupplier hubs to meet assemblyneeds with only a two-hour leadtime.Although private exchanges arevisible in every industry, Dell hasbeen particularly successful,because of its acute need forconnectivity and demandpropagation through a verticallydisintegrated supply chain. Aprivate exchange is a technology-based network that enables a company to electronicallysynchronize its supply chain withthose of its strategic tradingpartners to buy, sell, and movegoods more efficiently. Dell has

created a fully functional, onlinetrading community, where it and itskey suppliers meet to transactbusiness; and where $16 billion intransactions move annually. Twolevels of collaboration actually areinvolved in the Dell exchange. Oneinvolves the suppliers thatschedule Dells inbound materials.In this context, Dell sends suppliersa mandatory delivery schedule,and then closely manages thatschedule. The second exchange isbetween Dell and its suppliersthird-party warehouses (Fugate andMentzer, 2004). The analysis above shows Dellsdirect-to-consumer supply chaindesign provides safeguards toinhibit acceleration principle. Thetwo side effects of this principle(that is, Lead time and Inventoryreduction syndromes) that arecaused by distorted demand dataand delayed information across thevalue chain do not occur.

HISTORICAL NOTES ON GATEWAY

Having closely examined Dell, itshistory and its supply chain, weturn first to looking at a companythat perhaps may have started outlooking the most similar to Dell ofall the PC manufacturers, but endedtaking a very different path. Thatcompany is Gateway, Inc.Gateway began its existence as theTexas Instruments PersonalComputers Network in a barn nearthe Iowa/South Dakota border in1985, with founder Ted Waitt,another college dropout likeMichael Dell, selling add-on partsby phone for Texas Instrumentscomputers. In 1987, he and hisfriends built and sold their firstfully configured computer systemat a price that matched what othercompanies charged for a bare-bones personal computer. Salesbegan to take off and they changedthe name to Gateway 2000.Through a creative use ofadvertising, catalog placement, andphone sales, Gateway quicklyestablished itself as a successfulnew supplier in the personalcomputer industry. It bore asimilarity to Dell as a low-costdirect-to-customer manufacturer,but this characteristic was notsufficient to put Gateway into a


class with Dell. Strategic decisionsregarding Gateways direction keptit as a smaller provider.A primary difference between thetwo relates to the target customerbase. Dell went aggressively aftercorporate sales (only 20% of itscurrent sales come from consumersrather than corporations).Gateway focused more on theconsumer, rather than business-to-business sales. And though it wassuccessful in this market, providinggood value and excellent customerservice, it found that the potentialvolumes in the B2B market weresimply far greater than theconsumer market. By the timeGateway realized this fact it was alatecomer. It had established itselfas a consumer brand with itsHolstein patterned black and whiteboxes. This consumer focusactually hampered its entry intothe corporate world. The reverse isnot true for Dell, as Dell is nowbeginning to take market share inthe consumer market (Chambliss,2002; Shah and Serant, 2002).Gateway went both public andinternational in 1993, as it opened amanufacturing facility in Ireland,followed by retail showrooms inEngland in 1994, and an 80%acquisition of the largest Australiancomputer maker in 1995. Furtherexpansion entailed its own Internetservice, online software, andperipheral store.1997 marked another diverging ofpaths for Dell and Gateway.Gateway rejected a takeover offerfrom Compaq that year, in theamount of $7 billion. This was theyear that Dell launched dell.com,its goal to sell PCs through the website. This would be a huge boomfor Dell, and now accounts for 50%of its $31 billion in revenue (Shahand Serant, 2002). At the sametime, Gateway launched itsGateway Country stores. Thesewere not traditional retail stores,but were rather designed forconsumers to visit the store to tryout different types of computersand configurations, and then toplace their order for delivery totheir home. The unfortunaterealities of these stores, is this theyrequire overhead and salespeopleto staff them, along with on-siteequipment, which is subject todeterioration.

