Dell Computers (A): Field Service for Corporate Clients

Service Operations Management Case Analysis Report Dell computers since its interception has been doing well since its interception, by cost cutting and keeping itself restricted to efficient supply chain management. It was keen in developing and selling customized PC to each customer as efficiently as possible. The case directs us to a situation where PC market seems to be dying and Dell seems to be surviving at cost of reduction in its margins, where as Dell dont have its presence in server market which has better margins to play with. The case ends in a dilemma of Kapoor, one of Dells loyal customers to expand their line of business to large servers or switch to another hardware vendor i.e. IBM, H.P. etc.

Group 8

Aashish Jethani - 2010004 Debashish Bagg - 2010298 Namita Choudhary - 2010127 Prabhuvardhan Reddy - 2010159 Sreechand Nambiar -2010230 Susnata Chakraborty -2010236 Tanuraj Kulshreshtha -2010240 Mudit - 2010123

Service Operations Management

Dell Computers (A): Field Service For Corporate Clients

Table of Contents Introduction ..................................................................................................................................... 2 Dells corporate philosophy and initial success .............................................................................. 2 Operating strength ........................................................................................................................... 3 Problem Identification .................................................................................................................... 4 Pros and cons of expanding to new market .................................................................................... 5 Call centers for corporate clients .................................................................................................... 5 New Market and challenges ............................................................................................................ 6 Possible outsourcing ....................................................................................................................... 7 Reference: ....................................................................................................................................... 8

Figure 1: Cumulative change in year on year change in some operating ratios ............................. 4 Table 1: Calculation for SGA, R&D and Special charges per unit sold. ........................................ 3 Table 2: Year on Year Performance ............................................................................................... 4 Table 3: Initiatives and payoff ........................................................................................................ 5 Table 4: IBM cost structure for servers (High and Middle range) ................................................. 6 Table 5: Approximation of Dell employee cost structure ............................................................... 6 Table 6: Evaluation of vendor for outsourcing ............................................................................... 7 Introduction Dell was founded in 1983 by Michael Dell, an 18 year old college freshman from Texas who started out upgrading hard drives for IBM compatibles on nights and weekends. Within a year, his service business had grown to an incredible $6 million from performing computer upgrades for local area businesses and he dropped out of school to concentrate on the business. When Dell changed his offering to custom built-to-order machines, the business exploded, with $70 million in sales by the end of 1985. Evolving into an assembler company, Dell was able to exploit many opportunities in hardware industry and swiftly adapted to meet market conditions. Five years later, total sales had grown to an unbelievable $500 million and Dell became nationally known as a supplier of state-of-the art desktop and portable computers. Dell continually achieved phenomenal records in sales and profit growth, eventually making it the most successful company ever in the PC industry, surpassing $25 billion in 2000. As one of the world's premier providers of computer products and services, Dell was the US market leader in its core products, the desktop and laptop markets by 2001. Dell designed and manufactured comprehensive family of desktop, notebook, workstation, server, and data storage solutions for virtually every computing need. Dell's competitive advantage is its direct customer focus. Constant interaction with its customers gives Dell the ability to understand unique computing needs that drive individual and enterprise productivity. Dells corporate philosophy and initial success Group 8 Page 2

