Build to Order Strategy in Dell The Built To Order Revolution Student Summaries of 10

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					                      The Built To Order Revolution
                 Student Summaries of 10 Minute Segments
    BA 544 Supply Chain and Logistics Management         Prof. Stephen De Lurgio
    Henry Bloch School of Business
    University of Missouri, Kansas City


                                                                                   Aryanti Savitri
                                                                                   1st 10 Minutes

Background Introduction

Two leaders of the Built to Order Revolution are companies Dell Computer and FedEx.

Dell Computer, established in 1984, pioneered the concept of built to order computers and today
ranks as the world’s top computer maker, with annual sales reaching $32 billion dollars. Their
growth propelled by online selling of computer systems, Dell provides a complete portfolio of
custom made products and services to private and corporate customers. The latter today make up
about 90% of their business. With servers as the core segment, Dell has become the second
largest in the server market behind Compaq. With a strong regional presence in over 34
countries (42 – website updated), and manufacturing facilities in four continents, Dell employs
over 39,000 people (55,000 – website updated) worldwide.

Fed Ex was founded in 1971 by Frederick Smith, a Yale graduate who conceptualized the idea of
an express delivery system in his college years (and wrote a paper that got a C because it was at
the time considered unrealistic). The Memphis based company has since become the recognized
name for efficient distribution, with products and services ranging from transportation, supply
chain, consulting. The company has become a strategic partner for top performing companies
like Dell that rely on good supply chain management to support their direct selling strategy.

Interview with Michael Dell

Michael Dell started the Austin based company in 1984 with minimal capital and a solid idea /
―conceptual leap‖. The key to success was in creating efficiency in the way consumers are sold.
The idea is to sell directly to consumers by eliminating the middleman that adds unneeded time
and cost. Their strategy operates on building finished product when the consumer places the
order. This allows for dramatic cuts in inventory and costs (latest technology results in turning
over inventory every four days on average-website updated).
                                                                                   Brad Inman
                                                                                   1st 10 minutes

         Michael Dell dropped out of his pre-Med program at the University of Texas to pursue
his innovative computer sales idea – no middlemen, online ordering, and direct to the consumer.
Michael Dell is the CEO and chairman of Dell Computer Corporation located in Austin, Texas,
that started out small in his dorm room, went public in 1988 and mushroomed into a $32 billion
company. Dell had the best return of any company throughout the 1990’s, and did it by doing
something that the other market players thought impossible – by using a direct sales model.
         Michael Dell became the wealthiest Texan at only 36 years of age, all because he was
willing to take a risk and pursue his idea. Dell states that he saw an opportunity in the
inefficiency in the way computers were sold and changed that in his model. Dell gives advice to
future entrepreneurs and says that you should not have to ask others if you have a good idea for a
business – he states that it should just be known that it will work. At the time, Dell was sure he
had a good idea, but greatly underestimated how large the idea and company would become.
Dell’s direct sales model utilizes online sales, information exchanges with their suppliers and
techniques like JIT to succeed. Not only does this strategy and model cut out the non-value
adding middleman, but drastically reduces the inventory when compared to its competitors.
Utilizing preassembled modular components, once Dell receives an order over the internet, the
custom computer is put together (using the modular components), is shipped, and then received
by the customer within a few days. This pull production not only keeps inventories down, but
increases the speed and turnaround to the customer, reduces obsolescence, and allows Dell to
keep their costs low. Lower overall costs allow Dell to sell their computers for less, thus
satisfying the customer compared to their competition while keeping significant profit margins.
Approximately 90% of Dell’s business is from Corporations and the Government, they are second
in server sales, and are starting to branch out into peripherals.

                                                                          Joe Kelly
                                                                          2nd 10 Minutes
Michael Dell - Dell
      Business advice:
               1) Do not ask if you should start a company
                           If you have to ask that is the best sign that the business might not
                              be successful
               2) Sometimes you have to be unconventional to succeed
                           Differentiation of product, service, idea is what separates the
                              good from the great

                While Michael Dell was in college he began selling PC’s and realized that by
        expanding his operation and forming an actual company that he actually form a very
        lucrative company. After about six months of operation he began to realize that not only
        was his company going to be lucrative it had the potential to be a global power within the
        PC industry. The key to his success was the direct business model that Dell had put in
        place. Within about a year of operation the direct business model took over and forced
        the company to succeed.

