Chapter 6

Supply Chain
Integration

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Dell Desktop PC Supply Chain:
Case Study
Optimizing the Flexibility of
the Desktop PC Supply Chain

©2006 Massachusetts Institute of Technology.

All rights reserved.
Agenda
• L6 vs. L5 Value Comparison

• Root Causes Analysis

• Project Methodology & Next Steps

• Lessons Learned

3
Critical Components of a Desktop PC
& Major Component Manufacturers

Chipset
Motherboard
AMD
Intel ASUS
Foxconn
Intel
MiTAC
Printed Circuit
Board Desktop PC
BTI Electronics Acer
Compeq Apple
GCE Dell
Desktop Chassis Fujitsu Siemens
Plato Electronic
ASUS Gateway
Flextronics HP
LAN Chip Foxconn Lenovo/IBM
Broadcom MiTAC 4
Company list is not comprehensive.
Intel Lite-On Images used on this page belong to the respective companies.
L6 vs. L5
L6

MB
5 Weeks
China Dell
Integration Supplier Customer
Logistics Manufacturing
Center
Chassis

L5 3rd Party Integrator

(managed by Equipment
Manufacturers)

: L5 additional cost
MB
1 Week
Dell
Supplier Manufacturing
Chassis Logistics
Center Customer
5 Weeks
Problem Statement

Since July 2004, Dell and its contract manufacturers (CMs)

have had to adapt an increasing % of L5 manufacturing:
1. Empty chassis are shipped by ocean (L5) to Dell US &
Europe first. Motherboards are then air-freighted to Dell
US & Europe.
2. Dell incurs motherboard expedite/air-freight cost and 3rd-
party integration cost.
3. CMs incur cost for idle labor dedicated for MB-chassis
integration.

6
L6 vs. L5: Value Comparison
L6
• Integrated offshore & outside a Dell facility
• Integrated motherboard-inside chassis
shipped on water
+ Labor savings
+ MB air-freighting costs are eliminated
+ Reduced motherboard packaging costs
– Reduced supply chain flexibility
– More motherboards need to be re-worked
in the event of an MB ECN
L6 is more cost-effective than L5.
L5
• Integrated inside a Dell facility
• Chassis shipped on water
• Motherboards shipped by air
+ Increased supply chain flexibility
– Increased motherboard air-
freighting costs
– 3rd-party integration cost in US
– Separate logistical costs for
chassis and motherboards
7
L5 Driving Increasing Operational
Cost
Costs of air-freighting MBs and 3PI integration have been increasing.
MB-Airfreighting & 3PI Integration Costs

Worldwide
Procurement
Expedite Council
established

Q3FY05 Act Q4FY05 Act Q1FY06 Act Q2FY06 Act Q3FY06 Act Q4FY06 FCST

Americas EMF APJ MDS Total

8
AMF includes 3PI integration cost. EMF and APJ don’t as integration is done in Dell factory.
 L6 vs. L5 Shipments:
% Comparison
L5%
Dell Worldwide L5 vs. L6 Shipments Received
L6%
100%
from a Typical Contract Manufacturer
7% 6% 5% 4% 6% 4%
11% 9% 10%
14% 15%
90%
27%
80%

70% L5 shipped %
has been
60% increasing since
50%
March 2005.
93% 94% 95% 96% 94% 96%
89% 91% 90%
86% 85%
40%
73%
30%

20%

10%

0%
Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05

9
Root Causes Analysis

Majority of expedites are caused by chipset supply

shortage.
3.8%
8.3%

Chipset supplier decommit

or supply issues

24.5% Quality/Eng Issues

Dell Forecast Accuracy

63.5%
NPI

AMF Expedite $ by Root Cause (January to June ’05)

10
Project Scope

Is Is Not
Desktops Laptops, servers, storages,
peripherals
DAO (Dell America Outside DAO
Operation)
Constrained by chipset To improve chipset supply
supply shortage
Focused on factory To improve Dell’s demand-
operational improvement forecasting ability

