Lean Operations – Dell
Abstract
As the lean manufacturing philosophy has gained a lot of attention in the modern industry, this paper will analyze some basic concepts of lean operations and the importance of “Lean Thinking” in a competitive market. However, besides providing its advantages, the paper will have a close look at some most common managerial mistakes in implementing lean operations. Furthermore, through the real life case of Dell Company we will see how lean operations operate in practice and what difficulties may arise. – Table of Contents – Introduction3
Literature Review
For the last few decades there has been a great talk about lean operations. Many companies have decided to implement lean operations as a result of the global competition and the shift from batch production to more personalized, individual production. However, even though the system promises numerous advantages, companies out there still fail to get the best out of it and in most cases experience various losses.
The reason for such misfortune lies in the superficial examination of lean operations. To be more straightforward, one thing is to talk about it, and one thing is to implement it. Therefore, throughout the paper we will discus the basic concept of lean operations and some components of lean operations that managers usually tend to oversee. Furthermore, based on the real life company, Dell Computers, we will see what lean means in practice, what are its biggest advantages, but also what are its disadvantages and how it might suffer in the future. Literature Review – Lean Operations
It all started after the WWII when the competitive Japanese market was recovering from the war crises. At that time the economy was experiencing raw material leakage, fluctuating customer’s demand, and no capital for automation. The need for a different production approach was necessity (Percy and Rich, 2004). The fist ones with a different production approach were Eiji Toyado and Taiichi Ohno of Toyota Motor Company who developed a lean production system ( i. e. Toyota Production System or TPS) or differently known as Just-In-Time (JIT) system (Stuart and Boyle, 2007).
The system was nothing secret. It meant find the waste, eliminate the waste, have trucks deliver parts moments before they’re needed (no inventory), and know the demand (Levans, 2006). Further on, as the manufacturing industry grew, many different elements and techniques had started to adding up to the definition of lean, including six-sigma quality, visual display, defect prevention, one-piece flow, Kanban, setup time reduction, quality at source, just-in-time supply, preventative maintenance, value analysis and value stream mapping, etc. (Stuart and Boyle, 2007). According to Womack et al. 1990), depending on the type of manufacturing process, lean includes all these practices, but in different degrees of importance and intensity. Nevertheless, lean system as an operational system also has to manage on how to integrate all the those elements so they can fit and work together in order to attain waste reduction, production and quality improvement, as well as high workforce engagement (Stuart and Boyle, 2007). Regarding to Womack and Jones (1996), this integration of elements in a working cell that reduces waste, improves productivity and quality, and enforces workforce engagements is called: “Lean Thinking”.
Therefore, based on the success of processes used at Toyota, Womack and Jones (1996), proposes five key principles of the lean enterprise approach (see appendix, Figure 1) (Carnes and Hedin, 2005). The fist principle is called Value Stream Mapping (VSM). It is the process of “mapping the material and information flows of all components and sub-assemblies in a value stream that includes manufacturing, suppliers and distribution to the customer” (Seth and Gupta, 2005; p. 44). Once, we have mapped all wasteful activities[1] we can start the process of elimination of those activities in every value stream (Percy and Rich, 2004).
The third principle is making the value flow run constantly (Carnes and Hedin, 2005). In other words, avoiding batch production and inventory queues by keeping things moving. According to Percy and Rich (2004), this is usually done by using modular designs, cellular working, general purpose machines, quick changeovers, multi-skilled operators, etc. The forth principle is basing flow on customer demand (pull). This principle is founded on the Kanban or differently, Work Flow Control system which states that materials are released into production only when the customer demands them ( i. e. nly when needed) (Percy and Rich, 2004). Finally, the fifth principle implies continuous improvement and pursue of perfection (Carnes and Headin, 2004). However, according to Professional Engineering (2005) this is just the first step in the lean process. The important thing is how to “make it stick” over a long period of time. Regarding to Professional Engineering (2005) the problem is that the companies nowadays are too static. After they implement lean operations, they tend to “sit” and wait for the things to happen. However, what Vasilash (2000) points out, lean operations are like a “journey with no end” (p. 3). In order to get the positive results, companies need to be constantly committed to the lean operations that they are running. There is no such a thing as “Whew! We are done. Thank God it’s over. ” As Vasilash (2000) states: “it is never over” – or if it is, than our implementation of lean operations was of no use. But besides being continuous, a company in order to be lean has to have “lean workforce” (Carnes and Hedin, 2004). This is the part of lean where the importance of management infrastructure comes in place. According to Vasilash (2000), lean is a behavior rather than a product.
How a particular machine is being used and weather the machine is lean, depends primarily on the management infrastructure (the way that the manager organizes his workers). For example, if we put our grandmother behind an extra hi-tack computer that can do a billion things at the same time is not the same as if we would have a computer scientist. In the first case we would get much less machine utilization than in the second one. Therefore, we can say that it is the manager and the workers are the ones that makes the process lean. At the same time, it is not true that machines are unimportant.
