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Dell's Global Production Network
Dell is a global company operating in 34 countries in three world regions, with about 35,000 employees and $30 billion in sales. Dell is organized along geographic lines into the Americas, Asia-Pacific and Japan, and Europe/Middle East/Africa (EMEA). Corporate headquarters is in Round Rock, Texas, which is also the regional headquarters for Dell Americas. Each of the regions has its own regional headquarters and its own assembly plants and supply network. Regional headquarters include Bracknell, U.K. for EMEA, Hong Kong for Asia-Pacific and Kawasaki for Japan (table 1).
Dell’s business activities are organized in each region around different customer segments. These vary somewhat, but generally include: (1) relationship (large corporate) customers; (2) home and small business (sometimes called transaction customers); and (3) public sector (government and educational) customers.
Product development is largely centralized in the U.S., and the same base products are sold worldwide. These products are customized for different regional and country markets with appropriate power supplies, keyboards, software and documentation. Other functions such as IT and e-commerce applications usually originate in the U.S., and then are adopted with necessary modifications in the other regions. Manufacturing processes are always being upgraded, and the newest plant is usually the most advanced wherever it is located. Improvements developed for new plants are implemented in existing plants as much as possible.
A. LOCATION OF MANUFACTURING
While Dell does not manufacture its own components or subassemblies, it does handle final assembly for nearly all of its desktop PCs and servers. Notebook PCs are manufactured by Taiwanese manufacturers Quanta and Compal. In some cases the notebook PCs are shipped complete to the final customer. However, Dell is increasingly ordering base units from its suppliers and doing final configuration of notebooks in order to offer more configuration options to customers.
Dell organizes manufacturing by region, operating one or more assembly plants to serve its major markets. Plants in the Austin, Texas and Nashville, Tennessee areas serve North America; Eldorado do Sul, Brazil serves Brazil and South America; Penang, Malaysia serves the Asia-Pacific region; Xiamen, China serves China and Japan; and Limerick, Ireland serves Europe, the Middle East and Africa (table 1).
Dell began manufacturing its own brand of PCs in Round Rock, Texas in 1985. It subsequently expanded to new production sites outside the United States as follows (from Dell’s web site):
In addition, Dell has greatly expanded its production capacity in the Austin/Round Rock area over the years, and now operates four facilities there. These plants produce the full line of Dell hardware products. Until the Tennessee plant opened, they supplied the entire North American market. Similarly, Dell has expanded its production capacity in Limerick, Ireland and now operates two plants there.
Employment worldwide is closely correlated with sales (table 2). The Americas account for 72% of Dell’s revenues and 68% of employment; EMEA has 20% of sales and 22% of employment; Asia-Pacific equals 8% of sales and 10% of employment. The only slight surprise is the lack of bias toward the home country, even with the presence of corporate functions in Texas. An explanation could be that the large size and homogeneity of the U.S. market allow Dell to achieve economies of scale in its production sites, call centers and other operations, and thus have a higher revenue per employee than other markets.
B. DELL’S LOCATION DECISIONS
Dell’s decisions about where to locate are driven by the need to minimize costs while extending the build-to-order, direct sales model around the world. Given the need to have production and support capabilities in the major markets, Dell selects specific locations based on a combination of factors including labor costs, transportation and information infrastructure, market access, proximity to markets and government incentives. The role of these factors can be seen by looking at particular locations of Dell facilities.
Dell’s original headquarters was in Austin, Texas, where Michael Dell founded the company in 1984. In 1994, Dell was offered a package of incentives from the neighboring city of Round Rock that Austin did not even try to meet. After collecting the usual 2% tax on Dell sales, the city rebates 31% of those tax collections to Dell for 60 years; property tax abatement of 100% for 5 years; 75% for 5 years; 50% for 50 years (Schnurman, 2000). Dell moved its headquarters to Round Rock, built other facilities there, and eventually had over 12,000 workers in the former bedroom community.
Dell maintains manufacturing facilities in Austin, including its high-volume Metric 12 plant that assembles an estimated 4 million PCs per year. Overall, Dell has about half of its 36,000 employees in central Texas, owing to incentives, a relatively low-cost workforce (compared to other U.S. locations), and a tendency to expand existing capacity rather than look elsewhere as the company grew.