Motherboard-chassis Fans, power supply, SPAMS

integration (Speakers, Printers,
Advanced Port Replicators,
Monitors, Scanners), or 11

other components
Project Methodology

BPI project team established to evaluate the

following 6 scenarios:
1. Keep as current: 3rd-Party Integrator (3PI) managed by
Equipment Manufacturers
2. DAO Cellular Integration: Enable the Dell factory work cells
to perform L5L10 mfg work
3. Offline Integration: Keep the current L6L10 mfg process
unchanged; add a separate facility to handle MB-chassis
integration work
a. At SLC (Supplier Logistics Center)
b. At a Dell-leased building
4. 3PI managed directly by Dell
5. L6 from Equipment Manufacturers’ Mexico plants 12
Factors to Considered

For each of the 6 scenarios, BPI project team assessed the

following attributes:
1. Process smoothness & sustainability
2. Cost per box
3. Product quality
4. Capital investment
5. Material handling/cost-accounting
6. Logistics
Project Goal:
Identify the optimal scenario
based on these input attributes.
13
 Complexity Analysis

Option 2 Option 2
Option 1 (original) (revised) Option 3A Option 3B Option 4 Option 5
Worldwide Procurement 10 1 1 1 1 5 10
Regional Procurement 8 5 5 5 5 5 10
Master Scheduler 5 5 5 5 5 5 5
Production Control 5 10 10 7 7 7 5
Operations 1 10 10 5 5 1 1
DAO Quality 5 10 10 5 5 1 1
Processing Engineering 1 10 10 5 5 1 1
Supplier Quality Eng
(Regional) 10 1 1 1 1 5 7
Supplier Quality Eng
(Global) 1 1 1 1 1 1 10
Cost Accounting 5 1 1 10 10 10 1
Inventory Control 1 5 5 5 7 10 1
Logistics 5 1 1 5 5 5 10
Total: 57 60 60 55 57 56 62
Cost per Box $10.07 $7.00 $7.90 $7.54 $7.70 $7.61 $7.00
Legend:
The “Cost per Box” data has been modified to respect Dell’s data confidentiality.
Option 1: EM-managed 3PI Option 2: Integration at DAO work cells
Option 3A: Integration at SLC/hub Option 3B: Integration at Dell-leased bldg
14
Option 4: Dell-managed 3PI Option 5: Integrated chassis from Mexico
Option 2 vs. 4: Value Comparison

Option 2: Integration at DAO Work Cells Option 4: Dell-managed 3PI

+ Lower capital expenditure investment
+ Less impact to business if chipset supply
reverts to 100% L6
+ Fit the Dell Direct model better
– Builder headcount is more difficult to
scale
+ Dell has direct control over the 3PI
+ More clear definition of quality issues
ownership
+ Less manufacturing infrastructure
change required, less impact on
existing supply chain network

– Increased inbound & scheduling + Little additional capital expenditure

complexity investment, little lead time change

– More part numbers to manage – Only an incremental change from the

original manufacturing design
– Factory thru-put rate is downgraded

Option 4 enables Dell to focus on the more value-

added portion of the MB-chassis integration. 15
Lessons Learned

1. Supply chain coordination requires involvement from all

partners in the chain (customer, supplier, sub-tier
suppliers).
2. A well-planned strategy complements strong operational
execution ability from supply chain partners.
3. Change management requires 3 key ingredients:
• Top-down leadership
• Bottom-up engagement
• Cross-functional coordination
4. Qualitative judgment is just as important as or more
critical than quantitative analysis.
5. Working in a bi-lingual/bi-regional setting has its perks
and challenges. 16
Discussion and Q&A

Questions and Thoughts

17
Back-up

18
 Manufacturing Costs: L5 > L6.

Costs Common to L5 and L6

Costs of doing either L5 or L6: Type
Raw material costs Materials
China materials transportation costs Logistics
China assembler's cost (Foxconn performing L1-->L5) Labor
Chassis ocean-shipping cost Logistics
Chassis US transportation cost (trucks, rail) Logistics
Chassis inventory holding cost at SLC Inventory Holding
US assembler's cost at Dell (from L7-->L10) Labor

L6 Only Costs
Costs of doing L6, rather than L5: Type
China assembler's cost (Foxconn performing L6) Labor
L5 Only Costs
Costs of doing L5, rather than L6: Type
Motherboard packaging cost Materials
Motherboard air-freight/expedite cost Logistics
Motherboard US transportation cost Logistics
Motherboard inventory holding cost at SLC Inventory Holding
Chassis & motherboard US transportation cost
(from SLC to local/regional integrator and back) Logistics
Local/regional integration cost (Accurate, Saberex) Labor 19
Motherboard rework cost at Dell Labor/Quality
Dell L5 mgmt cost (e.g. Expedite Council) Labor
 Pros & Cons of the 6 Options

