Keeping it tight

ComputerWorld Canada’s senior writer Chris Conrath spoke with Dell Computer Corp.’s vice-chairman Kevin Rollins at Internet World 2001 in Toronto about facing a sluggish economy, hanging on to market share and the Internet integrated business model.

CWC: With a projected downturn in the economy, what is Dell doing to protect itself against slow sales and loss of market share?

Rollins: If you go back and look at our Q3 earnings announcement…we basically told the market, at that point in time, that we saw slower growth in the future and therefore we were going to be very cost conscious, careful not to spend and to cost reduce and that we were going to stay price aggressive to keep share gains going. Our competitors basically said baloney, things are going fine we are going to have a great quarter.

We saw that early on and got roundly criticized for predicting something that silly. So we saw [the slowdown coming] and started to get after it in terms of a cost-reduction focus. We have been doing that ever since and we will continue to do it. We are in a slower growth environment which means customers are more price sensitive, which means lower prices will prevail and the low cost producer will win.

CWC: How is Dell going to deal with the ASP, dot-net future where PCs are not needed? What will traditional box makers do?

Rollins: We don’t believe the whole market is going to do a student body right and go ASP. It’s just not going to happen. You have a lot of companies who don’t need it or can manage on their own.

Secondly, if you do have a service provider market, where do those software systems run? They are going to run on servers. If it shifts to a more server, data centre, ASP-centre market, fine, we will sell the servers that run ASP environments. Does that mean that desktop sales will be slower and server sales will be faster? Probably. That is fine with us. Servers make more money for us than desktops do anyway. And so then our goal is to win the server, ASP market.

CWC: What percentage of your sales are server vs. PC?

Rollins: In Q3 servers were around 20 per cent of revenue. We call them enterprise products and in that are servers and storage.

CWC: Given the fact that only 15 per cent of your revenue comes from the consumer market, is Dell ever going to abandon it?

Rollins: We have about a (U.S.) four-and-a-half billion dollar consumer business. It has just not been one we have focused on specifically. But what we have focused on in the consumer market is the high-end consumer. We try to take the latest, greatest technology to customers sooner. There will come a time I believe when you will see us proactively announce a much more focused strategy to the consumer [market].

CWC: How do you take productivity to the next level? Your inventory is now at a seven-day cycle and you mentioned you want to get it down to one or two.

Rollins: We used to be at 30 days of inventory and we got it below 20 and declared victory. And then we had a plant in Ireland that got it to 14. Another plant was able to take it below 10. So step by step we have been able to march it down. So now we are at seven. It takes us about five hours from the minute an order enters the plant to the minute it is shipped out of there. So why do we have seven days of inventory, why don’t we have five hours of inventory? There are barriers.

Our suppliers will take the (exact) product to our door if they know exactly what we are going to make and they don’t have to keep a set of buffer stock. So this is about the Internet connection to tell them, in real time, what I am building, what customers ordered today of their components. That will allow them to take inventory out of their system to only make what I buy. We are also getting so that we are bigger than any of our suppliers, with the exception of Intel, so what you are seeing is that our suppliers are coming and locating next to us.

CWC: One of the difficulties with using the newest technology is items going to market before all the bugs are out. How do you walk the thin line between wanting to be the first with, say, the latest Intel processor and wanting that technology to be completely bug free?

Rollins: We work with Intel. We don’t wait until they ship it to find out what goes on. Whenever a new technology from Intel comes out, we have been working with them for over a year. If you ask Intel “How do you debug a product?” they debug it by working with us and others. We find those bugs. But even with all of that something could happen. At this point it is not so much what you are going to do but how you are going to identify customers and tell them how to get the problem fixed, at the worst a replacement, at the least some software download.

At Dell we know where every single product went since they came directly from us. We know what processor, what software, what hard drive is in every single box that left the factory. We can go back to our records and find every single customer who bought that product, send an e-mail to every one of them saying you have got a problem, here is how to fix it. There is not a competitor in the world who can do that. They don’t know who bought what, they don’t know where it is because they sold it to a reseller who sold it to another reseller who you bought it from.

CWC: How much of your market position is directly attributable to the overall Internet integration of your company?

Rollins: It was initially a help to us on the sales side. It then went to suppliers, let’s get the suppliers linked up. It then went to internal, using the Internet internally to take out people and activities. So over time it has filtered its way through all of our business. Then we go back and see if we can take the sales up a notch, can we make the supply chain better. It basically permeates everything and continues to ratchet up in quality and speed.

CWC: How does Dell’s Internet supply chain model help set prices?

Rollins: Component prices in the last three to four mouths have been just dropping. Demand drops and prices drop. In that environment the Dell model just sings because we can take those (reduced) prices and pass them through in six days. Our competitors have generally a month of inventory in their house and then they have a month to two months in the channel so those prices take a long time to flush through.

CWC: How will you be able to continue to keep your market share if competitors start copying this model?

Rollins: 1992 was the first time our competitors announced that they were going to go direct. Can’t they just copy us? The answer is that conception is very simple but actual implementation is very complex. They would have to copy everything. They fundamentally have to re-engineer and restructure their entire business in order to get to my cost position and that is a massive shift and none of them are structured to do that.

CWC: I notice in a recent Dell brochure that there is not a desktop or laptop to be found. What dies that say about Dell’s focus?

Rollins: We have a great desktop business and we will continue to have one but our strategic success is now going to be based on winning the server and the storage game.

CWC: For this, who do you view as your biggest competitors?

Rollins: Sun and Compaq.