UNIVERSITY OF JYVSKYL

Faculty of Information Technologies

DELLS APPROACH TO ERP: DELL DIRECT MODEL

IT1 ENTERPRISE RESOURCE PLANNING: From ERP to e-business

Jyvskyl Summer School

August 4, 2000

Ahlfors, Ulla ullahlf@st.jyu.fi Kalermo, Jonna jkalermo@cc.jyu.fi Krkkinen, Timi timikark@st.jyu.fi

CONTENTS

DELLS APPROACH TO ERP: DELL DIRECT MODEL...................................................................... 3

Implementing ERP in Organizations ......................................................................................................................................3 Different approaches to ERP ..................................................................................................................................................3 Davenports (2000) three models: .....................................................................................................................................3 Escalle, Cotteleer (1999):...................................................................................................................................................4 Dell Computer Corporation ....................................................................................................................................................5 The Dell Direct Model .......................................................................................................................................................6 Dell Online .........................................................................................................................................................................6 SWOT-Analysis on Dells Direct Model of ERP ..................................................................................................................7 Dell approach to ERP: ...........................................................................................................................................................8 Discussion...............................................................................................................................................................................9 Enclosure

DELLS APPROACH TO ERP: DELL DIRECT MODEL

Implementing ERP in Organizations When implementing Enterprise System (ES) and ERP, it is of vital importance for the companies to balance the technical capabalities in an enterprise solution with its strategic capabilities. Most often, when ERP is implemented, the corporations have to adapt their business strategies to meet the capabilities of ERP. It is our opinion, that ERP systems should be able to be adapted to the business strategies of firms, not vice versa, especially when the strategies have been businesswise fundamentally considered and are proven to be profitable. The tactics and operative functions, however, can be adapted to be more effective and efficient through ERP.

When choosing to make supply chain management a focus of a companys ESs, it is important to consider what kind of approach to ERP solutions to take; whether to use bestof-breed, few major vendors, such as Peoplesoft, SAP, Baan, Oracle, J.D. Edwards, one single vendor, or a hybrid of possible approaches. According to Davenport (2000), doing great things in supply chain management seems to require a multivendor approach. No one vendor is not able to offer a fully integrated supply chain management solution. The supply chain to work perfectly inter-organizationally, a full integration would, however, be needed.

Different approaches to ERP Davenports (2000) three models:

Cherry picking Cherry picking the best available solutions is an approach that offers a rapid and safe access to world-class performance. But, the safer the approach

strategy, the less payback it provides. With this approach, a company cannot realize as much competitive advantages as with a riskier choice.

Going with the flow This approach means following the selections that have been made by the companys partners. One reason for this approach is that communication between co-operating companies is easier, when they have adopted similar systems. For middleware, it is not today important, which vendor to use, but as the linkages between corporations get more sophisticated, a mutual system brings the benefits of the same-vendor software.

Target shooting This approach is the most demanding to apply. It means that a company focuses on most profitable parts of supply chain and chooses the solutions that bring the biggest payback. It ignores solutions that might be excellent packages and chooses merely some part(s). It can also try to affect the vendors development processes by lobbying them and agitating for the applications important to it. An example of this is Reebok and VF, which, having formed a consortium that jointly paid for and managed the development of an R/3 add-on. This version was then later free for SAP to market in the industry.

Escalle, Cotteleer (1999): In their Harvard Business School article, Escalle and Cotteleer represent two approaches to ERP, which are best-of-breed and single vendor.

Best-of-Breed This approach means compiling the best possible package from the alternatives that vendors offer, creating the most suitable, tailored solution for the companys specific functions. The advantage for this approach is flexibility, but a drawback is that integration and vendor relationships get

complicated. In our opinion, this approach is actually in line with Davenports target shooting. Single vendor According to its name, the approach means dealing with one single solution vendor. A strength for this is that a functional integration can be achieved and problems can be addressed directly and also changes are more easily implemented. A weakness is, on the other hand, that this approach might limit the flexibility of the organizational functions.

Dell Computer Corporation

The start-up for the company was in 1983, when Michael Dell, a freshman in The University of Texas, Austin, spent his evenings and week-ends pre-formatting IBMcompatible PC-upgrades. In 1984 he started selling PCs directly to customers, bypassing the dealer channel, and build products to order. Already in 1985, he dropped the college and started a fulltime business with a revenue of $ 6 mio. He shifted then to launching and assembling his own PC brand, and by the end of the year raised the company revenue to $ 70 mio. By 1990 the revenue was already over $ 500 mio. The statistics of year 1999 show a revenue of over $ 18 bio. (see enclosure).

The company experienced a drawback in its operations in 1993, in spite of 40 % increase in its sales. The reasons for this were that their laptop computers did not meet the customers quality requirements, and that they had problems in selling through retail companies. Michael Dell froze the sales of laptops until their quality was high enough. He wanted Dell Corporation to follow a line of a very high quality, and created a program for decreasing the failure rates of manufacturing.

