Dell catches a 10-year-old trend

On Thursday, Dell’s 10-Q report suggested that it’s getting ready to dump some or all of its factories. The development was noted in a front page Wall Street Journal story on Friday and picked up by the NYT and FT this morning.

The irony of Dell outsourcing the manufacturing that has formed its historic source of competitive advantage is hard to understate. To quote from the 10-Q:

We were founded on the core principle of a direct customer business model which included build to order hardware for consumer and commercial customers. The inherent velocity of this model, which included highly efficient manufacturing and logistics, allowed for low inventory levels and the ability to be the industry leader in selling the most relevant technology, at the best value, to our customers.

But the key paragraph of the 10-Q announces the intended reversal:

We are actively reviewing all aspects of our logistics, supply chain, and manufacturing footprints. This review is focused on identifying efficiencies and cost reduction opportunities while maintaining a strong customer experience. Two examples of this include; our announcement on March 31, 2008, that we will close our desktop manufacturing facility in Austin, Texas, and the sale of our small package fulfillment center in the second quarter of Fiscal 2009. … In addition, we anticipate taking further actions to reduce total costs in design, materials, and operating expenses.

The WSJ counts the factory sale as a done deal, while the other reports are more tentative. All attribute the change to increasing cost pressures (i.e. commoditization) of the PC industry.

The WSJ notes that Dell had already moved to outsource laptop production to Taiwanese makers such as Foxconn. While IBM once made its own laptops, now all remaining US laptop makers (i.e. HP and Apple) have their laptops made by Taiwanese companies. Gateway solved their laptop supply problem by selling themselves two years ago to Acer (of Taiwan).

Actually, Dell’s decision to sell its factories and switch to CM is a decade behind the times. With my postdoc in 2000-2001, I studied Apple’s supply chain revitalization, including its decision to sell all its factories from 1996-1999. HP also began the process of shedding its factories and switching to CM use in this same time period.

The FT notes that Dell’s new supply chain guru is Michael Cannon, former CEO of Solectron (one of the earliest CM firms). This presumably played a role in Dell being willing to let go of its historic source of advantage.

But it does raise the question: if Dell can’t gain competitive advantage from manufacturing — and its direct-build IT logistics model has been widely copied — what will it to do avoid commodization? The temptation will be to move upmarket to a differentiated product, but Dell has failed in its previous attempts to do this because it contradicts Dell’s corporate culture (and customer reputation) as the low cost leader.

On the other hand, you can’t be the low cost leader if you have the same cost structure as all your competitors. Dell will be using the same component parts assembled in the same sort of CM factories as HP (and Acer and Lenovo and Toshiba). Other than an occasional feature on a new laptop, there’s negligible differentiation among the top five, so their similar features and cost structure — in the face of softening demand — is a recipe for further price wars.

Photo of a Dell factory from the BBC