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					                                  Dell Computers (A): Field Service
                                  for Corporate Clients
                                  Dell computers since its interception has been doing
                                  well since its interception, by cost cutting and keeping
Service Operations Management     itself restricted to efficient supply chain management.
          Case Analysis Report    It was keen in developing and selling customized PC
                                  to each customer as efficiently as possible. The case
                                  directs us to a situation where PC market seems to be
                       Group 8    dying and Dell seems to be surviving at cost of
                                  reduction in its margins, where as Dell don’t have its
      Aashish Jethani - 2010004   presence in server market which has better margins to
      Debashish Bagg - 2010298    play with. The case ends in a dilemma of Kapoor, one
   Namita Choudhary - 2010127     of Dell’s loyal customers to expand their line of
Prabhuvardhan Reddy - 2010159     business to large servers or switch to another hardware
   Sreechand Nambiar -2010230     vendor i.e. IBM, H.P. etc.
  Susnata Chakraborty -2010236
 Tanuraj Kulshreshtha -2010240
               Mudit - 2010123
Service Operations Management                                             Dell Computers (A): Field Service For Corporate Clients


Table of Contents
Introduction ..................................................................................................................................... 2
Dell’s corporate philosophy and initial success .............................................................................. 2
Operating strength ........................................................................................................................... 3
Problem Identification .................................................................................................................... 4
Pros and cons of expanding to new market .................................................................................... 5
Call centers for corporate clients .................................................................................................... 5
New Market and challenges ............................................................................................................ 6
Possible outsourcing ....................................................................................................................... 7
Reference: ....................................................................................................................................... 8


Figure 1: Cumulative change in year on year change in some operating ratios ............................. 4


Table 1: Calculation for SGA, R&D and Special charges per unit sold. ........................................ 3
Table 2: Year on Year Performance ............................................................................................... 4
Table 3: Initiatives and payoff ........................................................................................................ 5
Table 4: IBM cost structure for servers (High and Middle range) ................................................. 6
Table 5: Approximation of Dell employee cost structure ............................................................... 6
Table 6: Evaluation of vendor for outsourcing ............................................................................... 7


Introduction
        Dell was founded in 1983 by Michael Dell, an 18 year old college freshman from Texas
who started out upgrading hard drives for IBM compatibles on nights and weekends. Within a
year, his service business had grown to an incredible $6 million from performing computer
upgrades for local area businesses and he dropped out of school to concentrate on the business.
When Dell changed his offering to custom built-to-order machines, the business exploded, with
$70 million in sales by the end of 1985. Evolving into an assembler company, Dell was able to
exploit many opportunities in hardware industry and swiftly adapted to meet market conditions.
Five years later, total sales had grown to an unbelievable $500 million and Dell became
nationally known as a supplier of state-of-the art desktop and portable computers. Dell
continually achieved phenomenal records in sales and profit growth, eventually making it the
most successful company ever in the PC industry, surpassing $25 billion in 2000. As one of the
world's premier providers of computer products and services, Dell was the US market leader in
its core products, the desktop and laptop markets by 2001. Dell designed and manufactured
comprehensive family of desktop, notebook, workstation, server, and data storage solutions for
virtually every computing need. Dell's competitive advantage is its direct customer focus.
Constant interaction with its customers gives Dell the ability to understand unique computing
needs that drive individual and enterprise productivity.

Dell’s corporate philosophy and initial success

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Service Operations Management                           Dell Computers (A): Field Service For Corporate Clients


