Virtual Integration: When ERP fits the Dell's Direct model:
The introduction of enterprise resource planning (ERP) software improves the coordination between firms. Before ERP, the each function in value chain had separate organization with separate information system. Each function performed its own tasks thus not globally optimizing the whole value chain. ERP builds the "electronic nervous system" to links all units together and increases overall productivity. In some cases, firms found that they could eliminate most inventories by shifting to faster but more expensive transportation alternatives (e.g. air cargo) that replenished supply just in time. Simply put, ERP allowed information to replace inventory. The emergence of the Internet facilitated more and more information sharing between firms, extending the benefits of ERP from the value chain of an individual firm to the entire value system of firms and their suppliers and customers. ERP can be a vital component in controlling complex supply chains and in the fast developing world of e-business and B2B electronic exchanges. Dell Computer's success in reducing inefficiencies establishes it as a model for many other companies. The Dell Model
Dell's success is based on realizing the strategic power of the supply chain. The core of the Dell model is to deal directly with and sell directly to the customer, and build products to order. Dell collapses the value chain and eliminates two significant cost components: the retailer's mark-up and the costs and risks associated with carrying large inventories of finished goods. Texas-based Dell is the world's largest personal computer maker. Founded in the mid-1980s by a university student, Michael Dell, the company leads the sector with annual growth rates of 30 to 40 per cent. Dell has achieved its success in large part due to its highly efficient value chain integration approach, supported by ERP and - more recently - by the Internet. Dell produces custom-made computers "just in time" for orders received directly from the customer via telephone or the Internet. As Dell receives an order, it shares production requirement information electronically with its suppliers world-wide for immediate delivery to a Dell production facility, where the computer is assembled and shipped directly to the customer within a week. The Dell model relies on demand side pull rather than supply side push - no computer is produced unless there is corresponding demand in the marketplace. Thus the massive queues of inventory usually sitting idle within retail stores, distributors, and factories are virtually eliminated. The productivity advantages of this production model are profound. Dell is able operate with half the number of employees and one-tenth of inventory of its traditional computer competitors. Return on invested capital reached 195 per cent in 1999, compared to 10-20 per cent for traditional manufacturing firms. Companies from around the world have been flocking to Austin, Texas to understand the Dell production model, much as firms had flocked to Tokyo and River Rouge earlier in the century. The opportunity for productivity improvement was enormous; in the USA alone, the cost of goods in inventory of all value systems was nearly $1 trillion in 1997. As the 1990s closed, the 'Dell model' began to spread from high technology to traditional manufacturing sectors such as automobile production. Recently, General Motors, Ford, and Daimler Chrysler announced they were moving to electronic supply chain management systems similar to Dell Computer. If successful, the Dell Model could be every bit as revolutionary to the production structure as Ford's vertical integration and Toyota's lean production models were in earlier eras.
Dell's originality lay in the approach that it adopted in implementing the direct business model. In particular, unlike other computer...