It is just that people within an organization are fundamental part of lean operations. Regarding to Vasilash (2000), comparing to products, information, supplier/customer, and process flow, management/trust and people are weighted as more important ( e. g. 50% comparing to 1. 6, 1. 8, etc. ). Moreover, Vasilash (2000) continues and states that before we start the process of implementation the fist thing that we should consider doing is building trust among the workers and managers and have them functionally organized. It is almost impossible to perform kaizen (Process/Flow) without considering management/trust and people.
However, organizing workforce, building trust and commitment is not an easy thing to do. In other words, it is one of the biggest problems of lean operations (Percy and Boyle, 2005). Regarding to Carnes and Hedin (2004), numerous companies worldwide experience the problem of employees and management resistance. These resistances come from lack of upper management support, poor employee training, resistance to change, etc. After all, we are not all Japanese. Dell – Lean to the Bone As we have already mentioned in the introduction – One thing is to talk about lean operations, and another is to implement them.
Therefore, the following discussion will focus on how some major world corporations, such as Dell, have managed to successfully implement lean operations and get the best out of it. Back in 1984, the founder of Dell Computers Company, Michael Dell, came up with an extraordinary and amazing idea: Selling PCs directly to consumers, avoiding retail stores and limiting customer support, thus offering radically lower prices than the competitors (Kharif, 2005). Soon afterwards, the company grew at an amazing speed becoming a multibillion company and a leader in the industry (Chopra and Sodhi, 2004).
However, what actually has made the company a leader in the industry is the implication of its “Direct” approach, mostly being based on the Toyota Production System (TPS). The company takes orders directly and than builds product according to the order (Kharif, 2005). According to Breen and Aneiro (2004), in order to make the built-to-order process run smoothly, Dell relies on its unique supply chain systems. As the orders come directly form the customers (demand pull), Dell is able to know the exact demand for a particular product at any operating market and thus alert the suppliers.
The way it alerts the suppliers is by connecting all suppliers and suppliers’ suppliers together, so when the information about sold product arrives, everybody is dealing with it (Pritchard, 2002). By doing this, the company manages to keep its inventory level at the lowest possible points. As Michel Dell argues, when dealing with inventory it is all about flow (Pritchard, 2002). Manufacturing plant in Limerick, Ireland is one of the rare hyper-efficient factories in the world.
Regarding to Breen and Aneiro (2004), it has no warehouse, assembles nearly 70,000 computers every 24 hours, has two hours of inventory in its factories, and a maximum of just 72 hours across its entire operation. In other words, by keeping its stock for as little time as possible, the company manages to keep costs to the minimum and makes sure that the customer gets the brand new parts. Furthermore, other characteristics of the Dell business model that goes along with the TPS are employee commitment and continuous improvement (Pritchard, 2002) A key part in the organization is people.
According to (inside) “Dell has a highly skilled workforce and puts a strong emphasis on education. ” (p. 16). As a result, workers show more pride in the quality of their work and are willing to share ideas for further improvements (Kharif, 2005). Therefore, since there exists great employee commitment; continuous improvement in order to gain competitive advantage becomes unproblematic task. Regarding to Pritchard (2002), Dell is constantly working on improving its production process. One of the newer innovations is Dell’s PC cases that do not require any screws (snap shot system).
This system simplifies assembly and at the same time improves reliability. At the end we can see that even though the Dell’s Direct Model is based on the TPS, it takes it to the new level. Its financial model is the company’s most powerful weapon on the market. The model creates a “cash-convention” cycle of 36 negative days by receiving payments from customers right away through credit cards the company is able to pull products directly form the supplier and builds and ships the product within 4 days (Breen and Aneiro, 2004). In other words, Dell is able finance its operation costs through suppliers.
Another important aspect of the Direct Model is the management of supply-chain risk. Dell minimizes delay-related risk by using high-cost air transportation to deliver important parts from Far East, while for less expensive parts keeps some inventory that is shipped from the US on the regular basis. Moreover, Dell has some high-value suppliers in Asia on which it can rely on when needed (Breen and Aneiro, 2004). However, nowadays, there are too many academics out there suggesting that the Dell’s Direct Model is actually in crisis. They argue that it may no longer be an asset, but become a liability.
One of such critics of the model is Berry Zellen (2004) who states that the biggest problem in Dell model is that the company is forgetting the basics of lean operations. As the years go on and the competition increase, the system is getting more and more complex which may result in terrible consequences. According to Gottfredson and Aspinall (2005), in 70% of lean cases with an increase in complexity meant rising costs and hindering the profit growth. The catch is either to keep things simple and target what customers actually need or to raise the prices. In Dell’s case the company is doing exactly what it should not.
It increases the complexity but keeps the prices low (Zellen, 2004). This managerial move according to Zellen (2004) may have a detrimental effect on the company’s further growth. The reason why is because slowly in the USA (Dell’s biggest market) computers are becoming a commodity (e. g. Apple) and the market is moving on to the new level leaving all non-followers in a horrible financial struggle. Conclusion As we have seen so far, the bottom line of lean operations is: have flexible technology, break down operations to the basic elements, frequent materials movements, speed, and most importantly Simplicity.
Without simplicity, companies like Dell that once where the leaders of lean operations are expected to experience some profit losses in the near future. The reason is that the company has forgone some of the basic principles of the lean philosophy – Constant Improvement and Keeping things Simple.