                Dell believes that the fact that his competitors underestimated him was critical to
        the success of his business model. Competitors felt that Dell was never going to be more
        than a niche company and Michael Dell believes that contributed to his success.

Fred Smith – FedEx
           FedEx has over 19 Billion dollars in annual revenue
           Started out in Memphis with first hub and later created strategic hubs in Miami
              and Anchorage

           The idea for FedEx was based on a paper that Smith wrote when he was in College.
        The paper received a grade of C for being to far fetched and unachievable.
                                                                                Kulvinder S. Virdee
                                                                                     2nd 10 Minutes

What world of Advice would Michael Dell give to the Graduating Seniors in order to be a
successful Entrepreneur?

Don’t Ask: If you have a good Business Idea which can end up in a Business opportunity then
Don’t Ask someone for an opinion on your Business Idea. It should be your gut feeling which
should lead you in making a decision whether you should venture into a Business based on your
Business Idea. You should believe in yourself and base your decisions from the instinct that
comes from within you.

Dell realized within 6 months into his initial hard work that his Business Idea of selling directly
to end customers and cutting the middle-men altogether, as they were not adding any value to the
product or the Supply-Chain, just didn’t have a National appeal but Dell was looking at a Global
Opportunity of launching his Business Idea.

Dell initially didn’t realize the power of his Business Model. As more he ventured into his
Business Idea across different products and Supply-Chains he found more Business Opportunities
that he could exploit. Dell also realized the advantages of the Supply-Chain and thus he designed
an efficient Supply-Chain for his Business Model.

Dell acknowledges the fact that when his company was growing the well established Competitors
underestimated Dell. Therefore they never positioned themselves to compete with Dell. This
helped Dell tremendously in gaining the PC market share for which it was thirsty for. Currently
Dell has positioned itself to increase its revenues to $32 Billion.

Dell is expanding its line of products to consumer electronics and to System Hardware like
Servers, Storage devices. Dell sees a considerable opportunity in grabbing a huge market share of
the System Hardware Industry. Currently Compaq holds the leading market share in this Industry.
Dell foresees itself to grab the biggest market share in the industry nationally and internationally.

Frederick W. Smith is the Chairman, President and Chief Executive Officer of FedEx
Corporation. Smith has served as an officer in the U.S. Marine Corps in Vietnam from 1966-

Smith has lead FedEx to increase its revenue to $19 Billion. He pioneered the idea of Overnight
Delivery Service.

FedEx & Dell have worked together to deliver PC packages to customers in the shortest delivery
time. FedEx has also assisted Dell in merging different packages from different parts of the world
to one customer delivery instead of delivery different packages at different times for one
customer order.

                                                                         Stephen DeLurgio
                                                                         2nd 10 minutes

Michael Dell outlines three facts about keys to success:
1) Have a passion. He had an intuitive feeling that the direct-to-consumer model would do well
and he pursued it with passion.

2) Think innovatively and ―outside the box.‖ Often drivers of change come from individuals that
bring a new perspective to an industry; the new technology comes from the novices who borrow
ideas from other fields or who happen to hit upon an idea at a particularly opportune time.

3) Differentiate your product.

He was a freshman at Univ. of Texas at Austin and his parents wanted him to study, however he
believed he could prosper following his passion.

Six months into his business he realized that he had an idea that presented opportunities of
national or global significance.

While he developed his Direct Business Model he was fortunate that others in the Industry made
mistakes. While he did not mention these, those of us who were active in the industry at the time
recognize these others as IBM, DEC, CDC and other names that do not even exist anymore.

Remember that this was in the mid 1980’s and there was no WWW/Internet, yet the direct to
consumer idea was clearly a way to go.

Fortunately, the existing competition under estimated the importance of Dell, there was no real
competition for Dell.

The earlier days of a trade publication, Computer Reseller News referred to the Dell market as a
niche market, but that this niche market continued to grow and grow until Dell is the largest
producer of PCs and 2nd largest producer of Servers, having the highest market share of 30%.

At the time of this video, Dell had 32 billion dollar revenue.

During the early years of Dell, they experienced a 50% growth rate.

Fed EX

Next Frederick Smith discusses the early days of Fed Ex. He required $19,000,000 of venture
capital before making a profit (I believe it took 10 years). Fed Ex is in 212 countries around the
world. Fed Ex has 19 billion dollars in revenues. Originally with a single hub in Memphis then
another in Miami and finally in Anchorage Alaska.

Federal Express took its name from the early days of transporting checks over night between
Federal Reserve banks.

