Dell Inc. (DELL), in a move aimed at cutting costs and improve profitability, according to the WSJ, has approached contract computer manufacturers with offers to sell most — and possibly all — of its factories around the world within the next 18 months.
The competitive environment of the computer industry has been an essential factor in Dell’s success, one the company took advantage of from the very beginning of its business structure. That business structure was conceptualized in the belief that selling personal computer systems directly to customers would provide the most effective computing solutions. The structured plan also included the philosophy in which inventory was seen as incurring costs, or waste - prompting Dell to devise a plan for manufacturing its products close to its customers, the implementation of which resulted in increased return on investment and reduced inventory and its associated carrying costs, while maximizing the company’s cash flow. Because of an effective, well-executed and innovative business strategy, in fiscal 1999, Dell became the largest seller of PCs in the U.S., with $25 billion in revenue reported in January 2000.
However, eight years later things have changed considerably for Dell, and so has the market. Over the past three years, growth in the PC market has shifted from corporate customers ordering large volumes of desktop PCs from Dell’s factories to laptops sold to consumers at retail stores. This shift in market dynamics closely correlates with the company posting a 2% annual decline in its last quarter in desktop sales.
Even after more radical surgery, once Michael Dell resumed his role as CEO on February ‘07, the company’s outlook for the time being still remains somewhat fragile. Dell several weeks ago reported a 17% drop in quarterly income on a year-over-year basis. Profit margins fell, with costs remaining quite high. In addition, the Texas-based company is still lagging behind competitors in coming up with a streamlined system to build portable PCs.
Dell owns factories in Texas, Tennessee, North Carolina, Florida, Ireland, India, China, Brazil, Malaysia, and Lodz, Poland. Its plants, although for sale, are still regarded as efficient at churning out desktop PCs; however, the company could face some obstacles in selling them, particularly those in places with high labor costs, like the U.S.
Dell, notes the Journal, hopes that by reducing costs for manufacturing and other operations, it will restore momentum after a slide that saw the company lose its position as the world’s biggest PC maker by sales to Hewlett-Packard Co.(HPQ).
Dell plans to enter into agreements with the contract manufacturers to produce its PCs - since they can generally produce computers more cheaply. This consequently would allow Dell to concentrate on what is most important in its business - whether it is sales, development of new products, or enhancements to existing ones.