According to their 10K:
Dell’s business strategy combines its direct customer model with a highly efficient manufacturing and supply chain management organization and an emphasis on standards-based technologies. This strategy enables Dell to provide customers with superior value; high-quality, relevant technology; customized systems; superior service and support; and products and services that are easy to buy and use. The key tenets of Dell’s business strategy are:
* A direct relationship is the most efficient path to the customer. A direct customer relationship, also referred to as Dell’s “direct business model,” eliminates wholesale and retail dealers that add unnecessary time and cost or diminish Dell’s understanding of customer expectations. As a result, Dell is able to offer customers superior value by avoiding expenditures associated with the retail channel such as higher inventory carrying costs, obsolescence associated with technology products, and retail mark-ups. In addition, direct customer relationships provide a constant flow of information about customers’ plans and requirements and enable Dell to continually refine its product offerings. At www.dell.com, customers may review, configure, and price systems within Dell’s entire product line; order systems online; and track orders from manufacturing through shipping.
We’ll interrupt here to point to our comments here and here that this strategy may have come to at least a partial limit. For one thing, ever-lower average selling prices mean that the shipping costs constitute a larger percentage of the total price. Shipping many units to a few retailers (rather than to many customers) may now be the more efficient option.
* Customers can purchase custom-built products and custom-tailored services. Dell believes the direct business model is the most effective model for providing solutions that address customer needs. In addition, Dell’s flexible, build-to-order manufacturing process enables Dell to turn over inventory every five days on average, and reduce inventory levels. This allows Dell to rapidly introduce the latest relevant technology more quickly than companies with slow-moving, indirect distribution channels, and to rapidly pass on component cost savings directly to customers.
Again, we interrupt. First of all, the obvious comment is that DELL did not rapidly introduce the latest relevant technology from AMD (NASDAQ:AMD), and paid dearly for its allegiance to Intel. Secondly, is customization really all it’s cracked up to be? We went online recently and chose one of the basic configurations presented (as we suspect many do) and were told the estimated ship date was two weeks in the future. At CDW (CDWC), a similarly equipped computer was more expensive but shipped the same day. While DELL may be better for companies with plenty of time to plan orders, what about the guy that needs a new notebook NOW? Would it really kill DELL to have a whole week’s worth of inventory, with the extra couple of days being pre-assembled commonly-ordered systems?
We believe DELL has taken the correct first step by simplifying its pricing structure. It was well known that the Home and Small Business sections of DELL’s web site often had different prices for the same system, but that neither was consistently the better deal. Who needs to go checking two parts of the same company’s site to find out where it undercuts itself? Customers worry that whatever deal they are getting is not the best one possible.
The next step, as we mentioned above, is to raise inventory. While DELL’s efficiency is indeed a marvel among modern corporations, there is no sense letting a competitor win sales just because they have an item in stock.
DELL 1-yr chart: