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Building a competitive advantage in the supply chain Understanding the DELL-Way

The dot.com crash in 2000 has led many to believe that IT lost credibility and momentum. This, ultimately, stimulated an unsettled debate among academics but also business leaders on whether and how IT is or actually can create a competitive advantage. One of the most prominent writers is Nicholas Carr (2003) who in IT Doesnt Matter challenges whether IT is or ever was a strategic device. Carr (2003) argues that since the core functions of IT (data storage, data processing, data transport) have become cheaply available to every company, IT remains nothing but a commodity, an easily imitable device carrying risk of overspending and low return of investment. One of the most prominent critiques (DeJarnett et al, 2004) addressing Carr is that he looks at IT as a stand alone device solely and ignores the resource based of view meaning that one can only talk of IT as a competitive advantage if it is part of a companys internal resources which must be valuable, rare, imperfectly imitable an sustainable (Barney, 1991).This fault in logic has triggered off a key research topic in recent years aiming to show that IT Does matter and indeed can be of a competitive advantage if a resource base approach is adopted (Wu 2005, Taylor 2003)

By taking an IT does matter stance the aim of this paper is to understand how IT in the supply chain can be of a competitive advantage. The focus of this essay is to firstly

investigate the role of IT in the supply chain. Furthermore through using DELL as a case study, this paper aims to explain how DELL uses IT to create a competitive advantage. Whilst analysing DELL, the authors found an interesting analogy that DELLs Virtual Integration resembles an Open source approach to doing business. It was found that this decentralised and non-hierarchical infrastructure allows external rationalities to contribute to the innovation process thereby reinforcing the companys competitive advantage. The paper ends by discussing potential dangers to DELLs virtual approach and provides recommendations as to how DELL can further sustain its competitive advantage in the future by using a Hybrid model to intensify its presence in the spatial domain.

Today, the focus of IT initiatives has particularly shifted towards the supply chain. This is due to several reasons. Looking at the demand side, consumers have become increasingly

sophisticated in that they strive for both cost and customization advantages in their products. From the supply side, the availability of Information and Communication Technologies (ICT) such for eERP (Extended Electronic Resources Planning), EDI (Electronic Data Interchange), SAP have allowed companies to respond to these challenging demands by enabling for a

transparent view and accurate coordination in the management of its overall operations in the supply chain. Furthermore ever changing business environments, volatile markets, shorter Product Life Cycles (PLC) have made it imperative that supply chains work efficiently and effectively at the time (Kumar, 2001). This has consequently led to a shift of focus from a traditional literature view of how well supply should perform, to competing supply chains among firms to deliver through the use of IT cost and value advantages to consumers (Kumar, 2001). Yet companies do not compete any longer as single entities, rather they compete on the effective management of their supply chains. As put forward by Taylor (2003), the nature of competition is shifting to supply chain vs. supply chain.

Managing supply chains resides in covering the whole spectrum of activities from both the supply side and the demand side whereas the sharing of information among the supply chain partners has become the foremost element. This sharing of information is possible only once a company has established the foundation and the implementation of an Inter-Organizational Information System (IOIS) (Seidmann & Sundararajan, 1998 cited in Green & Shaw, 2006) amongst its channel partners which creates a seamless integration of various activities through a multi directional exchange of Real time information (See Appendix 1 Figure 1). IOIS ensures a myriad of benefits to all partners, as more specifically, this real time information gathering and sharing translates into a reduced need for inventory.

Several IT applications can be used in generating time and cost savings. On the supply side, Continuous Replenishment Process (CRP), for example allows the manufacturer to trim down the necessary level of inventory and to plan the shipments more efficiently (Clark & Lee, 2000 cited in Green & Shaw, 2006). This has made CRP a common practice in the retailing industry. Furthermore a shift from EDI purchase orders and invoices to Collaborative Planning Forecasting and Replenishment (CPFR) can be observed (Green & Shaw, 2006). This tool provides a platform for the collaboration of a joint forecast between manufacturers and suppliers that ultimately acts as a driver for the above mentioned replenishment process through the entire supply chain. If implemented in collusion, both systems, CRP and CPFR, effectively eliminate the need for purchase orders and invoices.

