Dell’s Push-Pull strategy relies upon a simple approach; push products to market, ones that customers want and need, and then incentivize them to pull demand with the promise of providing a custom-made product in a fraction of the time when compared to conventional means. The company’s strategy bypasses retailers altogether, and it does this by employing a direct sales model that eliminates the middle man in the supply chain. It’s an approach that borrows from the lean principles of cellular manufacturing and assembly, while using portions of Just In TIme (JIT) to reduce inventory carrying costs. So, what are the costs of holding inventory in Dell’s Push-Pull?
Five Essentials to Dell's Push-Pull
Much like JIT, Dell’s strategy relies upon the ability to pull in sub-component parts, raw materials and finished goods only when needed. It focuses on minimizing inventory levels in order to avoid the high costs of obsolescence on parts. Inventory levels are minimized due to the rapid technological changes that are so much a part of the computer industry. After all, yesterday’s inventory is useless, especially in an industry where companies are measured by their ability to deliver the newest and greatest product offering.
Dell’s contribution to supply chain management can be summarized by the following points. First, the company emphasizes minimal inventory, thereby reducing its cost of capital. Second, it relies upon shortening turn times on delivery through its direct sales model, one that allows Dell to sell direct to end-users. Third, it offers custom-made products with the ability to immediately ramp up production to volume forecasts. Fourth, by avoiding retailers, the company is able to eliminate the costs of added markups, thereby reducing costs and allowing them to capitalize on a lower price to market. Fifth, the company backs up its product offering with direct end-user support.
What are the Inventory Holding Costs in Dell's Push-Pull?
Unfortunately, much like JIT, very few companies have the ability to successfully run Dell’s Push-Pull strategy the way it was intended. Holding costs in this system are minimized by the company’s ability to emulate Just in Time strategies; take in only what you’re guaranteed to sell. However, that ability comes from the company’s volumes of scale, its importance with its vendors, and the close proximity of those vendors. In this case, Dell minimizes its holding costs of inventory by matching payables to receivables. In essence, if you sell a product within a day of having purchased the sub-component parts needed to make that product, then you’ve effectively reduced your inventory financing costs. The following outline shows how Dell is similar to JIT in its ability to minimize inventory holding costs by limiting how long inventory is held before it's sold.
Making Dell Work for Your Enterprise
Unlike JIT, Dell’s strategy doesn’t require a fixed bill of materials to make its strategy work. This is central to the company’s strategy of offering custom-made assemblies. What it ultimately means is that the company relies upon cellular assembly lines, ones where the majority of a given computer is assembled. Finally, the remaining parts are called in at the last minute in order to finish off the assembly and deliver what amounts to “build-to-order” product. This is ultimately why Dell's strategy isn't merely a supply chain strategy; it's also an order fulfillment strategy and one where customers driver requirements.
If your company is one that manufacturers, or assembles, custom-made, or build-to-order finished goods, then you may be able to reduce the time it takes to provide that product to your customer base. This would imply that you would pre-manufacture a portion of the overall assembly, and then call in the remaining sub-components in order to reduce lead times. This allows you to "push" products to market, while minimizing how long it takes to deliver a customized good, by empowering customers to "pull" demand.
Very few companies have the ability to make JIT, and or Push-Pull, work the way it’s intended. The reality of both strategies implies that a company is able to protect its costs of capital by minimizing its inventory counts. This means the company must have substantial volumes of scale and be able to use those volumes to dictate service terms with vendors. It must hold a position of utmost importance with its vendor base and use that position to mitigate the high costs of delivery delays. However, this doesn’t mean that smaller enterprises are unable to run a modified version of Push-Pull. A company manufacturing customized assemblies can still emulate the most important portions of the strategy by reducing its product to market lead times; pre-assemble most of the product with a fixed bill of materials, and then finish the rest of the assembly with a semi-fixed bill of materials, one where the company provides its customers with several predetermined customizable options.
To read about holding costs in Just In Time inventories, please refer to: What Are the Costs to Hold Inventory in Just In Time - JIT ?
To read about holding costs in Min-Max inventories, please refer to: What are the Costs of Holding Inventory in Min-Max Supply Chains?
To read about an article where I was interviewed about Push-Pull strategies, please go to: The Institute for Supply Management, ISM, Calls Upon Drive-Your-Success
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