        Dell started off “leveraging investments that are made by others and focused on
delivering solutions and service to customers, rather than creating each part of the value chain on
their own” (pg 2 of Ref 4). Dell was focussed on selling directly to customers hence no
intermediaries. This strategic move of Dell helped them to get firsthand experience of their
customer and leveraging others investment helped them to reduce their operating cost.
       Direct sales to the customer also helped them in reducing the intermediation cost and also
gave them flexibility of lowering and increasing their operating margins. A result of this
philosophy was that the Dell’s shipments increased by 9.8% from 2000 to 2001 where the overall
market of PC were shrinking by 8.1% (Ex 2). Also Dell was leading in the customer satisfaction
report consecutively for the last 4 years. It can be hence summarized that Dell was initially
successful because of the following
  1. Dell Direct: Business clients comprised 90% of Dell’s customer. Main help came from
      Premier Pages.
  2. Low Inventory Control: Dell viewed inventory not only as an unnecessary cost also a sign
      of a problem within the product delivery system. Reduction of COGS and days of
      inventory over the years. This also helped Dell to push cutting edge of technology to
      deliver innovative solutions to customers
  3. Low-Cost Production and Low Prices: No intermediary to decide on mark up also
      reduction in operating cost per unit from $330 to $240 in a span of 5 years.
  4. Customized Web Page: Customized Web pages easy to use front-end, web-based
      customer sales and support system for corporate client. Advantage of Premier is
      discussed below.
Operating strength
        Dell’s operating strength was reduction of days of inventory. One of dell’s main
customers was business clients that made up to 90% of its customer base. This helped in
increasing their sales. They were also inclined in making and maintaining customer relationship
though not innovating on that front.
        One of the main innovations on the service front was corporate Premier Pages. This
helped them to reduce the processing charges to $50 which is 25% of the selling, general and
admin expenses (which is approx $205). Table below shows the calculation of per unit cost.
                      Table 1: Calculation for SGA, R&D and Special charges per unit sold.
                             Net revenues (in millions) (Ex 7) $31,888
                             COGS                               $ 25,455
                             SGA (Ex 7)                           $3,193
                             R&D (Ex 7)                             $ 482
                             Special charges (Ex 7)                  $105
                             Average total revenue per unit ($)     2,050
                             Units sold (millions)                 15.55
                             COGS/ unit ($)                       $1,636
                             SGA/ unit ($)                           $205
                             R&D/ unit ($)                        $30.99
                             Special charges / unit ($)            $ 6.75
                             Margin per unit                     $ 171.2


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Service Operations Management                                                                    Dell Computers (A): Field Service For Corporate Clients


        This table also says that the margin per unit being $171 only $50 is almost 29% of the
margin that is saved in the processing. It also added to reduction of error in procurement cost till
200 per million transactions.
        Premier Pages also helped them to customize and alter the product offering so that they
can improvise and improve the product offering according to improving technology. The after
service that is being needed for other vendor were also reduced due to the high understanding of
the customer requirement that Dell had and hence saving on after sales service still remaining
the best vendor to its customer.

Problem Identification
       By 2001, year the case has been written Dell has successfully reduced its days of
inventory to 5 from 31 in 1996 (Ref 1, 2). Dell has captured 24% market in USA and 13.4% in
worldwide market (Ex 2, 3 of Ref 4). Even after all the above success Dell’s operating income to
net revenues have been declining at the rate of 7% after it has also cut down its margins from
21.3% in October, 2000 to 17.5% in July 2001 (pg. 2 of Ref 4), and laid down 5,000 of its
employees to remain in profit. On cumulative basis Gross margin to Net revenues have depleted
by 6%, so have operating margin to net revenues, the only one ration that seems to have still
been cumulatively positive is Net income to net revenues that to at 5% in comparison to 15% in
1998 but at an increase in investment and other income and change in accounting standard (non
core business related activities).
                                                      Figure 1: Cumulative change in year on year change in some operating ratios
                                  25%
   Year on Year change in Ratio




                                  20%
                                  15%
                                  10%
                                   5%
                                   0%
                                                      1998                            1999                           2000                            2001
                                  -5%
                                  -10%
                                                                                                Years
                                         Gross Margin/ Net Revenues               Operating Income/ Net Revenues                  Net Income / Net Revenues
                                          Note: if a ratio for example Net income/ net revenue is 5% in 2001 it means if in 1998 it was 115 then in 2001 it is
                                          105.



                                                                             Table 2: Year on Year Performance
                                  Units sold (millions)                                                  3             5      8     11     16
                                  Selling, general and administrative per unit                         287           254    230    213    205
                                  R&D per unit                                                          44            43     35     33     31
                                  Special ch/ unit                                                       0             0      0     17      7
                                  COGS per unit                                                       2120          2026   1821   1785   1636
                                  Margin per unit                                                      248           278    264    202 171.20
                                  Operating Expenses per un it                                      331.28        296.55 265.36 263.16 243.01
                                  SGA/ employee                                                      0.079         0.074 0.073 0.065 0.079

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Service Operations Management                        Dell Computers (A): Field Service For Corporate Clients




Pros and cons of expanding to new market
Reasons for entering large server:
    1. The core competence of Dell, the sale model-Dell direct, can extend to other segment,
       large server
    2. The excellent customer relationship management will help Dell to break into the new
       segment.
    3. The high service quality in PC field makes customers believe in Dell's new product.