Fed Ex faces a 18% growth rate in international business.

Fed Ex will manage all logistics functions of their customers including final assembly, which
they out source.

Fed Ex is a Logistics and Information Company and will remain a big user of the World Wide
Interesting phrase that Smith quotes – ―A good advertisement can destroy a bad product.‖

The implication is that Fed Ex had to live up to early advertisements of ―on time, over night

Smith notes that academic research has shown that about 40% of the businesses in the US (I
presume) use fast cycle, just in time in their operations – that is 40% are innovative supply
chains. An additional 20% are 80% innovative supply chains. However, groceries and other low
cost, high volume products will require efficient supply chains or in the case of services, cannot
be delivered through a combination of overnight shipping or WWW.

However, the vast majority of firms and operations will be and are affected by the WWW and
rapid delivery via Fed Ex, UPS, DHL, USPS, etc.

My note (not mentioned, but implied in the video): Both Michael Dell (Dell) and Frederick
Smith (Fed Ex) have business models that have prospered because of the following recent
technological improvements:
        Air transportation improvements
        JIT – Built to Order – Dramatic Through-Put Times.
        Globalization – fierce global competition
        Comparative advantages of nations
        Improved supply chain technology and knowledge

All of the above are in relatively great supply.

                                                                                      Lin Chia-yi
                                                                                    3 10 minutes
-―Speed‖ is the primary promise Fedex gives to customers.
-By cooperating with other companies, Fedex provides a new service. Fedex takes different
  products form different suppliers, consolidates them at Fedex distribution centers and then
  deliver directly to customers.
-Fedex’s biggest competitor: UPS
 In order to compete with ground service of UPS, Fedex sets up post offices to deal with 2-3 days
  class mails.
-Fedex never looks business right and left and is always a shipping business for care.
-A revolution era:
 Fedex used to put money to venture capital system for following reasons:
  1) There is a competitive idea
  2) There is an independent party or tool to verify the concept
  3) There are good people to trust
-How to keep delivering overnight promise on advertisement?
 When the promise is put on advertisement, it is also a challenge for Fedex itself.
 History can tell us clearly that company cannot take risk.

Michael Dell V.S Frederick Smith
-Service of Fedex:
 1) quality service
  2) Network (Speed)
  3) Best competitors
-Build-to-order revolution
 The revolution helps Dell to take off cross transaction and absorb unnecessary costs.
-Information system helps to source supply and to decrease the unit cost, especially for
                                                                                  Daniel Potts
                                                                                  4th 10 Minutes

During the forth ten minute segment of the video, specific questions and general inquiries of
opinions by the interviewer and the faculty of the University of Texas in Austin were presented to
Michael Dell and Fredrick Smith. The following are some of the points made by Dell and Smith.

Made to Order

    1. The purpose of the made to order strategy is to take out unnecessary costs including high
       mark ups and quick depreciation.
           A. By getting rid of the regular retail store method of sales to the consumer and
                using a made to order direct shipping strategy, Dell computers has been able to
                save money for the consumer by taking out the retail mark up cost. This has
                given Dell more flexibility in price variation and variation of products.
           B. The computer market is one where products depreciate very quickly in a short
                period of time. By not using retail stores, Dell has made it possible for customers
                to get products just days after manufacturing to insure that no product
                depreciation has taken place while the product was moving through the supply
                chain or sitting on the shelves of retail stores.
    2. Billions of company dollars are tied up in guesses
           A. When using retail stores, the customer buys off the shelf a product that usually
                doesn’t exactly fit to the desires of the customer. The sales data then tells the
                company to create more of the selected product and the company invests more
                money into a product that they think is exactly what the customer wants, yet that
                may not be exactly true.
    3. Made to order and customization only really works for high ticket items
           A. Cheap, quickly used up and disposed of everyday items are not good for this
                strategy. Customers are willing to live with a product that might not be exactly
                what they want if it falls into this category.
           B. High priced items are different. If a customer is paying a lot of money for an
                expensive item (such as computers), they expect to get exactly what they want
                and may be willing to pay a little more for it. This is especially true if they can
                get it relatively quickly (speed delivery).
    4. How does the economic slowdown affect this strategy?
           A. Economic slowdown has not affected demand, and actually the companies have
                experienced a growth in productivity over this timeframe.
           B. Both Dell and Smith believe the economic slowdown is short term and can see
                possible future company expansion to additional higher end products/services,
                geographic expansion, and market share expansion.
    5. How has the rapid growth of the company and the expansion of products and services
       affect the company’s core business?
           A. The fact is that as Dell grows, FedEx grows. As Dell’s core business becomes
                more efficient and expansion opportunities increase, so does FedEx. It is obvious
                that the core business is the money maker, but a company cannot continue to
                compete unless it expands and grows to match and overcome its competitors.
                What is the core of the business today may be obsolete in the future, thus the
                company must evolve.