The Dell Direct Model The Dell Direct Model based on an effective made-to-order system. It provided high velocity and low cost distribution, and built upon direct customer relationships, build-toorder manufacturing and segmentation of target customers. Using traditional print advertising, Dell informed its customers of this model and its advantages. Through a learning curve, the company was over time able to predict customer response to their marketing communication efforts and adjust their sales staffing and production levels to meet the market demand.

The model shortened the distribution channel by leaving out one distribution level. The company operated with just-in-time materials, a continuous manufacturing flow, and direct shipment capability. This was based on computerized manufacturing and logistics management, and extended information systems.

Dell Online Dell saw that Dell Online phase was an ultimate extension to Dell Direct Model, which included an interactive relationship with the customers online. Already in the beginning of 90s he started a work group to explore the possibilities of Internet. The more they studied the subject, the more convinced they became about the benefits of going online. Most of Dell customers had access to Internet and 2/3 of them also had access to Intranet.

Dell went online in mid 1996. In the beginning, the online operation was transactional and the dell.com web sites included technical support and online retail store. In addition, they launched over 200 customer-specific web pages, Premier Pages, for their key customers, whom they call relationship customers. First, the online sales were $1 mio. per week, but after six months, the revenue reached $1 mio. per day. After three months, is had doubled again, and the increase continued even if not quite doubling the revenues anymore.

The interactive, password-protected Dell Premier Pages

SM

allow the customers an access

to information about Dells products and services. The customized pages allow them also to configure, price, and buy systems at approved, discounted prices, track orders and inventory through detailed account purchasing reports, and access contact information for Dell account and service and support team members, including telephone numbers, e-mail addresses, and pager numbers.

The success in going online also led to organizational changes in Dell corporation. The Online resources were thought to be necessary in all the business units globally. The business units were: the Americas, Europe, Japan and Asia. They also plan to offer their Premier Pages more widely to their contractual customers.

SWOT-Analysis on Dells Direct Model of ERP Strengths: When successfully implemented, the model increases efficiency and effectiveness. It helps the corporation to integrate its functions in all business units. As a pioneer, Dell has the longest learning curve, which enables it to forecast the demand in the market, and thus also to allocate the budget, and balance the sales force and manufacturing levels. This helps in optimizing the inventory levels and lowering costs. The model enables Dell also to achieve a shortened supply time. Having only few suppliers, Dell can maintain a close relationship to each of them and integrate its purchases, and also makes the communication between the company and the suppliers easier. The direct relationships with customers, achieved by customized online services enables Dell to increase the quality of the customer relationships, while allowing the sales staff more time to focus on their important accounts. Also real time information about current customers, and their needs and purchasing habits enables Dell to add value into its services.

Weaknesses: The model is not protected against competitors copying it to their functions. Implementation of ERP is time and money consuming, especially when Dell compiles

different parts from different vendors. This also leads to the problem of possible difficulties in integrating these to one functioning entity. According to different statistics, 50 80 per cent of ERP implementations are doomed to fail. The percentage depends on how failure is interpreted.

Opportunities: Conducting analyses of information about the customers, gained by data mining, new market niches can be found. Also good customer relationships and high quality help in gaining new customers worldwide. There is high potential for growth in Asia, for instance in China and India.

Threats: Having not so many suppliers can also be seen as a threat because, as Porter states, the supplier power can be quite high in supplier-buyer negotiations. Many believe that the direct model can risky, as not all of the PC customers can be reached online. Hard competition and the increase in saturation level in the markets lowers the net margins. The fears of consumers about the security of online purchasing, as well as regulations differing in different regions, is a threat to e-business.

Dell approach to ERP:

The Dell Computer Corporation used first Escalle and Cotteleers model of single vendor, and began implementing SAP R/3 to run its manufacturing operations. The process took a very long time, and as the company strategy changed from a global business strategy to more regionally segmented strategy. SAP was not able to adapt to Dells needs, and two years later, the company decided to abandon the SAP solution.

In 1997, Dell chose the Davenport approach of target shooting and compiled a package of most suitable parts of different vendors, ie. i2 Technologies, Oracle and Glovia. Through these smaller information systems (i2 for raw material management, Oracle for order

management, and Glovia for manufacturing), the company delivers quicker value than through building a huge ERP system.

Discussion In our opinion, the success story of Dell is not purely a fairy tale of smooth implementing of ERP. Even though the articles that report Dells implementation of enterprise systems, mostly tell a success story, there have been fears within the personnel, and probably more difficulties than uncovered in the articles. The basic models for strategic functions

actually are old, such as just-in-time manufacturing and supplier partnerships, but the way Michael Dell combined them in the new model was innovative. Sources:

Davenport, Thomas H. 2000. Mission Critical: Realizing the Promise of Enterprise Systems.

Escalle, Cedric X., Cotteleer Mark J. 1999. Enterprise Resource Planning (ERP). Harvard Business School. February 11, 1999. Margetta, John. 1999. The Power of Virtual Integration: An Interview with Dell Computers Michael Dell. Harvard Business Review. March - April, 1998.

Porter, Michael. 1980. Competitive Strategy: techniques for analyzing industries and competitors. New York Free Press. Rangan, V. Kasturi and Bell, Marie. 1999. Dell Online. Harvard Business School. March 26, 1999.