Gateway continued to increase itsrevenue until the year 2001, whichmay prove to be an extremelycritical year for the company. Theentire personal computer marketexperienced a downturn for thefirst time in its history, andGateway was hit particularly hard,with a drop in revenue of more than30% (Swartz, 2002). The companydecided to close all of itsinternational operations, pullingout of Europe (Client Server News,2001) and Asia (Asia Pulse, 2001)completely. They are, in effect,giving up on internationalcompetition. However, in 2002 PCvendors with strong indirectchannels exceeded the salesgrowth trend in Europe, the MiddleEast, and Africa as this regionrecorded modest growth (Flinders,2002). Even though the U.S. marketis in recession, Asia continues to beone of the few bright spots for thecomputer industry. Dell is growingmuch faster in Asia than itscompetitors (Pletz, 2001).According to Ted Waitt, foundingCEO of Gateway, their model is thesame as Dells model, includingusing expertise of the sameconsulting firm that had workedwith Dell in earlier years. Thisretrenchment includes a boostingof effort in the more than 270Gateway Country stores, with morecash-and carry options beingoffered to customers. The companyended 2001 with over $1 billion incash and marketable securities,which served to sustain it as itsought to compete once again withDell domestically. The strategyfocused now on selling PCs thatwould lead customers to purchaseadditional services, such as settingup a home network. They all butdeclared in the spring of 2002 thatthey would match Dell on price, butbacked away from that after acouple of months (Mainelli, 2002).

GATEWAYS SUPPLY CHAIN MODEL

Gateway may be on the ropes ifthey do not turn things around inthe next year or two. They arefollowing Dells model bycontinuing to assemble themselves,with manufacturing now beinglimited to their North Sioux City

facility in South Dakota, and theirHampton, Virginia, plant. Theirsales occur through the web (withcustomized extra-net sites beingoffered similar to Dells), throughthe phone, and through its GatewayCountry stores (both as orders andas cash-and-carry). The supplychain for Gateway Computers isshown in Figure 7.

Gateway will continue to rely onthese stores as a focus of its efforts.They hope to bring customers in byoffering innovative products atgood prices, but whether it isenough is yet to be seen (Mainelli,2002). In the meantime, they arelooking into a means of generatingrevenue from the computers ondisplay in its stores through aconcept called grid computing.The principle is to link all themachines together and use thecombined processing power as onewould use a supercomputer fornumber crunching. Corporatecustomers could then purchaseaccess to this power. Othercompanies are experimenting withthis concept, which resemblesselling computing power as autility, on a time basis. Innovativeideas such as these, which cangenerate revenue from otherwiseidle and depreciating resources,will be necessary for the survival ofthe company (Musgrove, 2002).

GATEWAYS Suppliers

Gateways goal is reducing itsprocurement and manufacturingcost, monitor supplier much moreclosely, and create a mechanism toshorten response time among allconstituents of its supply chain(Ojo, 2003). Gateway has eight keysuppliers, among them include:Western Digital, Microsoft, and Intel(Carbone, 1996).Compared to Dell, Gatewaysfulfillment time is longer. It takes sixdays. It may be due to geographicaland infrastructure factors whichGateway has disadvantage overwith other companies. The key tothe success is for Gateway toabsolutely finding out potentialsuppliers and how they make apartnership earlier than othercompetitors with fulfillment of itsdirect business model. Gateway


requires a high volume of qualityproducts and components for theirPC and Consumer Electronics / non-PC offerings, substantially all ofwhich it obtains from outsidesuppliers. In some circumstances,Gateway maintains single-sourcesupplier relationships, such as withMicrosoft for operating systemproducts and Intel for PCmicroprocessors. If the supply of akey material product or componentis delayed or curtailed, Gatewaysability to ship the related productor service in desired quantities andin a timely and cost-effectivemanner could be adverselyaffected. Gateway seeks to mitigatea portion of these risks bymaintaining insurance to protectthemselves against loss of profitsdue to a suppliers inability toperform due to an insurableproperty loss. In addition, they seekto mitigate such risks by havingdual sources of supply whereappropriate and by using reputableand reliable suppliers. However,even where multiple suppliers areavailable, certain key componentsare at times subject to industry-wide availability and pricingpressures. In cases where Gatewayneeds to switch to another supplierand alternative sources of supplyare available, qualification of thesources and establishment ofreliable supplies could result indelays and possible reduction innet sales. Gateway has been increasinglydependent upon third-partyproviders of products and services.During 2003, Gateway outsourced asubstantial portion of its