Drawing from our discussion of some IT tools and their implementation vis-a-vis the supply chain, we would like to turn to DELL who as a model company has perfected this concept and applied it to remarkable effect in revolutionizing the way in how business was conducted and made them the best performing supply chain in the world (AMR Research, 2006).

Building on their advantageous marketing philosophy of the Direct Business Model, the company adapted the latest in IT technology to leverage their existing business processes and gain an unassailable lead over the competition. In DELL terms, this process has become known as the Virtual Integration - which sees its implication both internally and externally.

Internally, to start the virtual integration process, DELL installed an Integration software solution the DSi2, which is DELL specific as in it runs on 120 internal servers using an inhouse high speed 100 Mega Bit Ethernet, managing 250 suppliers and responsible for delivery of 3500 components (Jacobs, 2003). Now that the enabling environment is in place, it makes extensive use of the internet to get its orders- which are more than 25, 000 orders per day (Jacobs, 2003). Using a host of complimentary software linking the procurement solutions including Oracle Financial for purchase orders, Cost centre data and accounting code data, a comprehensive DELL internet requisition tool was formulated. The result: It provides savings of 61% over a normal $110 per requisition costs and a time saving of another 62% from previous manual practices (Jacobs, 2003). Once an order is acquired externally, it is processed by a legacy order management system and is released to manufacturing. Internally, an order allocation solution then talks to the main Dsi2, through an enterprise integration application software which then optimizes the assembly line. The i2 system also integrates material and components requirements inside the factory achieving real time cost and time savings. The result: the inventory flip is reduced from 20 days to an astounding 6 days (Jacobs, 2003). Going by the philosophy of reducing the uncertainty of demand, which actually creates inventory, and Trading inventory for information, DELL complies with an extremely effective forecasting tool using the i2 softwares demand planning technology in line with the Collaborative planning forecasting and replenishment methodology as discussed lately, DELL has visibility into supply and demand trends. It thereby issues forecasts on its Extranet (Valuechain.DELL.com) and suppliers commit back to DELL based on the forecast provided. (See Appendix 2 Figure 1)

Externally, to establish regular customer interaction DELL develops customized intranet sites called Premier Pages for well over 200 global clients. This in turn allows them to further improve customer service, on-line without employing a dedicated team of sales staff that can then be used for more personalized constructive consultative roles On the field service side, DELL uses a supply chain event management software to manage the return of non compliant products coordinated with third party logistic providers. The result: Average repair cycle time has improved from 42 days to 17 days (Jacob, 2003).

All the above mentioned measures aim at enhancing DELLs position vis--vis, its competitors by drastically reducing costs in its supply chain. For a company that manufactures 50,000 computers per day, with an inventory holding of only four days as compares to 20-30 days for its competitors alone translates into a cost advantage running in millions per day (Jacobs, 2003). Also, when more than half of its annual revenues coming through a virtually cheap channel like internet, whereas competitors incurring costly manual methods for requisitioning of demands and sourcing and selling solutions, DELL distances itself from its competitors by the sheer use of ingenuity built into its systems using IT tools. Innovatively integrating its supply chain structure through IT initiatives, DELL has managed to embed them into their very fabric of their organizational structure. The intermarriage of their Direct Business model with IT has thus ensured that, being embedded, only now the company has a competitive advantage which is rare, non-imitable, valuable and sustainable part of their resources (Barney, 1991). Hence IT, in DELLs case DOES MATTER. . Furthermore, this virtual integration constitutes an important competitive advantage for DELL in terms of innovation and knowledge creation. In these terms the authors have found some stimulating analogy with the Open Source model. In the Open Source model, partners co-exist in a symbiotic relationship, and while their objectives may be slightly different, such cooperation can benefit them all. Companies are increasingly showing interest in the Open Source approach as a way to support their most critical business process innovation (Van Wendel de Joode et al., 2002). The power of the Open Source ideology resides in the heterogeneity of individuals which constitutes (what has been called a community of practice) the foremost source of creativity within the community.

