|YOUR COMPUTER, YOUR WAY|
March 10, 1999
|Correspondent Tom Bearden looks at changes in the way computer manufacturers are doing business.|
TOM BEARDEN: Henry Ford revolutionized manufacturing when he invented the assembly line. Historians may eventually put Michael Dell in the same class of innovators. He's turned the assembly line idea on its ear and parlayed it into a host of factories, like this one, all over the world. The story goes that in Henry Ford's factory, you could have any color Model T you wanted, as long as it was black. If you want a Dell Computer, it's custom-built to your specifications. They call this the direct model of manufacturing, and it's the hottest idea in computers since the microprocessor.
Michael Dell got into making computers as a student at the University of Texas in the early 80's. He took orders from fellow students, bought old computers, and then upgraded and customized them. Dell reportedly made $180,000 in his sophomore year, and promptly left school to start his own company.
Revolutionizing the way PCs are sold.
MICHAEL DELL: When I was in college, I saw that the computer distribution system in this country was really very inefficient. You would buy a computer for $3,000 that consisted of about $600 worth of parts, and there were, you know, several different steps along the way that weren't really needed. So I saw that by having a direct relationship with the customer, you could not only provide a better level of service, but do so at a much better cost, and that was the basis of the founding of our company.
TOM BEARDEN: Dell's dorm-room idea has grown into a company with nearly 18,000 employees in 42 countries. Dell Computers are built in Texas, Ireland, Malaysia, and China, and another plant will open later this year in Brazil. It's the fastest growing computer company in the world, and they still build them to order.
SPOKESMAN: Then Dell came to see me.
SPOKESMAN: So I called Dell.
SPOKESPERSON: I went with Dell on the Internet.
SPOKESMAN: And they built it.
SPOKESMAN: And they built it.
SPOKESPERSON: Just for me.
SPOKESMAN: Just for us.
TOM BEARDEN: 34-year-old Dell says the direct sales model is the key to his success.
MICHAEL DELL: Essentially, it's a smarter way to buy the product, with a higher level of service.
SPOKESMAN: And if you do have any questions, or you need anything in the future, just don't hesitate to give me a call.
TOM BEARDEN: It all begins when an order is placed, by telephone, or increasingly, via the Internet. Dell is the largest online seller of computers, each day moving $5 million worth on the Net. The bulk of their customers are businesses. Manufacturing director Lois Goss showed us how the customer specifications are printed on a piece of paper called a "Traveler."
LOIS GOSS: This is like a customer order. And so on this piece of paper is everything that we're going to put in a unit for this customer.
TOM BEARDEN: Workers use the "Traveler" to pluck the appropriate parts from bins, and put them all in a box, which then goes to an assembly area.
LOIS GOSS: Everything the cell assembly operator needs is at their disposal.
TOM BEARDEN: Like a model airplane kit?
LOIS GOSS: Absolutely, just like a model airplane kit.
The new assembly line.
TOM BEARDEN: But unlike Ford's assembly line, where a product traveled down a conveyor belt and many people worked on it, construction here is done by teams, known as "cells," who do the entire assembly.
LOIS GOSS: These two operators are a team, and they're actually going to build the computer up now. Once they build the computer up, their other team member in the cell is a quick test operator, and they will do a quick test on it to be sure the unit is functioning correctly.
TOM BEARDEN: If it works, three hours of rack testing follow, to make sure all the components and software are operating. The whole process, from the initial receipt of the order to sending the finished computer out the door, takes just four hours. But that's still too long for Goss.
LOIS GOSS: This is our challenge. This is what we're looking at, is to reduce the test times down. We would like to get this to two hours.
TOM BEARDEN: If all this looks easy, it's not, according to Keith Maxwell, the man who designed the system.
KEITH MAXWELL: If you look out at the assembly process, it looks like a water ballet. If you look at the people doing a water ballet, it looks beautiful on top, and everything's orchestrated. You go look underneath the water, and their legs are just thrashing like crazy. That's what happens below the surface, is there's huge amounts of activity going on to go drive the demand to equal the supply, and to continually be revolving the supply base to be able to meet the flexibility we need to go do things in the time frame we want to.
TOM BEARDEN: And you're dancing as hard as you can?
KEITH MAXWELL: Dancing as hard as we can.
TOM BEARDEN: The biggest advantage of direct sales is inventory control. Most manufacturers forecast demand, construct the machines, and ship them to retailers. The problem is, if the forecast is wrong, they're stuck with a lot of machines they have to dump at a steep discount. On top of that, computers sitting on shelves lose their value as newer and faster machines enter the pipeline. Dell doesn't build a computer until it's ordered, and therefore has no inventory problem. John Schreiber, a financial analyst with Janus Mutual Funds, says that gives Dell a huge pricing advantage.