manufacturing operations, serviceand support operations togetherwith the implementation of new ITsystems and a number ofadministrative services to third-party providers under contract(Olenick, 2003). While suchoutsourcing arrangements, includingthe outsourcing of a substantialportion of manufacturing, maylower the fixed cost of operations,they also reduce Gateways directcontrol over production anddistribution. In many instances,Gateway relies on offshoresuppliers, particularly from Asia, for product assembly and manufacturing, and risksassociated with transportation andother natural or human factors maydisrupt the flow of product. Gateways supply chain is similar inmany respects to Dells especiallyas it relates to configure to order. Itis more vulnerable to outsourcingwhich is a significant part of itsmanufacturing operations unlikeDell. Acceleration principle islargely minimized in Gatewayssupply chain though lead time islonger compared to Dell.

HISTORICAL NOTES ON HEWLETT-PACKARD (HP)

Hewlett Packard is a leading globalprovider of computing and imagingsolutions and services (www.hp.com).Its mission is to make technologyand its benefits accessible toeveryone around the world. Inearly 2002, HP completed itsacquisition of Compaq, making itthe largest PC manufacturer in theworld at the time; Dell for the past

two years has surpassed HP in totalglobal market share - the figures atthe end of first quarter of 2004 areshown in Table 2 p 26.

HP now finds itself struggling tokeep pace with Dell, and given itsworldwide position in the PCmarket, it has a lot to lose(Economist, 2001b; Economist,2001c). In an effort to remaincompetitive and protect its marketposition, HP is also makingsignificant efforts to take costs outof its supply chain whilemaintaining or improving customerservice (Vijayan, 2002). In someways HP is trying to mimic or outdoDell. In other ways HP is trying todo things differently than Dell(Lohr, 2002). To isolate thesedifferences, we will look at HPssupply chain in two ways: the BackEnd and the Front End. By BackEnd we mean all steps in the supplychain from component productionuntil computer assembly and byFront end we mean from the sale tothe customer to delivery.

HP SUPPLY CHAIN MODEL

This section reviews both the backend and the front end of HPssupply chain prior to looking at itstotal supply chain.

HP Back End Supply Chain

On the back end HP appears to beconceding that Dells model is theway to go. HP is makinginvestments to develop the kind ofinfrastructure that Dell has. It isconverting to a built-to-forecastsystem, using technology tocommunicate needed productionthroughout its chain (CanadianCorporate News, 2001). It is havingtrouble, however, as the Compaqacquisition is slowing the processconsiderably (Park, 2001;Silverman, 1998). Instead offocusing 100% on reengineering itssupply chain, it has had to focus onintegrating the two companies.This is a very complex process asissues such as asset rationalization,personnel positioning and culturalintegration have had to be dealtwith. It will be a while before HPcan get the majority of itsproduction to the level of efficiency

Figure 7Gateway Supply Chain


Dell is today, and once it does, Dellwill be even farther ahead as itcontinues to become moreefficient.

HP Front End Supply Chain

While HP is essentially trying tomirror what Dell does on the backend, it is pursuing a very differentstrategy on the front end.Specifically, HP is focused onselling through resellers vs. onlydirect-to-consumer. Prior to beingacquired by HP, Compaq hadestablished itself as the numberone PC sold via retail channels(Silverman, 1998). It hadestablished a broad network ofrelationships and outletsworldwide. HP is trying tomaximize the value of the networkthat Compaq built. Instead offocusing only on selling direct-to-consumers, which it is still trying todo with part of its sales, it has setup extranet sites for its resellers tobe able to order HP PCs and otherproducts in the same way thatconsumers do. By doing this, HP ispassing the inventory managementburden on to the reseller, whom HPbelieves is better equipped to do sosince the resellers are closer to theend users. In short, this makesresellers much like a corporatecustomer, ordering online andenabling HP to sell direct without