DELL encourages its partners to become part of the company, part of the same organism. As a result they can suggest or contribute internally to the development of creative ideas. Sawhney et al (2003) presented the relevance of innomediaries (or innovation intermediaries) as elements in the supply chain which contributes to bridge the gap between producers and consumers and help companies to speed up their innovation processes. Furthermore the feedback from customers becomes an important source of innovative products. The idea is to equip the customers with the appropriate tools (websites, forum, emails) so they can design the products and services that suit them more (von Hippel, 1986; von Hippel & Katz, 2002; von Hippel & Krogh, 2003) (See Appendix 3 Figure 1) As a consequence, efficiency in innovation is not any longer a matter of control and supremacy of the firm throughout the overall process but it is founded on collaboration, cooperation and integration among internal and external rationalities. DELLs virtual integration constitutes an enormous competitive advantage for the company in these terms as well.

Although highly successful in their approach, potential dangers can be identified by conduction business in the virtual domain. One of the issues, one may argue, is that DELL is actually customer focussed but not market focussed (Yamin & Sinkovics, 2006). The virtual integration enables DELL to share and gain knowledge from its customers and suppliers but on the other hand, the company predominantly depends on information received from dealing with customers on-line which may not be fully reliable. This in turn, affects the companys ability to be knowledgeable about the different markets which it operates in terms of the culture or the uniqueness of the countrys business environment. This draws to the fact that online interaction is better at transferring information rather than understanding (Morgan cited in Yamin & Sinkovics, 2006). The constraint of online interaction with customers does not permit a true relationship between both parties. Hence Reliance on online interaction may generate a 'generalisation' from learning about customers and lead to the assumption that learning has also taken place about the market conditions (Yamin & Sinkovics, 2006: p.349). This psychological heuristic has been called virtuality trap (Yamin & Sinkovics, 2006).

Having discussed the potential outfalls of the virtuality model vis--vis the Virtuality trap, we believe that the way forward for DELL, keeping its strength in the Virtual Integration, should now be, to build and complement this strength by shifting its focus slightly more towards accommodating customer trends in the actual spatial markets. This may be achieved by establishing e.g. listening posts (this could be one or more person depending on the size

and importance of the market) that will enable them to feel the pulse of changing consumer/supplier preferences and making them proactively aware of emerging trends in the market. This is important for DELL to sustain its competitive advantage. DELL has an excellent integrated system in place working on the principle of Open Source mentality by which this pre-emptive information can be transferred to relevant departments and customer led innovations can be incorporated before any of their competitors. That innovation can then be brought to market in record time using the efficiently embedded IT environment which will ensure their position as the market leaders. This essentially suggests that DELL should now try to shift to a hybrid business model (as opposed to the existing Direct Model), which expands on the already embedded IT strengths, and incorporates the spatial market feedback. This practice will provide DELL with a proactive outlook of actual market trends which the company can then convert into new products using its Open Source philosophy to foster innovation. This pre-emption coupled with extra efficient and embedded IT infrastructure will ensure a sustained competitive advantage for the company over its competitors in the long term.

Conclusion From the arguments presented in this paper, we conclude that organizations with well embedded IT systems in their organizational designs are fully poised to complement their business activities and obtain a competitive advantage over their adversaries. This has been clearly demonstrated by DELL which as an industry model supports the existing literature in that IT indeed Does Matter, particularly in the supply chain (Wu 2005, Taylor 2003). Interestingly, it was found that DELLs virtual integration presents some analogy with the Open Source mentality that enables the company to sustain its competitive advantage by fostering product innovation and enhanced time to market. At the same time, however, the authors also realized that utilizing the virtual integration approach has an inherent disadvantage in that it can be misleading, and has a tendency to deliver superficial market information which in the long run may lead the company in losing the feel for how the market actually ticks in the spatial domain. The writers hereby proposed a Hybrid model that incorporates both, a presence in the virtual and spatial markets. This proactive model will ensure DELL not only to avoid the virtuality trap but also to sustain their competitive advantage in the future.

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APPENDIX 1 Figure: 1: Role of Technology in Supply Chain Integration

Source: Green and Shaw, 2006 APPENDIX 2 Figure 1: Role of Extranet in Supply Chain Management

Source: Green and Shaw, 2006

APPENDIX 3 Figure: 1 Customer Driven Innovation based on R&D

Source: www.DELL.com