Local Optimization, or, The Trouble With Dell
One of my core beliefs is that if you pick some aspect of your business to optimize, and focus only on that one number, you tend to ruin other parts of the business that you’re not measuring as carefully, resulting in a local optimization that actually harms your business as a whole.
Dell Computer is a great case in point. In books and magazine articles (see also the January Business 2.0) they brag endlessly about how low their inventory is. Everybody at Dell knows that what makes Mr. Dell happy is reducing the inventory to a bare minimum. Inventory, he says, costs money, especially in the fast moving computer industry where a part on a shelf has a half life of 6 months.
Unfortunately, the dirty little secret about Dell is that all they have really done is push the pain of inventory up to their suppliers and down to their customers. Their suppliers end up building big warehouses right next to the Dell plants where they keep the inventory, which gets reflected in the cost of the goods that Dell consumes. And every time there’s a little hiccup in supplies, Dell customers just don’t get their products. I ordered a new server from them more than a month ago and every week, the day the server is supposed to ship, I get an automated email telling me that my order is delayed by another week and there’s nothing they can do about it. Today the email said that the server will ship January 21 (originally promised January 7th).
I called Dell to ask what was holding up my server. “It looks like it’s the CPU,” the rep told me. “It’s those Xeons.”
“OK, do you have any different CPUs you could put in? Maybe a faster or slower Xeon?”
“Let me check that for you, sir. Nope, there are no Xeons available until January 30th.”
“None? At any speed?” I asked, incredulously. Somehow I don’t believe that Dell can’t get a single Xeon until next month.
“How about a Pentium 4?” I know that the server I’m buying used to come with Pentium 4s.
“No, we don’t make those servers with Pentium 4s any more.”
Sounds to me like they don’t make those servers at all.
When you need a computer right away, you can’t call Dell: even when everything is working perfectly they have to build the computer for you and it takes a week or two to get it. Compare that to, say, PCConnection, which can overnight a new IBM or HP server to you and you get it the next day, and Dell is at a significant competitive disadvantage. Combine that with the fact that the no-margin-of-error inventory model means that every hiccup in the supply chain automatically results in an angry customer, and you have a pretty serious liability that probably hurts Dell a lot more than not carrying a few days of inventory helps them. But Michael Dell never told his employees to optimize for customer satisfaction or to optimize for delivery time, he told them to optimize for inventory velocity and nothing else, and that is what he got.