having to create any inventories(Cirillo, 2002; Davis, 1998; Lee,Billington and Carter, 1993; Lee andBillington, 1995). The criticism of this strategy is thatthere are costs added to the entiresupply chain by having the retaillink: the retailer needs its marginand the consumer is forced to paymore than if he/she were to buydirect. HP believes this will beoffset by the services offered by thereseller. If the reseller wants tomove product in large volume, itwill have to remain aggressive onproduct prices and it will more thanlikely have to earn its margins byselling services. To assist in itsoverall success, HP hasstrategically chosen whichresellers it works with. It wants tobe sure that resellers representingHP brands have the capacity todeliver services that consumers arelooking for. If not, product wontmove and HP would risk developinga poor image.HP has now larger economy ofscale since it acquired Compaq. Ithas same capability as Dell toconfigure to specification anddeliver its product in five days.Although HP and Compaqacquisition has done better thanmost people has expected, HPsgreatest challenge still remains tobe in improving its supply chains,not leveraging its size (Gifford,

2004). One of the examples wouldbe figuring out how HP iseliminating redundancies in itssupply chain, customerrelationship management, andlogistics in local area. HP hascreated an integrated supply chainmodel with five major businessbuilding blocks. This model isshown in Figure 8 below (AsiaComputer Weekly, 2003).

The HP supply chain shown inFigure 8 consists of followingcritical business elements:No or low touch contractmanufacturing delivers goodsdirectly from the manufacturer tocustomers, with no interventionfrom the distribution channel. Vertically integrated, high volumesupply chain - requires only minorlocalization in certain regions. Forexample, a printer may need alocally appropriate power cord tobe added from suppliers to theconfiguration before shipment (VanHoek, Commandeur and Vos, 1998). Direct configure-to-order allowsorganizations to accept salesorders directly from customers,creating the product to meet thecustomers specifications as it isassembled. Value added system solution supports complex, highlyconfigurable products the typesof goods that businesses expect tohave configured expressly for theirneeds, such as infrastructuresolutions, servers, and high-endprinter products. Service logistics provides spareparts for service organizations;they require an understanding ofthe demand for parts and theirstocking requirements, such aslocation and frequency (HPsAnnual Report).

Table 2Global and US market share Dell versus HP (Daoud, Loverde, Promisel and Kay, September 2004)

Figure 8HP Supply Chain

HPS Suppliers

In order to cut its costs, it is crucialfor HP to create a strong long-termrelationship with its suppliers.Such relationship with fewersuppliers creates greaterpurchasing efficiency; nevertheless,working with more than onesupplier per component area canenhance competitive pricing andwith scale comes influence (CristaSouza, 2003). Furthermore, in order to maintain a long-termrelationship, HP looks at itssuppliers from six perspectives:price, quality, security, service,capacity and technology. HP spends a large amount, anaverage (based on past 3 years) of$43 billion per year on productionmaterials. It therefore wants tomake sure it is getting the bestprice, the highest quality and thebest support possible fromsuppliers. Over the last three years,the company has launchedinitiatives to exercise greatercontrol of its spend, consolidate itspurchases where possible anddevelop emerging sources ofsupply in China, Eastern Europeand India. Its business units usuallyhave different supply requirements.The company believes it has founda way to satisfy all of its businessunits supply and procurementrequirements while still reducingcost and taking advantage ofemerging markets. Havingrevamped its approach to suppliermanagement since its 2001 mergerwith Compaq ComputerCorporation, HP has centralizedpurchasing of key commodities,such as, microprocessors, memoryICs and disk drives that are used bymany of HPs four business units toleverage its spend with suppliers.For commodities that are unique tobusiness units, such as chassis andpower cords, it has a decentralizedapproach. To support bothcorporate purchasing andpurchasing at business units, HPhas its Global ProcurementServices group, which serves as aninternational procurementorganization and a buying arm forthe company. HP uses itsPurchasing Council to help developpurchasing strategies usedthroughout the company. It also

