Dell computer is one of the best managed companies because it has redesigned its value chain.

Redesigning of the Value Chain of Dell
The traditional value chain in the personal computer industry could be characterized as "build-to-stock." PC manufacturers designed and built their products with preconfigured options based on market forecasts. The products were first stored in company warehouses and later dispatched to resellers, retailers, and other intermediaries, who typically added a 20 to 30 percent markup before selling to their customers. Manufacturers controlled the upstream part of the value chain, leaving the downstream part for middlemen. Retailers justified their margins by providing several benefits to customers: easily accessed locations; selection across multiple brands; the opportunity to see and test products before purchasing; and knowledgeable salespeople who could educate customers regarding their choices.

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Two trends in the 1980s allowed Michael Dell to radically reengineer the value chain. First, corporate customers were becoming more and more sophisticated and no longer required intense personal selling by salespeople. By the end of the decade, even individuals--especially those buying their second or third PCs--had become savvy and experienced technology users. Second, the different components of a PC (monitor, keyboard, memory, disk drive, software, and so on) became standard modules, permitting mass customization in system configuration.

When Dell developed its "direct" model, it dramatically transformed the value chain architecture by departing from the industry's historical rules on several fronts:
1. It outsourced all components, but performed assembly.

2. It eliminated retailers and shipped directly from its factories to end customers.
3. It took customized orders for hardware and software over the phone or via the Internet.
4. It designed an integrated supply chain linking its suppliers closely to its assembly factories and the order-intake system.
Three major benefits ensued from this new architecture: technology advantage; cost advantage; and customer knowledge advantage. (Dell Computer…….).
Technology Advantage
Dell custom-built its machines after receiving an order, instead of making them for inventory in anticipation of orders. Thus, it had very low levels of components as well as of finished goods inventory; on average, inventory turnover for Dell was 7 to 1 days, compared to 70 to 100 days for other PC manufacturers and their resellers. Low inventory translated into a huge technology advantage.

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Microprocessors and other component technologies kept advancing at a relentless pace. Because Dell essentially had no finished goods inventory in the pipeline, it enjoyed a first-mover advantage in bringing leading-edge component technology to the marketplace. Its components were 60 to 80 days newer than those in IBM or Compaq PCs, so it could introduce new products faster than its competitors. (Magretta, 1998)

Cost Advantage
Dell derived cost advantage in three areas: component purchasing; inventory and working capital; and selling and administration. First, because the cost of computer components kept declining, and because Dell purchased its components on a just-in-time basis, it enjoyed a component cost nearly 6 percent lower than that of its competitors.

Second, radical reductions in inventory helped Dell save on the interest of financing the inventory as well as warehousing and storage costs. With its direct channel to customers, Dell eliminated the need to mark down inventory not sold by retailers, thereby minimizing the cost of product obsolescence. And its direct dealings with individual customers ensured immediate payment by credit card, which meant a lower investment in accounts receivable investment and insignificant bad debt risks. Moreover, Dell enjoyed normal credit terms from its component suppliers. As a consequence, it operated with negative working capital: in 1998 it had 36 days in accounts receivable and seven days in inventory, but 51 days in accounts payable--for a negative 18 days of sales in working capital!

Third, bypassing the retailer and establishing a direct interface with customers via phone and/ or the Net eliminated the typical markup and extra sales force of the middleman, as well as the need for physical space at distributors' showrooms. And the Net helped reduce sales costs further by cutting down on telephone personnel salaries, toll-free call charges, and the bricks and mortar for the telephone service center.

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Customer Knowledge Advantage
Direct contact with customers helped Dell gain a superior understanding of specific customer needs. Each of its several market segments multinational corporations (MNCs), medium-sized businesses, small firms, individuals, the federal government, state and local governments, and educational institutions--had unique computing needs and different buying processes. Global service capabilities were critical for MNCs; mid-sized companies placed a high value on presale, product repair, and help-desk support; and so on. By organizing its marketing and sales functions around distinct customer groups, Dell was able to address varying customer needs with greater precision and speed.

Proprietary information about customers' purchasing patterns also gave Dell a superior ability to forecast demand, which in turn helped it maintain minimum inventory without suffering the problem of "stock-outs." Those purchasing patterns helped Dell forge lifelong customer relationships. For instance, it understood better than its competitors which customers would benefit most when newer versions of hardware and software were available, so it could actively market them to the right customer segments.

By owning these relationships with customers, Dell not only avoided getting "filtered" information from third-party retailers but also insulated itself from poor service and a lack of product knowledge on the part of retailers. (Govindarajan & Shank, 1991)