Dell changes tack to cut costs and increase sales

Dell wants to wring more costs out the process of designing, making and distributing computers as it tries to reduce expenses by $3bn annually by 2011

DELL, THE pioneer of direct selling custom-made computers, is moving away from its build-to-order model to reduce costs.

The US group - which employs more than 4,000 people in manufacturing and sales in Ireland - is limiting the degree to which buyers can dictate specifications while expanding its line of pre-packaged models, operations chief Mike Cannon said this week. Dell will also outsource more PC manufacturing to partners, he said.

The company is working to revive earnings and win back customers after trailing Hewlett-Packard Co in the PC market for six straight quarters. To fuel sales, chief executive Michael Dell last year abandoned a strategy of only selling to customers directly and put the company's computers in more than 10,000 outlets.

Although Cannon declined to say how much Dell expected to save by limiting customer choices, he said that global operations, including reducing build-to-order options, were a "significant part" of the $3 billion in annual savings which Dell predicted this week it would reap by 2011. "We don't sell half a million different configurations," Cannon said at Dell's headquarters in Round Rock, Texas.

"If customers don't want that, we have to rip that cost out."

As part of the savings plan, Dell announced on March 31st that it was closing a desktop PC factory in Austin, Texas, and was considering selling the unit which helped customers to finance their purchases. The company also reiterated a May 2007 pledge to cut 10 per cent of its workforce, or 8,800 people, within a year.

As of last quarter, Dell had trimmed 3,200 employees. About 900 workers will lose their jobs in Austin. Manufacturing there would be shifted to other North American locations, Cannon said. Dell has factories in North Carolina and Tennessee.

Dell spokesman Jess Blackburn would not say how much of the company's manufacturing would be outsourced or how much of its current operations were already handled by outsiders.

"You'll see us partner more . . . we'll have more and deeper partnerships with ODMs [ original design manufacturers] and EMS [ electronics manufacturing services] companies where they can satisfy the needs of our customers at the lowest costs," Cannon said.

Dell's rivals, such as Hewlett-Packard Co, International Business Machines Corp and Sun Microsystems Inc, have long-standing relationships with such partners, which typically offer customers bundles of computer hardware, software and services, but Dell has been a relative outsider as it sought to fatten margins.

Cannon defended Dell's direct sales model, saying it was "hard to say that was flawed", since the strategy led to more than $60 billion in revenue last year.

"The direct model will remain a primary focus," he said. "It helps us win a lot of business our competitors can't reach."

In the US, the world's largest PC market, Dell said that a slowdown in the economy was weighing on sales to car-makers. Dell is a leading provider of technology to the car industry, which has reported that US sales fell in March after record petrol prices kept consumers away. "We feel their pain," said Paul Bell, chief of Dell's Americas business unit.

Dell, already known for running one of the industry's most efficient supply chains, will wring more costs out the process of designing, manufacturing and distributing computers as it tries to reduce expenses by $3 billion annually by 2011, Cannon said.

Cannon, the former chief executive of contract electronics maker Solectron Corp and disk-drive manufacturer Maxtor Corp, said Dell historically relied too heavily on its own businesses to design and make computers. Competitors such as HP, which unseated Dell as the largest personal-computer maker in 2006, typically use a more diversified supply chain.

"Instead of having a one supply chain approach for Dell, we are going to have multiple supply chains. I've been in that business," Cannon said, referring to contract electronics manufacturing. "I know the capabilities of those companies and what they can do."

At Dell, Cannon added, executives were "so inwardly focused on our model that we didn't appreciate that those industries have made tremendous progress in scale and capability, and that they should be [ better] partners for us".

He would not say how much the changes in the supply chain would contribute to the $3 billion savings goal. "We want that $3 billion of cost out on an annualised basis. We want to grow faster than the industry." - (Bloomberg/Reuters)