has core teams which work in newproduct development andcommodity teams which manageparts purchased for multiple HPbusiness units.Reliance on suppliers fortechnology development is onereason HP has centralized itspurchasing with a small group ofsuppliers. 80-85% of HPsproduction spend is with just 35suppliers. Another way HP hasreduced cost from suppliers isthrough its Absolute Best Cost(ABC) process. With ABC thecompany identifies what is the bestcost it can find for a part. Thecompany determines what are thefeature sets it may want to add tothe part, what are the costs for thefeatures and if the customer willpay for them. HP also does riskassessment on parts. The companythen agrees to a price ceiling inreturn for a volume commitment tothe supplier. Another way HP hashelped control cost is through e-sourcing. The company doeselectronic requests for quotations(RFQs) and private offers. A privateoffer is a form of an electronic RFQ,but it is sent to an individualsupplier. No data on RFQs is sharedamong the suppliers. The companyalso does reverse auctions withsome suppliers. Reducing the cost of purchasedgoods, either throughconsolidating purchases or using e-commerce tools is important to HPbecause 70% of HPs revenue isused to buy parts for production.Any savings in material goes to HPsbottom line. That is one reason whyHP keeps control of its strategicpurchases of components used byits electronics manufacturingservices (EMS) and original designmanufacturing (ODM) providers.Like most OEMs, HP outsourcesmuch of its manufacturing toreduce its total cost and uses EMSproviders and ODMs in variousways to support its differentbusiness models. In each of thesemodels, HP maintains control ofsourcing for strategic componentssuch as DRAMs, drives andsoftware. For such parts, HPcorporate purchasing negotiatescontracts with suppliers. HPsGlobal Procurement Services (GPS)buys the parts and sells them to the

companys manufacturing partnersin what HP calls its buy/sellprocess. Parts are sold to the EMSprovider at a higher price thanwhat HP paid to the supplier. The analysis of HPs supply chainindicates many similarities anddifferences between HP and Dellssupply chains. The company isworking to eliminate inefficienciesin its supply chain. However, whenit comes to acceleration principleand its side effects - lead time andinventory reduction syndromes; HPhas been managing its supply chainvery effectively through proactivemanagement of information andmaterial flow with all its tradingpartners.

GLOBAL COMPETITION

When we look at the PC globallandscape, it is clear that the battleis between Dell and HP. Figure 9shows both Dell and HP have globalcoverage, however, due to thebreadth and complexity of HPsproduct mix, it has far moremanufacturing presence worldwide.

At 18.6 and 15.6% of the globalmarket, respectively, these two sitfar ahead of the rest of the pack.Prior to hypothesizing about whichstrategy we think will win, wewanted to make some commentsabout the industry at large.Specifically, we wanted to identifywhere the industry is headed andwhat the key success factors aretoday. We do this through fourmain points: 1. Maturity in the industry. The PC

has gone through manymetamorphoses. Its evolutionhas taken it from being the sizeof a bedroom, to a desktoputility, to a portable brain trustthat can be used all over theworld; increasing its speed andcapacity the entire time. Duringthis period there have beensignificant R&D investments inthe design of the PC itself,making it more desirable for theconsumer. That evolution,however, appears to be reachingits end (see the S curve chartshown in Figure 10) (Robertsand Wenyun, 2003; Christensen,1997). Now, there isnt much thatdifferentiates one PC from


another. Consumers are able toget virtually the same productfrom any PC manufacturingcompany. Software andprocessors are proprietary tothird party companies and canbe found in just about any PC.The difference, then, comesdown to two things: Price andService.

2. R&D is going towards supply chain improvements. As areaction to the maturity of theindustry, PC manufacturingcompanies have invested nearlytheir entire R&D, with theexception of a few (e.g. Apple),on improving the cost andefficiency of their supply chains.Since they are competing mainlyon price and service, loweringthe price is their goal. Whileproviding service is typically alabor cost, supply chainefficiency is the only place forR&D to go. That leaves thesoftware and microprocessorcompanies (e.g. Microsoft &Intel) to invest in products thatwill entice consumers based ontheir product attributes.