Description Pros Cons

1 Current • Least impact for Ops & PE • Most expensive option
Process, EM- • Dell does not own inventory during MB- • WWP and Regional Procure. have more intense EM and
managed 3PI chassis integration at 3PI 3PI mgmt/coordination
• Most difficult option for SQE
2 L6 at Dell • Less complex for WWP • Long ramp time of new builders
work cells • SQE mgmt is reduced • Difficult for PC to run deviations of both L5 and L6 in
• L5 and L6 parts are ordered and tracked one process simultaneously
independently  clear-cut Cost Accounting • Work cells config need to change  Greatest impact
• Easiest option for Logistics for Ops and PE
• DAO Quality concern from an L5-L6 hybrid mfg model

3 L6 at Dell SLC • Less complex for WWP • Most complex for Cost Accounting
A • SQE mgmt is reduced • Extra PC and IC headcounts required
3 L6 at Dell- • Less complex for WWP • Most complex for Cost Accounting and IC
B leased • SQE mgmt is reduced • Extra PC and IC headcounts required
external
location • Requires additional lease commitment

4 Dell-managed • Easiest option for Ops & PE • Most complex for Cost Accounting and IC – difficult to
3PI • DAO Quality expected to improve as Dell manage Parts Cost at a Dell-managed 3PI
directly manages 3PI
5 L6 from EM • Lowest possible cost compared to China L6 • Requires Regional Procure. to manage L6 out of EM
(China, • Overall easiest option for Dell facilities from China, Mexico, and possibly other regions.
Mexico, • Increased SQE mgmt
and/or • Most manageable for Master Sch./COC, PC,
elsewhere) IC, Ops, and DAO Quality 20
• Multi-regional logistics coordination is a concern.
 6.1 Introduction
 Effective SCM implies:
 Efficient integration of suppliers, manufacturers, warehouses,
and stores.
 Coordinate activities across the supply chain
 Improve performance: reduce cost, increase service
level, reduce the bullwhip effect, better utilize
resources, and effectively respond to changes in the
market place.
 Challenges can be met by integrating:
 the front-end, customer demand,
 to the back-end, production and manufacturing portion of the
supply chain.
 Various supply chain integration strategies:
 Push, pull, push–pull strategy.
 Matching products and industries with supply chain
strategies.
 Demand-driven supply chain strategies.
 The impact of the Internet on supply chain integration. 6-21
 6.2 Push, Pull, Push-Pull
Systems
 Push and Pull traditional categories of
manufacturing operations
 More recent hybrid strategy of combining
the two, Push-Pull systems

6-22
 Push-Based Supply Chains
 Production and distribution decisions based on
long-term forecasts.
 Manufacturer demand forecasts based on
orders received from the retailer’s warehouses.
 Longer reaction time to changing marketplace:
 Inability to meet changing demand patterns.
 Obsolescence of supply chain inventory as demand
for certain products disappears.
 Variability of orders received much larger than the
variability in customer demand due to the bullwhip
effect.
 Excessive inventories due to the need for large safety
stocks
 Larger and more variable production batches
 Unacceptable service levels
 Product obsolescence
6-23
 Bullwhip Effect in Push-Based
Supply Chains
 Leads to inefficient resource utilization
 Planning and managing are much more difficult.
 Not clear how a manufacturer should determine
production capacity? Transportation capacity?
 Peak demand?
 Average demand?
 Results:
 Higher transportation costs
 Higher inventory levels and/or higher manufacturing
costs
 more emergency production changeovers

6-24
 Pull-Based Supply Chains
 Production and distribution demand driven
 Coordinated with true customer demand rather than
forecast demand
 firm does not hold any inventory and only responds to
specific orders.
 Intuitively attractive:
 Reduced lead times through the ability to better
anticipate incoming orders from the retailers.
 Reduced inventory since inventory levels increase
with lead times
 Less variability in the system
 Decreased inventory at the manufacturer due to the
reduction in variability.