Service Operations Management

Dell Computers (A): Field Service For Corporate Clients

Dell started off leveraging investments that are made by others and focused on delivering solutions and service to customers, rather than creating each part of the value chain on their own (pg 2 of Ref 4). Dell was focussed on selling directly to customers hence no intermediaries. This strategic move of Dell helped them to get firsthand experience of their customer and leveraging others investment helped them to reduce their operating cost. Direct sales to the customer also helped them in reducing the intermediation cost and also gave them flexibility of lowering and increasing their operating margins. A result of this philosophy was that the Dells shipments increased by 9.8% from 2000 to 2001 where the overall market of PC were shrinking by 8.1% (Ex 2). Also Dell was leading in the customer satisfaction report consecutively for the last 4 years. It can be hence summarized that Dell was initially successful because of the following 1. Dell Direct: Business clients comprised 90% of Dells customer. Main help came from Premier Pages. 2. Low Inventory Control: Dell viewed inventory not only as an unnecessary cost also a sign of a problem within the product delivery system. Reduction of COGS and days of inventory over the years. This also helped Dell to push cutting edge of technology to deliver innovative solutions to customers 3. Low-Cost Production and Low Prices: No intermediary to decide on mark up also reduction in operating cost per unit from $330 to $240 in a span of 5 years. 4. Customized Web Page: Customized Web pages easy to use front-end, web-based customer sales and support system for corporate client. Advantage of Premier is discussed below. Operating strength Dells operating strength was reduction of days of inventory. One of dells main customers was business clients that made up to 90% of its customer base. This helped in increasing their sales. They were also inclined in making and maintaining customer relationship though not innovating on that front. One of the main innovations on the service front was corporate Premier Pages. This helped them to reduce the processing charges to $50 which is 25% of the selling, general and admin expenses (which is approx $205). Table below shows the calculation of per unit cost.
Table 1: Calculation for SGA, R&D and Special charges per unit sold.

Net revenues (in millions) (Ex 7) $31,888 COGS $ 25,455 SGA (Ex 7) $3,193 R&D (Ex 7) $ 482 Special charges (Ex 7) $105 Average total revenue per unit ($) 2,050 Units sold (millions) 15.55 COGS/ unit ($) $1,636 SGA/ unit ($) $205 R&D/ unit ($) $30.99 Special charges / unit ($) $ 6.75 Margin per unit $ 171.2

Group 8

Page 3

Service Operations Management

Dell Computers (A): Field Service For Corporate Clients

This table also says that the margin per unit being $171 only $50 is almost 29% of the margin that is saved in the processing. It also added to reduction of error in procurement cost till 200 per million transactions. Premier Pages also helped them to customize and alter the product offering so that they can improvise and improve the product offering according to improving technology. The after service that is being needed for other vendor were also reduced due to the high understanding of the customer requirement that Dell had and hence saving on after sales service still remaining the best vendor to its customer. Problem Identification By 2001, year the case has been written Dell has successfully reduced its days of inventory to 5 from 31 in 1996 (Ref 1, 2). Dell has captured 24% market in USA and 13.4% in worldwide market (Ex 2, 3 of Ref 4). Even after all the above success Dells operating income to net revenues have been declining at the rate of 7% after it has also cut down its margins from 21.3% in October, 2000 to 17.5% in July 2001 (pg. 2 of Ref 4), and laid down 5,000 of its employees to remain in profit. On cumulative basis Gross margin to Net revenues have depleted by 6%, so have operating margin to net revenues, the only one ration that seems to have still been cumulatively positive is Net income to net revenues that to at 5% in comparison to 15% in 1998 but at an increase in investment and other income and change in accounting standard (non core business related activities).
Figure 1: Cumulative change in year on year change in some operating ratios

Year on Year change in Ratio

25% 20% 15% 10% 5% 0% -5% -10% Gross Margin/ Net Revenues 1998 1999 2000 2001

Years Operating Income/ Net Revenues

Net Income / Net Revenues

Note: if a ratio for example Net income/ net revenue is 5% in 2001 it means if in 1998 it was 115 then in 2001 it is 105.