                                                                                  Na Dai (Cindy)
                                                                                  4th 10 Minute

        In the 4th 10-minute segment of this video, Mr. Dell emphasized the function of the flows
in a supply chain. He said that make good use of the flows of information, fund, and product
would reduce costs. About the flow of product, he said that it was very important to forecast the
market need. It’s good for company to be in anticipation from the locators. He gave the example
of car market. He said that it’s best to view the markets like customers do, and to forecast demand
from the market. Company hardly produces exact same product customers expected, but able to
produce the product customer need.

         About the flow of information, he said that information was a source exchange and
information system installment was very basic and important. He gave the example of Wal-Mart
and said that information installment for a company’s infrastructure should reach to 40%. And
Internet information infrastructure provides a company a worldwide choice.

         In the second part of this 10-minute segment, both Mr. Dell and Mr. Smith thought that
no matter for short-run or long- run benefit, sustaining company’s growth is the key to success,
even in the period of recession. To sustain growth, demand has to be continued and company
should identify market potential. And Mr. Dell gave the example of company Dell. The stock of
Dell in its worst period still maintained strong growth.
                                                                                     Vijay Yelmat
                                                                                      5th 10 minute

Interview with Michael Dell, Chairman and CEO of Dell computers and Fredrick Smith Founder,
Chairman, President & CEO of FedEx Corporation. Dell Computers has pioneered in selling
computers directly to consumers. Mr. Smith seized upon that idea to fuel FedEx future growth.
This episode of the CEOs’ exchange was taped at McCombs School of Business at the University
or Texas at Austin.

The topics of the discussion were:
    The built to order revolution
    Sustaining growth
    Changing the Model

Summary: Change in the model to expand the scope is good for the growth of the company as
along as the change of scope is in line with the core business and compliments the strengths of
your business. Alliance with the competitors can be good if the alliance is a complimentary thing
to your business. Finally a good CFO, Legal advisor, controllers and good infrastructure are all
important for a successful entrepreneur.

Here are the comments from Michael Dell and Fredrick Smith on ―Changing the Model‖ with
respect to their companies:

Change in Strategy DELL: Broader in scope. Expand from current PC business into servers, data-
storage equipment, printers, consumer electronics and technology services. Ex: soft drinks—
regular, diet, lemon, vanilla flavors. Expand the scope to pretty much manage the whole supply

Changing the Model FedEx: FedEx is not an assembly shop but manage the process (could
subcontract the assembly).

Comments on Expansion:

How elastic DELL can go from computer making to something totally different?
Michael Dell Ans: Servers and storage are not much different from DELL computer business.

UPS has expanded into financing. Will FedEx follow the suit?
Fredrick Smith Ans: FedEx would stay out of financing as they think it is not their strongest suit
but could partner with some good financing company’s.

Fredrick Smith’s comment on Post Office alliance: Post office alliance is a complimentary and
not competition. Contract would take benefits by utilizing each others excess resources/capacity.

What keeps going for both FedEx and DELL?
DELL: Ever growing IT industry and to be market leader in computers, servers, storage all over
the world.

FedEx: Innovative and competitive. Be in middle of growing companies by providing the
necessary services.

Key attributes for a Successful Entrepreneur:
Good CFO, Legal Advisor, controllers and good infrastructure.
                                                                                   Jeffrey Forsyth
                                                                                   5th Ten minutes

Michael Dell responds to Sun MicroSystems CEO, Scott McNeely’s charge that the ―PC is
dying‖ (servers and other technology are the future):
The PC is not dead and compared with Sun; Dell has achieved more success in less time. Sun
started a few years before Dell with much more capital and now Dell is #1 in workstations and is
a much more profitable company.

Fred Smith talks about ―growth‖:
FedEx is in the business of ground packages, global shipping, 2nd-Day shipping, and more. His
company is also able to manage entire supply chains for certain companies. In other words, there
is a great deal of room for growth and continued success and improvement at FedEx.