6-25
 Implementation of Pull-Based
Systems
 Often difficult to implement
 when lead times are long
 impractical to react to demand information.
 more difficult to take advantage of economies of scale
 Advantages and disadvantages of push and pull
supply chains:
 new supply chain strategy that takes the best of both.
 Push–pull supply chain strategy

6-26
 Push-Pull Strategy
 Some stages of the supply chain operated
in a push-based manner
 typically the initial stages
 Remaining stages employ a pull-based
strategy.
 Interface between the push-based stages
and the pull-based stages is the push–
pull boundary.

6-27
 Supply Chain Timeline

FIGURE 6-8: Push-pull supply chains

6-28
 General Strategy
 Make a part of the product to stock –
generic product
 The point where differentiation has to be
introduced is the push-pull boundary
 Based on extent of customization, the
position of the boundary on the timeline is
decided

6-29
Identifying the Appropriate Supply
Chain Strategy

FIGURE 6-9: Push-pull supply chains

6-30
 Impact of Demand Uncertainty and
Economies of Scale
 Demand Uncertainty:
 Higher demand uncertainty leads to a preference for
pull strategy.
 Lower demand uncertainty leads to an interest in
managing the supply chain based on a long-term
forecast: push strategy.
 Economies of scale:
 The higher the importance of economies of scale in
reducing cost
 The greater the value of aggregating demand
 The greater the importance of managing the supply chain based
on long-term forecast, a push-based strategy.
 Economies of scale are not important
 Aggregation does not reduce cost
 A pull-based strategy makes more sense. 6-31
Implementing a Push–Pull Strategy
 Achieving the appropriate design depends
on many factors:
 product complexity
 manufacturing lead times
 supplier–manufacturer relationships.

 Many ways to implement a push–pull

strategy
 location of the push–pull boundary.
 Delllocates the boundary at the assembly point
 Furniture manufacturers locate the boundary at the
production point
6-32
Impact of the Push-Pull Strategy
 Push portion
 Low uncertainty
 Service level not an issue
 Focus on cost minimization.
 Long lead times
 Complex supply chain structures
 Cost minimization achieved by:
 better utilizing resources such as production and
distribution capacities
 minimizing inventory, transportation, and
production costs.
 Supply Chain Planning processes are applied.
6-33
Impact of the Push-Pull Strategy
 Pull portion
 High uncertainty
 Simple supply chain structure
 Short cycle time
 Focus on service level.
 Achieved by deploying a flexible and
responsive supply chain
 Order-fulfillment processes are applied

6-34
 Characteristics of the Push and
Pull Portions of the Supply Chain
Portion Push Pull

Objective Minimize cost Maximize service level

Complexity High Low

Focus Resource allocation Responsiveness

Lead time Long Short

Processes Supply chain planning Order fulfillment

6-35
Interactions of the Two Portions

 Only at the push-pull boundary

 Typically through buffer inventory
 Different role for the inventory in each portion
 In the push portion, buffer inventory is part of the
output generated by the tactical planning process
 In the pull system, it represents the input to the
fulfillment process.
 Interface is forecast demand
 Forecast based on historical data obtained from the
pull portion
 Used to drive the supply chain planning process and
determine the buffer inventory.

6-36
 6.3 The Impact of Lead Time

 Longer the lead time, more important it is

to implement a push based strategy.
 Typically difficult to implement a pull
strategy when lead times are so long that
it is hard to react to demand information.

6-37
 Impact of Lead Time

FIGURE 6-10: Matching supply chain strategies with products:

the impact of lead time and demand uncertainty

6-38
 Impact of Lead Time
 Box A
 Items with short lead time and high demand uncertainty
 Pull strategy should be applied as much as possible.
 Box B
 Items with long supply lead time and low demand uncertainty.
 Appropriate supply chain strategy is push.
 Box C
 items with short supply lead time and highly predictable demand.
 Continuous replenishment strategy
 Suppliers receive POS data
 They use these data to prepare shipments at previously agreed-
upon intervals
 A pull strategy at the production and distribution stages and push at
the retail outlets.
 Box D
 Items with long lead times are long and unpredictable demand
 Inventory is critical in this type of environment
 Requires positioning inventory strategically in the supply chain
6-39
 6.4 Demand-Driven Strategies
 Requires integrating demand information
into the supply chain planning process
 Demand forecast:
 Use historical demand data to develop long-term
estimates of expected demand
 Demand shaping:
 Firm determines the impact of various marketing
plans such as promotion, pricing discounts,
rebates, new product introduction, and product
withdrawal on demand forecasts.