Table 2: Year on Year Performance

Units sold (millions) Selling, general and administrative per unit R&D per unit Special ch/ unit COGS per unit Margin per unit Operating Expenses per un it SGA/ employee

3 287 44 0 2120 248 331.28 0.079

5 8 11 16 254 230 213 205 43 35 33 31 0 0 17 7 2026 1821 1785 1636 278 264 202 171.20 296.55 265.36 263.16 243.01 0.074 0.073 0.065 0.079

Group 8

Page 4

Service Operations Management

Dell Computers (A): Field Service For Corporate Clients

Pros and cons of expanding to new market Reasons for entering large server: 1. The core competence of Dell, the sale model-Dell direct, can extend to other segment, large server 2. The excellent customer relationship management will help Dell to break into the new segment. 3. The high service quality in PC field makes customers believe in Dell's new product. Reasons for not entering large server: 1. The Dell-direct may not succeed in large server due to different requirements. The customer of large server has different background. 2. The position of Dell is to focus on low-cost production and low prices. This position cannot be accept by large server market. 3. The Price wars are expected to take profits even lower. 4. The existed competitors are doing well in field service. Dell's strategy might not make difference to them. 5. The way to large server is incremental. Dell has to follow customers' needs. Such needs are different from PC market. 6. The trading and cost for an inhouse field service team are more critical for server. Call centers for corporate clients This is one of the most rewarding moves that seem to be in support of the move that Dell might take in entering the server market. Dell that is looked up as a vendor who is active in reduction of days of inventory that is being hold and also employing low cost labour, was able to change this perception to customer friendly vendor.
Table 3: Initiatives and payoff

Initiatives Ship to target First-time Resolvers

Call centre representatives Frequently asked questions

Feedback for the product

Payoffs 1. Reduction of cost of transit 2. Improved customer service 1. Improved number of issues solved in the first go 2. Thus improved customer perception of the product and hence reduced number of technical visits thus reducing after sales cost. 1. Reduction of technical visits to 75% 2. Hence enabled company to place more stringent constraints on service levels that can be delivered to customer 1. Reduced the technical visits required further 2. Help improve after sales service turnover time 3. Also leveraged the technical knowhow of the technical team for its advantage 4. It helped in gaining customer satisfaction without employing extra resources for the same 1. Helped in improving Frequently asked questions 2. Helped as gold mine for product development team and support team to

Group 8

Page 5

Service Operations Management

Dell Computers (A): Field Service For Corporate Clients

handle queries more effectively hence reduction of cost.

New Market and challenges Dell seems to have been caught up with the dilemma of expanding or not to the server market. Before we move on to the question of expanding or not lets look at the facts of the server market. IMB leads both middle and high range server market with 28.7% and 35.9% of market share respectively. It is said that the higher end server market has a margin as high as 40% to 50% (Ref 3). Let 50% of it goes into employ cost i.e. 50%*40% *($ 4996 + $ 4149) = $1,829. Also given that the number of customer of IBM is 12,000 (pg 7), for which it needs 1,35,000 employee to service. This gives the service cost is $1.5 million per customer, and $44,444 as cost per employee.
Table 4: IBM cost structure for servers (High and Middle range)

IBM cost Revenue Middle range server (million $) High end server (million $) Total (million $) Number of client (Pg 7) Margin of profit (Ref 3) Expenses (million $) Number of after sales employee (Pg 7) % of employee cost (Assumption) Employee expenses (million $) Employee expenses per client (million $) Employee expenses per employee ($) Employee per customer $ $ $ 4,996 4,149 9,145 12,000 50% $ 4,573 135,000 40% $ 1,829 0.38 $ 33,870 $ 11

Lets make a cost analysis of employee cost structure on the same line for Dell expanding to middle and high end server.
Table 5: Approximation of Dell employee cost structure

i ii iii iv v vi vii viii

ix x xi xii

Approximate cost if Dell enters Cost cut due to CSR's (in PC) (Pg 6) Cost cut due to CSR's ( technicality is double) (Assumption) non First time resolves (PC case) (Pg 6) non FTR's (for server is at least double) (Assumption) Multiplication factor due to repetition Service level provided (hrs) Service level in server (hrs) Multiplication factor due to service level (Assumption) Total Multiplication factor (ii*v*viii) case 1 Employee expenses (Table 1) Employee cost in expansion (ii*v*viii*ix) if Efficiency of Dell employee in Server is less (Assumption) Employee cost in expansion case 2 Number of employee per customer (PC) (per million) Number of employee per customer in server (per million) (xii*viii/(ii*(1+iv))