Dell and Smith talk about ―changing the model‖:
Smith says that is important to manage the process (supply chain) and that FedEx is able to do
that for its customers.
Companies may fail if they move too far away from what they originally set out to accomplish.
Dell believes that his company is still in the ―sweet spot‖ of their model. He thinks that Dell
Computers, Inc. started on the edges and is now moving more toward the center of its company

Smith was asked if he believes that UPS (his main competitor) is struggling to innovate:
Smith believed that it was important for FedEx to stay within its core competencies
(transportation, logistics, and supply chains). He indicated that FedEx might coordinate with
other companies to provide a full set of services for an entire company, but that it would not
branch out into businesses outside of its focus. He indicated that the partnership with the US
Postal Service was for greater synergy and that both the USPS and FedEx would benefit from
each others strengths.

Question and Answer Period (from the audience):

Q: What keeps you going and what is left to accomplish?
Dell A: Opportunities within the business and things that are still left to accomplish.
Smith A: Competing, innovating, and being in the middle of business trends.

Q: How do you get over the initial entrepreneurial hump in the beginning?
Smith A: Be surrounded by good people in both the basic and important positions.

Q: What is there to look for when starting a business?
A: There must be an underlying potential and/or opportunity.
(Don’t just copy someone or something else…innovate).
There must be a sustainable point of business generation that you can build a company around.
It helps to take a different approach to doing things; not just doing a ―me-too‖ business that
mimics something already out there.
                                                                                    Robert Pruitt
                                                                                    5th 10 minutes

Portfolios of each company:
Dell- Sun Microsystems was a workstation company that predicted PCs would die and
consequently, expanded into servers only. Dell stayed in the PC market which it now leads. Dell
later expanded into servers as well and now leads the server market.

FedEx- The FedEx portfolio has expanded into more things than Smith expected. Some
customers now want FedEx to manage their entire supply chain.
Value adding: Fed Ex does not want to get into assembly of orders but order assembly is a good
way to add value as a distributor.

How elastic is the Dell model?
Dell is still working in the area they want. Their expansion into servers and other peripherals is
not a departure from their core competencies. If the computer technology market is viewed as
concentric circles, Dell began at the outside with PCs and is now working its way toward the

UPS is now offering some types of financial services. Will FedEx do the same?
FedEx is not interested in the financial services market. They want to stay with their core
competencies. It is a possibility that FedEx could partner with a company to offer those services

USPS/FedEx partnership
USPS is now using FedEx air transportation to ship lightweight and priority packages. In
exchange, FedEx will place its drop-off boxes in post offices. This new contract is expected to
save USPS about US$1 billion per year.
Audience questions:
What keeps them going? What’s left to accomplish?
Dell- Opportunity; computer technology is the fulcrum of the new economy. Dell wants his
company to be the worldwide leader.

Smith- Loves to compete. Loves to be in the middle of the business.

Most businesses fail in the hyper-growth stage; how did they not?
Both- Must surround yourself with good people and stick to fundamental principles. Do not
forget that the business must make a profit.

What do you look for in a startup business?
Dell- value potential; new ideas that are better
Smith- a sustainable point of competitive advantage; ―me too‖ ideas won’t work
Dell- the fundamentals do not change
                                                                                  Yuying Gu (Julie)
                                                                                      April 8 2005
                                                                                    6th 10 minutes
Question: When start a business, what to look for?
Answer: Underlying value. It should be tremendous value for customer and shareholders. To
copy is hard for success. It should be some big opportunity, something now invented fairly
better. And it should sustainablly convey differences. It does not mean OK if it can not deal a
company around. The idea is not anything that has done before. They are different approaches
with concept leap, and sustainable economic wealth pursuing.
The business is for cash flow to earn profit, and this does not change. There is some period that
do not believe in earn profit??

Question: How to deal with emergency? for students to learn?
Answer: FEDEX. Fortunately never have fatal incidents. We have extensive emergency plans,
include who's in charge? Whom to communicate etc. We go through the plans from time to
time. PR thing downside: best. Reaction time 18 second??

Questions: How many hours do you work every week? How you value your personal life with
your careers?
Dell: I have four young children. I make sure time with them. Of course there is limit (because
of the career) to how it effects. But there are point of importance which make the different. I
work five days a week, working until 5:30 to 6:00, 8 to 10 hours a day. When starting up, work
longer time. There were longer time pains unless some....

Fedex: I have a large family. Family is number one in my life. Working to a long time is counter
productive, burn yourself. You should learn to discipline yourself.

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