Case Study Operational Excellence At Dell Computer

by Costas Papaikonomou

Operational Excellence – the mantra that came into fashion in the early nineties of the previous century and one that is still fanatically preached across the globe. This is the world of Lean, Six Sigma, 5s, TQM. It assumes businesses thrive by being operationally perfect.

Paradoxically, many of the process superstars that grew to dominate their markets through Operational Excellence have fallen prey to its stillborn twin: Systemic Inertia. In a quest to raise profitability and short term reward, companies everywhere have been over-optimizing their business processes and ignoring an ancient planning truth: plan 80% with rigor and cunning, then leave 20% flexible for the Unpredictable. Scary stuff, because it requires reserving expensive resources that may end up not being used at all. Even worse, it may be abused in the most anti-operational horror known to process designers: improvisation.

Leadership teams grew blind to the fact the world around them is by nature unpredictable. They created a monster that leaves their business inflexible, unresponsive and in trouble. And the trouble accelerates, not just because of today’s ever changing economic reality, but for two systemic reasons as well.

  • Blinkered systems. Masters of efficiency will be unaware they are in trouble until their relentlessly churning systems jam and it’s way too late to correct course. Dell was the unrivalled master of assembling and delivering desktop computers to customized customer specification. But when the market interest abruptly shifted to laptops, Dell did not notice until stock started piling up in places it never had before. Had Dell been a little less ‘perfect’ on desktops and spent more resources on chasing (and failing) less profitable non-desktop market opportunities, it may have caught the laptop and subsequent tablet waves in time. Similarly, the planet’s most efficient manufacturing machine, Toyota, drove itself into unimaginable losses like a run-away train before it could tame the beast and adapt to the changed market dynamics.
  • Operator attitude. The expertise required for Operational Excellence and the attitude required to successfully improvise are mutually exclusive. Businesses that accumulate pools of great process operators will naturally evolve into horrendous improvisers. And the more skewed resource pool, the more likely the one type will drive the other out of the organization as they tend to disagree on almost everything. So the better a business is equipped to accelerate profitability by Operational Excellence, the worse it will be at innovating and keeping an eye open for the next big opportunity. Just imagine what meetings are like in a room full of process operators once the systems have jammed. An operational mind-set tends to look for even further rigor in planning and stricter process controls, rather than questioning the output and the process itself.

Is there then no hope for Operational Excellence? Of course there is, and you can even dress up the solutions as old-school Operational Excellence so none of the accountants will notice.

Here’s what you do:

  • Fail faster. Accelerating failure and dealing with regular small losses saves you from the life-threatening systemic bleeders. Do many small launches rather than few big ones. Ensure your production lines derail, jam or raise flags much faster when demand changes (even when it goes up). Operational Excellence systematically pushes business life into sameness, whilst it’s the ability to notice, react to and create differences that help tap new opportunities.
  • Entrepreneurial attitude and incentives. In the micro-cosmos of Operational Excellence, the processes become more important than the output, which is reflected in employees’ KPI’s across all levels and disciplines. Marketing Managers are rewarded for concepts’ performance in market research rather than on shelf. Manufacturing Managers receive applause for improving asset efficiency, but not for smart use of the resulting idle time when they optimize capacity beyond market demand. Customer Service teams are increasingly good at providing their customers help in ways prescribed in the helpdesk operation manuals, but hopeless when confronted with a non-scripted problem.

Increasing flexibility, being less operationally excellent will appear like a short term dip in process efficiency. But finding a balance between planning and improvising is the only way to protect oneself long term from the Systemic Inertia that Operational Excellence naturally leads to.

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Costas Papaikonomou is Founding Partner of Happen, a global innovation agency based in London, Amsterdam, Toronto, New York, and Sydney.
FlexibilityInnovationoperational excellenceplanningProcess Control2013-10-03

Costas Papaikonomou

Notorious for its lean inventory and just-in-time manufacturing methods, Dell recently announced that it would be altering its operating model as part of a three year $2 billion cost-cutting initiative. While the made-to-order PC vendor spent the past 28 years benefitting from scaling low operating margins, it sees close competitors pursuing higher margin opportunities in enterprise computing and has decided to follow suit.

Although Dell may have spearheaded the lean manufacturing initiative in the personal computing realm, methodologies that worked decades ago will always need to be updated. LNS Research believes that Dell’s shift in strategy is part of a larger concern of manufacturers today: aligning strategic objectives with both internal resources and changing markets.

Redefining Manufacturing Processes

With the initial idea of offering cost-effective, made-to-order PCs, Dell has traditionally been known as a pioneer in lean manufacturing. The use of JIT and leveraging strong supplier networks allowed the company to operate on a direct-to-consumer model. Because it could produce with incredibly low inventory costs, this created a competitive advantage. However, today, the technology market is more dynamic and consolidated than ever, and product demand along with the business models of high tech companies are changing rapidly.

Recently, HP made a similar cost-cutting and strategy shift announcement. It seems that Dell is trying to keep pace by moving toward a service-based business model, focusing on clients such as large enterprises and governments. With the approach of now being a service provider, in addition to selling personal computers, Dell's client-base changes to internal services and large IT organizations. This means that those highly configurable manufacturing processes that enabled direct-to-consumer sales don’t make as much sense anymore.

Applying the Operational Excellence Framework

In this case, we believe that Dell’s change in strategy to adapt to the market is a great example of how lean production and manufacturing efficiency do not exist in a vacuum. As always, LNS Research advocates for companies to ensure that manufacturing processes are viewed in the context of the firm’s financial and operational objectives, and that these objectives are aligned with the broader market and competitive pressures.

Applying the LNS Research operational excellence model, this means two things. First, Dell has an operational objective to move from a product to services-based business model. And second, the company has a financial objective of reducing operating costs to remain competitive. The challenge for manufacturing will be in balancing these objectives, while also producing low cost products within the context of reliable, scalable, and cost-effective services for large enterprises.

From Dell, we can learn that companies need to have a supportive framework and strategy for collaboration and communication between product development, sales, and services. To gain market share in the services area, it's likely that Dell will have to rearchitect its processes to facilitate and promote this adaptable model for the future.

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