Dell Has "Excess Inventories?"
Article Link –> Dell Will Miss Q3 Target – CIO News Alerts – Blog – CIO
Dell Computer announced they are not going to meet Wall Street estimates for the second straight quarter, so it's open season on them by the analysts and the press.
From my experience, Dell is not a model “TPS” company, but they are usually held up as a “lean” example, mainly due to the build-to-order model, their flow-based factories, and pulling material from suppliers every two hours (we could argue if they are just pushing the problem upstream or not).
But still, they're one of the most successful U.S. companies of the last decade, so you hate to see them hurting. One quote rings loudly:
Many observers, including customers, partners, and analysts, fret that Dell has been cutting costs so much in order to hit financial targets in recent quarters that it has compromised other measures of performance, including customer support and, possibly, product quality. “The key is to keep customers happy in an efficient fashion,” says Maxwell. “Not getting the processes right canreally snowball through the system quickly.”
You can't just cut costs. “You can't cut your way to greatness” – was that Tom Peters who said that? I've seen quotes from Toyota Georgetown people that say their goal isn't “cutting costs”, but rather, “increasing profitability.” Dell could learn from that. They might be cutting costs now, but how many customers are they driving away due to poor customer service and quality problems. The Business Week article mentioned some major motherboard glitches in Dell's corporate PC's, that's expensive to them and to customers both.
What really shocked me though, was the WSJ headline talking about Dell's “excess inventories”. The article from CIO Magazine said:
Dell, known throughout the technology industry for its aggressive inventory management practices, is not commenting on the nature of the excess parts, [Dell spokesman] Blackburn said.
This doesn't make sense, does it? Dell famously has “two hours” of raw material and they build everything build-to-order. Ah, but that's the PC business. Do you think all of the excess inventory comes from the new consumer businesses that build using the “typical” Asia contract manufacturer supply chains? Things like plasma TV's, printers, MP3 players, and printers are NOT done build-to-order. I bet this is hurting them in the inventory turns metrics.
Update: Business Week says the inventory problem is “excess” parts for product they no longer sell. That still doesn't make sense if Dell only buys parts from suppliers on a Just In Time basis, does it?
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Regarding the quality problems, the Dell spokesman said:
“There’s no safety risk associated with it and no data loss associated with it,” he said. “The (affected) systems just won’t power up.”
Oh, that’s OK (as a customer). They “just won’t power up”. That’s no big deal, is it??? ;-)
Also, the Dell spokesman claims, in the Business Week article, that it’s a “relatively small number” of defective PC’s that need the motherboard replaced.
$300 MILLION is the charge they are taking for this repair.
Assuming $50 for a motherboard and $100 for the repair labor, that’s 2 MILLION computers.
Even a ridiculously expensive repair, at $1000 each, that’s 300,000 PC’s.
Ouch. The cost of poor quality was high, indeed.
It seems to me that this is the continuing hammer impact of Wall Street on a manufacturing company. The complaint is that the earnings per share will only be $.31. These are the same people who advised Toyota to give more profit to their shareholders and invest less in developing new technologies.
There was an interesting article on NPR this morning (go to http://www.npr.org/templates/story/story.php?storyId=4984222)about the shift in investing and the role of fund managers. It would take one year of corporations saying that they were not going to give out quarterly reports to make a fairly large improvement in the decision making.
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