Dell strategy: Mobile PC outsourcing benefits and drawbacks

Since Michael Dell resumed the position of chief executive officer at Dell Inc. in January 2007, the company has undergone tremendous changes with regard to its channel strategy as well as production management. Specific to its supply chain, Dell's recent decisions indicate the formation of a more homogeneous and standardized outsourcing strategy across major mobile PC OEMs, which in turn will have significant impacts on companies operating in the mobile PC industry.

Customization has become increasingly costly
For a long time, Dell prided itself on offering its customers with a high degree of product customization, which few of its competitors can match. Customers simply go to Dell's Web site, specify the desired sorts of processors, optical devices, memory modules and so on, place the order and then expect to receive the custom-made product within a few days.

In the back end, Dell's operates complex Configure-To-Order (CTO) operations to support this practice. For its mobile PCs, Dell maintains three internal manufacturing facilities to support the major end markets it serves.

Traditionally, Dell had its Original Design Manufacturers (ODMs) ship only the bare-bones mobile PCs-defined as units without the aforementioned, customizable parts-to the three internal facilities, complete the final configuration according to customer requirements and then ship the finished goods to hubs in the end market before they reach the customers.

Over time, however, the benefits of this practice began to become outweighed by the drawbacks which included overhead, inventory carrying-costs and longer time to market. This situation forced Dell to re-consider its overall manufacturing strategy.

How will Dell respond? Who benefits from Dell's strategic shift?
Starting from late 2007, Dell began to experiment with a manufacturing approach that had been used by Hewlett-Packard (HP) and Acer for years, which was to let ODMs ship completely-built mobile PCs from the ODMs' facilities directly to the OEM's logistics hubs in the end markets.

In 2008, Dell continued with this approach and increased the percentage of fully-built mobile PCs that originated from its ODMs.

Conventionally, Dell uses Wistron for the consumer segment and Compal for the enterprise segment while Quanta covers both segments for Dell. Sources indicate that the percentage of Wistron's fully-built mobile PCs for Dell surpassed 50 percent in 2008.

Since Dell still retained the majority of final configuration for its enterprise mobile PCs, the percentage of Compal's Dell-bound bare-bone units was still extremely high in 2008.

However, as Dell continues to rationalize its manufacturing strategy, moving closer to HP and Acer, Compal may see a significant increase in its fully built mobile PC shipments to Dell in 2009, which will increase Compal's revenue potential.

iSuppli's estimate suggests that if Dell shifts all CTO operations to its ODM partners, the ODMs can expect at least a $532 million increase in their top-line growth because of the incremental materials that would now be included in their shipments.

So What?
Dell's decision to gradually use ODMs for CTO operations indicates the company's intention to relinquish more supply chain control to ODMs. Now that HP, Acer and Dell-the three largest mobile PC OEMs-are on board and becoming homogeneous with their outsourcing approaches, the already-dominant ODMs in the mobile PC supply chain will further solidify and exercise their influence over the mobile-PC supply chain.

More information available here.

Source: iSuppli