Dell opened its first North American manufacturing facility outside of Texas in 1999, in
Nashville, Tennessee. Nashville was chosen for very generous state and local tax incentives, good transport infrastructure, good labor supply and location central to East Coast markets.
Tax and other incentives from the state of Tennessee included:
The local Nashville government offered even more lucrative incentives, including:
Dell now has two manufacturing facilities in Tennessee: one in Lebanon making consumer desktop PCs and one in Nashville making consumer notebook PCs. It also has a sales and support call center in Nashville.
In 1999, Dell began manufacturing at a facility in Eldorado do Sul, Brazil. The decision was motivated by the need for production to supply the South American market. Locating in Brazil enabled Dell to avoid tariffs that can nearly double the price of an imported $1,000 PC, according to Dell. Our own research (Dedrick et al., 2001) shows that tariffs on PCs can reach about 30% of the price, so perhaps Dell is also including transportation or other costs into this estimate. In any case, Brazil is by far the largest market in South America, and it would be impossible to compete there with such a price disadvantage. Also, PCs produced in Brazil can be exported without tariff to other Mercosur countries, which include Argentina, Uruguay and Paraguay.
The specific choice of Rio Grande do Sul state was somewhat surprising, as most of Brazil’s computer industry and supplier base is located near Sao Paulo. However, there were reportedly financial concessions offered by the state government, and the southern state is centrally located to supply the other Mercosur countries. Michael Dell said in a statement that the region is a "phenomenal opportunity" for Dell. "Rio Grande do Sul is an excellent base of operations because of its sophisticated labor force, its economic incentives to attract technology manufacturing companies to the region and its strategic location as an export hub to other South American countries," (Mahoney, 1999).
Europe/Middle East/Africa (EMEA)
Dell’s EMEA headquarters are in Bracknell, United Kingdom. It also operates a sales and support call center there for consumer and small business (transaction) customers in Europe.
Dell opened an assembly plant in Limerick, Ireland in 1990 to serve the European market, and subsequently opened a second plant and administrative center there as well. It also operates a sales and customer support center in Bray, Ireland to support larger corporate and other institutional (relationship) customers. Dell located in Limerick initially because of the low cost and high quality of labor. Today labor costs are much higher, but the work force is still highly skilled and non-union. Dell has received good cooperation from technical schools and universities in the area to develop the skills Dell needs. Now 50% of the people working for Dell in Limerick have at least a bachelor’s degree.
Another advantage of Ireland is its low corporate tax rates. In addition, Ireland is part of the European Community, so products made in Ireland can be shipped to Europe without paying the value-added tax. Also, because Ireland is now adopting the Euro, Ireland will have currency stability with the rest of Europe, eliminating the exchange rate risk within Europe. This is a major factor in Dell’s decisions to expand production in Limerick (Loughran, 2000).
Another factor was the tax incentives and other support offered by the Irish Development Agency. The agency helped Dell find land, set up its facilities, and assisted with job training. More recently support has been provided in the form of per capita grants for each Dell employee (Kennedy, 2000a). Finally, Ireland is attractive due to the presence of suppliers such as Intel and Microsoft, the presence of contract manufacturers such as SCI, and the quality of its freight and transportation infrastructure (Kiely, 2000).
In addition to Ireland and the U.K., Dell operates subsidiaries in 16 other countries around EMEA, mostly for sales and local technical support. It also operates five logistics hubs where PC units are brought together with monitors, peripherals and other add-ons for distribution to end customers. Furthermore, these hubs also provide repair services.
Dell opened its first manufacturing center in the Asia-Pacific region in 1996 in Penang Malaysia. Malaysia was chosen for its central location in the region, proximity to suppliers, reasonable wage rates and attractive incentives. When Dell built its factory in Penang, it received a five-year tax holiday. High-tech companies investing in Malaysia are entitled to five years without having to pay the country's 30% corporate income tax. Projects that the government thinks will have a significant impact on the economy can qualify for strategic-project status, which provides for a 10-year tax exemption, so Dell began working to get a better deal according to Phil Kelly, Dell's president for Asia-Pacific operations at the time (Arnold, 1997). Evidently, Dell got what it was looking for. In 2000, the company announced it would more than double its capacity in Penang by opening a new facility that will produce notebook PCs for the Asia-Pacific and U.S. markets.