6-40
Forecast Errors Are Always Present!
 High demand forecast error has a detrimental impact on
supply chain performance
 Approaches to improve accuracy
 Aggregate forecasts are more accurate,
 Select the push–pull boundary so that demand is aggregated over
one or more of the following dimensions:
 Across products/geography/time
 Use market analysis and demographic and economic trends
to improve forecast accuracy (see Chapter 2 for details).
 Determine the optimal assortment of products by store
 Reduce the number of SKUs competing in the same market.
 Incorporate collaborative planning and forecasting
processes with your customers
 Demand forecast by SKU by location has to be supported
by the supply chain
 Interaction of demand planning and tactical supply planning
 Iterative process

6-41
 6.5 The Impact of the Internet on
Supply Chain Strategies
 Expectation that increasing use of the
internet would solve a lot of the business
problems
 Reality was very different
 Many of the problems in the internet-
based businesses were related to
logistics strategies

6-42
 Successes and Failures
 Notable Failures
 Furniture.com
 Peapod.com

 Notable Successes
 Amazon.com
 Hybrid of successes and failures
 Cisco
 $2.2B inventory write-off in 2001
 Has been successful in leveraging the internet
subsequently

6-43
 E-Business
 E-business: a collection of business
models and processes motivated by
Internet technology and focusing on
improvement of extended enterprise
performance.
 E-commerce: ability to perform major
commerce transactions electronically.

6-44
 Key Observations
 e-commerce is only part of e-business.
 Internet technology is the force behind the
business change.
 Focus on the extended enterprise
 Business-to-consumer (B2C)
 “direct to customer,”
 Retail activities over the Internet, and includes
products, insurance, banking, and so forth.
 Business-to-business (B2B)
 Conducted over the Internet predominantly between
businesses.
 Includes:
 electronic sourcing (the so-called eSourcing)
 reverse auctions
 collaboration with suppliers and vendors to achieve
common goals.

6-45
 Grocery Industry
 Typical supermarket employs a push-based strategy
 Peapod was built on pure pull strategy with no inventory
and no facilities.
 Significant service problems with high stockout rates
 Changed to a push–pull strategy by setting up a number of
warehouses
 Warehouse covers a large geographical area
 Aggregated demand
 Other challenges:
 Reducing transportation costs
 Short response time
 Low customer density
 Products have low demand uncertainty
 high economies of scale in transportation cost
 push-based strategy is more appropriate.

6-46
 Book Industry
 Initial model of Amazon.com a pure pull system with no
warehouses and no stock.
 Ingram Book Group supplied most of Amazon’s customer
demand.
 As volume and demand increased:
 Amazon.com’s service level was affected by Ingram Book’s
distribution capacity
 Using Ingram Book in the first few years allowed Amazon.com to
avoid inventory costs but significantly reduced profit margins.
 As demand increased distributor no longer required.
 Current Amazon.com:
 Several warehouses around the country where most of the titles
are stocked.
 Inventory at the warehouses is managed using a push strategy
 Demand satisfied based on individual requests, a pull strategy.
 Slow moving low volume books and CDs are not stocked
at Amazon distribution centers
 Amazon orders those when demand arrives.
6-47
 General Retail Industry
 Late to respond to competition from virtual
stores and to recognize the opportunities
provided by the Internet.
 Brick-and-mortar companies are adding an
Internet shopping component to their offering.
 Already have the distribution and warehousing
infrastructure
 Click-and-mortar firms
 High-volume, fast-moving products stocked in stores
 Push strategy
 Low-volume, slow-moving products are stocked
centrally
 Push-Pull strategy

6-48
 Traditional Fulfillment Versus e-
Fulfillment
Traditional fulfillment E-fulfillment

Supply chain strategy Push Push–pull

Shipment Bulk Parcel

Reverse logistics Small part of the business Important and highly complex

Delivery destination Small number of stores Large number of geographically

dispersed customers
Lead times Relatively long Relatively short

6-49
 Summary
 Implementation of push-pull strategies and
demand-driven strategies have helped many
companies to improve performance, reduce
costs, increase service levels.
 Collapse of many Internet companies shows that
e-business has great challenges.
 Companies need to:
 Identify the appropriate supply chain strategy for
individual products.
 Case for no physical infrastructure or inventory is
tenuous
 Push–pull strategy
 advocates holding inventory
 although it pushes the inventory upstream in the supply
chain.

6-50