Improving the flexibility of the desktop PC supply chain

Abstract

Dell Inc. is a company headquartered in Round Rock, TX founded by entrepreneur Michael Dell in 1984. In its 20+ years of history, Dell has revolutionized the PC industry by deploying the "Dell Direct" model--eliminating the "middleman" retailers in the PC supply chain-and achieved the Number 1 market share in the PC market. In managing its supply chain, Dell also utilizes its direct model and owns strategic relationships with many of the contract manufacturers, most of which have factories in China. For desktop PCs, these contract manufacturers produce semi-completed products and ship these products to Dell's U.S. and Ireland factories, and then Dell factory workers complete the remainder of the desktop PC assembly process by installing the components that are customized by Dell's customers. In order for Dell to remain low-cost and readily respond to customer demand, Dell's suppliers maintain a minimum amount of semi-completed goods inventory in a hub near each of Dell's manufacturing facilities. Foxconn (Hon Hai Precision Industry Co., Ltd.) was founded in 1974 by Taiwanese entrepreneur Tai-ming Terry Gou. Besides its home base in Taiwan, Foxconn has major manufacturing operations in mainland China, U.S., and Europe.

(cont.) Originally a maker of plastic parts, connectors and cable assemblies, Foxconn has since established manufacturing facilities worldwide that produce a variety of high-tech products, including electrical and mechanical components, modules and sub-systems for PCs, consumer electronics, handsets, networking, and display products. Foxconn's eCMMS (e-enabled components, modules, move and service) model and its high degree of vertical integration in supply chain allow Foxconn to address clients' needs from a single source. Foxconn services name-brand clients, such as Dell. Similar to Dell's inventory management strategies, Foxconn also requires its suppliers to keep a minimum amount of raw materials at its inbound warehouse. Dell and Foxconn's shared strategy is to maintain a minimum level of inventory while balancing it with a continuity of supply, in order to maximize sales and minimize the inventory-holding cost. However, this inventory management policy has been disrupted by a continuous shortage of chipset supply from Dell's chipset manufacturer since July 2004. A chipset is a critical component of the desktop motherboard manufactured by Foxconn in China.

(cont.) After manufacturing the motherboard, Foxconn is also responsible for installing the motherboard into the desktop chassis before shipping the motherboard-inside chassis from China to U.S. or Ireland by ocean. The chipset supply shortage has caused Foxconn not to be able to procure chipsets in order to manufacture the motherboards in China. As a result, some chassis are shipped empty by ocean first, and motherboards are air-freighted later. This leads Dell to utilize Third-Party Integrators (3PI) in the U.S. to install the motherboards into the chassis. The continuous shortfall of chipset supply increases the volume of motherboard-chassis integration in the U.S. and further increases Dell's overall manufacturing costs. Thus, the goal of this thesis is to create a framework for improving the flexibility of the Desktop PC Supply Chain. This framework examines how the various players contribute to the supply chain, the dynamics among these players that led to the current supply chain design, and how Dell can work with its suppliers and other strategic partners to more effectively balance demand and supply.

(cont.) This thesis will explain the symptoms as well as the root causes of the problem, present the original direction of my internship and the exogenous factors that caused the direction to change, and describe the renewed direction. It will also examine Dell's decision-making process, organizational processes, and leadership issues involved. In addition, it will discuss how other industries structure their manufacturing given a supply shortage and the importance of trust and innovating contracting in cultivating more collaborative relationships in a supply chain.