Reasons for not entering large server:
    1. The Dell-direct may not succeed in large server due to different requirements. The
       customer of large server has different background.
    2. The position of Dell is to focus on low-cost production and low prices. This position
       cannot be accept by large server market.
    3. The Price wars are expected to take profits even lower.
    4. The existed competitors are doing well in field service. Dell's strategy might not make
       difference to them.
    5. The way to large server is incremental. Dell has to follow customers' needs. Such needs
       are different from PC market.
    6. The trading and cost for an in–house field service team are more critical for server.

Call centers for corporate clients
       This is one of the most rewarding moves that seem to be in support of the move that Dell
might take in entering the server market. Dell that is looked up as a vendor who is active in
reduction of days of inventory that is being hold and also employing low cost labour, was able to
change this perception to customer friendly vendor.
                                      Table 3: Initiatives and payoff
Initiatives            Payoffs
Ship to target            1. Reduction of cost of transit
                          2. Improved customer service
First-time Resolvers      1. Improved number of issues solved in the first go
                          2. Thus improved customer perception of the product and hence reduced
                               number of technical visits thus reducing after sales cost.
Call centre               1. Reduction of technical visits to 75%
representatives           2. Hence enabled company to place more stringent constraints on service
                               levels that can be delivered to customer
Frequently asked          1. Reduced the technical visits required further
questions                 2. Help improve after sales service turnover time
                          3. Also leveraged the technical knowhow of the technical team for its
                               advantage
                          4. It helped in gaining customer satisfaction without employing extra
                               resources for the same
Feedback for the          1. Helped in improving Frequently asked questions
product                   2. Helped as gold mine for product development team and support team to

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Service Operations Management                            Dell Computers (A): Field Service For Corporate Clients


                                handle queries more effectively hence reduction of cost.
New Market and challenges
       Dell seems to have been caught up with the dilemma of expanding or not to the server
market. Before we move on to the question of expanding or not let’s look at the facts of the
server market. IMB leads both middle and high range server market with 28.7% and 35.9% of
market share respectively. It is said that the higher end server market has a margin as high as
40% to 50% (Ref 3). Let 50% of it goes into employ cost i.e. 50%*40% *($ 4996 + $ 4149) =
$1,829. Also given that the number of customer of IBM is 12,000 (pg 7), for which it needs
1,35,000 employee to service. This gives the service cost is $1.5 million per customer, and
$44,444 as cost per employee.
                          Table 4: IBM cost structure for servers (High and Middle range)
                                                   IBM cost
                          Revenue
                          Middle range server (million $)                    $   4,996
                          High end server (million $)                        $   4,149
                          Total (million $)                                  $   9,145
                          Number of client (Pg 7)                               12,000
                          Margin of profit (Ref 3)                                50%
                          Expenses (million $)                               $ 4,573
                          Number of after sales employee (Pg 7)                135,000
                          % of employee cost (Assumption)                         40%
                          Employee expenses (million $)                      $ 1,829
                          Employee expenses per client (million $)                0.38
                          Employee expenses per employee ($)                 $ 33,870
                          Employee per customer                              $      11
       Let’s make a cost analysis of employee cost structure on the same line for Dell expanding
to middle and high end server.
                              Table 5: Approximation of Dell employee cost structure
                                       Approximate cost if Dell enters
   i      Cost cut due to CSR's (in PC) (Pg 6)                                                     25%
   ii     Cost cut due to CSR's ( technicality is double) (Assumption)                             50%
   iii    non First time resolves (PC case) (Pg 6)                                                 10%
   iv     non FTR's (for server is at least double) (Assumption)                                   20%
   v      Multiplication factor due to repetition                                                   1.2
   vi     Service level provided (hrs)                                                               24
   vii    Service level in server (hrs)                                                               4
   viii   Multiplication factor due to service level (Assumption)                                     6
          Total Multiplication factor (ii*v*viii)                                                   3.6
                                                    case 1
   ix     Employee expenses (Table 1)                                                       $       205
   x      Employee cost in expansion (ii*v*viii*ix)                                         $       738
          if Efficiency of Dell employee in Server is less (Assumption)                            50%
   xi     Employee cost in expansion                                                        $     1,476
                                                    case 2
   xii    Number of employee per customer (PC) (per million)                                     2571.5
          Number of employee per customer in server (per million) (xii*viii/(ii*(1+iv))           25715