In 1998, Dell opened a new manufacturing facility in Xiamen, China. The plant is directly across the straits from Taiwan, and is home to a number of Taiwanese computer and components makers. This provided Dell with a base of suppliers and other support services. Having a plant in China was necessary to sell in the main land China market. With China’s tariffs and taxes, importing is not a viable strategy, and if Dell hopes to sell to government agencies and state enterprises, it needs to have production in China. In 2001, Dell announced it would begin producing desktop PCs for the Japanese market in Xiamen, shifting production from Penang.
General Location Factors
Looking across the regions and sites, the following are the major factors affecting Dell location decisions. As was suggested by each of the vignettes above, no one of these factors is sufficient by itself to determine a location decision. Rather they seem to operate in a nested hierarchy with market considerations first, followed by labor and infrastructure, and then by government incentives.
Unlike other PC makers, Dell has avoided outsourcing final assembly of its products. It outsources subassemblies, such as motherboards and bare-bones PCs, and outsources nearly complete assembly of notebook PCs, doing only limited final configuration in its own assembly plants. Also, in 2001, Dell outsourced production of a standard, non-configurable PC called the SmartStep to Taiwan’s Mitac, which is manufacturing the product in its plants in China (Commercial Times, 2001). But in general, Dell prefers to keep control over the key final assembly and configuration processes for the bulk of its products. One reason is a concern that by outsourcing its manufacturing completely, Dell might be creating its own competitors, as U.S. television makers did when they outsourced to Japanese suppliers. Also, unlike some of its major competitors (IBM, HP, Compaq), Dell’s main business is PCs, and it feels it cannot afford to give up its capabilities in PC production (Louise O’Brien, 2001).
A network of suppliers and contract manufacturers supports each production facility. Sourcing decisions are made by worldwide procurement and product development in Austin with input from the regions. Most sourcing is global, which means that Dell sources major components for all locations from their headquarters. This allows Dell to consolidate its buying power and get better terms from suppliers.
While sourcing of materials for PCs (major components and systems) is done centrally, sourcing of consumables is local (box and shipping material, printing of keyboards, printing of manuals, etc.). The majority of sourcing is from low cost suppliers in Asia, but some sourcing is from local producers. For example, monitors for the EMEA region are purchased from Sony, Samsung and Acer, and shipped by sea from Asia, but monitors are also purchased locally from Phillips and Nokia. This might be due to product specifications, need for backup supply or price.
For major components, Dell looks for suppliers with global capabilities such as Intel, SCI, IBM, Samsung, Toshiba, Sony and Seagate. For each major component, it usually works with only a few suppliers, e.g., with Seagate, Maxtor, Western Digital and IBM for disk drives. Local suppliers in each region provide other parts.
Suppliers are required to maintain inventory near or in Dell plants to support Dell’s build-to order production. They can produce elsewhere and ship to supply hubs, or they can set up production nearby. For EMEA and the Americas, Asian suppliers increasingly do both. In some plants, components are actually kept in trucks backed up to shipping docks, and are pulled off as needed. Suppliers are required to maintain ownership of that inventory until it is actually pulled off the truck and onto the assembly line (Intel is the exception; its market power allows it to set its own terms, which require PC makers to take ownership as soon as the product leaves Intel’s facilities).
Impacts of Dell’s Location on Supplier/Partner Location
With so many different suppliers and partners involved, the location decisions of these companies naturally vary by company and location. Many parts and components are manufactured in Asia and shipped to distribution centers near Dell facilities. This is usually the case for hard disk drives, floppy drives, power supplies, CD-ROM drives, cables and connectors, and many add-on cards such as modems, sound cards and video cards. On the other hand, a larger share of motherboard production is located regionally. For instance, Solectron and SCI supply Dell’s U.S. plants from their plants in Guadalajara, Mexico, and from plants in the U.S.