25% 50% 10% 20% 1.2 24 4 6 3.6 $ $ $ 205 738 50% 1,476 2571.5 25715

Group 8

Page 6

Service Operations Management Employee cost in expansion

Dell Computers (A): Field Service For Corporate Clients $ $ $ 2,053 33,870 10,839

case 3 xiii Employee expenses (IBM cost) (Assumption) xiv Employee cost in expansion (ii*v*viii*xiii)

In all the cases as shown in table 4 we can see Dell can be doing better even in the case of serving server market. Case 1 calculates employee cost needed to expand to server market assuming that CSRs will be half as effective, so are FTRs. Reduction of service level from 24 hrs in PC market to 4 hrs that is promised in (Server market) is also assumed to cost 6 times more. Cost of expansion is given $ 1,476 per employee in comparison to IBM paying $44,444 per employee. Case 2 attempts to calculate number of employees per customer needed to serve in server market under the same set of assumption. It can be seen that Dell would need only .0257 employees per customer where the number for IBM is approx 11. Case 3 assumes that after sales service is outsourced to IBM. Hence the cost of employee of IBM is considered to calculate total cost that will be incurred if Dell could make up the service level as done in PC (previous) market. It is low as Dell would max need 3.6 employees/ customer and IBM employee 11. The main drawback in the above calculation is that most of the calculation that are done in this case is based on assumptions of the extension of results from the call centre of PC market hence might not be effective. It can be also see that the dell is yet to enter the market and hence might not be able to enjoy the margin others are able to enjoy. Dell also has build up its expertise in PC market over the period of year which would be needed in the server market. Dell also will incur either training cost (in-house support) or cost of outsourcing (for after sales service). On a long run if Dell is able to sustain the initial investment and make the service level as in PC market then dell will be able to reap heavy harvest in this market too else it might be a wrong move. Numerically four hours of support time is feasible, marketing should be also good but it might be heavy on Dells bottom line initially. Possible outsourcing As given in the case Dell has been consistently performing well and growing in America (Ex 7, Ex 2), which consists of more than 70% of market share hence tapping on the American market for large and medium range server is a better option. Dell, if follows on the operational strategy that was applied for PC market will need the support team for initial few years and then will be able to replicate the service in-house if needed.
Table 6: Evaluation of vendor for outsourcing

Points in favour Points against Decision One 1. High reach in the target market 1. Customer interface will vary hence against 2. Highly experienced in providing service for Dell-direct server especially high end (Pg 7) 2. Might or might not make up to the SLAs hence a risk at Dells end 3. Stringent Dells operation and service policies may be heavy for them IBM

Group 8

Page 7

Service Operations Management 1. High reach in the target market 2. Highly experienced in providing service for server especially high end (Pg 7) 3. High employee/ customer ratio hence will have workforce to meet SLA 4. Might help in boast in sales due to brand association with IBM.

Dell Computers (A): Field Service For Corporate Clients 1. Direct competitor in the market 2. Will it have any pressure to deliver the SLA of Dell 3. Might lead to breach of core competency i.e. operational efficiency to IBM.

Above table is a comparison of the two options that are available for outsourcing. Though both the options are weighed equally in terms of pros and cons of each it can be seen that Decisions One is a better options as its gives bargaining power to Dell and also serves the bill exactly as needed financially and operationally but IBM is better in terms of Marketing though SLAs might need to be compromised in both the cases. Reference: 1. 2. 3. 4. Dell Annual Report, 2000 Dell Annual Report, 2001 Computers: Hardware. Industry Survey, Standard and Poors, May 23, 2002. Frances. X. Frei., Amy. C. Edmondson, Dell Computers(A): Field Service for Corporate Clients, Harvard Business School, Case No: 9-603-067.

Group 8

Page 8