3. The battle is being fought at the retailer vs. direct-to-consumerlevel. Direct-to-consumer evolvedas a way to lower supply chaincosts and get to the consumer atthe cheapest price possible. Itsevolution has included fasterproduct delivery, better customerservice, and its benefits/competitive advantages are

obvious. Nevertheless, there arestill issues about that model thatsome consumers dont like.Some want to physically visitwith a sales person to discusstheir various options. In addition,some prefer to have somewhereto go when there are problemspost-purchase. In many cases,the direct-to-consumer modelonly offers a help line, and thatdoesnt work for all consumers.There is value in having a retailoutlet for some people, hencethe ongoing competition betweenretailers and direct-to-consumercompanies.

4. Most of the diversified PC makers are losing focus on the PC. As PCcompetition has revolvedaround price and service,margins have come down and

the industry has become far lessattractive. As a result, the PCcompanies that have establishedbusinesses in other areas havechosen to invest where they canrealize a better financial return.Since the emergence of Dell,many found themselves at a competitive disadvantage.Investing to become morecompetitive simply didnt seemlike a good investment,especially where there wereother markets in which theycould realize significant profits.IBM, for example, has let its PCmarket share slide significantlyover the last five years. Instead,it has invested in servicebusinesses and other technology(Popovich, 2002). Now we areleft with two world powers whilethe others struggle. Thesignificant drop in sales fromGateway evidences this. Whatwe have left is the comparison ofDell and HP. Since service ismainly outsourced throughresellers, these two cant avoidcompeting on price.

To determine which is betterpositioned for this, we looked at avariety of ratios that spoke to eachcompanys overall efficiency (seefinancial ratios for 2003 in Table 3).

Aside from Gross margin percent,Dell is beating HP on every front.With price such a key issue, Dellclearly has the advantage today. Thisleaves two options for HP if it wantsto compete with Dell long-term in thePC industry: 1) Make investments in


Figure 9Global Locations: Dell Versus HP (Reeve, 2002)

Figure 10PC Industry S Curve

its supply chain to be able tocompete on price, or 2) Develop sucha strong position through service viaresellers that customers prefer thischannel for purchasing (Park andBurrows, 2001).

CONCLUSION

The analysis presents majorbusiness trends in supply chaininnovations including detaileddescription of the supply chainmodels that have beenimplemented by the three major PCmanufacturers Dell, HP andGateway. It describes how theirinnovative business practices havehelped mitigate the impact ofacceleration principle and alsoassociated side effects lead timeand inventory reduction syndromes.Specifically, the supply chainstrategies used by all three PCmanufacturers to minimize theacceleration principle include:managing inventory investment inthe value chain; establishingsupplier relationships; increasingcustomer responsiveness; buildinga competitive advantage for thechannel; and introducing enablinginformation technologies. Theresearch study also exploresanswers to a number of questionswhich formed the basis of thestudy.

It may be viable to assume that inthe end this battle will be won andlost over price, and HP mustimprove its supply chain if it wishesto compete. While service is anissue, we believe that over timeconsumers will become morecomfortable with the help line andas the processors and softwareimproves, there will be lessproblems for consumers to worryabout. Given Dells position, wethink the battle HP is up against willbe too big for it to win. Ourassessment: Dell will win the warand HP, if it continues to producePC's, will eventually become aniche player in that market.


Table 3Dell versus HP Financial Ratios Comparison (Annual Reports, 2003)

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About the author

Sameer Kumar is a Professor and Qwest Endowed Chair in GlobalCommunications and TechnologyManagement in the College of Businessat the University of St Thomas,Minneapolis, Minnesota. Prior to this position he was a Professor of Engineering and TechnologyManagement at the University of St.Thomas. Before joining St. Thomas, Dr.Kumar was a Professor of IndustrialEngineering in the Department ofIndustrial Management, University ofWisconsin Stout. His major researchareas include optimization conceptsapplied to design and operationalmanagement of production and servicesystems. He has been actively involvedin a wide variety of challenging industryprojects for more than 25 years in theUnited States and India. He haspublished and presented articles in various research journals andconferences. He is a registeredprofessional engineer, certifiedmanufacturing technologist, certifiedmanufacturing engineer, and certifiedplant engineer and has earned mastersdegrees in mathematics (University ofDelhi), computer science (University ofNebraska) and industrial engineeringand operations research (University ofMinnesota). He received his Ph.D. inindustrial engineering from theUniversity of Minnesota.


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