In Europe, Dell’s Ireland plants are supplied from Asia and from local plants. Many of Dell’s suppliers came to Ireland at Dell’s insistence. After opening the first Limerick plant, Dell gave Irish suppliers eight months to show they could meet Dell’s demands. When local suppliers could not do so, Dell brought in outside suppliers (Kennedy, 2000a). The outsiders bought some Irish companies, consolidated others, and took over much of the supply industry. The companies that came in were global companies that were already serving the PC industry. They included, for example: Fullerton -- a Scottish company from Glenrothes that does work for Dell and for IBM in Raleigh, NC; Lightening Beech -- a U.S. company that supplies sheet metal; Trend Tec--a company that does metal and plastics in the U.S. and serves Dell and Compaq; and APW, which bought two Irish companies and does chassis, plastics, and metal. In addition, contract manufacturers already in the UK or Ireland supply Dell: Jabil supplies Dell with PCBAs from Scotland, SMS from Wales, and SCI from Fermoy, Ireland (Kennedy, 2000a). One Irish supplier, Keytech, did make the grade. Keytech is located in Shannon near Dell’s Limerick plants, and made cases, chassis and subassemblies (Kennedy, 2000a,b).
For the Ireland plant, the breakdown of supplies by region is as follows:
For some specific components and peripherals, the locations are as follows:
SCI (now owned by Sanmina) makes 90% of the motherboards used by Dell in Cork. However, a new deal with Hon Hai to supply motherboards globally may change that. Three different suppliers provide the chassis. The suppliers’ truck, located on the inbound side of the plant, is the local warehouse, and the suppliers’ people deliver chassis to the production cells as needed.
Overall, not much actual manufacturing is located very close to Dell’s plants, except in Malaysia, and much of that was already there. But more components are produced regionally as suppliers and CMs organize their own production regionally. For instance, PCB assembly and box builds are done in Mexico and Europe as well as in Asia to supply much of Dell’s demand in the U.S. and EMEA. It is hard to attribute any of this to Dell alone, as Compaq, Apple and Gateway are all in either Ireland or Scotland and in either Malaysia or Singapore, so CMs can supply multiple PC customers from one location. Dell’s BTO model clearly does not require higher value components to move closer, nor do very low value components such as power supplies and keyboards need to move closer. It’s the mid-level components such as box builds, motherboards and other PCB assemblies that seem to be moving closer to Dell’s assembly plants. This is particularly the case for large, bulky items such as box builds (nearly complete systems) that would be expensive to ship by air to meet volatility in demand, and at the same time are too expensive to risk holding in inventory. Although light in weight, motherboards tend to be assembled locally because the build-to-order model does not allow sufficient time for them to be assembled in Asia and then shipped. However, baseboards for PCB assemblies are manufactured in Asia and shipped in by air.
D. DELL’S OTHER OPERATIONS
Dell’s other operations tend to follow the location of its production facilities, but they do not follow in a simple pattern, as each operation seems to have its own organizational logic and location considerations. This is illustrated by looking at a few of Dell’s other operations: logistics, call centers, marketing and sales and data centers.
Dell’s organization of logistics in EMEA provides a good illustration of the general logic for logistics. All of Dell’s inbound logistics for material needed in assembly of PCs are handled by suppliers who must have supply hubs or production facilities located within 30-minutes' travel time of the Limerick plants. Third parties operate some hubs for a number of suppliers. On the outbound side, Dell has five distribution hubs in EMEA to take advantage of location close to major markets, transportation networks and logistics expertise. These distribution hubs are as follows in EMEA:
A different logistics partner operates each hub. Similar outbound staging areas and arrangements with logistics partners exist in the Americas and Asia-Pacific.
Dell makes extensive use of call centers, both for sales and for technical support. Dell generally organizes its call centers around its major customer segments with different call centers for relationship and transaction customers. It tends to locate call centers regionally to optimize telecommunications and language considerations, but customers may at different times be routed to call centers in different locations. Regional call centers are located as shown below. The EMEA call centers illustrate the complexity within any one region.
