Dell flies in the right direction

Captains of supply chain optimize air capacity for build-to-order model

David Hannon, Managing Editor -- Purchasing, 11/17/2005

Optimizing the management of air shipments may be more important to your bottom line today than ever before. Global sourcing from Asia, Europe and other regions has extended the length and complexity of many supply chains. At the same time, an increasing drive towards lean principles often requires manufacturers to reduce the amount of inventory in the supply chain, which means more parts flowing through the supply chain at faster speeds.

"Supply chains today are working like worldwide production lines," said Gene Long, president of consulting services at UPS Supply Chain Solutions, in a session at the recent Council of Supply Chain Management Professionals (CSCMP) conference in San Diego. "We can't afford safety stocks and stuffed warehouses in today's market. Supply chains today are working at turbo speeds; it's not uncommon for many companies to receive an order, build it and ship it within 40 hours."

While many manufacturers continue to struggle with the "lean vs. global" quandary, there are some best practice examples available today. One of the companies best known for the velocity and customization of its supply chain is PC maker Dell. And while the Austin, Texas-based giant is widely recognized as a supply chain innovator, it is continually looking for areas where its logistics practices can help improve its customer-driven supply chain.

During the same session at CSCMP, Fred Montoya, fulfillment director at Dell, outlined the company's supply chain strategies in Asia and gave a detailed example of how the company is optimizing air freight for supply chain improvement. With the majority of its suppliers located in Asia, and a global customer base, Dell is taking a regional approach to its supply chain. Meaning, the company is building more of its products in the region that the order comes from to expedite delivery. Dell manufactures in six locations globally under its "direct model" where no one comes between the company and its customers.

"Our customers expect price, customization and quality," Montoya said in his presentation. But the customization in Dell's "build to order" supply chain can mean spikes or dips in demand for certain products and components, requiring improved communication and flexibility in product flow from suppliers.

Dell evaluates its suppliers on four major points: continuity of supply, e-business collaboration, low-cost manufacturing, and technology leadership. It has consolidated its supply to the point where 80% of its spend is with 50 suppliers. In Asia specifically, Dell spends about $50 billion with suppliers, $16 billion in China alone today.

"We provide weekly MRP forecasts out to our supply base, which allows suppliers to ship products to our manufacturing sites," Montoya said. "The challenge is always how quickly we can change transportation to meet demand."

Historically, suppliers were responsible for the logistics (costs and processes) to get parts into Dell's manufacturing sites. They would own the inventory and if there was a demand increase for a certain component, the supplier would expedite the parts by air to Dell's site, creating excess cost and handling.

In today's efficiency-focused market that lack of control does not fly.

Allowing suppliers to control logistics decisions (especially air freight expedited shipments) created "gaps" of continuity of supply and cost in the chain, according to Montoya. The velocity and customization of Dell's supply chain model relies on air freight capacity—not an easy task, especially in the current Asian market where demand for air freight is far outpacing what the region's airports and infrastructure can handle. (UPS, for example, has 18 weekly flights out of China, according to Long). Air transportation networks for Dell mostly originate in Asia at its sites in Shanghai, Taiwan, Singapore and Hong Kong.

Four years ago, Dell began working with its suppliers and logistics partners in the region to aggregate its air freight to secure blocks of space on regularly scheduled flights out of the Asian market. Montoya said the tightly scheduled air networks provided advantages in planning vs. other modes.

"By aggregating the demand for air freight across the supply base we not only gain cost savings, but we gain more information which we can use to better meet demands of customization," Montoya said.

For example, if Dell's demand forecast shows 50% 17-in. flat panel displays and 50% 19-in. displays, the company historically would fill its air shipments with half and half.

"If we saw that we needed more 19-in. displays we would call the supplier and they would expedite them," Montoya says. "But instead of doing that now, we have pre-established lanes and secure space on planes, so we can better use that space to meet customization demands. Substituting space on the planes for 19-in. instead of 17-in. is much more efficient."

Today, Dell averages three 747-sized shipments of cargo out of Asia every day and is rolling a similar strategy out to its ocean shipping to secure capacity that can be configured to meet customer demand indicators.