JOHN SCHREIBER, financial analyst: Dell carries roughly seven to eight days of inventory, so it's turning its inventory roughly 50 times a year. If you look at competitors like Compaq, Hewlett Packard, IBM, they're really dealing with three to four weeks of inventory in the channel. Add to that three to four weeks, roughly, within the factory walls, and you're talking about six to eight weeks of inventory, as compared to Dell's one week. That alone gives Dell, you know, a 5 to 7 percent pricing advantage. And when you add on top of that the margin that the reseller is taking to stay in business, Dell really enjoys a 10 to 15 percent price advantage out of the chute.
The competition strikes back.
TOM BEARDEN: If there is any cloud on Dell's horizon, it's the prospect of facing its own weapon in the marketplace. The number one computer maker, Compaq, announced recently it will begin selling computers directly to consumers via the phone and the Internet. Moving toward direct sales is a tricky business for a company whose dealers still sell most of its product. But Compaq Vice President Mike Winkler says Compaq's retailers understand the computer business is undergoing a fundamental change.
MIKE WINKLER, Compaq: What they have recognized is that their business model must change over time as well; that they must be less dependent on hardware, and more on software, support, services-- and consulting with the customer. And that's what they're starting to do now. And we're helping them in that way by trying to push business their way that enables them to get this higher-margin services business that we believe more than compensates for the loss in some of the hardware business.
SPOKESMAN: And speakers come with the monitor.
TOM BEARDEN: Despite the advantages of direct sales, Compaq is not deserting retailers, assuming there will always be customers who prefer that way of doing business.
MIKE WINKLER: Part of it is they like what I call "a single throat to choke." They want a single-point accountability for the success of their installation.
SPOKESMAN: With your ware, people like my dad can buy a computer with an Intel Pentium II processor and unlimited Internet access for just $49.95 a month.
TOM BEARDEN: Executives at Gateway, the company that sells computers in those quirky cowhide-looking boxes, agree about that single point of accountability.
SPOKESMAN: What do you call this thing?
SPOKESMAN: Your ware.
SPOKESMAN: Your ware? Different.
TOM BEARDEN: The South Dakota-based manufacturer has been selling computers directly, primarily to home users, for about as long as Dell. But two years ago, Gateway began building what they call "Country Stores" to sell their products.
WOMAN: Now, how long does it take to get these systems, once you place an order?
SALESMAN: Usually about a week.
TOM BEARDEN: They now have 150 of them, places where customers can try out various models, and then order a computer to be built just for them.
SALESMAN: This is the standard monitor on there.
|An end to traditional retail?|
TOM BEARDEN: Gateway believes this combines the best of both retailing and direct sales. Joe Burke is in charge of the Gateway Country Stores.
JOE BURKE, Gateway: It's actually about 25 percent of all PC's sold in the U.S. are in the retail channel. And unless and until we participated in that channel, we weren't going to serve any of those customers. When we came up with the model for our Gateway Country, we took a look at what was wrong with the PC-buying experience, and tried to address all of those issues; when you walk in, from the environment, that the store looks somewhat engaging, looks different. It's not a typical warehouse or grocery store setup. It's rather engaging. You can get hands-on and live demo with every piece of technology here in the store.
TOM BEARDEN: Several giant retailers have also started to see the direct handwriting on the wall.
SPOKESMAN: It's really very simple. A sales counselor determines your needs, comes up to the kiosk here. We've determined that you wanted a Pentium II 400.
TOM BEARDEN: Places like Comp USA and Circuit City have installed kiosks where customers can order directly from a variety of computer manufacturers. Mike Ryan is in charge of computer sales for Circuit City.
MIKE RYAN, Circuit City: Manufacturers realized that this is what we needed to do to serve the customer better and optimize what we call supply chain management, or the amount of inventory that's in the stores. And we wanted to balance that, because we knew that there was some stuff that people wanted to order direct, and some stuff in the store.
TOM BEARDEN: So this gives you access to a market you didn't have before?
MIKE RYAN: Yeah, I think that's true. I think the direct customer wanted certain choices that we weren't able to offer them on the fly. They wanted to have a better video card, they wanted to have Microsoft Small Business Edition, so that they had the right software loaded. So yes, absolutely, it's increased our assortment, not decreased it.
TOM BEARDEN: Ryan says although ordering directly from the manufacturer is becoming more and more common, he doesn't think it poses any real threat to retailers who still sell computers the old-fashioned way. But Dell thinks in the near future, all manufacturers will adopt the direct sales model, in spite of the difficulties that poses for them.
MICHAEL DELL: Essentially, to do that they have to go into competition with the people who sell virtually all their products today. So it's a fairly monumental transition for them. But still, they're headed down that path, so we're focused on how we can take our business model to the next level, using things like the Internet, product line expansion, and deriving further efficiencies through our business.
TOM BEARDEN: Dell predicts this new way of manufacturing may well eliminate the middleman retailer once and for all.