Marketing, Sales and Support
Dell’s marketing function is directed from global and regional headquarters with special messages targeted for the different country markets. However, the sales, service and support functions are located in the individual countries because these activities must be close to end customers. To compete for large contracts from corporate and public sector customers, Dell’s direct sales force must be on the ground in each country in order to be aware of sales opportunities, interact with procurement personnel and negotiate through the competitive bidding process. Moreover, since many Dell contracts are large and Dell hopes to expand its business with every customer, the account executives assigned to each large customer must be within easy reach. Similarly, although telephone technical support is centralized in regional call centers, field service and support require location close to the customer. As a result, Dell has sales and service offices in 34 countries around the world, usually in a large urban area and with multiple offices in some countries.
IT and Data centers
A network of data centers supports Dell’s sales, manufacturing, logistics and other operations. The data centers are regionalized and have their own development as well as operations staffs. Global applications such as online sales tools, order management, and supply chain management generally are developed or first implemented in Austin. The regional data centers are then responsible for transferring these applications and adapting them to the local markets. Data centers are as follows:
Dell’s Service Partners
Rather than do everything itself, Dell has made extensive use of business partners to help serve its customers, especially as it has moved into producing servers and targeting the small and medium business market. Three functions - systems integration, service and repair, and consulting - all have to be located very close to the customer, as they involve direct contact with the customer. Dell partners with companies that can deliver these services globally - or at least regionally.
Reaction to Market Slowdown in 2001
Like all PC makers, Dell’s sales were affected by the decline in PC demand that started in late 2000 and continued throughout 2001. Dell was the only PC maker to show any growth in sales in 2001, as it made major gains in market share, but it still saw much slower growth than the 30-50% annual gains it was used to. It also saw its margins reduced by the price war that it launched to gain market share.
In order to cut costs, Dell laid off about 5,000 workers, mostly in the Austin, Texas area. These included cuts in headquarters staff and some other functions. Smaller cuts of a few hundred employees were made in Tennessee. About 600 workers were laid off in Europe. The concentration of layoffs in the U.S. appears to be due to the focus on cutting corporate staff more than a shift of production or other activities away from the U.S.
Arnold, Wayne. 1997. Two major PC firms stand to save big in Malaysia. The Asian Wall Street Journal, 21 January: 6
Corkery, Sean. 2000. Interview with Sean Corkery, General Manager, EMF3, Limerick Ireland, November.
Commercial Times. Taiwan's Mitac Wins Desktop PC Orders from Dell. October 31.
Dedrick, Jason and Kraemer, Kenneth L. 1998. Asia’s Computer Challenge: Threat or Opportunity for the United States and the World? New York: Oxford University Press.
Dedrick, Jason, Kraemer, Kenneth L, Palacios, Juan J, Tigre, Paulo Bastos. 2001. Economic liberalization and the computer industry: Comparing outcomes in Brazil and Mexico. World Development, 29(7):1199-1214.
Freake, Reginald. 2000. Interviews with Reginald Freake, Industry Relations, Dell Computer. Limerick, November.
Kennedy, Tom. 2000a. Interview with Tom Kennedy, Enterprise Ireland, October.
Kennedy, Tom. 2000b. Interview with Tom Kennedy, Enterprise Ireland, November.
Kiely, Stephen. 2000. Interview with Stephen Kiely, Dell Computer Ireland. December.
Kraemer, Kenneth L., Dedrick, Jason and Yamashiro, Sandra. 2000. Dell Computer: Refining and extending the business model with IT. The Information Society, 16(1):5-21.
Locker, Richard. 1999. Nashville wins Dell Computer with hefty incentives, thousands of jobs promised. The Commercial Appeal, 7 May: A1.
Loughran, Declan. 2000. Interview with Declan Loughran, Manager, Logistics IT Development, Dell Computer, Limerick, Ireland, October.
Mahoney, Jerry. 1999. Dell Computer to open factory in Brazil today, KRTBN Knight-Ridder
Tribune Business News: Austin American-Statesman – Texas, 3 November.
O’Brien, Louise. 2001. Interview with Louise O’Brien, Dell Computer, April.
Kraemer, K. and Dedrick, J. (2002). center for Research on Information Technology and Organizations. University of California, Irvine.
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YouSigma. (2008). "Dells Global Production Network." From http://www.yousigma.com.
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