How Dell’s business model benefited its supplier partners (e.g., Sony) and customers can be explained by the characteristics of the direct, virtual integration model. Dell’s direct business model eliminated the intermediaries’ markup and dramatically reduced the costs and risks associated with having large inventories of finished goods, which is vulnerable to product transitions in the computer industry. The direct model allows the company to have a relationship with customers, and that creates valuable information by enabling coordination and focus and blurring the boundaries among suppliers, manufacturers, and end-users, which Dell calls virtual integration.
Such a model was beneficial to the supplier partners for several reasons. First of all, because the model increased speed by reducing the lag between the point of demand and the point of supply, Dell essentially bought more monitors fasters from them in a very consistent, predictable way. They worked as partners and communicated in real-time information on what demand is and inventory levels are. Dell ordered typically thousands of units, which needed to go to one of the manufacturing centers in Austin, Ireland, and Malaysia, and all they had to do was to get the products to Dell and not worry about selling. This model reduced inventory, cost, risks, variability, and increased efficiency. Also, because of the mix of large and small customers, they were able to keep the demand high. In addition, because the manufacturers and the supplier partners worked as together as if they are inside the company in this model, there was a lot of information sharing on design databases and methodologies. This speeds time to market and created more value. The suppliers also assigned their engineers to their partners’ plants, which allowed them to get feedback and fix the problems in real-time.
This model was also beneficial to customers for several reasons. First of all, under this model, Dell was able to focus more on segmenting customers and to essentially better forecast what the customers need and when. They were able to give more attention and focus to customers and have a close relationship with them. For example, direct selling enables close tracking of the company’s total purchases country by country and feeds this valuable information to the customers. This helped when the customers had problems with the products and when the needs appear. Dell created a massive network in the factory to share information with the customers. Also, they coordinated with the customers. The senior executives in Dell participated in forums called Platinum Council to ensure the free flow of information with the customers. The customers were able to directly give the company feedback. Also, Dell had third-party maintainers (TPMs) to make the service calls. When customers had problems, the call will trigger customers' sites and TPM to dispatch to diagnose the problem and redesign the component by feeding the information back to suppliers.
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