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Service Operations Management                         Dell Computers (A): Field Service For Corporate Clients


          Employee cost in expansion                                                     $     2,053
                                             case 3
   xiii Employee expenses (IBM cost) (Assumption)                                        $    33,870
   xiv Employee cost in expansion (ii*v*viii*xiii)                                       $   10,839
        In all the cases as shown in table 4 we can see Dell can be doing better even in the case
of serving server market.
        Case 1 calculates employee cost needed to expand to server market assuming that CSR’s
will be half as effective, so are FTR’s. Reduction of service level from 24 hrs in PC market to 4
hrs that is promised in (Server market) is also assumed to cost 6 times more. Cost of expansion is
given $ 1,476 per employee in comparison to IBM paying $44,444 per employee.
        Case 2 attempts to calculate number of employees per customer needed to serve in server
market under the same set of assumption. It can be seen that Dell would need only .0257
employees per customer where the number for IBM is approx 11. Case 3 assumes that after sales
service is outsourced to IBM. Hence the cost of employee of IBM is considered to calculate total
cost that will be incurred if Dell could make up the service level as done in PC (previous)
market. It is low as Dell would max need 3.6 employees/ customer and IBM employee 11.
         The main drawback in the above calculation is that most of the calculation that are done
in this case is based on assumptions of the extension of results from the call centre of PC market
hence might not be effective. It can be also see that the dell is yet to enter the market and hence
might not be able to enjoy the margin others are able to enjoy. Dell also has build up its expertise
in PC market over the period of year which would be needed in the server market. Dell also will
incur either training cost (in-house support) or cost of outsourcing (for after sales service).
        On a long run if Dell is able to sustain the initial investment and make the service level as
in PC market then dell will be able to reap heavy harvest in this market too else it might be a
wrong move. Numerically four hours of support time is feasible, marketing should be also good
but it might be heavy on Dell’s bottom line initially.

Possible outsourcing
        As given in the case Dell has been consistently performing well and growing in America
(Ex 7, Ex 2), which consists of more than 70% of market share hence tapping on the American
market for large and medium range server is a better option. Dell, if follows on the operational
strategy that was applied for PC market will need the support team for initial few years and then
will be able to replicate the service in-house if needed.
                                Table 6: Evaluation of vendor for outsourcing
Points in favour                                 Points against
Decision One
  1. High reach in the target market              1. Customer interface will vary hence against
  2. Highly experienced in providing service for     Dell-direct
      server especially high end (Pg 7)           2. Might or might not make up to the SLA’s
                                                     hence a risk at Dell’s end
                                                  3. Stringent Dell’s operation and service policies
                                                     may be heavy for them
IBM


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Service Operations Management                     Dell Computers (A): Field Service For Corporate Clients


 1. High reach in the target market                1. Direct competitor in the market
 2. Highly experienced in providing service for    2. Will it have any pressure to deliver the SLA of
    server especially high end (Pg 7)                 Dell
 3. High employee/ customer ratio hence will       3. Might lead to breach of core competency i.e.
    have workforce to meet SLA                        operational efficiency to IBM.
 4. Might help in boast in sales due to brand
    association with IBM.
       Above table is a comparison of the two options that are available for outsourcing. Though
both the options are weighed equally in terms of pros and cons of each it can be seen that
Decisions One is a better options as its gives bargaining power to Dell and also serves the bill
exactly as needed financially and operationally but IBM is better in terms of Marketing though
SLA’s might need to be compromised in both the cases.

Reference:
   1.   Dell Annual Report, 2000
   2.   Dell Annual Report, 2001
   3.   “Computers: Hardware. Industry Survey”, Standard and Poor’s, May 23, 2002.
   4.   Frances. X. Frei., Amy. C. Edmondson, “Dell Computers(A): Field Service for Corporate
        Clients”, Harvard Business School, Case No: 9-603-067.




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